Exploring prospect of startups in developing countries

A school teacher's job is to teach in the classroom, and maybe to  engage in a bit of tutoring too.  Turning the classroom teaching into a global learning platform is a success story of a 37-year old teacher from India who became a billionaire. This is certainly worth inspiring to pursue startups. Unfortunately, in the same country, the news of the suicide of a startup luminary is heartbreaking. The founder of Café Coffee Day (CCD) in replicating the idea of Starbucks in India found his journey caught in an inescapable loss trap, as his subsidy driven expansion strategy failed to develop a profitable business model.

Startup has become an easy exit for politicians and bureaucrats in developing countries to brush off unemployment, especially graduate unemployment. However, given the mixed outcomes, how to succeed with startup agenda has become a crucial issue, particularly for developing countries like Bangladesh with 87th position among 100 countries in StartupBlink Rankings Report. The focus should obviously be on strengthening the startup ecosystem. 

Startup has become a global phenomenon spreading across the world. According to Inc42 DataLabs, India is home to 39,000 active startups, and the number is growing. This startup population number might make India the second largest startup hub in terms of sheer number. The recent political agenda, startup India has significantly increased this population. It has been reported that 15,472 startups have been recognised under the Startup India programme recently. Among them, 13,176 recognised startups have reportedly created 1,48,897 jobs. To accelerate the pace further, 24 Indian states have introduced startup policies. The government also made 22 regulatory amendments and approved 1,275 patent rebates in the last three years. Funding for the startups has also grown substantially. For example, upon housing 339k startups, total funding ($11b) for startups in India in 2018 as compared to the USA ($84b) and China ($63b) was 13 per cent and 17 per cent respectively.

Among the developing countries, not only India and China and other south Asian countries, but also Middle East and North African (MENA) countries are also showing strong response to startup. 2018 saw a record number of 366 startup deals across MENA amounting to $893m of total investment., The year 2018 saw a record amount of funding in regional startups, up 31 per cent from 2017. The UAE remained the most active ecosystem with 30 per cent of all deals, followed by Egypt, which was the fastest growing startup ecosystem. FinTech overtook E-commerce as the most active industry by number of deals. More than 155 institutions invested in MENA startups in 2018 -- 30 per cent from outside the region and 47 per cent had not previously invested in the region. The recent announcement of SoftBank to invest $2 billion in building digital infrastructure in Indonesia is encouraging news for developing countries to leverage startups.

The startup concept was coined in the USA to articulate the journey of venture formation out of ideas developed in university and national laboratories--often pursued by students and faculty members.  But without having research facilities, developing counties are promoting this concept among the bright, creative students citing mega successes like HP, Apple, Intel or Microsoft. Often the success of a great idea needs a flow of ideas in making the product out of initial idea better as well as cheaper to reach profit.  In the absence of having a strong R&D ecosystem supplying that flow of ideas, bright graduates often end up being like unpaid slaves in pursuing startups.

That does not mean that developing countries should say 'no' to startups. Startup appears to be a viable alternative to conventional subsidy and incentive-driven entrepreneurship to replicate, whether for domestic consumption or export.  It's time to strengthen the ecosystem to increase the formation as well as success rate of startups.  This appears to be a serious development agenda for which most of the economic planners, policy makers and also academics in developing countries and LDCs (least developed countries) are not trained.

Despite the often cited bright side, there is a dark side of startup success, which is not only limited to high failure rate of startups. It's being reported by the Wall Street Journal, "entrepreneurs were 50 per cent more likely to report having a lifetime mental health condition and reported significantly higher rates of depression, attention-deficit disorder, substance abuse and bipolar disorder than a control group." An often-cited issue in tech circles is that many startups fail because of problems related to humans, and not to business issues, as a survey by the National (USA) Bureau of Economic Research identified the management team as the most important factor in startup failures.

But to succeed in startup, particularly in creating jobs for graduates, it should be more than an easy exit. Most of the developing countries are suffering from growing graduate unemployment. To address it, politicians and bureaucrats are pointing to startup potential-asking graduates to be creative and pursue great ideas. They are becoming popular among the youth as they talk about start-up, innovation, creativity, VC (venture capital) fund, incubation, and unicorn.  Upon offering seed capital and a place to work, bright youths are asked: pursue your dream; the sky is the limit.

The digital economy has significant latent potential to drive economic growth, virtually in every country. To show progress in building digital economy, governments of some of the developing countries are focusing on borrowing in financing digital infrastructure and service roll out, even posing a risk to crowding out private investment.  A smarter alternative could be to focus on creating an ecosystem to encourage VC funds to flow to turn ideas into digital economy success stories. To encourage VC funds, growth prospects should be well articulated, demonstrated and presented to empower investors to take bold decisions to scale up.

M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy. [email protected]