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Survival of technology based small start-up companies

Sourced from Centre for International Trade and Technology (CITT), IIFT


Start-ups seem to be the way forward for entrepreneurs in India. Like in many other markets, technology or Internet-based start-up companies are quite popular. With an instinct to be self-sufficient and a disinterest in working for big corporations, increasing numbers of entrepreneurs are setting up shop.


A start-up can be defined as a newly created company looking for markets and investors alike. Start-up companies are generally more scalable and have potential for growth, with limited investments of capital, land and labour. They are regarded as the best places to work for, among the predominantly young workforce, as they offer unlimited scope for creativity. A start-up gives a sense of belonging, poses thrilling challenges that come from all sides, great opportunities to build skills, and instils a sense of pride.
Start-up companies play a significant role in the growth, development and industrialisation of economies over the world. Technology-based start-ups are much higher in number because the world is moving at a rapid pace towards new methods of knowledge and content creation.


In India, start-up companies face constraints in the form of government policies, access to finance, raw material costs and other support systems. Survival of technology-based start-ups is dependent on hand-holding and support. They contribute majorly to developing new technology, are a source of innovation and stimulate competition in the market.


 

Executive Summary

 

Introduction

 

 

 

 

Start-up companies have played and continue to play significant roles in the growth, development and industrialization of many economies the world over. Globally, technology based start-up companies are registering in higher number than non-high tech companies because of their growing importance in the new knowledge economy. Since the rate of generation and innovation in knowledge has become very fast, the rate of obsolescence of technology has also become fast and consequently, the rate of mortality of start-up companies have also gone up. Hence, it is important that appropriate strategies are framed for their long term survival. Even in the US only about half of new employer firms survive 4 years or more and bankruptcies occur for nearly 60 per cent of the high-tech start-up companies.

In India, there are practically no serious studies related to Technology based small start-up companies though some studies are available for computer software start-ups. A study on Status and Support Needs of Technology based Start-ups was taken at CITT,IIFT with the support and funding of Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India.

The present study is a pilot study on the status of technology based Start-up companies in select areas and was undertaken to identify difficulties and constraints faced by Start-up companies in India and to suggest remedial measures. The study has recommended measures to make the sub-sector virile and vibrant in order to play a crucial role in economic and technological developments in the country.

 

Objective of the Study

The objective of the present study is to study the performance and status of the technology intensive start-up companies in select areas, and evolve measures to encourage and support start-up businesses. In order to meet the objective of the study, the task was divided into the following two areas:-

1. Study of the status of the technology intensive start-up companies in select areas.

2. Determination of the constraints faced by the start-up companies and suggest measures and mechanisms for encouraging start-ups and improving their survival rate.

Methodology

Since the study was the first of its kind in India, a thorough literature survey was done to find out the various issues connected and what other advanced countries have found out by such studies. The issues were then deliberated by the investigators and the suggestion of senior IIFT faculty members were incorporated in finalizing the questionnaire.

A total of about 400 Start-ups incorporated between 1991-2005 were randomly selected from all the states of India and covering virtually all forms of ownership like Sole Proprietorship, Partnership, Private and Public Limited Companies, etc and kinds like Manufacturing, Dyes and chemicals, Pharma, Electronics and Computer hardware, etc of business taking help of the data base created by Ministry of Company Affairs, Science & Technology Parks, Incubator units, Banks, Funding institutions including venture capitalist ,etc

The study data has been categorised in two types of enterprises. One constitutes the enterprises based on well established and readily available technologies which have been termed as "Traditional Technologies" in areas like paints, pigments, chlorine based chemicals, synthetic dyes, organic chemicals, well known pharmaceutical preparations and fabrication units etc. The other enterprises involving higher level of processes or machines like bullet proof glass, precision machine tools, automated control systems, robotics, microwave systems etc. which have been termed as "Technology based " enterprises.

Therefore, two sets of questionnaires were constructed, one set for the Start-ups with Traditional technologies and the other for the Technology based start-ups and sent to the selected participants. The responses to the questionnaires were complemented with personal interviews of the key operators by the researcher. The responses of the participants were analyzed using the excel analysis tool pack, which generated cross tables and percentages of the responses.This well designed questionnaire was then sent to 400 carefully selected Start-up companies and 115 responses were received involving 82 enterprises in traditional technologies and 33 in technology based enterprises.

Visits were also made to the incubator units in IIT Delhi, FITT and all existing incubating companies were interviewed and responses duly filled in the questionnaire were collected from the incubator units.

The data received from the responding start ups was further augmented by the information available from the web site of National Science and Technology Entrepreneurship Development Board .The information was also collected from the participating companies from trade fairs like Auto Expo 2006, Auto Enterprises 2006, Plast-India 2006 and Def Expo 2006. Apart from above sources the primary information was also collected through personal visits to 82 companies in an industrial cluster in Ankleshwar, Gujarat. This augmented information was got vetted from the start up companies, analyzed and interpreted for the study.

 

Scope of the Study

This study ( A Pilot study on Technology based Start-ups ) is limited to the following identified sectors:-

1. Defense Equipments & Accessories

2. Plastic & Machinery Parts

3. Auto Component

4. Electronics, Computer Software & Hardware

5. Dyes and Chemicals

6. Drugs and Pharmaceutical intermediates

7. Others

The criterion for the selection of the companies for the study were:-

1. The companies, which were incorporated during the period 1991-2005.

2. Only the companies registered under Companies’ Act were taken for the study.

3. The companies, which are in existence (from the date of incorporation) for at least 5 years.

4. Enterprises are promoted by first time entrepreneurs.

The various parameters for the study were decided on the basis of issues and factors coming out of literature survey and in consultation with faculty of IIFT. Some of the parameters were:-Choice of a time period for the study, Choice of firms / companies, Size of the firm, Nature of loan, Background of the owner / promoter, Number of owners, Role of venture capitalists, Aim and vision of the owner, Technical change made, Business strategy and marketing, Organizational and management issues, Human capital, Wages, the constraints faced and suggestions to overcome the constraints.

Based on the data available, analysis and findings of the study, recommendations have been made. Limited data could be obtained or has been made available by the respondents as most of them have been hesitant in supplying information or responding to a well designed questionnaire or even for our visit to their respective units. It is hoped that the report would be useful to policy makers, industry, academicians and all others concerned with the subject.

Findings and Recommendations

The major findings of this study include the following:

1. Majority of traditional technology based companies are in partnerships (86.59%) whereas 13.41% are private limited companies, while in technology based companies, majority is of Private Ltd Co. (60.61%) and partnerships (18.18%).

2. Most of the entrepreneurs in the traditional technology industries are graduates (96.34%) and only few have other professional qualifications, whereas in technology based companies, mostly are engineering graduates (63.64%) followed by diploma holders (12.12%) and other professional qualifications (9.09%).

3. The main aim of business for majority of the entrepreneurs was self employment for income.

4. As far as source of technology is concerned for traditional technology based companies, only a few have collaborated with Indian labs otherwise the technology has come from the partners themselves, while technology based companies are developing products through indigenous technology and a few of them have technical tie-up. Some of them are using open sources for fulfilling their technological needs.

5. None of traditional technology based companies had formed technological tie-ups with either university or Technological labs. In technology based companies, 9 Companies (27.27%) have formal technical tie-up with R&D labs, universities or other agencies in India or abroad. in order to be both competitive locally and globally and to conform to international product standard.

6. Most of traditional technology based companies have investment in plant & machinery in the bracket of 25 lakh to1 Crore, while in technology based companies, majority of them have invested in plant & machinery in the range of Rs 1 lakh to 25 lakh.

7. The source of funding for traditional technology based companies is mainly self finance (43.44%), banks or financial institutional funding (40.69%) or private loan (13.79%) in that order, where as for technology based companies it is mainly banks or financial institutional funding (44.44%) and self finance (31.11%). Only a few have utilized other sources of funding like venture capital (8.89%), foreign investment (8.89%) and capital market (2.22%).

8. In traditional technology based companies, average expenditure on R&D against turnover usually varies from 1 to 2 % and in exceptional cases beyond 2 %, where as in technology based companies, expenditure on R&D varies from 0-2 % to upto 25 per cent of respective turnovers and a major group is spending in range of 8-10 %.

9. The workforce employed by the traditional technology based companies mainly consists of under graduate with only a few graduates, post graduates and higher degree holders. Technology based companies are employing large number of technical people consisting of ITI certificate holders, diploma holders and other professional qualifications.

10. Most of traditional technology based companies lack in skilled working force and are not using the modern techniques of production for improving their quality of product.

11. The profit in traditional technology based companies is steadily increasing from year 1991-95 to 2000-05.

12. Most of the traditional technology based companies have turnover in the range of Rs 25 lakhs to Rs. 1 Crore, while technology based companies have turnover in the range of Rs 1 Crore to 20 Crore.

13. Most of the traditional technology based companies have average exports upto Rs. 5 Lakhs, whereas in technology based companies, average exports for greater number of companies fall in the bracket of 25 lakh to 1 Crore ,10 to 25 lakh and 1 Crore to 20 Crore.

14. The constraints faced by Start-ups in India in decreasing order of intensity include: Government Policies (21.90%), access to finance (20.31%), Marketing (16.70%), Skilled labour (14.45%),access to modern technology (13.99%), High cost of raw materials (6.32%), Infrastructure (2.03%) and others (support system, Management issues, Inexperience, Quality management, competition, Business strategy). Thus government policies represent the greatest problem faced by start-ups in India.

The various problems in government policies emerging from the study are:- Lengthy Procedures & formalities, extensive paper work (20.30%), High Import duty, Excise duty, Custom duty, Sales tax (19.55%), Stringent norms of Labour Laws (14.66%), Wrong interpretation of laws & policies of the govt. by the enforcement agencies(14.10%), Stringent Environment & Pollution control Norms (12.22%), Various Insurance Schemes (9.59%), Frequent Raids & Checking by Vigilance Teams (8.08%) and taxation (1.50%).

The various problems in access to finance include: Lengthy time taking procedure (30.15%), High Interest Rates (27.64%), Reluctance of Funding Institutions/Banks (16.08%), Collateral Security (11.06%), Lack of Information (10.55%), Non Availability of Angel & VC’s (2.51%) and insufficient seed funding (2.01%).

The various problems in marketing faced by start-ups coming from the study are:- Lack of Information about new markets for expansion (67.86%) constitutes the major problem for start-ups followed by lack of access to media and publicity (15.48%) and reluctance of business community for business (13.09%).

In the study, it was found that technology constitutes 13.99% of overall constraints faced by Start-ups. Non availability of Information (40.00%) about better and newer technologies constitutes the first major problem related to start-ups followed by non availability of required technology (27.61%), procedural problems in technology upgradation (22.86%), problems in technology acquisition (3.80%) and technology collaboration (2.86%).

Specific recommendations are made within the context of various issues:

(i) The business environment in which technology based start-ups operate should be reviewed and improved upon in terms of the regulatory and legal framework in order to encourage the growth and competitiveness of such start-ups. Adequate awareness creating mechanism needs to be strengthened.

(ii) The government should as a matter of urgency, effect appropriate reforms in the customs as well as in the ports operations to reduce the number of agencies involved and make the clearing of goods more efficient, at least for time sensitive sectors. The awareness among the custom officials and the inspecting agencies, about the critical needs of technology based enterprises is desirable.

(iii) There is a strong need to promote appropriate support programmes that would offer training of staff of financial institutions to evaluate small borrowers quickly and monitor them in addition to training entrepreneurs to keep good financial records.

(iv) Long term loan facility should be provided to start-ups at a lower interest rate that is supportive to loan repayment and overall growth and competitiveness of the start-ups.

(v) Lack of information on the operations of banks on the part of start-ups was identified as one of the factor hindering start-ups from accessing financial support services. Thus ,it is recommended, finance institutions should from time to time organize forums for start-ups where issues surrounding access to financial facilities are discussed. Financial institutions should endeavour to act as investment participants in giving credit facilities and should see to it that their investment yield the maximum result. Bankers should assist start-ups to receive bank loans, create institutional credit consciousness in start-ups and also help them to maintain proper account. All these require effective communication network for it to succeed to the mutual benefit of all stakeholders.

(vi) Government/other agencies must attempt to make pre-venture capital relatively easily available for entrepreneurs with a certain back ground and experience. The government should stimulate the development of Venture Capital Market for Start-ups through the provision of specific tax incentives for venture capitalists, and may have dedicated staff to address the concerns of VCs and start-ups. It is recommended that government officials who have had experience with the start-up environment be involved as a point person for VCs and start-ups to direct their concerns and direct them to the proper guidance. Coordination among various funding agencies and developmental agencies giving grants or subsidies needs to be strengthened.

(vii) Start-ups need support programmes for displaying their products in fairs and exhibitions and to train them on management, especially in relation to marketing issues such as methods of costing and pricing and techniques of promotion and sales. Marketing support required include among others the following:

• market information and research • trade statistics • product promotion •    information procedures and regulations for export and • information on international exhibitions and fairs.

The government should readily and freely assist start-ups to have access   to necessary information relating to business opportunities, markets and services etc which would enable them to enter in new markets and expand their operations. For this to be feasible, effective and functional, government should establish Business Information Centers (BICs) and Business Support Centers (BSCs) in partnership with States and Local Governments at every state capital and local government headquarters. The BSCs should offer advisory and mentoring services to entrepreneurs and provide them with information about new markets were they can expand their business or from where they can get their desired information by paying nominal amount of fees. The existing mechanisms may be reviewed and strengthened.

(viii) There is a need to promote effective communication mechanism between start-ups and technology producers in order to create awareness of newer technology available and transfer of technology, and easier access to them.

(ix) The existing relationship between R&D institutions and start-ups need to be strengthened, as it is very weak. There is need to promote the establishment of start-ups coordinating units in the R&D institutions in order to facilitate assistance to these firms. Also, the creation of frameworks for joint research projects that address Sectoral needs of startups such as technology support needs and technological information infrastructure is imperative.

(x) There is a need to support technology acquisition and upgrading by start-ups through a number of recognized arrangements such as technical assistance agreement, "know-how" agreements, joint ventures and franchising. The understanding, application and use of patenting among start-ups should be encouraged and promoted.

(xi) Start-ups should be advised and guided in choosing suitable and economic technology. Such advice and guidance on both the choice of technology and the appropriate provider and the manner of implementation of agreement can be provided by private consultants or technical service providers at subsidized cost with the support of private sector organizations such as chamber of commerce and industry.

(xii) There is need to promote the creation of integrated networks of start-ups. The new role of support services is to influence start-ups to help each other and work together. This network will be aimed at increased output and upgraded technology to produce through combined efforts, products that can compete locally and internationally. This demands that policy makers should aim at creating the enabling environment to move start-ups away from relying on their own limited capability towards cooperation within groupings in order to gain greater competitive strength. It equally calls for the promotion of industrial clusters which will encourage specialization and cooperation between firms of the cluster with a view to developing collective efficiencies. The functioning of S&T Parks and TBIs etc needs to be reviewed for more effective support to technology based start-ups. High level of trust and risk taking with entrepreneurs would encourage start-ups.

 

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