The capital of the newest Indian state Telangana, Hyderabad has emerged as new startup hub for the whole country. In September last year, a NASSCOM report showed that close to 8% of the startup activity in India has been happening in Hyderabad. Sanjay Enishetty, of 50K ventures, predicts that by 2018, the Hyderabad Startup Ecosystem will possibly be bigger than the Bengaluru Startup Ecosystem.
What changes happened in last two years which have made Hyderabad into a breeding ground for startups?
The brand “Hyderabad” wasn’t built in just two years; rather it was done through a gradual process of radical economic policies. Thanks to Mr Chandra Babu Naidu, the ex-Chief Minister of undivided Andhra Pradesh, and his obsession with technology, Hyderabad has become India’s answer to the Silicon Valley. A typical anecdote of the time was how the former Chief Minister, Chandrababu Naidu, managed a meeting with Bill Gates and convinced him to start Microsoft’s Research Centre out of Hyderabad. At the peak of its IT revolution, Hyderabad was home to titans like Microsoft, Facebook, and Google. Naidu’s obsession with technology and efficiency had earned him the moniker of Andhra Pradesh’s CEO. However, political issues like the Telangana movement put a halt to Hyderabad’s march towards becoming the predominant startup hub.
Was There A Need Of A Startup Hub?
The new state of Telangana was just born after decades of violent struggle. The agitation witnessed prolonged demonstrations and shutdown calls, blocked train and road services through the region and largely disrupted public life. The Deccan city of Hyderabad was almost written off as an investment destination when K. Chandrashekar Rao swept to power in Telangana in June 2014 and was elected its first Chief Minister.
The new government met various industry leaders and assured the safety of employees and a conducive environment. The toning down of the socialistic rhetoric helped in assuaging the concerns of IT sector . The whole movement of making Hyderabad a startup destination was to satisfy the concerns of corporates about the newly formed state.
Bengaluru, the IT and startup hub of the country is and was a competition for Hyderabad. The government realised that Hyderabad couldn’t compete with Bengaluru on software exporting output. Data analytics, cloud technology, internet of things (IoT), gaming and animation, start-ups, data centers—areas that no one city in India can yet lay a claim to—were identified in the process.
Hyderabad was able to woo Amazon to the state. Amazon also set up its then biggest Indian warehouse spread across 280,000 November 7. creating in Telangana. Flipkart soon followed, opening its largest store, spanning 220,000 sq. ft, near Hyderabad.
Telangana Government also worked closely with new age tech companies like Uber, Ola and other taxi aggregators by developing the new regulatory framework. Eventually, Uber and similarly, the Swedish furniture major, Ikea also decided to do their Indian debut in Hyderabad. Ikea has bought 13 acres primary property in Hitec City.
Boeing Co. has also decided to set up a plant to manufacture the fuselage of Apache helicopter along with Tata Advanced Systems Ltd. These examples clearly point us in the direction that a lot of large companies have started investing in Hyderabad.
Local Innovation Drives Foreign Investment
But for all these companies, whether services companies or the product development firms, the need for a local innovation ecosystem is a critical part of their consideration. Even if a city wants to attract big business, it is essential to ensure that a thriving startup ecosystem exists. Ramesh Loganathan, a recent president of local industry body, Hyderabad Software Enterprises Association, said “It resonated well because some of the larger companies are looking at the city because we have projected a very strong R&D innovation start-up focus. They like to be operating in that environment.”
J. Kotter in his publication, Leading Change, demonstrates in his changed management model that any change is preceded by helping others to see a need for change and for convincing people to act immediately. But the governments in India don’t work that way. Barring few exceptions, most of the time, government policies have been ‘reactive’. For instance, the high levels of unemployment in the country and subsequent poverty led UPA government to introduce MNREGS. Also, unlike in the corporate organisations, once a person is selected to lead a (govt.) agency, he or she usually has only a limited amount of time to see a change effort through.
Creating A Guiding Coalition
The poster boy for the startup revolution in Hyderabad is Kalvakuntla Taraka Rama Rao (KTR), the IT and Panchayati Raj Minister of Telangana State. Known to be a progressive and disruptive young thinker, KTR’s vision is to make Hyderabad a global city and Telangana the most sought after investment destination in the country. KTR has travelled to numerous countries as an ambassador of Telangana’s success story and has been able to attract a lot of industries in Telangana.
As part of ITIR policy, the government of Telangana established T-Hub. T-Hub is a unique public/private partnership between the government of Telangana, 3 of India’s premier academic institutes (IIIT-H, ISB & NALSAR) and key private sector leaders. It stands at the intersection of the start-up, academic, corporate, research and government sectors. The first phase of T-Hub was housed in a 70,000 square foot building called CatalysT, making it the largest incubator in a single location in India entirely dedicated to entrepreneurship. The building is used for co-working spaces, meetings, mentoring, networking sessions and conferences. T-Hub provides access to mentors, investors and academia under one roof. Presently, there are 800 start-ups that have housed themselves in T-Hub.
Change efforts often start with few people who believe that the change is necessary. The need in the initial phase of guiding the change is to gather enough initial core believers in the cause. This initial group should be influential regarding the roles they hold in the “church”, the reputations they have, the skills they bring and the relationships they have. Even Kotter also suggested “involving respected leaders from key areas of your church in this coalition will pay great dividends later”.
If you look at the board of directors of the T-Hub, you will find almost all the members want to attract investments in the City. The board of directors for T-Hub are not only the well-known industry leaders, but the list also comprises of the angel investors who can invest in these startups and it also has academics on the board who can mentor the budding startups.
Developing A Change Vision
Within one year of coming into power, the Government of Telangana was able to establish a startup incubator, T-Hub in Hyderabad. The vision of the government was evident; To make Hyderabad the startup capital of India. The idea was to build a support system that is so powerful that startups don’t find it difficult to get advice, mentorship, funding and infrastructure. The government didn’t stop at establishing T-Hub. The government recently introduced Innovation Policy-2016.
The Innovation Policy of the Government of Telangana is based on five broad pillars
- Developing physical infrastructure & program management capabilities
- Focus on creating sustainable funding models, through funds and other instruments
- Develop human capital, by creating the right environment and support systems for learning, experimentation and innovation from the early phases of education
- Proactive engagement with industry to continuously promote and identify innovation
- Encourage startups in the Rural and Social Enterprise space by providing additional incentives
Communicating The Vision
Kotter (1995) suggests the leadership should estimate how much communication of the vision is needed and then multiply that effort by a factor of ten. The government of Telangana has done a good job in this area. The government has organised numerous startup summits and fests in last two years. They have also advertised about the Hyderabad’s startup story on every platform. The government has clearly reiterated at many occasions that how it thrives to build Hyderabad as the startup capital of the country.
Empowering Broad-Based Action
Removing existing obstacles which may be getting on with the change is a critical step. Nothing is more frustrating than believing in the change but then not having the time, money, or support needed to effect it. Telangana government has ensured that the startups in Hyderabad get rid of these obstacles. The most critical obstacle is the absence of seed capital. The Government has been trying to overcome this forming T-Fund and T-SEED. Along with this, it has also collaborated with some of the VCs and the angel investors to ensure the conducive environment for both the VCs and the start-ups. The figure depicts how after the establishment of the T-Hub, the total funding of startups in Hyderabad has increased.
Apart from this, there is no dearth of examples wherein the government has gone an extra mile to resolve the issues of the new age tech companies amicably. Uber was in the eye of the storm over a rape incident in Delhi by one of its drivers when it announced its plan to establish its first centre of excellence in Asia in Hyderabad to provide round-the-clock specialised support for “critical incidents that require immediate attention”. Taxi aggregators such as Uber, Ola and TaxiForSure were under government scrutiny on whether they should be regulated when Uber said it would invest $50 million in the city. The biggest factor that sealed the deal in Telangana’s favour was the government’s offer to “work closely” with Uber to develop a new regulatory framework. Telangana’s transportation department evolved a framework to allow new-age online services like Ola and Uber to operate without any ambiguity.
When the Telangana government recently considered a ban on surge pricing, on the lines of the Delhi government, on Ola and Uber, the state’s IT department intervened on their behalf to point out the economic rationale behind surge pricing. The state’s transport department relented.
Planning And Generating Short-Term Wins
To attract startups to Hyderabad, the Telangana government has introduced incentives. As funds are always an issue for startups at the nascent stage of their conception, any relief by the government is always a welcome step. By reducing the taxes and in some cases even reimbursing the taxes, the Telangana government has put Hyderabad one of the favourite places for startups in the country.
The following are the incentives for the startups at Hyderabad:
- Service Tax paid by startups: Reimbursement of Service Tax paid by startups incubated in the Government supported/recognised incubators, which annual turnover does not exceed INR 50 Lakhs for first three years.
- Reimbursement of VAT/ CST: Annual Reimbursement of VAT/CST paid in Telangana, up to a maximum of INR 5m turnover by incubated startup companies within a period of first three years of being incubated.
- Promotions: Government shall provide reimbursements of 30% of the actual costs including travel incurred in international marketing through trade shows. This incentive will be subject to a maximum of INR 5 Lakhs per year per company.
- Patent Filing cost: The cost of filing and prosecution of a patent application will be reimbursed to the incubated startup companies subject to a limit of INR 200,000 (0.2 million USD) per Indian patent awarded. For awarded foreign patents on a single subject matter, up to INR 1m (1 Million USD) would be reimbursed. The reimbursement will be done in 2 stages, i.e., 50% after the patent is filed and the balance 50% after the patent is granted.
- To promote idea stage companies, the government shall offer recruitment assistance of INR 10,000 per employee for the first year.
- Startups that record a year-on-year growth rate of 15%, as per audited accounts, shall be eligible to get a grant of 5% on Turnover, subject to a limit of INR 1m within a period of three years from the date of incubation.
Do Not Declare Victory Too Soon
The best part of the Telangana government was that it didn’t just stop at the T-Hub. They came out with the proper Innovation policy on the state. The innovation policy is very comprehensive and first of its kind in the country. It is so robust that the state like Karnataka, whose capital is already the biggest startup hub in the country, is taking cues from it. The government has also envisioned to establish two more T-Hubs in tier two cities of the state. Apart from this, the government has also decided to set up an incubator for rural and social enterprises which can have an impact on the life of the people at the grassroots. This is a very welcome move by the government. The government is not just stopping at Hyderabad, but it is also using the expertise of startups for human development in rural parts of the state.
Incorporating Changes Into Culture
The Chief Minister of the state and the KTR, the IT minister of the state have taken theory personal interest in ensuring that Hyderabad adapts to startup culture. But the question is what if, three years down the line, a new government comes, and it doesn’t match up to the vision and the dedication of this government to promote startups? This is one of the critical questions when you reflect on public policy through the change management perspective. In India, the government changes every five years, so it becomes tricky to envision a massive change, implement it and then see if it is sustainable. So, only the time will tell, if the change is incorporated into the culture.
Hyderabad has a potential of becoming the largest startup hub not only in India but also in South East Asia. The government’s intent along with the supply of human capital through numerous engineering colleges in the state and the premier institutes like IIT, IIIT, ISB and TISS is added advantage to this vision. Hyderabad is even showing tremendous growth in some startups. But still, the number of startups in Hyderabad is significantly fewer compared to the global start-up hub competitors. Building a startup ecosystem is a long process. It will take a lot of time. The policies formulated by the government (including the Innovation Policy 2016) have a lot of short-term goals (i.e. the plan looks at only the next 5 years). But it fails to assign long-term goals. If the government wants to make Hyderabad an international startup hub, it has to have long term goals. For instance, you can’t just keep on focusing on establishing new incubators, but you also need to focus on aspects like will there be enough resources such as water, electricity, roads and public transport to cater to the employees of these startups 10 years down the line. If we don’t think about things like this, then Hyderabad will also end up like Bengaluru, marred by the traffic jams.
Secondly, if we look at the startups which are operating out of Hyderabad, we will find that most of their products cater to the Indian Market. And when you are just aiming at the local markets, it becomes difficult to have a scalable business model. This is one of the main reasons for a startup to fail. Mentorship by academicians is a welcome move to get rid of this problem. But the T-hub shouldn’t rely just on academicians for this. Because sometimes academicians are not able to look at practical intricacies.
Third, the number of Angel Investors and VC firms which are collaborating with T-Hub is comparatively few and far between. To become a real startup hub, the government should get more VCs and investors on board.
Another issue is the steep rate of office spaces at T-Hub. The government should think of reducing the rates of cabins. While the cost of a booth space in T-Hub can range anywhere between INR 55,000 and INR 65,000 a month, the same is available at a private incubator for INR 5,600 or less. The cost should be reduced.
How To Build A Startup City
I have zeroed down some of the important factors which are necessary to build a startup city. Some of those factors are:
Public-private Partnership: it is very required for the government/administration of the state/city to partner with the corporates, academicians, venture capitalists, industry leaders to build up a coalition which can work towards creating an innovation culture. The T-hub is a desi example of how PPP can do wonders when implemented properly.
Providing funding and operational support to startups: Operational support provided by granting the seed capital for the startups. The support also extended by tax exemptions, infrastructural support, by marketing the products of these startups. Telangana government has established funds like T-Fund, T-seeds to provide seed capital to the startups. Along with this, the government has provided infrastructure for these startups to function and also given them an exemption on taxes.
Offering Direct incentives: It is important to give incentives for the administration to attract the startups to their cities. It’s a human tendency to get attracted to the incentives.
Include the ideas of entrepreneurs in policy formulations: it is very necessary for the government to consider the opinions of all the stakeholders. In this case, the key stakeholders are the owners of these startups. The government should be continuous communication with the entrepreneurs for knowing their issues which cities. The administration of Tel-Aviv, the second largest startup hub in the world is in constant touch with the entrepreneurs for resolving their problems.
Human Capital: The critical prerequisite of a city to be a startup hub is that it should have a good supply of talent. It is necessary for the administration to ensure that the quality education is imparted. The proximity to premier institutes also plays a vital role. Silicon Valley became of huge success because of its proximity to Stanford and several other major state schools.
Basic Infrastructure: Infrastructure in the city is also a critical factor. Bengaluru is a very attractive startup destination, but die amongst the traffic problems; many companies are planning to shift their operations to other cities. Cheap public transportation is also necessary.