In the age of digital transformation, data has become the most valuable resource for startups. Whether it is a fintech startup analyzing transaction patterns, an edtech app tracking student performance, or an e-commerce platform using purchase history for targeted advertising, data lies at the core of innovation. However, this reliance on personal data exposes businesses to risks of data breaches, identity theft, unauthorized sharing, and regulatory penalties.

Governments across the globe have responded by enacting comprehensive data protection laws that regulate how personal data can be collected, stored, processed, transferred, and deleted. For startups, these laws are not just compliance obligations. They directly affect product design, business models, investor trust, and global expansion. India’s Digital Personal Data Protection Act, 2023 (DPDP Act), the European Union’s General Data Protection Regulation (GDPR), and U.S. state-level frameworks like the California Consumer Privacy Act (CCPA/CPRA) are shaping how startups must operate in a privacy-first digital ecosystem.

In this article, CA Manish Mishra talks about Data Protection Laws and Their Impact on Startup Business Models.

The Digital Personal Data Protection Act, 2023 (India)

The DPDP Act, 2023, enacted on August 11, 2023, is India’s first comprehensive privacy law. It replaces the patchwork of obligations under the IT Act, 2000 and the SPDI Rules, 2011, creating a modern framework aligned with international standards like GDPR.

Applicability and Scope (Section 3)

The DPDP Act has an expansive scope:

• Processing within India: It applies to all digital personal data processed within India, whether by startups, large corporations, or government bodies. Offline data digitized for processing is also included.

• Extraterritorial Application: The law applies to foreign companies if they offer goods or services to individuals in India or process data of Indian users. For instance, a U.S. e-commerce platform delivering to Indian customers falls under the Act.

This ensures that both Indian startups and global players serving Indian consumers are bound by uniform privacy standards.

Key Definitions

• Data Fiduciary: The entity (e.g., startup or business) that determines the purpose and means of processing personal data. They hold primary responsibility for compliance.

• Data Principal: The individual whose data is being processed, such as a customer or user. The Act grants them rights over their personal data.

• Data Processor: A third-party entity that processes data on behalf of a Data Fiduciary, such as a cloud hosting service.

Lawful Basis of Processing (Section 4)

Personal data can be processed only on two lawful bases:

• Consent-Based Processing: Requires free, specific, informed, unconditional, and unambiguous consent. It must be obtained by clear affirmative action (no pre-ticked boxes). Consent must also be easy to withdraw.

• Certain Legitimate Uses: Processing without consent is permitted in limited cases such as:

  • Compliance with law or court order.

  • Medical emergencies and disaster management.

  • State functions like subsidy delivery or certification.

This ensures that consent remains the rule, while legitimate use functions as an exception for public interest.

Consent Requirements (Sections 5 & 6)

The Act strengthens user control through strict consent conditions:

• Purpose-Specific Consent: Consent must be collected only for a clearly defined purpose. Startups cannot use data for unrelated activities without seeking fresh, separate consent from the user.

• Plain Language Notice: Notices must explain why data is collected, how it will be used, and users’ rights, using simple and clear language so individuals fully understand before agreeing.

• Revocable at Any Time: Consent is not permanent. Users must be allowed to withdraw it whenever they wish, ensuring continuous control over how their personal data is handled.

• Easy Withdrawal: Withdrawal of consent must be as simple as giving it, through accessible settings or dashboards, without forcing users into lengthy procedures or unnecessary complications.

• No Blanket/Bundled Consent: Broad or bundled approvals covering multiple unrelated purposes are invalid. Each purpose must have separate, specific consent so users retain meaningful choice and control.

• Startup Obligation: Startups must redesign apps, websites, and systems with clear opt-ins, layered notices, and consent dashboards, ensuring compliance while building user trust and avoiding penalties.

Duties of Data Fiduciaries (Section 8)

The DPDP Act, 2023 places strict obligations on Data Fiduciaries startups or businesses that decide why and how personal data is processed. Under Section 8, they must ensure accuracy of data when used for decisions or disclosures, preventing harm from outdated or incorrect information. They are also required to adopt reasonable security safeguards, such as encryption and access controls, to protect against breaches. If a breach occurs, Fiduciaries must promptly notify the Data Protection Board of India and affected individuals, ensuring accountability and transparency. Additionally, they must erase personal data once its purpose is fulfilled, unless retention is legally mandated. These duties push startups to invest in cybersecurity, data governance, and user rights management systems, making compliance both a legal necessity and a trust-building strategy.

Processing of Children’s Data (Section 9)

Children’s privacy receives special attention: 

• Parental Consent Mandatory: Startups must collect verifiable consent from parents before processing a child’s data, ensuring minors are not exposed to privacy risks or misuse without parental approval.

• Ban on Tracking: The Act prohibits startups from tracking children’s online activities, preventing profiling or exploitation through browsing behavior, thereby protecting minors from privacy invasion and digital manipulation.

• No Targeted Advertising: Personalized or targeted advertising directed at children is strictly banned, safeguarding minors from manipulative marketing practices that could exploit their age, interests, or vulnerabilities.

• No Behavioral Monitoring: Continuous observation or surveillance of children’s online behavior is not allowed, ensuring their digital activities remain private and free from exploitative monitoring.

• Impact on Startups: Edtech, gaming, and social media startups must redesign platforms, adopt parental consent systems, and eliminate tracking features to comply with Section 9 and avoid penalties. 

Significant Data Fiduciaries (Section 10)

The government may classify certain entities as Significant Data Fiduciaries (SDFs) based on factors like data volume, sensitivity, and riskto individuals, or potential impact on national interests:

• Appointment of DPO: SDFs must appoint a Data Protection Officer (DPO) located in India to oversee compliance and act as a point of contact for grievance redressal.

• Data Protection Impact Assessments (DPIAs): Mandatory DPIAs must be conducted for high-risk processing to evaluate privacy risks and ensure safeguards before launching data-intensive projects.

• Independent Data Audits: SDFs must undergo regular third-party audits to assess and verify compliance with data protection obligations under the Act.

• Impact on Startups: Fintech, health-tech, and other data-heavy startups may face higher compliance costs, stricter governance requirements, and increased regulatory oversight once designated as SDFs. 

Rights of Data Principals (Sections 11–14)

The Act empowers individuals with several rights: 

• Right to Access: Users can request a clear summary of personal data being processed, including purposes and recipients, ensuring transparency and accountability in how startups use customer information.

• Right to Correction/Erasure: Individuals can demand correction of inaccurate or outdated data and request erasure once the processing purpose ends, ensuring their information remains accurate and not unnecessarily retained.

• Right to Grievance Redressal: Startups must provide effective complaint mechanisms so individuals can seek timely resolution of issues related to their personal data, ensuring accountability and protection of their privacy rights.

• Right to Nomination: Users may nominate a representative to exercise their rights in cases of death or incapacity, ensuring continuity of privacy protection even after their absence. 

Startups must create self-service portals to handle these requests efficiently.

Cross-Border Data Transfers (Section 16)

The Act follows a list approach of personal data can be transferred abroad unless a country is specifically restricted by the government, giving flexibility to businesses while ensuring national security and public interest are safeguardedare:

• Sectoral Overrides: Despite general allowance, sector-specific regulations apply. For instance, RBI mandates that all payments data must be stored exclusively in India, limiting startups’ flexibility to use foreign servers.

• Impact on Startups: Startups relying on foreign cloud providers must design careful data localization strategies, ensuring compliance with both the DPDP Act’s rules and sectoral mandates like banking and financial regulations. 

This affects startups using foreign cloud services and necessitates careful data localization strategies.

Penalties and Enforcement

The DPDP Act introduces a strict penalty regime: 

• ₹250 Crore Penalty: Imposed for failure to implement reasonable security safeguards, stressing the importance of cybersecurity measures and protection of personal data against breaches.

• ₹200 Crore Penalty: Levied for failure to notify data breaches promptly or for misuse of children’s data, ensuring accountability and prioritizing child safety.

• ₹150 Crore Penalty: Applicable to Significant Data Fiduciaries (SDFs) for non-compliance with enhanced obligations like DPO appointment, DPIAs, and independent audits.

• Enforcement Authority: Penalties are enforced by the Data Protection Board of India (Section 18), an independent body empowered to investigate violations and impose fines.

• Impact on Startups: Compliance is a business survival necessity; penalties of this scale can damage finances, investor confidence, and market reputation if laws are ignored.

Recent Updates: Draft DPDP Rules, 2025 

• Release of Draft Rules: In January 2025, the government published Draft DPDP Rules, 2025 for consultation, providing operational clarity for businesses on implementing the DPDP Act’s provisions.

• Standardized Consent Notices: Rules propose uniform formats for consent notices, ensuring users get clear, plain-language information on data collection purposes, usage, and their rights, requiring startups to redesign consent mechanisms.

• 72-Hour Breach Reporting: Mandatory reporting of data breaches within 72 hours to the Data Protection Board, aligning India with global standards, pushing startups to adopt robust monitoring and incident response frameworks.

• Timelines for Data Erasure & Grievances: Draft rules specify deadlines for data erasure after purpose completion and grievance redressal, compelling startups to establish efficient dashboards and complaint-handling systems.

• Status as of August 2025: The DPDP Act is enacted but awaits full notification. Draft rules are under consultation, so startups should prepare compliance frameworks early to avoid rushed implementation later. 

Pre-DPDP Regime in India

Until the DPDP Act comes into force, startups remain bound by:

• IT Act, 2000 (Section 43A) & SPDI Rules, 2011: Startups must adopt reasonable security practices, take consent for sensitive data processing, and publish a privacy policy. Non-compliance can lead to compensation liability for negligence and misuse.

• CERT-In Directions, 2022: Companies must report cyber incidents within six hours, retain IT logs for 180 days in India, and appoint nodal officers for coordination, ensuring rapid response and stronger cybersecurity accountability.

• RBI Data Localization Directive: All payment system data must be stored exclusively in India. If processed overseas, copies must be deleted and repatriated to India within 24 hours, ensuring strict financial data security.

• Startup Obligation: Startups must balance current compliance under IT Act, SPDI Rules, CERT-In, and RBI guidelines while proactively preparing governance, consent, and security frameworks for smooth transition to the upcoming DPDP Act. 

The European Union’s GDPR

The General Data Protection Regulation (GDPR), effective since May 2018, is the global benchmark for data privacy. 

• Extraterritorial Scope: GDPR applies worldwide, covering any business offering goods, services, or monitoring to EU residents. Even non-EU startups must comply when handling personal data of European individuals.

• Lawful Bases (Article 6): Data processing is permitted only on six bases: consent, contract, legal obligation, vital interests, public task, or legitimate interests. Startups must establish and document the correct lawful basis.

• Special Categories (Article 9): Sensitive data like health, biometrics, or race receives extra protection. Processing requires explicit consent or specific exceptions, making compliance critical for startups handling medical or biometric information.

• Privacy by Design (Article 25): Startups must embed privacy safeguards in product development from the beginning, ensuring features, databases, and systems prioritize user rights and minimize unnecessary data collection.

• DPIAs (Article 35): For high-risk data processing such as profiling, large-scale monitoring, or sensitive information use, startups must conduct Data Protection Impact Assessments to identify risks and adopt preventive safeguards.

• Breach Notification (Article 33): Organizations must notify relevant authorities within 72 hours of becoming aware of a breach. This ensures accountability and gives users protection opportunities against potential harm.

• Penalties (Article 83): Non-compliance can attract heavy fines: up to €20 million or 4% of global annual turnover. These penalties highlight GDPR’s strict enforcement and make compliance non-negotiable.

• Startup Relevance: For startups serving EU customers, GDPR compliance is essential. It builds user trust, ensures lawful processing, and prevents penalties, shaping how digital businesses handle personal data globally. 

U.S. Data Protection: The State-Level Patchwork 

• California (CCPA/CPRA): California grants consumers rights to know, delete, and opt out of data sales. Enforcement by the California Privacy Protection Agency compels startups to adopt transparent, consumer-first privacy practices.

• Delete Act, 2023 (California): The law establishes a centralized system by 2026, allowing individuals to request deletion of their data from all registered brokers, pushing startups to streamline deletion and compliance workflows.

• Other States (Maryland, Minnesota, Vermont): From 2025, these states introduce stricter data minimization, sensitive-data protections, and consumer rights, forcing startups to monitor multiple privacy regimes and tailor compliance strategies accordingly.

• Startup Relevance: Startups entering the U.S. market must prepare flexible compliance models, balancing varied state-level requirements. Building GDPR-grade systems with state-specific toggles helps ensure long-term adaptability and legal readiness.

Impact on Startup Business Models

Data protection laws are reshaping how startups build products, earn revenue, expand globally, and manage compliance are:

Revenue Strategies

Heavy dependence on monetizing user data is no longer sustainable under strict regulations. Startups are shifting to subscription, freemium, or value-added services, reducing legal risk while maintaining profitability through compliant revenue streams.

Operational Costs

Compliance is resource-intensive. Startups must invest in legal experts, cybersecurity tools, independent audits, and consent management platforms, increasing operating costs but ensuring trust, investor confidence, and long-term sustainability.

Global Expansion

Serving international customers requires multi-jurisdictional compliance: GDPR for Europe, CCPA/CPRA for California, and DPDP for India. Startups must build adaptable frameworks that can meet overlapping but varied global obligations.

Risk Management

Laws impose strict breach reporting timelines (6 hours under CERT-In, 72 hours under GDPR). Startups must maintain robust incident response plans, monitoring systems, and data governance policies to manage risk effectively.

Conclusion

The Digital Personal Data Protection Act, 2023, together with global frameworks such as the GDPR in Europe and state-level privacy laws in the U.S., marks a paradigm shift in how startups must approach personal data. These laws are not limited to mere compliance checklists; they fundamentally influence how businesses are structured shaping product development, revenue models, investor confidence, and opportunities for international expansion.

Admittedly, compliance brings additional burdens in the form of higher operational costs, governance structures, audits, and legal oversight. However, the long-term benefits far outweigh these costs. Strong data protection practices strengthen customer trust, improve brand reputation, attract investors, and ensure resilience in global markets.

For startups, the message is clear: privacy must be embedded as a core business principle, not treated as an afterthought. In today’s data-driven economy, the ability to protect personal data is not just a safeguard against penalties but a strategic advantage, forming the very foundation of sustainable growth.

Frequently Asked Questions (FAQs)

Q1. Why are data protection laws important for startups?

Ans. Data protection laws ensure startups handle personal data responsibly. They protect customer privacy, reduce breach risks, build user trust, and help startups remain compliant while expanding globally.

Q2. How does the DPDP Act, 2023 affect Indian startups?

Ans. The DPDP Act applies to all digital personal data processed in India and even foreign companies serving Indian users. Startups must ensure lawful processing, consent management, breach reporting, and security compliance.

Q3. What role does GDPR play for startups outside Europe?

Ans. GDPR has extraterritorial reach. If a startup offers goods or services to EU residents, GDPR applies. Non-compliance can lead to penalties up to 4% of global annual turnover.

Q4. What challenges do startups face under these laws?

Ans. Startups face challenges like higher compliance costs, redesigning consent flows, meeting breach-reporting timelines, and implementing cybersecurity frameworks while maintaining scalability and profitability.

Q5. How do U.S. privacy laws impact global startups?

Ans. The U.S. has state-level frameworks like CCPA/CPRA in California and newer laws in Maryland, Minnesota, and Vermont. Startups must design adaptable compliance strategies for multiple states.

Q6. How do data protection laws impact startup revenue models?

Ans. Laws restrict over-reliance on user data monetization. Startups are shifting toward subscription models, freemium services, and value-added offerings to remain profitable while staying compliant.

Q7. What measures should startups take to comply?

Ans. Startups should implement privacy by design, maintain consent dashboards, adopt cybersecurity safeguards, establish incident response plans, and prepare compliance frameworks adaptable across jurisdictions.