Key Takeaways for Startup Sector in the Interim Budget

In the last 10 years, India has come a long way in the Startup sector with the ecosystem boasting of over 1,12,718 DPIIT-recognized startups as of 03rd October 2023, a phenomenal increase from a mere 350 startups in 2014. This amazing growth can be attributed to constant efforts undertaken by the government under its flagship Startup India initiative. An even bigger achievement is the number of Unicorns which had already crossed the >100 Unicorns (~111 Unicorns) milestone in 2023 & it now positions India as the 3rd largest Unicorn ecosystem in the world.

Despite all these big achievements in recent years, the Startup sector had a forgetful year in 2023. Throughout 2023, only 2 startups (~ Zepto & Incred) were able to achieve the coveted Unicorn status. The Unicorn status has previously acted as an indicator of the prosperity of the Startup ecosystem. It has been seen as an indicator of how India has facilitated an environment enabling startups to grow bigger. At the same time, these startups have also attracted a lot of foreign investment.

However in present circumstances, with many startups going under the knife for unrealistic valuations, it has cast a shadow on the future of the funding ecosystem. All this in recent times has resulted in many investors withdrawing their investments undertaken as a part of the FII route.

Overall, if we look at the funding figures for the year 2023, startups received US$4.2 Bn worth of funding in late-stage deals which is a mammoth 73% decrease y-o-y. Infact the third quarter of FY24 projected a 30% decline in investments y-o-y. This is not all, over 8 giant startups including the likes of Byjus & Meesho faced a big markdown in valuations. Several factors contributed to the markdowns, including unsustainable business models exacerbated by the pandemic-induced surge in 2021 and 2022 and frequent regulatory crackdowns.

Although November & especially December provided some respite with many startups getting listed & witnessing an enthusiastic response from the investor community. This phenomenon of low funding has been popularly termed as Funding Winter by the investor community.

Outlook for 2024:

After the significant drop in valuation, one thing can be said with surety in the future, startups & investors will chase startups who are focused on creating real value for customers, employees & selves instead of chasing valuations. In contrast, the initial startup boom was fueled by the ‘Burn more than you earn’ approach which pushed startups to increase their expenses to gather more traction while their real sales didn’t reflect the benefits of spending more. Infact an Inc42 report also stated that 82 out of the top 112 startups recorded cumulative net losses worth US$ 7 Bn.

Given the incumbent government’s push for entrepreneurship & startups, a lot rides on the upcoming interim budget. The startup sector often looks to the interim budget for policies and initiatives that can foster growth, innovation, and sustainability. Here are some key announcements made for the startup sector in the interim budget:

1. Access to Funding: The government has appreciated the role of startups who are focusing on new age technologies & the impact they have had on the citizens. In line with it’s goal of making India the Startup Capital of the world, the Government has announced a special fund to assist startups in its infancy, providing financial assistance to startups to help them pivot & fuel their initial growth. As a part of the initiative, government plans on establishing a corpus of ₹1 Lakh Crore, which will provide a 50 year loan without interest to budding entrepreneurs.

It is a well-documented fact that India despite all its focus on innovation allocates the lowest amount as a % of GDP (~0.7%) among the G20 nations to Research & Development & this doesn’t augur well for a country that is projected to become World’s third-largest economy in a few years. For comparison, China allocates over 2% of its GDP to R&D. Hence, it would be a big positive if India shifts its gears towards a higher allocation of funds for R&D. This corpus is expected to help foster innovation & encourage much needed investments in Research & Development.

2. Tax Reforms: The Startup sector had listed out their expectations in the pre-budget meeting in front of the Union Finance Minister including tax incentives, exemptions, or reduced rates for startups to encourage investment and spur growth. Most importantly they requested clarity on angel tax and provisions related to capital gains tax.

It seems like the Government has paid heed to their request have put forward a proposal to prolong tax incentives for startups and investments facilitated by sovereign wealth and pension funds for another year, starting from March 2025. Startups meeting the specific criteria outlined by the DPIIT are entitled to a tax holiday for three out of seven years from their date of incorporation. This benefit applies as long as the annual turnover of the business does not surpass ₹25 Cr. in any of these financial years.

3. Push to Climate Resilience: An analysis by Inc42 had shown that Venture Capital & Private Equity investment dipped 40% in FY24 in the Climate Tech. sector. The government being aware of this announced slew of initiatives that might well be the catalyst the Climate sector badly requires after a lacklustre year.

While presenting her sixth budget, Union Finance Minister Nirmala Sitaraman a rooftop solar project that would cover 1 Crore households & provide upto 300 units electricity free, saving households approximately ₹15,000 annually.

4. Sector-Specific Sheme: Regarding startup-specific initiatives, one notable focus area addressed by the FM is the support for domestic deep-tech technologies in defense. This move is expected to significantly enhance India's drone technology ecosystem, which has been advocating for streamlined access to defense contracts and public-private partnerships involving deep-tech defense solutions.

By implementing these announcements, the interim budget has the potential to catalyze the growth of the startup ecosystem, unleash entrepreneurial dynamism, and contribute to India's economic development.