The government should focus on linking established startup clusters with emerging hubs, rather than creating new ecosystems in new areas in a bid to create balanced regional development
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“Startup” has been a buzzword in India in recent years, especially since the flagship ‘Startup India’ initiative was launched by the Government of India (GoI). India arguably has the third-largest startup ecosystem in the world and is home to over 100 unicorn companies. The idea of startups as frontrunners of innovation, capable of propelling the country into a higher growth trajectory is etched in the popular psyche. Startup founders are also often seen as job-creators who can help reduce the educated unemployment in the country, enabling India to take advantage of its demographic dividend. However, an exploration into the intricacies of Indian startups indicates that it is premature to start relying on them for employment generation. India’s startup revolution is largely concentrated in a few pockets in the country, despite efforts by the government to increase its geographical spread in a bid to create balanced regional development. We call for a reconsideration of this policy objective as agglomeration is essential for knowledge-based entrepreneurship to thrive.
The idea of startups as frontrunners of innovation, capable of propelling the country into a higher growth trajectory is etched in the popular psyche.
At the Startup Mahakumbh conducted by the GoI in March 2024, startup founders were lauded for being ‘job-creators and not mere job-seekers’. The Economic Survey 2022-23 also commends the employment generation capacity of startups, citing the steady increase in the number of jobs created by startups (self-reported) from around 43,000 in 2017 and 88,000 in 2018 to 1.98 lakhs in 2021 and 2.69 lakhs in 2022. However, other surveys on employment generation by Indian startups show mixed results.
A Pilot Survey on Startups conducted by the Reserve Bank of India (RBI) finds that around 60 percent of the participants had less than 10 employees at the time of the survey while 22.4 percent had 10-20 employees. Moreover, data collected by Global Entrepreneurship Monitor (GEM) indicate that job-creation expectations among Indian early-stage entrepreneurs are the lowest among the top-performing startup ecosystems of the world. Figure 1 shows that in 2023, only 8.42 percent of the total early-stage entrepreneurs in India surveyed expected to create more than five jobs in five years, even though early-stage entrepreneurial activity as a percentage of total entrepreneurship is higher than in some of the major countries in the figure. Figure 2 shows that the expectation of job creation has been consistently lower for Indian early-stage entrepreneurs relative to their counterparts in other top startup ecosystems of the world. This indicates that the relatively high level of startup creation in India does not translate into the same degree of startup-driven employment creation as observed in other countries.
Source: Own compilation based on GEM 2023 data
Source: Own compilation based on GEM data 2016-2023
Moreover, a record growth in venture capital investments in 2021 followed by a ‘funding winter’ since 2022 has led to the layoff of over 37,260 employees across 130 startups in India. Additionally, rate of failure is higher among startups due to the uncertainty associated with innovation. In the last few years many growth-stage startups that had received multiple rounds of funding also have shut down their operations or down-sized considerably due to avoidable reasons like corporate mismanagement. These instances question the quality of job creation of startups as well.
Studies have shown that startups contributed to over half of the new jobs created in the United States (US) in the final decades of the 20th century. While most of the startups exited or failed within the first 10 years, a few grew exponentially and compensated for the job losses due to failure. India may also witness a surge in employment due to startups, once the Indian startup ecosystem matures and begins to generate new-to-the-world innovative products. India’s competitiveness in IT & IT-enabled services, together with its talent pool of engineers and early adoption of futuristic technologies like Artificial Intelligence (AI) may pave the way for India to leapfrog into capturing the global market.
In a country with low R&D investment, startups have provided a new dimension to India’s innovation landscape. True to the vision of the Startup Action Plan launched by the Government of India in 2016, startups have diversified from software-related services to agritech, edtech, and cutting-edge manufacturing industries like electric vehicles and space tech. 50 percent of the participant startups in the RBI’s pilot survey claim that their product is truly innovative, while 35 percent believe that they have brought to the market an improved version of an existing product. The GEM 2018 data concurs with this- close to 47 percent of the early-stage entrepreneurs in India claim that their product or service is new. The Economic Survey 2023-24 reports that startups have filed for over 12,000 patents between 2016 and March 2024. It also notes that over 13,000 startups work on the frontiers of technological progress in areas such as AI, robotics, Internet of Things (IoT) and nanotechnology.
True to the vision of the Startup Action Plan launched by the Government of India in 2016, startups have diversified from software-related services to agritech, edtech, and cutting-edge manufacturing industries like electric vehicles and space tech.
Startups have revolutionised how innovation is conducted in the country. Startup-corporate collaboration is a symbiotic partnership between startups and business conglomerates for innovation and expansion. With the emergence of entrepreneurial firms as disruptors engaging in futuristic technologies, the large incumbents are forced to look beyond their internal R&D departments and engage with startups to stay ahead of the game. Such collaborations often give an exit option for startups and their investors, while also providing the corporate firm with cutting-edge technologies and new verticals and markets, enabling them to remain competitive.
The Startup Action Plan (2016) envisions a scenario in which startup activity moves from tier 1 cities to tier 2, 3, semi-urban, and rural areas. A report by the Ministry of Commerce states that 590 districts in India have at least one registered startup. However, startups, across the world, have been known to grow in clusters, be it the earliest startup hub—Silicon Valley—in San Francisco or the subsequent ones in London, Tel Aviv, or Beijing. It is well-established that industries tend to agglomerate, more so when they are knowledge-intensive industries as physical proximity creates knowledge spillovers that induce innovation and create spinoffs.
Despite targeted efforts by the government to bring about regional balance in the growth of startups through the Startup India initiative and state-level startup plans, startups in India are largely concentrated in metropolitan regions, especially in Delhi NCR, Bangalore, and Mumbai. These regions accounted for 83 percent of the startups founded and 92 percent of the funds raised between 2018 and 2020.
A minimum threshold of startups, venture capitalists, incubators and knowledge-generating entities including larger companies, universities and research organisations in proximity is required for startups to gain from agglomeration.
Startups grow and thrive in ecosystems where there is access to a network of financiers including venture capitalists, support mechanisms in the form of incubators, knowledge-generating entities like universities and research organisations, related companies, a pool of skilled workers and a ready market to test their niche products. Being a part of these formal and informal networks is very important for startups as they require external support in the form of capital, knowledge, and leadership to grow and scale up quickly. These are not readily available in every district of the country. Moreover, a minimum threshold of startups, venture capitalists, incubators and knowledge-generating entities including larger companies, universities and research organisations in proximity is required for startups to gain from agglomeration.
From an efficiency standpoint, it may be prudent for the government to focus on deepening and expanding the established startup clusters by creating linkages between them and emerging hubs, rather than attempting to create new ecosystems in multiple districts. Rather than encourage individual states to create policies and compete to attract startups into their jurisdictions, inter-state and pan-regional clusters should be created. Indian startups have been attracting global venture capital and are gaining traction, thanks to a large pool of dynamic and innovative entrepreneurs and diaspora linkages to Silicon Valley. However, unsound corporate governance practices and the tendency to chase valuations and quick growth over profitability and sustainability remain sticky issues that need to be tackled for startups to become employment-generating growth engines.
Krishnapriya VS is a Doctoral Candidate at the Centre for Development Studies (JNU), Trivandrum, Kerala
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Krishnapriya VS is a Doctoral Candidate at Centre for Development Studies (JNU), Trivandrum working on the growth and performance of startups in India. She has ...
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