In June, Commerce and Industry Minister Piyush Goyal announced the state startup rankings for 2021. While Gujarat and Maharashtra are the best performing states, Meghalaya has the highest honors among the northeastern states.
These rankings are based on market access, capacity building, enabling environment to incubate, promoting entrepreneurship and innovation, funding and institutional support for startups in India.
India has done relatively well in the startup space over the past decade, thanks to various policy initiatives from the government.
However, Indian startups usually face many hurdles like intense competition in the market, change in customer preferences, cutting edge technology, scarcity of skilled employees, market linkages, lack of financing support, etc.
Among all these factors, the absence of free access to finance and market connections is the main stumbling block for startups to survive and thrive. Of the 61,400 startups launched in India, nearly 93 percent have not been able to raise funds from angel investors so far. Moreover, very few agricultural start-ups have mobilized funds through this channel.
In fact, India’s startup ecosystem is leaning in favor of big data, education technology, fintech, logistics and supply chain activities, rather than agriculture. The main reason for this may be the low purchasing power of the target segment: farmers. More than 86 percent of them are small and marginal farmers.
India has more than 1,000 start-ups offering innovations in the field of agricultural technology. However, it lacks scale due to the high cost of servicing small/marginal farmers.
While startups offer innovative and emerging technology solutions due to their domain expertise, they are not as adept at financial management.
Since finance is the oxygen of any business, and even more so in the case of agricultural start-ups, their financial health can be improved by adopting the following:
keep proper records: Startups do not have easy access to financing due to opaque ledgers and insufficient business-related information (Kaplan and Stromberg, 2001). Agricultural startups can attract more investors by maintaining proper ledgers that reflect a true and fair view of business operations.
Other stakeholders i.e. customers, employees and suppliers are also expected to keep proper records of the startups. Multi-user software with a cloud accounting system, tax planning, and automated return files powered by artificial intelligence may be useful for agribusiness startups.
opening Separate business bank account: Following the concept of “business entity”, every novice agricultural entrepreneur needs to maintain a separate bank account for his business in order to distinguish it from the personal financial transactions of the owner. According to case law in Salomon vs Salomon Co.Ltd. , the business entity will ensure not only the payment of a justified claim, but also the defense against wrongful claims.
Affordable development and Climate-Smart Technologies: Agricultural startups may have a better success rate, if they focus on SDG 13 – climate action while developing their products and services. Agricultural start-ups Gold Farm, Khethinext, Oxen raised $13 million by making their services more accessible to small and marginal farmers.
preparation realistic budget: Agricultural startups have to prepare their budget in a practical way by validating their financial forecasts. Further, they need to monitor their performance using the CEO dashboard (sales, expenses, earnings, etc.) at quarterly intervals to make sure things are in order.
Perfect usage Factors of production: Agricultural startups may boost their overall productivity by adopting an asset-light approach and mobilizing funds from internal sources. For example, instead of buying sophisticated machinery/equipment during childhood, startups may choose to rent them out to reduce costs and increase returns.
cash management Float: If the profit and loss account examines a startup’s business operations, the cash flow statement displays its financial health in X-rays. Essentially, meager inventories and fast receivables improve their cash flow.
Therefore, agri-entrepreneurs have to manage their cash flow, both in the short and long term, in order to meet the requirements of suppliers, bankers, investors and the like.
Generally, companies follow the “order-of-scroll theory” to mobilize their finances (internal financing, debt, and equity in that order), yet startups turn to equity after increasing internal resources, possibly due to their disruptive business models.
angel tapping Investors: The perceived ability of a startup company exceeds its past track record and achievements and is generally measured as the internal rate of return for investors (Gompers and Lerner, 1998). Angel investors, among other things, look for Valuation mismatches, exit opportunities, and regulatory and tax issues before investing in agribusiness start-ups.
Moreover, information asymmetry in startups will lead to moral hazard and negative selection. By addressing these issues, Ninjacart, a start-up agricultural company involved in the supply chain, has mobilized $164 million from angel investors.
sturdy build Networks: Network is the net worth of any entrepreneur. Although agricultural start-ups work in small teams, they need to connect with a group of agricultural researchers, financial experts, and tech wizards.
Agricultural startups such as Stellapps and Sid’s Farm’s digital dairy supply chain by relying on advanced technologies and networking applications to create market connections.
Risk Management: Every day is a new day for any entrepreneur. Being seasonal ventures, emerging agribusinesses face new challenges and inherent risks – credit, market and operational – that need proper scaling and ingenious handling.
ESG . factoring In the business model: As ESG (Environmental, Social and Governance) gains traction in the market, agricultural start-ups may develop their business model in a sustainable way. Case in point, Licious, India’s first D2C rhinoceros horn, received a Thought Leadership Award for its compliance with ESG standards in 2021.
In short, apart from delivering quality goods and services to customers at a reasonable price in a timely manner, agricultural startups need to focus on their financial health by relying on skilled youth and digital technologies.
If agricultural start-ups manage innovation, finance, and marketing properly, they will become unicorns/decacorns in no time.
Srikanth is Associate Professor, Registrar and Director (Finance), Syamala is Research Officer, NIRDPR, Hyderabad
August 15, 2022