Why do Indian Start-ups fail?
Mostly because they have a narrow understanding of what Scaling-Up Means.
Roots of Scaling Up Philosophy
There is a reason why Industrialization, the father of our modern technology, the way we know it, was born in the west. When industrial age set in (1700’s), British were controlling more than 24% of the world, using a population of 8.2 Million. When American settlers were fighting the British oppression, they were about 2.5 million. The French, Germans, Portuguese and Spanish were not far behind.
Compare that with India with a population of 127 Million covering some 7% of world area at the peak of Mughal Empire.
You can see, that 8.2 million or 2.5 million cannot control such a vast geographical span and grow economically, without moving faster, communicating better, and producing more.
This gave rise to our present technologies which are prosthetic in nature. Every single function that has been developed since the industrial age is an extension of ourselves. We started off by building extensions to our arms and legs, and ended up by building a brain. From simplest to the most complex body part.
Why do we need population? We need it to produce more things which can be sold and to defend these means of production. Capitalistic economies have had a simple rationale, which is to grow working population, real or artificial.
How have advanced countries done it? First by working themselves, then hiring slaves, then building machines. Every process cheaper than the previous one. It is economics and the return on investment at play.
The need to scale things up is an inseparable need of a capitalistic framework. I am not saying it’s good or bad, but it’s a fact
One of the best ways that this was put forward was by David Attenborough (or Kenneth Boulding?)
“Anyone who believes in indefinite growth on a physically finite planet is either mad, or an economist”
We are at a stage, where the planet itself is feeling small, and all of a sudden “Colonizing on Mars” and search for habitable planets are looking more palatable.
Eastern Markets are Not the Same as the Western Markets
You see, India or China had no use of the philosophy of scaling up. If you go back all the way before industrial revolution, most of the tools and animals were complimentary and not competitive.
They existed to do things which we cannot do. Mechanization and Animal husbandry were two parallel tracks. What could be done by people, was done by people.
Scaling things up is simply not in our DNA.It’s an acquired trait. Technology for us is first a socialist tool, then a capitalist one.
When we became industrialized, we did it kicking and fighting, with unions and tough labor laws as assurance.
We saw what happened in Bengal Famines in 1940’s and became really good in Agriculture and milk production.
TCS and Infosys languished for years till we were about to lose our gold reserves in early 90’s, and Y2K threatened everything.
Now we have reached an inflection point, where there is enough infrastructure and disposable income to attract Foreign Investors.
The Rise of FDI and Indian Venture Capital
FDI is here to compete with the grounds up businesses. Mostly to stun them with a flash and a bang, and skim profits home before they are able to respond.Mostly the profit comes from an arbitrage between the technology implementation by new companies and response times from the old established ones.
FDI isn’t making its way to India to lose money. It’s come with an expectation, that more money will be made in profits and taken back, than what is being invested.
We have a government, which hopes the direct investments widen the tax base so that it can secure a future for the poor.
With this money flowing in, it’s only understandable that this money will try to replicate its previous successes. This means using technology to cut out middlemen, flatten corporate structure while increasing income gap as a side effect. My argument is that this doesn’t work in the Indian Context.
All of a sudden we see startups work on a business model, based on ideas lifted from successfully funded ideas abroad. The template has become a simple one, which includes finding ways to reach people while reducing costs by bumping off businesses along the value chain.
This method is not creating value, but just redistributing wealth from many small businesses to a single giant of a business using technology. It might have worked in the west, but will not work as easily in the Indian Context. Largely because India is far more prone to give in to populistic demands than say a government in EU.
I bring this up because this is what our new hoard of entrepreneurs thinks is the path-breaking new idea. Cut out the middlemen and add that margin to your own, and done. I don’t know what these guys hope. That the entire value chain will just keel over and die?
The Truth of Doing Business in India
If there is one truth to doing business in India, is that businesses only grow when they form long-lasting partnerships with other businesses and share their successes.
This spirit of collaboration is largely lost on our startups as most of them are working with funds that have to show returns in 5 years. Decision making for the Long Term needs patient capital.
Look at every single Indian business which is a part of India Inc.. You will find that the company has been successful because it connected people, provided them with jobs and grew the entire economy. For each one of these companies, the entire ecosystem grew. Thousands got job manufacturing things and millions got jobs selling them.
TCS and Infosys grew in stature also due to the goodwill of millions employed. Godrej and Tata’s spent huge profits improving the lives of millions. They were doing all these things within the first year of their businesses.
India is a country where 94% of the people work in unorganized sector. If your strategy involves fighting this 94% and taking money out of their pocket, think again, as it might be short term. They are not going away and will always be plotting your demise.
World over, if google created an advertising platform, it also enabled marketing agencies and individuals grow the platform and be evangelists. If apple invented iphone, it also allowed an entire developer ecosystem to partake in profits and compete.
Individual companies don’t compete to become successful. Business ecosystems around individual companies compete to become successful, with the losing ecosystem absorbed by the winning one.
Business depends on Laws
Your business derives power from the legal framework, which is as good as it is enforced. Enforcing laws takes political will. Politics favors larger number of people. The equation is simple. More businesses for you, than against you is the mantra for the Indian Economy.
So either create a blue ocean, a category of products& services which don’t exist, or fill the gap created by ever expanding population and disconnected society, or create a product that improves efficiency for existing market players. But all these should be inclusive, creating a win-win for your partners, who should grow with you.
But at no point should you forget that a business can only be profitable and successful if it operates under the unwritten social contract for the betterment of the society.
The Views expressed here are my own and shouldn’t be construed as the views of any of my employers, present or past.