India’s Unique Take on Venture Capital
India’s thriving economy and technical workforce has organically created a vast startup and venture capital ecosystem in recent years. Between 2018 and 2019, the amount of venture capital deployed in India grew 55% to $10 billion. Deal volumes also expanded by 30% over the same period, according to data published by Bain & Company.
High-profile exits, such as Flipkart, MakeMyTrip and Oyo, have encouraged more Indian entrepreneurs to dive in and launch their startups, according to the same report. However, venture capitalists in the country face a unique set of challenges which has made the industry structurally different from the rest of the world.
Regulations and taxation have constricted the flow of capital across the country’s fledgling startup ecosystem. Perhaps the best example of this is India’s unique ‘Angle Tax’ – a tax on stock compensation offered to startup employees that could be as high as 30%. In 2018, 30% of startups surveyed by citizens engagement forum LocalCircles said they had received notices from the tax authorities for these payments.
“The government has made efforts, but that effort has to remove the roadblocks,” Anand Lunia, founding partner at early-stage venture capital firm India Quotient, told India’s Economic Times last year.
To avoid these hurdles and draconian tax liabilities, several well-established startups have registered overseas while operating in India. Ola, Oyo, Curefit, Lenskart, Urban Company (previously UrbanClap) and Paytm First Games operate out of Singapore or the United States to raise funds or limit tax liabilities, according to the Economic Times.
Beyond these factors, VC culture in India is unique too. Deal volumes and sizes are noticeably smaller. In 2019, there were 81 deals worth between $25 million and $100 million. By comparison, there were 10,777 deals completed in the U.S. over the same period, according to Pitchbook.
The lifecycle of startup investments also tends to be longer in India, according to Kartik Hosanagar, Professor at The Wharton School of the University of Pennsylvania. “In India, it takes way longer for a start-up to grow to the right size,” he told Entrepreneur Magazine.