I am an Engineer from HBTI & an MBA from IIM Calcutta. I was one of those guys who gave up a 1+ Cr job offer to start up, yeah one of those idiots.
As a founder I have persisted for 6 long years to reach operational breakeven have generated more than 35+ jobs, most of them for fresh candidates, right out of college.
Over the last 6 years, I have raised capital from angel investors that has helped me not only build my product (a Software) but also survive. Every single time my startup has raised capital, however small it may be, we have got an IT scrutiny notice on valuation (some say I am very lucky ?)
Somehow the IT Officers in India believe that only the companies that have Land/buildings/Machines are real businesses that are worth of premium valuations and companies that are built around Intellectual Property are just frauds laundering money.
We have dealt with one such notice. We are dealing with one currently. And we will certainly face it again as we will continue to grow using external capital.
As a consequence, IT folks have harassed us in past, they are harassing us now and I assume that shall continue as well.
It came as a breadth of fresh air when I heard about Startup India program encouraging startup ecosystem. What an intelligent move, I thought, to encourage aspiring entrepreneurs to startup and generate tons of employment.
However, going through the hoops and tons of IFs and BUTs in the process, I realize it is not helping; instead it is burdening a startup more than anything.
I present my learning’s here for the powers that may be to see the pain of a founder in going through the simple process of obtaining a simple DIPP certificate for IT exemption (read saving some harassment from IT folks)
Step 1: The Registration Process
Registering on startup India was a breeze.
Startup India certificate too came quickly. Kudos for that too!!
Step 2- Requesting DIPP IT certificate:
This step is like a landmine filled path designed in a way that you get amputated if not killed before you make it to the other side.
How you wonder? The First requirement for DIPP request submission is that EACH incoming investor should
Have a minimum average returned income of 25 Lacs Rupees as returned income in INDIA for last three FY
OR Have a net worth of 2 Cr in last FY.
You see the issue here?
No? Please now consider these points –
- A startup that is just raising Rs 5-25 lacs may attract investment from friends and family. They are not only investing their hard earned money but also their immense faith.
GOI expects only those who have 2 cr network or 25 lacs income to invest a few lacs? Cant a father invest 5 lacs from his life long income in his son’s startup?
- Even in the case of an outside angel investor coming in the company, you expect the investor to share their complete financial health with every company (& its founder) they invest in and overexpose themselves?
If GOI it bothered it has investors PAN in ROC filings and can chase them, why ask startups to do the tough work of belling the cat?
- God forbid if you have a NRI friend/family member:
– Who is stationed outside (temporarily) India and earns his present income there
– Who has his past income languishing in Indian accounts
– And who is willing to invest
He/she won’t qualify, as he has to earn average returned income of Rs 25 Lacs in India for last three years. So even incase he meets this condition for 2 years and not for any 1 year (remember he is outside India), he wont and thus your startup will not qualify.
- Even if one of the incoming investors doesn’t meet the stringent criteria, the company suffers. Tell me of any one startup that would reject incoming money from a known source for the love of DIPP certificate? It’s a choice between survival and good health. You can’t have good health if you don’t survive. Simple.
The second requirement is that startups should get a valuation certificate from SEBI registered Category-1 Merchant banker.
Now suppose a startup raises Rs 20-25 Lacs from friends, family & some angel investor, GOI expects company to spend upwards of Rs 100,000 to 150,000 (almost 5%) of this vital surviving capital on just obtaining a merchant banker certificate? Really? When a CA account or a Cat-3 merchant banker can do the same work for Rs 5,000-10,000 at most.
Not to mention the company ends up spending equal amount of money for services rendered by CA, Company secretary & auditors for each transaction.
This needs to be simplified and simplified now before India misses its startup bus.
Here are my humble suggestions for the policy makers –
- Anyone should be allowed to invest in a company irrespective of their income or net-worth just like how GOI is encouraging everyone to startup irrespective of their bank balance/pedigree. Putting criteria such as Rs 25 Lacs returned income/ Rs 2 Cr net worth for angle/seed/early investments is counter productive.
- Startups have long gestation period. Definition of startup should be broaden to ten (10) years.
- Abolish the Angel tax. At the initial stage Investors invest in the founders more than the idea. And valuation is a subjective guesstimate of an uncertain reality that two parties – investors & founders- agree to. Nobody else can judge what’s agreed between the buyer and the seller in a free market leave alone the Assessment officer (AO’s).
- The issue of round tripping (read money laundering) can be avoided by the following simple checks
- Money flow should be allowed only via banking channels.
- Audit the source of funds i.e the investors. Investor’s PAN numbers should be enough to draw his/her entire history.
- Audit the application of funds i.e what the company did with the money.
For the valuation bit:
- Make DCF the default method for valuation.
- Trust our CAs and their certifications because if a CA is not qualified then how would a Merchant Banker be (remember both are CA’s/MBA Fin, right?). At the end of the day they are JUST validating and endorsing projections of a founder. They can’t, and I repeat they cant, value a startup independently without looking at founder’s vision and projections. Why bring them in the process then?
- Why insist on SEBI registration for a merchant banker/CA? We are dealing with startups that are unlisted and raising small money and SEBI’s stringent guidelines may be a tad too much for them to meet.
All this can’t succeed if the changes are not percolated at the ground level, that is, at the level of the Assessing Officers. Sensitize them of the following to help them understand and appreciate Startups:
- Founders are not swindlers by definition.
- Share premium is not same as income.
- Valuation is a projection of future cash flows and should never be compared to actuals
- No one is paying a single rupee bribe as no one is doing anything illegal.
We somehow have to make life of a startup founder easier as they are the ones who create new jobs and create wealth.
Please nurse us today and we promise to feed as many as we can tomorrow!