Innovation is a game of numbers. You need to end barriers to start: Jayant Sinha

Interview with Partner & MD, Omidyar Network India Advisors

Jayant Sinha has been passionate about promoting entrepreneurship, saying the Indian culture of scarcity has rendered most of us risk-averse and focused on steady income. Recently, he has been involved as a committee member for the Planning Commission’s report on ‘Creating a vibrant entrepreneurial ecosystem in India’ A partner and managing director of impact fund Omidyar Network India Advisors, which finances entrepreneurship for social benefit, he speaks on these views to Abhineet Kumar. Edited excerpts:

What makes the Indian middle class so averse to taking risk?
We come from a country of tremendous poverty for thousands of years. It’s a culture of scarcity. All of us are very scared of being in a situation where there is tremendous related to one’s income. If you are not earning a steady income, you are starving on the street.

We are very focused on stability and security. Unless you come from a business family that can really support you through the ups and downs of entrepreneurship, it is tough being an entrepreneur. Most of us who come from the middle class and do not come from a business family are extraordinarily nervous on risking our life and career. That is not the case in the West because of the strong safety net that exists or the abundance of jobs. People are willing to take risks with their life. Here, the stakes are too high; if you fail, you risk your life.

What are the key recommendations the Planning Commission panel has made to promote entrepreneurship?
The recommendations are basically for the entire entrepreneurial ecosystem, largely constituted of the government, academic institutions, businesses and the supporting firms of venture capitalists and angel investors. All these play the roles of various actors in the ecosystem.

In general, there are five sets of recommendations. One is about the catalytic policies that the government can think about and then there is a set of recommendations around providing more capital to the sector. Another set are around businesses, which should think of themselves as being entrepreneurial hubs, and for academic institutions to promote entrepreneurship. Finally, there are recommendations to develop a platform where the whole ecosystem can collaborate. 

Where is the support from the government most required?
There are supportive tax policies in Israel, the US and the UK to encourage start-ups. Here, angel groups do not get any tax support. We have made recommendations on how angels should be treated, both as individuals and as groups. We have suggested benefits to funds on pass-through taxation, long-term capital gains and transfer of unlisted securities.

For individuals, if they are making angel investments, they should get tax reduction with a certain cap every year. There are a lot of things the government can do.

What are the recommendations for facilitating funding?
There are recommendations on how domestic financial institutions should be thinking about supporting venture capital (VC) funds in terms of equity contributions. Right now, there is no almost no domestic VC industry. Ninety per cent of the money that comes to India is from outside — sovereign wealth funds, Harvard endowments, University of Pennsylvania endowments. These people are funding innovations in India. That’s not right. If you want to fund innovation, that should be supported by financial institutions in India - an insurance company, pension funds or banks. We have to encourage our domestic financial institutions to be willing to support domestic VC funds, domestic seed funds.

Similarly, there are recommendations for venture debt, which is special by being not asset-backed but cash flow-backed. This requires sophisticated understanding of how to support small businesses.

Which sectors would attract such funding in India?
Many sectors are already active but can be scaled up. Health care, education, manufacturing of various kinds, retail, online commerce — these are all sectors where we can have a lot more entrepreneurs.

Large companies feel the Licence Raj is back, as approvals and resources are increasingly becoming difficult for businesses. How do you see these kinds of initiatives getting traction?
We have suggested creating small business parks, like the software technology parks we created 15 years ago. Small business that sets up in small business parks should start through self-certification or single-window clearance. There’s a lot of regulation, whether it is in getting incorporated, getting environment clearances and so on; there should be a clear regulatory structure. Below a certain employee size, start-ups should get all those certifications done very quickly.

Small companies are created and when they are not successful, they need to be shut down. Liquidating and shutting businesses in India is incredibly cumbersome. What we have suggested is, small business parks will enable small companies to start up quickly and see whether they can scale up quickly or not. If they can’t do that, they should be able to shut down quickly as well. We need small business parks to encourage this kind of initiative.

Innovation is a game of numbers. You never know from where the great innovation is going to come from. If we create barriers to innovation, we create a lot of impediments to creating companies. So, the experiment will not happen.

How is your fund performing in India? How is its presence increasing?
Our fund got physical presence when I joined three years earlier. We have capital from Omidyar and the goal is to achieve social impact.

We can achieve this in two different ways. One is through supporting for-profit businesses with operating at the base of the pyramid and helping innovate product and services. Second, by helping non-profit organisations that can also scale up, grow and develop. These are philanthropic investments and our goal is not to generate financial returns as such.

For-profit companies can also have social impact. Those we have backed are having tremendous social impact. For example, in micro finance, our total investment is $500 mn globally, in which $100 mn is in India.

What is the break-up of for-profit and not-for-profit firms in your investments?
We have committed over $100 million across for-profit and not-for-profit organisations since we set up the India operation in 2009. The portfolio split between these two is 50:50 but in terms of dollar investments, it’s 75 per cent in for-profits and 25 per cent in not-for-profit.

Also any return that is generated is again ploughed back. So, our goal is not to generate financial returns but to have huge social impacts.