How Government Policies Shape Startup Ecosystems: Key Insights

Discover the impact of government policies on startups in India. Explore tax incentives, regulatory reforms, and initiatives like Startup India that foster growth and innovation.

Historically, the government has played an indispensable role in fostering the growth of startups. One of the clearest examples is Paytm, an Indian fintech giant. In its early days, Paytm was able to tap into government-backed initiatives like Digital India and UPI (Unified Payments Interface), which laid the groundwork for the company's exponential growth. With the support of regulatory frameworks and infrastructure, Paytm was able to scale rapidly, revolutionizing digital payments in India. Without this government push, the journey might have been much more challenging, if not impossible.

There are several other examples of many such companies that have benefited from government initiatives. As India stands at unique crossroads of achieving its target of a $7 trillion economy, the role of regulations and the government will become more pivotal.

We thought it would be timely to break down how regulations affect startups, and how they will shape the growth of startups in the near future.

In the early days

Prior to 2015, when the Government of India announced its initiative geared specifically towards startups—the Startup India initiative—setting up, running, and operating a startup was largely complex. The ecosystem was primarily concentrated in sectors like IT services, software development, and outsourcing, with consumer-oriented startups in e-commerce just beginning to emerge. In 2013, there were only four unicorn startups. Startups also had limited access to resources they needed—like incubation and accelerator support—which was still nascent. Since then over the years, more than 53 regulatory reforms have been enacted to further streamline operations and encourage innovation within the startup ecosystem, marking a significant shift in how the government engages with and regulates emerging businesses in India.

Understanding How Regulation Affects Startup Growth

Regulation, often seen as a hindrance, can actually be a major enabler for startups, provided it is carefully balanced. Perhaps the biggest example of this can be seen for some fintech companies. The government’s push for a digital-first economy and support for digital wallets allowed players like Paytm and PhonePe for instance, to capture a massive audience.

That being said, regulation can also impact startups in a variety of ways—from data protection and compliance laws to intellectual property and taxation. It is essential that regulations are not overly restrictive but flexible enough to accommodate the unique challenges startups face. For example, tax incentives can significantly boost startup growth by reducing financial burdens, thus allowing entrepreneurs to invest more in innovation.

That brings us to understanding the role of tax exemption.

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Tax Incentives and Grants for Entrepreneurs

Government-led tax incentives and grants have been a cornerstone of startup support. The Indian government’s Startup India initiative, for example, offers tax exemptions, easy patent filings, and access to funding, ensuring that entrepreneurs have the resources and space they need to experiment and grow. Of late, the ecosystem of itself has been able to air the grievances related to their tax as well. This led to the abolition of angel tax, last year, which gave startups a breath of relief.

That being said, some obstacles still remain.

Lack of awareness

Despite the abundant support available, a significant challenge remains: the lack of awareness among startups regarding the government’s offerings. Many entrepreneurs are unaware of the specific programs available to them, either due to lack of access to information or complex bureaucratic procedures. For instance, a study indicated that the current system is seen as inefficient and unpredictable, leading to significant bureaucratic hurdles that discourage entrepreneurial activity.

At WeWork Labs, when we conducted a drive with DPIIT to bolster registration numbers, most startups we spoke with said they were unaware of the benefits they had as founders vis-a-vis the government. “I think as a founder this [registering for DPIIT] is something that is always at the back of your mind, it is something that you need to get done,” Aashika Abraham, the Founder of Mama Miya told WeWork Labs at a DPIIT drive at WeWork Galaxy.

We recommend reading about our efforts with DPIIT here.

Going beyond the metros for startup innovation

Looking ahead, the startup landscape is evolving rapidly. Data from startup meetups in Chennai and the growing pre-seed ecosystem highlight how the next wave of innovation is coming from smaller cities and rural areas, not just metropolitan hubs. At WeWork Labs, we also interacted with the vibrant startup community in Chennai and spoke with StartupTN which is leading the efforts to bolster regional startup ecosystems.

“With mentorship, we realise that while a lot of Chennai-based startups have the exposure and understanding of growth, other cities need the support a bit more to be able to grow at the scale they want, so our incubation centres are there to facilitate the same,” said Sivarajah Ramanathan, Mission Director of StartupTN, in a conversation at our first founder meetup in Chennai.

Read about all our efforts in Chennai, here.

WeWork Labs Take

As we move forward, the role of the government in supporting startups will only become more vital. For startups to thrive, they need a collaborative environment where innovation can flourish within a framework that protects all stakeholders. At WeWork Labs we understand the importance of bridging the gap between government regulators and startup founders. Our work in building this bridge has allowed us to help both sides understand each other better, driving awareness about available support systems and ensuring that entrepreneurs are equipped to navigate regulatory landscapes.

If you are a government representative who is interested to work with us, please feel free to reach out to us at labsteam@wework.co.in.

See you in the next WeWork Labs blog!