(Part I of a two-part series)
Start Ups are Institutional vehicles which have captured the cultural and media imagination in the digital era, initially rising out of the Bay area in California known in popular culture as Silicon Valley, meanwhile inspiring an HBO series of the same title as well.
Start Ups initially started as enterprises with software as the main product which could meet an unrealised market requirement through human ingenuity in technological innovation, funded by a class of asset investors known as Venture Capitalists who invest risk capital (in the hope of disproportionate returns far higher than standard instruments such as stocks) in early stage or even proof of concept ideas.
The point of departure from the conventional small business set up or the corner store was the ability of technical professionals such as coders to create valuable product centric ventures with a negligible investment often out of the basement in the homes of suburban America spewing a major ‘tech bro’ sociological sub-culture.
The digital revolution has flowered on the back of American public sector investments originally meant for defence use (with provisions for dual use deployment in the civilian realm) in internet infrastructure, high powered mobile devices and satellite capabilities in geolocating a place which took a few decades to coalesce on the same plane. These foundational scientific breakthroughs laid the anchors for the digital revolution to dock at its consumer shore.
The highly improbable payoff can be hyper lucrative (for the risks venture capitalists take, the returns are worth it, no pain no gain as the maxim goes) as can be seen from Alphabet or Facebook’s S&P500 Valuation, of a Trillion Dollars for Alphabet and 620 Billion for Facebook as per a recent Economist article.
It leaves the founders such as Sergei Brin and Larry Page, and Mark Zuckerberg (a major film was made on his start up days at Harvard, a key driver towards myth making) with plenty of spare cash for philanthropic activities. The original garage tech start-up, Microsoft, gave Bill Gates a new identity as a ‘philanthrocapitalist’ with his foundation creating significant capacity for the dispensation of public goods such as in vaccines research.
Mr. Gates with eleven percent of Microsoft stock has current Microsoft CEO Indian American Mr. Satya Nadella to thank as well. Mr. Satya Nadella has ‘reboot’-ed (also the name of a book he has authored) the firm towards cloud-based services which has enabled the company to retain value and deliver greater returns.
The insane valuations have led to ‘Blitzscaling’(name of podcast and book) in the words of Reid Hoffman, the LinkedIn Founder to burn cash to gain traction in the market where speed matters more than the revenues in the short term. Peter Thiel, the legendary founder of PayPal and Palantir (and Facebook Board Member and early investor) in his book ‘Zero to One’ calls for a monopolistic capture of the market.
These ideas however counterintuitive to conventional economics, seem to have found traction in India’s ecosystem with its own share of hero’s Flipkart with the Bansal duo, exited to Walmart in an unprecedented deal. Flipkart though an Indian venture is a Singaporean company on paper, due to lack of clarity of taxation matters which is a damp squib as a clear regulatory framework aids to the Ease of Doing Business, a key initiative of the Modi Government has been to improve them.
Retrospective tax norms hurt investor sentiment such as with the Vodafone case. This rather unfortunate scenario makes India an extractionary market where companies come in the country with investment but technically park their earnings in overseas tax friendly centres such as Singapore, Mauritius and Dubai.
The valuation focused and ‘burn cash to growth’ mindset seems to have inverted the priorities of a significant portion of the start-up community in Asia, where Start Ups are often a heuristic for a new age California Gold Rush. Softbank linked companies such as OYO, WeWork and Uber are truly disruptive businesses in their own manner but have been at the receiving end of damning reportage due to their partner hotels, driver partners and building partners suffering lower than usual bookings and earnings due to the high pressure, cash fuelled business model where the room for adapting to organic/intrinsic changes in the market have been snuffed out.
What is often not discussed in Tech and MBA powered boardrooms, is that the start-up is a vehicle to deliver solutions within a community and is not located in a utopian set up away from social and legal matters. Start Ups reflect/refract the ecosystem they are posited in, juxtaposed within the matrices of race, power, gender and its glorious intersectionality’s.
Start Ups work well as they deliver innovation at the rate that governments cannot catch up and is agile enough to configure consumer efficient operating models solving a ‘Jobs to be Done’ problem in the words of Late Harvard Academic Prof. Clayton Christensen. The reason Uber, Ola and Grab have delivered is because they have enabled the consumer with choices beyond inefficient public transportation systems coupled with digital payments which makes it a winner.
WeWork had to shelve its IPO because it was portrayed as a tech firm, which was not. It is a real estate platform facilitator with a digital interface. Retail and Institutional Investors will cut through the mirage as soon as they see it as money gravitates towards a gradient where it can grow the maximum.
Start Ups are democratic as the ones that succeed are those which solve the most problems and offer good value to a value discerning consumer. Analogues may cut into the revenues of the leader of the segment but cannot cannibalise the space of the leader, as the segment creator has a massive lead than its followers (due to creating the very product category itself), and in a large market such as India, Indonesia or China there is ample elbow room for all to grow. The venture capitalist in his portfolio is trying to pick the monopolistic winner (Zero to One) to transfer the most value to the original sovereign wealth fund or the pension fund which has invested initially in the VC Fund.
The views and opinions expressed in the article are those of the authors and do not necessarily reflect the official policy or position of The Tilak Chronicle and TTC Media Pvt Ltd.