In today’s knowledge-driven economy, innovation is the prime driver of progress. India’s ability to generate wealth and create social good will come to naught unless we monetise innovative ideas by unshackling entrepreneurship. For innovation to flourish, we need to fund ideas to take them to market. Without capital, even the most transformative ideas can die before they take wing.
India’s economic agenda is being shaped to deliver high growth based on an innovation matrix that cuts across social and economic activity. This approach is expected to result in economic reforms and value-added products and services that are key drivers of India’s progress. Whilst the strategy is sound, the process of implementation is pivotal to its successful outcome.
Financing the innovation ecosystem: What India needs is a national innovation ecosystem that puts in place a financing cycle: academia generate ideas, especially those based on science and technology, which are incubated to proof of concept through government-sponsored seed and incubation funding and then taken to market through businesses backed by venture funding. India’s ecosystem is not only suboptimal but it also lacks a some enabling mechanisms that can help innovation germinate and take root.
Let’s start with academia’s role in generating ideas. While government funding supports this phase of the innovation value chain fairly adequately, it falls short in nurturing ideas and growing them to a proof-of-concept stage where business can intervene. The notion of incubating start-ups within academic institutes is still nascent. The regulatory reforms that permit researchers to unconditionally assume dual roles as academicians and entrepreneurs is yet to be fully implemented. Academic entrepreneurs have virtually built the entire US technology sector and are continuing to do so despite the economic recession. India urgently needs to emulate this aspect of the US innovation ecosystem.
It is when the proof of concept is taken to the market through a process of commercialisation, that venture funding makes the critical difference between an idea and successful business. Venture funding relies on a regulatory framework that encourages risk-taking. Today, venture funds in India typically steer clear of risk-ridden small business ventures, leaving a huge funding vacuum in the commercialisation process. Venture funding in the US, on the other hand, is at the heart of driving innovation to the market. A sobering statistic offers food for thought: Venture capital investments in India reached $658 million in 2010, a 19.8% increase over 2009, according to data collated by Venture Intelligence. Compare that with China where venture capital investments reached $5.4 billion in 2010, a 79% increase over 2009.
A secondary stock exchange: I strongly believe the disconnect lies in lack of access to capital markets. Technology companies that do not have revenues are not eligible under Sebi guidelines to apply for listing. Such companies are stuck in a loop in terms of availing venture funding: venture capitalists won’t fund technology companies that don’t provide exits to capital markets and capital markets are not available to such companies owing to listing regulations. Industry bodies such as the Association of Biotechnology-Led Enterprises (ABLE) have been pushing Sebi for differentiated eligibility criteria for technology, research and innovation-driven companies for several years to no avail. Unencumbered entry and exit will be the catalyst in taking innovation to the next level.
So, how do we create an enabling innovation ecosystem that enables entrepreneurs to propel ideas into a sustainable business that adds value to our economy? The only option is to set up a secondary stock exchange to allow technology-driven, revenue-less, innovative companies to access capital markets, emulating the role Nasdaq plays in the US for technology companies and London’s AIM for technology companies in the UK. This will spur innovation and unleash an entrepreneurial avalanche that will transform the pace of value-added growth in the Indian economy.
Drip feeding innovation will not build a sustainable technology sector, nor will risk-averse investors build a credible innovation ecosystem. Innovation requires sustained capital infusion both by the government and private sector. Unless investors are willing to back innovation, it will not create a credible knowledge-led economy that delivers high value to the economy. This is the underlying rationale for a secondary stock exchange for technology/innovation-driven companies that do not generate revenues but drive value creation as they approach the market.
Beyond capital markets: The ecosystem must also facilitate curiosity-driven research across academia and business. India’s diverse social and economic challenges provide a substrate for innovative solutions that can create innumerable business opportunities based on affordability and accessibility. The size of the Indian market adds to business opportunities. But the optimal financial model to catalyse innovation is missing.
The government has initiated the investment process through some financing mechanisms that cut across grants, seed and incubation funding. The private sector now has to bring in the next level of funding through venture capital and access to capital markets. We need regulatory reforms that enable the creation of another exchange to spur innovation. Ideas abound in India. The challenge is to monetise these ideas through successful ventures. Only then can India move rapidly up the value chain to achieve faster, more sustainable growth.