What Venture Capitalists Want: Policy Changes, Currency Management, R&D

Given India’s ambitious target of achieving a $10 trillion economy, and having started companies themselves, Bhide started by asking for the most critical policy or regulatory change when it comes to the formation of a startup or at the compliance level.

“The one answer to that is simplification and to make things accessible. And, we have to find ways to encourage greater investment into things like manufacturing, and research and development (R&D),” said Murthy, the managing partner at Lightbox, a venture capital firm focused on early-stage investments in technology-driven consumer businesses.

Also read: Why the “venture mindset” is not just for tech investors

He added that the spending on R&D in India against its GDP is 0.7 percent, whereas for most developed countries it’s at 4 percent.

“We have to find a way to get that number up, whether it comes from the government or private companies, it needs to be a priority to be able to address the opportunities that still exist,” Murthy said.

To the question, Singhal, an entrepreneur, and co-founder of Nexus Venture Partners, a venture capital firm specialising in enterprise software, healthcare, and impact investments, recalled the two steps that helped set up the IT industry in India successfully. One, allowing the import of computers, and second, implementing 10 years of no taxation.

“That had a huge impact in terms of the ability of these companies to build and scale and retain their profits for growth,” he said. “Our taxation policy, not in terms of the policy itself, but its implementation is becoming restrictive when it comes to startup creation and it has a significant impact on startup founders trying to build their businesses,” Singhal added.

Domkundwar, CEO at Better Capital, a pre-seed fund with 200-plus portfolio companies and unicorns, stressed the importance of organisation to help founders get an idea of how the innovation economy companies should be created.

“When a founder is starting, all of them will start their company knowing very different facts. There are one or two facts that tell you how to start the right company the right way. How do you structure it? Therefore, we need a simple template that every founder, whether in a tier one or tier four, understands that this is how they should do it” he said.

The second aspect of that, he said, is related to designing the policy to start up.

“Almost every system that is there for any company creation or formation today has not changed. It has remained the same from whenever your father started a company, it’s probably just evolved a little bit,” Domkundwar said. And added, “It’s not taking into consideration what this new generation companies look like. And, that’s what is causing a lot of problems as well, especially in terms of compliance. We need an overhaul there too.”

On what are some of the reasons for foreign limited partners or LPs not wanting to invest in India, Domkundwar added that there still exists a major perception problem.

“It takes one bad news to take us back 25 years in terms of perception,” he said. “It’s upon us—not just the government, or a single founder—to prove that we are a trustworthy ecosystem,” he said.

Next is the consistency in regulatory policies, Singhal mentioned.

“There’s always a worry that they invest under a certain regulatory regime and that changes in a certain time frame. So, there is a very strong desire to have some level of consistency in the regulatory policies,” he added.

Singhal said he often hears is the problem of liquidity. He emphasised hearing from foreign LPs saying that the capital did not come back to them despite India being a growing market.

“And that has to do with the fact that many companies in the initial periods are loss-making companies, and disruptive businesses take time to build,” he said.

But, in global markets, such as in the US, investors don’t mind backing companies in the public market that are losing money, because they believe that over time, that company will start making money.

“And so whether it was Amazon or Uber—they went public and were able to raise money from the retail investor despite the risk of going down to zero. However, in India, there is this feeling that we have to protect the retail investor. So, SEBI puts in a bunch of regulations to prevent loss-making companies from going public, which becomes a big challenge in terms of both raising capital and gaining liquidity for global investors,” Singhal explains.

On the other hand, Murthy took a different approach to the question and asked why we still need foreign capital for a venture.

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“It stems from the fact that domestic capital hasn’t necessarily understood venture as a category,” he said. “So ideally, step one is, I would hope the reliance on foreign capital reduces, and we continue to grow our domestic base because not only is it easier, but also better that domestic capital benefits from the growth value that’s going to come from these types of investments moving forward,” Murthy added.

It would also help if the currency is managed well, according to Murthy.

“It definitely hurts our side of the business. To fight a two to three percent per year depreciation of the exchange rate, while trying to deliver outsized returns, makes the job that much more difficult,” he added.

The panel moved on to answering a question on the general perception of why VCs in India aren’t willing to take a risk on hard tech or the “outlandish ideas that might one day become a SpaceX,” in Bhide’s words.

Singhal disagreed but said that one has to look at the global market as a benchmark and the global talent targeting that space.

“If a founder of an AI company comes to me, I’m going to say, how do you compare to people who are sitting in the valley?” he said.

Domkundwar said that it’s also essential to see that ultimately, investors are also running a business and they have to manage risk.

The panelists also discussed changes required in the education policies to get an advantage that other countries have.

The first, said Domkundwar, is to focus on the quality of work.

“The 70 hours and 90 hours discussion misses the quality of work. 70 hours of mediocrity is more mediocrity. 90 hours of mediocrity is just more mediocrity. We have to commit to improving the quality of our work. There will be a massive disruption now with AI sweeping the white-collar jobs, so you have to commit to some sort of excellence. And make the curriculum more practical,” he added.

Singhal pointed out that the biggest gap in education is the absence of quality teachers at the scale that we need them.

“So I would say the policy change here is to actually figure out a way to encourage practitioners to be teachers,” he said. And added, “If you can make farming tax-free, I think you should make teaching tax-free. Every teacher should be able to go teach without having to worry about taxes.”

Lastly, Murthy mentioned the need to encourage a mindset that allows experimentation, failure, learning, and repeating rather than scores and marks.