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April 03, 2014

Will Dr.Rajan wake up to the Exodus of SaaS Startups?

As an email addict, I'm only happy to have my credit card get charged automatically by Google (for extra storage) and Boomerang (a cute little Gmail management tool) - both US-based companies who (understandably for them, unfortunately for me) bill me in US Dollars. I wish we at Venture Intelligence could charge our customers the same way for accessing our database services. But thanks to the RBI, it looks like we can't - unless we re-incorporate in Singapore or Delaware, USA. As today's Economic Times article indicates, this combined with the 0% Capital Gains tax (on sale of shares in private companies) in Singapore just makes the proposition almost a no brainer and explains why so many of the venture capital-backed SaaS/Cloud-based businesses are rushing out.
Software product companies are also stymied by a RBI mandate - meant to protect credit card users- that prevent companies from debiting money without the customer approving every transaction. Enterprise software maker FreshDesk recognised this roadblock early and chose to register the company in the United States right from inception in 2010. Its development operations are in Chennai. The company now has over 18,000 clients, including Pearson and Unicef. "This mandate defeats the entire business model," said 38-yearold cofounder Girish Mathrubootham who did not want to lose customers who would have found the process tiresome.

But data analytics startup Profoundis wasn't so lucky. "Our retention rates went down to 30% as opposed to an industry standard of 80%. We were forced to register in Delaware last month," said Jofin Joseph, the 25-year-old cofounder of Profoundis which expects to earn revenue of about Rs2 crore next fiscal. The relatively low chances of big-ticket exits for investors who back India-based companies are also proving to be a deterrent for many startups.

"All things being equal, lawyers prefer to recommend a New York or Singapore-based startup over an Indian company to the clients looking for an acquisition," said Vaibhav Parikh, a partner at law firm Nishith Desai Associates. To address this perception issue, GamePlan, an Indore-based company which makes software for the construction sector, also incorporated a separate venture in Delaware, United States, called True Intelligence Technologies.
Tsk tsk.

Now that the rupee is appreciating (remember the day Dr.Raghuram Rajan took over?), interest rate hikes have been paused and the long talked about new banking licenses announced, hopefully Dr.Rajan will turn his attention to the small tweak that will alleviate the plight (flight?) of  startups (including that of poor old VI, of course) from the country. (The capital gains tax of course will have to wait for the next Next FinMin.)

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