Though Tamil Nadu is one of India’s most developed states, startups have failed to take off due to bureaucratic interference and lack of funding ecosystem, write the authors.

Employees workingImage for representation/Pixcy
Voices Opinion Friday, January 07, 2022 - 15:37

Tamil Nadu is considered to be one of India’s most developed states. In any metric that is growth related or based on socioeconomic development, Tamil Nadu ranks as one of the best states in the country. This is unique in India, where many states have either managed to focus on growth or social-economic development, but never both. Tamil Nadu is also an industrialised and urbanised state and capitalised on the IT and automobile boom early on. In fact, 17% of all industries in the country are located in the state, with Chennai accounting for 60% of the country’s automotive exports, making it by far India’s largest automobile cluster.

When it comes to education and health as well, Tamil Nadu ranks high. The National Institutional Ranking Framework (NIRF) for 2020, released by the Government of India, places 35 engineering colleges/universities in the state within the top 100 spots. In health, among large states, Tamil Nadu is ranked number one for per capita doctor and public health expenditure.

From the above, it is clear that Tamil Nadu has all the ingredients to become a startup leader. But what remains a conundrum is how a state with such high potential – NITI Aayog ranked it third in the county for innovation index – has failed to capitalise on the growing startup ecosystem. A ranking of states by the Union government, based on its startup ecosystem, puts Tamil Nadu at the bottom of the list, alongside UP and Chattisgarh for the second consecutive year. Meanwhile, another ranking has Bihar, Uttarakhand and Chhattisgarh ahead of Tamil Nadu when it comes to “state support for entrepreneurship”.

When it comes to the number of unicorns, Tamil Nadu shows one of the worst performances. In fact, out of 45 unicorns in India, as of 2021, two are from Tamil Nadu (Freshworks has offices both in Chennai and San Mateo). Even VC funding inflows into the state have remained surprisingly low. This is directly in contravention to the assertiveness the state shows when it comes to the development of traditional industries and leadership in some major sectors such as automotive technologies and the textile industry. Many studies point to a correlation between R&D spending and the number of startups. However, even in R&D spending Tamil Nadu has done much better than most states. 

Possible bottlenecks

To begin with, the state government was too slow to intervene when it came to promoting startups. As the graph above shows, most of the growth in startups across the country took off after 2015. This was when the previous government was stuck with a series of internal troubles and administration suffered.

The previous Tamil Nadu government had released the 'Startup & Innovation policy 2018-2023’ with a mission to provide an enabling and innovative ecosystem for startups registered in the state and to make Tamil Nadu a “Global Innovation hub for startups” by 2023. However, the implementation was lacklustre. 

The primary reason for this is the lack of agility, which stems from a high degree of interference from bureaucracy. For example, a source aware of the working of the Tamil Nadu Startup and Innovation Mission (TANSIM) said that something as basic as registering TANSIM as a private limited company took two years. Also, within the bureaucratic elite, as in most other countries and states, the appetite for risk taking and innovation is limited. This problem is further exacerbated by frequent elections. 

The bureaucrats often rely on the status quo, and decision making is inordinately delayed. This is also aggravated by the quantum of work, due to staff shortage. The bottom line is that bureaucrats should, as far as possible, be removed from entrepreneurship. Venkatesh Shukla, the former TiE Global Chairman has highlighted the harmful effects bureaucracy has on startups in India. Therefore, it is absolutely pertinent to decouple the working of any startup initiative from the usual functioning of the government.

Second, and most importantly, the funding ecosystem for the state is in a rudimentary state. This limits the ability of entrepreneurs to attract seed funding/ VC funding, making the ecosystem in the state rather inchoate. While the setting up of a Tamil Nadu Startup Seed Grant Fund (TNSSGF) of Rs 50 crore has been mentioned, this is too little and too late. Most startups fail or move out because of their inability to raise Series D funding (this funding serves as a final push before an IPO or is needed as the goals set for Series C funding weren’t met).

Last, there has to be a paradigm shift of thought in the state and the culture has to evolve. So that in time, firms and startups see cities in the state as startup hub like Bangalore or Gurgaon. In fact, there has been little to no effort from the Tamil Nadu government to change the outlook of the cities and in promoting a pro-millennial approach. To create a startup infrastructure, the first and foremost action should be to create entrepreneurial thinking and awareness among the youth. Further, public policy interventions are needed in areas of access to capital, access to talent, access to markets, and a pro-innovation regulatory and fiscal policy. 

Why are startups important?

According to an OECD study, startups play a major role in developing our economy. In fact, the same study identifies that in certain developed economies more than 50% of the jobs are contributed by startups. Another research, across a large sample of OECD and emerging countries, found that young small firms, rather than small firms as a whole, are net job creators. Historical data shows that this was true even during the Great Recession. More importantly, startups innovate more and are subsequently found to be more productive. And, the fundamentals of economics teach us that innovation and continuous accrual of productivity, apart from capital, are necessary for sustained growth. Further, startups are more often wealth creators, not wealth destroyers. Therefore, for Tamil Nadu to have sustained and prolonged growth, focusing on startups is important. 

However, the same importance given to attract industries or FDI has not been given to startups in the state. Numerous studies have shown that FDI attraction does not mean employment generation. Though indigenously developed startups can contribute to the generation of both Gross Domestic Product (GDP) and Gross National Product (GNP), industries set up on FDIs contribute only to GDP. This implies that startups account for more wealth accrual for the state. This is the reason why many developed nations are now making efforts to spread their innovation and startup hubs spatially. Also, creating a startup ecosystem costs a small fraction of money, but it will warrant the state to do things differently than before. 

Therefore, the immediate need in the state is to focus on startups. All that is needed is a business “ecosystem”, where potential entrepreneurs can learn the right skills and innovation is both encouraged and nurtured.

Immediate steps TN govt should take 

While the current government is reexamining the policies proposed and rethinking the interventions needed, the following steps should be taken by the government on an immediate basis to promote startups in the state. 

Regulatory and administrative barriers: 

> VC and startup leaders have requested governments to keep “traditional bureaucracy” away from startups and entrepreneurship. Tamil Nadu should follow the same. The appointment of Shivaraja Ramanathan, a social entrepreneur leading Native Angels Network and with working experience across Tier 2/ 3 cities, as the CEO of TANSIM is a much needed step in the right direction. However, TANSIM is governed by a Board of Directors, which is majorly composed of IAS officers, and the CEO is expected to report to the Board, which will make all major decisions. This does not give much autonomy to the CEO or the organisation. The current composition of the Board should be completely revamped, and it should be majorly comprised of private sector experts associated with startup: Startup C suite executives, VCs, prominent angel investors, etc. How can bureaucrats, who have no experience in entrepreneurship, decide which policy will suit the startups or which startup should get funding and how much?   

> Efforts to promote entrepreneurship and startups requires an interdisciplinary approach between various ministries – such as the MSME, industries, finance, higher education, etc – therefore attempts should be made to create a process, wherein, TANSIM could directly work with different agencies/ ministries, allowing for decisions to be taken at a speed that startups require, thereby, bypassing traditional bureaucratic red tape.

Supply side interventions:

> In Tamil Nadu, there seems to be a lot of focus on IIT Madras when it comes to the startup scene. But for any successful ecosystem what is most important is access to funding. Not just seed funding, but funding at different stages of development. For example, the number of startups initiated in countries such as New Zealand and Turkey is high, but average post entry growth is much lower. The primary reason behind this is the lack of funding for later stages. Therefore, the state government should focus on creating funds for startups at different stages of development. The best case study for this would be Norway, where public funds have been directed towards private VC funds to create a fund of funds. A Norwegian public company, Argentum Fondsinvesteringer AS, has invested together with Private VCs, creating three funds, these funds in turn invest directly into firms for equity returns. The fund currently manages nearly 1,000 firms. The success of Norway’s fund of fund model has propelled South Korea and Turkey to emulate the same. There are also examples of countries and sub-nations creating their own direct VC fund, such as Sweden. In a stratified country such as India, such interventions can also help in maintaining affirmative action, but in such a case what could be a concern is lack of capacity and trust.

>What differentiates Tamil Nadu’s industrial growth model from other states is the spatial development of industries. The same should be emulated for startups. The state should focus on a cluster-based approach for startups. A good example for this is French Tech –  where they focus on different regions of France for different industries. Like the city of Nantes is a seafood/ food processing hub. It is important for the government to identify the competencies of different clusters in Tamil Nadu and model policies and strategies for the emergence of startup hubs. For example: Tuticorin could be a seafood hub/food processing. Apart from Chennai, cities like Trichy and Hosur could be promoted as startup hubs. By setting up an airport in Hosur, the government will be able to foster growth in that region. With Hosur being in close proximity to Bengaluru, the state will be able to attract top talent and can offer a lower cost of living and capital expenditure for startups. This would also propel the economy in the Krishnagiri/Dharmapuri belt. Trichy, which has the right mix of elite universities (NIT Trichy, IICPT, IIM, BIM, Sastra), has the talent and pedigree to promote a startup ecosystem. Trichy’s easy connectivity to other Tier 2/3 cities in the state makes it a compelling candidate.

> In order to kindle interest and to showcase talent within Tamil Nadu, there should be a yearly contest to select 10 high achieving startups domiciled in the state, whereby each startup in seed stage would be awarded Rs 2 crore each, apart from other support.  

Demand side interventions:

>To promote interest in innovation and to foster entrepreneurship within the university ecosystem, the Tamil Nadu government could set up foundries (modelled after Oxford Foundry) in different universities and colleges. This would act as a coworking space within prominent universities of Tamil Nadu and would focus on providing entrepreneurship and technological skills. The foundry would also be a place for students to network, ideate and learn the latest happenings related to funding, startup and technological progress. The foundry could be financed either completely by the government for government and semi-governmental institutions, and can be slowly taken into private colleges on PPP mode with support from the TN government. Further a digital app could connect all the foundries, allowing for startup founders to network.

>There have been numerous events to propel industrial growth in the state, such as the CM’s Investment Conclave. On the same lines, there is a need to have startup conclaves, bringing together startup leaders, innovators and VCs, etc. 

>In the long term, the focus should be on reforming the school curriculum. There should be a structural transformation, with a shift from rote learning to learning by doing. Research shows that this attenuates critical and entrepreneurial thinking. Further, a compulsory course on entrepreneurship should be introduced at the school/ university level. So students learn about successful startups, ideation, formulating business concepts and the world of fundraising.   

>Though Tamil Nadu missed the initial bus when it came to promoting entrepreneurship and startups, it is still not too late to catch up. The Indian startup system is in a very nascent stage and the country has achieved very little in comparison to other countries, such as China. The Chief Minister of Tamil Nadu, MK Stalin has taken steps in the right direction – such as appointing the Economic Council – which has gained the state much needed legitimacy in international circles. Now, if the state government could work towards creating a conducive ecosystem for startups, Tamil Nadu has the potential to become a leading state for startups.

(Views expressed are the authors’ own)

Salem Dharanidharan is an alumnus of the University of Oxford and Paris Institute of Political Studies (Sciences Po, Paris). He is an executive coordinator at Dravidian Professionals Forum and co-founder of Oxford Policy Advisory Group.

Ruby Rajendran is a BTech and MTech graduate from IIT Madras in engineering design. She works in the startup space. 

The authors would like to thank Ramachandran for his contributions.

Become a TNM Member for just Rs 999!
You can also support us with a one-time payment.