Challenges faced by startups in an International Environment Essay Example

towards creating a favorable business environment. Private establishments in India have also been proactive in promoting businesses. Consequently, in areas like availability of credit, India has performed well compared to developed nations.

Infrastructure

India's infrastructure falls behind that of most countries globally. Even though it boasts the world's largest rail network, its road and air transportation systems are not fully developed.

Despite significant progress in the past decade, India's telecommunication sector has limited adoption of telephone and internet services. Furthermore, the country faces challenges in fully utilizing its abundant human resources due to shortcomings in primary and higher education. However, there is a noticeable urban-rural divide within this industry, resulting in a substantial pool of educated professionals in IT and ITES sectors located primarily in major cities.

Macroeconomic Factors

India's robust financial system and diligent regulation have allowed it to withstand the current global recession.

The interest rate on savings in India has been steadily increasing, providing businesses with easy access to funds. However, a worrisome issue is the volatile inflation rate that has remained at approximately 10% over the past two years. As a result, the purchasing power of the population has been negatively impacted.

Market Conditions:

Political instability in India has adverse effects on various aspects, including market conditions. India's domestic market is ranked fourth worldwide and exhibits a wide range of consumption patterns. Despite having a low per capita income, there are specific areas of substantial prosperity that generate significant demand.

This has been one of India's most significant assets during the recession. Moreover, India has made considerable advancements in its government sector, which has attracted major global companies. Consequently, despite falling behind the OECD in all four aforementioned factors

on an overall scale, India showcases asymmetrical development where certain regions are highly competitive and provide a favorable business environment.

United States

The United States of America has maintained its position as the world's leading economic power for approximately 100 years. Despite currently experiencing a severe recession, it continues to be one of the most competitive economies globally.

Institutions

The legal and governmental organizations in the US are renowned for their favorable attitude towards business. They promote transparency in business operations, supporting the effectiveness of a capitalist economic system.

Infrastructure

Although its railroad network lags behind other countries, the United States excels in road and air transportation sectors. Furthermore, it is a global leader in telecommunications, with numerous top telecom companies originating within its borders. Additionally, the US is host to some of the most prestigious educational institutions worldwide.

Despite the ongoing recession, the United States has been able to attract a highly skilled workforce from all around the world due to its size and the importance of its currency in the global economy.

Macroeconomic Factors

Despite significant deterioration in the United States' budget and other macroeconomic factors, experts still consider it a safe investment opportunity. Unemployment levels have been high and inflation has been decreasing over the past two years, posing major concerns.

Market Conditions

The domestic market in the United States is not only the largest but also the most diverse in the world.

Competition in the market is driven by innovation, resulting in the global success of many US companies. However, current macroeconomic conditions have caused a temporary decline in consumer demand. Nevertheless, the

domestic market continues to be a catalyst for business growth.

Introduction to Web services

Web services are designed for human interactions and facilitate information sharing while also supporting both B2B and B2C commerce.

Nowadays, there is an increasing integration of web-based procedures, allowing people to comfortably interact within their own space. These web-based services can be extensively utilized in the value chain, providing quick access to information.

Application of Porter's diamond to the Indian IT and net-based industry

The IT-ITeS industry in India has become a driving force for the economy. It contributes significantly to GDP growth, urban employment, and exports as it aims to build a "young and resilient" India. Despite the economic crisis, this sector maintained a double-digit growth rate and emerged as a leader by diversifying across various regions and industries while adapting service offerings. The Indian IT-BPO industry displayed resilience and determination in overcoming unpredictable conditions caused by the economic crisis, reaffirming India's core value proposition.

Consequently, India remains the global leader in the outsourcing market.

Factor conditions:

India possesses a large and constantly growing pool of skilled and affordable human resources. The combination of skilled workforce, multilingual proficiency, and cost advantages has propelled the country to become a frontrunner in Knowledge Process Outsourcing (KPO) worldwide. The increasing adoption of technology by domestic industries has begun to manifest in improved performance and competitiveness. This indicates that India will not face any limitations in terms of resources in the near future, giving it a competitive edge over other countries like the United States and European nations.

The job here is that the availability of resources will limit innovation and progress compared to other countries.

Demand

conditions:

The increasing demand for IT & web-based services in India creates a more demanding local market, leading to a national advantage. Currently, most of the services provided are back-end services for foreign countries (export: 60% to the US and 20% to the UK). It will take time to increase the demand within our own country.

Related and supporting industries:

When local supporting industries are competitive, companies have access to more cost-effective and innovative inputs. Alongside the growth in IT services and BPO exports, software product development and technology services have also seen continued growth, reflecting India's increasing role in global technology IP creation.

Firm Strategy, Structure and Rivalry:

Local culture and the type of business greatly influence firm strategy and structure.

Indian IT companies heavily rely on low cost global delivery, 24*7 timely delivery, customer retention, and cost leadership. The organizational structure in India tends to be more hierarchical and the power distance is greater, influenced by Indian culture. These companies face significant competition from multinational counterparts and other Indian IT companies. When mid-sized Indian consulting firms like TCS and Wipro introduced offshoring by charging lower prices per consultant, large IT consulting firms like IBM and Accenture had to hire IT professionals in India and charge comparable prices per consultant.

Application of Porter's diamond on US IT industry

In the United States, the Information Technology Revolution brought about a gradual change in the way business and government operations are conducted. The country transitioned key processes in manufacturing, utilities, banking, and communications to networked computers.

Due to this, there was a significant decrease in manufacturing costs and an increase in

productivity. Since 2002, the U.S. economy and national security have heavily depended on information technology and the information infrastructure. All sectors of the U.S. economy, such as energy (electric power, oil and gas), transportation (rail, air, merchant marine), finance and banking, information and telecommunications, public health, emergency services, water, chemical, defense industrial base food, agriculture,and postal and transportation are directly supported by an interconnected system of networks.

Factor conditions:

The IT industry in the US relies on innovation and advancement due to a shortage of skilled workforce and high labor costs. This gives the US a competitive edge in technology, but other countries are also catching up, making it challenging for the US to maintain its advantage in the long run.

Demand conditions:

The demand for IT and web-based services is increasing as more industries incorporate IT into their operations. However, because of expensive labor, many IT jobs are outsourced to countries with low-cost labor available.

Related and supporting industries:

In the US, supporting industries related to IT are thriving and fiercely competing with each other. This competition provides cost advantages to IT firms.

Furthermore, these industries are highly integrated, giving the US a competitive advantage in terms of supply chain and value chain addition.

Firm strategy, structure, and competition:

US IT companies are primarily concerned with achieving low-cost operations, prompting them to outsource most of their backend operations to countries with low-cost labor. Rivalry also compels US IT companies to outsource operations in order to reduce costs and achieve higher customer satisfaction.

CHALLENGES FACED WHILE RUNNING STARTUPS: INDIA AND US

Based on our discussions with people working in different startups, we have decided to take a vertical-based perspective of startups and compare and contrast the

challenges faced while running startups in both locations.

The main focus will be on operational information. As part of the project, we have interviewed Mr. Bhupendra Khanal, CEO of Inrev Systems, Bangalore, a company specializing in web services for social media analytics. We have also interviewed Mr.

Krishna Das, a 3rd year FPM Student who had experience working with startups and Mr. Abhishek Yadav, working in Tenmiles.com.

Scheme

The startup's strategy involves determining whether it should specialize or not, the mindset it should have (long term or short term), and the type of growth and scale it should target.

Specialized or Generalized?

If the startup specializes, it will gain recognition and differentiation. In the case of InRev Systems, it had the first mover advantage as the first company in India in the social media analytics space.

While concentrating all investments in one area carries potential danger, it can be effectively managed by diversifying products within the same country. This helps mitigate risk. If your primary product faces intense competition or external challenges, it is wise to shift focus towards other offerings. In the event that these alternatives also fail to deliver satisfactory results, expanding into a related country should be considered as an option. Essentially, adopting an agile approach is crucial.

Originally, InRev Systems had a primary focus on fiscal analytics and provided a range of three to four products. Regrettably, the recession had a significant negative effect on their market presence for all these products. To adjust and take advantage of the increasing popularity of

social media analytics, they redirected their attention to this specific area where they possessed expertise - analytics. It is crucial to prioritize and excel in our fundamental strengths.

Short Term vs Long Term

In terms of startups' long term vision and execution plans, the United States and India have different realities. In an ideal scenario, startups would have a clear long term vision and an execution plan. However, in the US, it is easier to find support and secure funding for startup concepts through professors acting as Venture Capitalists in colleges. This allows for a greater focus on the concept itself and its long term goals. On the other hand, startups in India need to approach or reach breakeven point before attracting attention from any Venture Capitalists due to numerous unsuccessful startups that make VCs skeptical and cautious about taking risks.

So, a traditional Indian startup typically has a short-term mindset focused on achieving breakeven.

High Growth vs Controlled Growth

The rate of growth depends on the scale of operations, which, in turn, relies on the available resources. If there are ample resources, high growth becomes possible. However, if there are resource constraints, companies have to opt for controlled growth. Take the example of Orkut, an internal project of Google. The access to resources allowed for a large-scale launch. In contrast, Inrev faced both resource and financial limitations, resulting in a strategy of controlled growth.

Support plays a significant role in determining the success of startups in both the US and India. However, there are notable differences between the two. US startups receive strong support and emphasize rapid growth from the outset. On the other hand, Indian startups often have to

navigate controlled growth until they reach the breakeven phase. Another important distinction is that in the US, entrepreneurs develop their companies up to a certain stage and then hand over ownership rights to capable managers.

These cats now run the company while the enterprisers get net income and work on other thoughts. Coming to India, Indian enterprisers are more affiliated to their startups and like to retain control. This clearly affects their growing at ulterior phases and influences their selling determinations as good.

Selling

Marketing for a startup involves undertaking all necessary measures to gain visibility, position itself apart from competitors, and attract customers. Acquiring customers may be the most challenging aspect of this process. The US Market is inundated with startups, making it highly competitive unless one has a unique idea.

Therefore, the main focus is largely on selling. US Startups emphasize on large scale selling from the beginning and allocate enough finances. They even visit universities and present projects, give talks about their company, and establish their presence. On the other hand, Indian Startups focus more on public relations and networking. They prioritize immediate customers rather than a massive scale. Of course, the reason behind this disparity is finances.

The choice is primarily to travel for low cost marketing through social media and blogs and look for innovative ways to increase web traffic. Currently, there are startup conferences where moderately established startups receive attention and coverage. As mentioned earlier, Indian entrepreneurs, who are attached to their startups and prefer to maintain control, may not be able to grow rapidly in the later stages and therefore have to limit their marketing efforts

accordingly.

Operations

For a startup, Operations refer to the types of processes in place, cost issues, and strategies to minimize them as well as decisions regarding outsourcing.

Procedure

The process for startups is initially adhoc due to the low speed of merchandise development, taking 2-3 months from idea to execution. However, as time passes and the company and product complexity increase, it becomes necessary to establish proper procedures. Startups should consider the level of flexibility needed when implementing these procedures, as it becomes challenging to introduce new procedures once the company has grown.

Converting people to accept these changes is the most difficult part. In this aspect, US startups are more proactive compared to Indian startups.

Expenses

A common belief is that costs are lower in India compared to the US, especially when it comes to the workforce. However, over time, the wages of the workforce, which were initially around 10% of the US workforce, have increased to 55% of the US workforce. The costs of other factors like power and transportation have also increased over time. When considering the inefficiencies in India's infrastructure, it is found that there is not much cost advantage in India compared to the US, leading some startups to move to the US.

Outsourcing

We have learned about outsourcing, where companies delegate non-essential tasks to focus on their core competencies. For startups, the main reason for outsourcing is the cost advantage. However, by doing so at the early stages, startups miss the opportunity to establish a competitive advantage in that country, which becomes difficult to achieve later on. This decision also affects innovation and research and development. Therefore, this strategy

should only be considered if well-thought-out and if the startup has a clear understanding of its long-term consequences. Indian startups tend to resort to outsourcing due to cost considerations and short-term thinking, resulting in missing out on crucial technical knowledge from the beginning.

Companies use cloud computing to outsource server management, resulting in a lack of expertise in managing servers in-house. On the other hand, US companies focus on building their in-house resource pool and gaining expertise due to access to funding. This could be one of the reasons why Indian startups are not as successful and large as startups in the US.

Human Resource

Human resource issues for a startup primarily involve employing workers, providing suitable work conditions, understanding their culture, managing worker rewards, offering incentives for quality work, and managing the hierarchical organizational structure. These human resource factors vary across countries based on cultural differences, wage differences, and legal requirements for hiring and firing employees.

Cultural Comparison between India and US

Some key cultural differences between India and the US are:

Power Distance

In the US, the power distance is very low.

Employees in start-ups quickly and efficiently take on and manage full projects, demonstrating strong dedication. They often become invested in the company, which further motivates them. Thus, the importance of the tasks assigned to employees often outweighs their salary. It is worth noting that power distance is significant in India.

The employees in the initial phases are seldom given significant tasks and may be unaware of the project at times. They also rarely take ownership of their work and remain as employees throughout. As a result, salary becomes their primary concern in a startup company.

Open v/s Closed

Entrepreneurs in the United

States are open-minded and information about them is readily available on websites and blogs. They place emphasis on teamwork and execution. In contrast, Indian entrepreneurs are quite closed and there is very little information available about them in most cases.

Except for the CEO, most other team members have limited understanding and awareness of the company and its vision.

Surpassing vs Timid

US entrepreneurs are highly aggressive, frequently issuing press releases and organizing events to engage with clients, investors, and employees. They actively participate in all key industry gatherings. In contrast, Indian entrepreneurs tend to be more reserved and less proficient in dealing with the media and public interactions.

They are generally present at investor and startup shows but rarely attend relevant industry events.

Logical vs Emotional

United States entrepreneurs are more logical and when confronted with alternate thoughts or suggestions, they react more positively and do not take it personally. They tend to make more rational decisions while negotiating with VCs, investors, and clients. On the other hand, Indian entrepreneurs are very emotional. Many times, the advice and suggestions are taken personally and it is difficult for them to accept criticism about their companies.

Social vs Lonely

United States entrepreneurs are quite social and it is not uncommon to see rival CEOs hanging out together, sharing booth space and office space, networking together, and hosting co-sponsored parties and events.

They actively support other startup companies and entrepreneurs. In India, entrepreneurs often work alone and there is little collaboration among non-competing startups. Some of these differences are due to the early stage of India's startup ecosystem development. Many of these differences will disappear as the startup ecosystem matures over time.

Managing

employees and their compensation:

India is ranked 112th globally in terms of the ease of hiring workers. Not only is hiring difficult, but terminating employees can also be challenging for businesses.

Obtaining permission from authorities to terminate an employee in India is a complex process. The labor laws in India consist of 47 national laws and 157 provincial laws that directly impact the labor markets. These laws often contradict each other and sometimes overlap. As a result, it is extremely difficult for both employers and employees to fully comprehend their rights and responsibilities, and for enforcement agencies to ensure compliance.

In the United States, hiring and firing workers is relatively easier compared to India due to less labor laws, allowing flexibility for both workers and startup companies.

United States

While speaking with some startup companies, we discovered that Indian employees are known for being hardworking and ambitious. However, on the flip side, it is challenging to find the right employees due to the large workforce. In contrast, American employees are more open and direct, making the hiring process easier.

Administration STRUCTURE AND MANAGEMENT STYLE

One notable difference in the administration structure and management style of start-ups in India and abroad is the emphasis on control. In India, most start-ups have a hierarchical structure with a few decision-makers and the rest of the employees as employees. However, in the US, a promising employee who can take ownership may be given ownership of the product and a stake in the company, making them an owner rather than just an employee.

The level of ownership among US employees is significantly higher compared to Indian employees.

Finance

Several key concerns pertaining to funding for

a startup revolve around support requirements, revenue-boosting laws, government incentives, and investor protection. These factors mostly rely on the laws and cultural norms in a particular country, resulting in variations across nations. Additionally, such factors are more favorable for startups in developed economies compared to those in early stages of development.

Funding startup house:

The ease of acquiring recognition is a major factor in India's rank of 65th. However, reforms implemented in recent years have improved the environment for obtaining recognition. The Credit Information Bureau of India Ltd. (CIBIL), a private partnership between commercial banks and recognition information service providers, has increased the availability of recognition information in the country. In contrast, the US, which has proper recognition information available, ranks 4th in the ease of acquiring recognition.

The willingness of banks and financial institutions to lend to start-ups is higher in the US compared to India. Two main factors contribute to this difference: the availability of sufficient information about recognition in the US and government support for start-up companies to repay their loans in case of business failure. Other factors influencing the ease of obtaining recognition and evaluations are as follows:

Index

India

United States

Venture Capital

There is also a significant disparity in venture capital support between India and the US. Finding venture capital support is much easier in the US compared to India. In the US, entrepreneurs can easily find venture capital if their business idea is good.

VC support allows startup houses to focus on long-term goals, as it provides support for the long-term ends of the concern. In fact, even professors act as Venture Capitalists in college. However, obtaining Venture Capitalist support

in India is challenging. VCs in India have a rigorous filtering process to select concerns, resulting in only a small percentage of ideas receiving VC support. Another significant requirement for many ventures seeking VC support is to achieve break-even first.

So in order to secure venture capital funding, many startup companies focus on short-term goals of achieving profitability rather than pursuing long-term objectives.

Tax:

India is ranked 158th in terms of ease of paying taxes. The tax system in the country is cumbersome, requiring approximately 59 separate payments per year. Additionally, the tax rates are relatively high. As a result, there is significant tax evasion and avoidance. Unfortunately, India has not made much progress in improving this situation over the years.

On the other hand, the United States ranks 61st in terms of the ease of paying taxes. The tax rates are low and the compliance regulations are strict, resulting in less tax evasion and avoidance. When comparing certain aspects between India and the United States: one suggestion for improvement is to have simple, moderate taxes and quick, inexpensive administrative processes that can attract investors. The Investment Climate Surveys conducted in India consistently identify tax compliance as a significant barrier to business, particularly for small companies. Although the implementation of a Value Added Tax (VAT) is an improvement, there is still an urgent need to standardize the categorization of goods across states under the new VAT system.

From our experiences working with start-ups, one thing in India that is significantly attracting start-ups (as well as other IT companies) are the SEZs (Special Economic Zones), which provide tax exemptions. An example of this is Electronic City in Bangalore. When it comes

to protecting investors, both in the US and India, they are well protected and there is not much difference that has a significant impact on starting a business.

Legal

Legal issues involve the legal and procedural requirements for starting a business, the cost of legal disputes, and intellectual property rights, among others. As each country has different laws and procedural requirements for starting a business, as well as different levels of compliance with these laws, legal issues will vary between countries. In India, there are extensive procedural and legal requirements for starting a business, making the process lengthy, cumbersome, and costly. The table below shows the procedures, number of days required, and costs involved in starting a business in India.

Visit an authorized franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI) Investors Services Ltd to obtain a Permanent Account Number (PAN). Obtain a tax identification number for income taxes deducted at the beginning from the Assessing Office in the Mumbai Income Tax Department, along with the process taking 7 days. Simultaneously, register with the Office of Inspector, Mumbai Shops and Establishment Act. Register for Value Added Tax (VAT) before the Sales Tax Officer of the ward where the company is located. Register for professional tax. The legal procedures for registering a company have recently been simplified, and ideally it takes around 35 days to complete. However, this is rarely achieved in practice. In comparison, the time required to start a business in the US is much less. In the US, there are only 6 procedures required to start a business, and it takes only 6 days to register a

company there.

Another legal issue regarding startup companies is the expense of pursuing a lawsuit. In the United States, the cost of pursuing a lawsuit is quite high, and there is also a high level of compliance with laws and consumer awareness. As a result, companies in the US hire attorneys to handle legal matters. Additionally, the time required for the resolution of a lawsuit is relatively short in the US.

On the other hand, in India, the cost of filling a legal suit is relatively low, and there is a lack of compliance and consumer awareness. As a result, companies do not need to hire a permanent attorney. Additionally, the time it takes to resolve a legal issue is much longer.