Thursday, June 2, 2016

Start-ups and me-too e-commerce are not innovation

The Nobel laureate Robert Solow said in 1987, "We see the computer revolution everywhere, except in the productivity statistics". In the context of the excitement about India's IT startup companies, one could as well say, "People talk about Bangalore bubbling with young and smart entrepreneurs indulging in a vast array of innovations. While we can see bubbles of "me-too" startups everywhere, where are the innovations?"

Entrepreneurship demands creativity, risk appetite, diligence, and deferred gratification. I am not sure, whether any of these elements, in a reasonable magnitude, are at play in India's entrepreneurial eco-system. Consider the examples of the popular e-commerce and sharing economy firms. All of them borrow well-tested business models, work-flow processes, and technology platforms from developed markets. This naturally limits project risks, except commercial viability risks associated with any such ventures. Creativity and diligence is confined to finding ways to manoeuvre around the country's stifling and inhospitable bureaucracy. In line with modern shareholder capitalism, our entrepreneurs too prefer to pursue gratification which is instant than deferred. 

Unfortunately, despite the generic nature of the business models and processes, India's e-commerce story has not gone beyond the well-trodden paths of e-commerce, vehicle sharing, home stays, and e-payments. Where are the entrepreneurs who have taken the agricultural market place by storm with extension services or sharing of farm implements? Where are the tele-medicine and e-learning apps which have grown in scale and enabled access to high quality health care and school education for millions? Where are the killer apps that could have broken the stranglehold of middlemen by enabling farmers, fishermen, milkmen, and other producers of primary products to bridge information asymmetry by being able to access large enough markets? Where are the public grievance redressal or public systems monitoring apps that could have transformed governance delivery?

Given that each one of the above mentioned, if successful, could have transformed the global market itself, it is surprising that India has not had any homegrown global brands and market leader like the M-Pesa of Kenya. All these endeavors have the potential to constitute market opening innovations, and would actually demand significant doses of all the four aforementioned attributes. They would require patience and hard work, understanding the markets and iteratively designing appropriate business models. That would have been innovation. 

However, it may be unfair to blame the entrepreneurs alone for chasing low hanging profit opportunities, especially when there is plentiful investments chasing them. This takes us to the role of finance itself. It cannot be denied that venture capitalists like Kleiner Perkins, Sequoia and A12Z played the classic role of venture capital in catalyzing technology startups in the Silicon Valley. But, given that the Indian startups are merely replicating commercially validated models (and that too across several global markets), it is perhaps a fair point that this capital is more private equity than venture finance. This begs the question, where are the real venture capitalists in India? How do the venture capitalists see Indian market?

Worse still, none of the big domestic startups have been able to do at least the one thing that defines a successful startup, me-too or not - transition from customer acquisition to sustainability of commercial model. It is most likely that, given the dipping valuations and the contractual obligations like liquidation preferences, none of the Indian unicorns are much above the line for their original promoters. It is, therefore, not unlikely that ten years hence, the e-commerce and sharing economy landscape of India will be littered with Amazons, Ubers, Zillows, AirBnB's, Lending Clubs, Alipays, Expedias and so on with nary a sight of Flipkarts, Oyos, and Olas. 

As an ardent behaviouralist, I am one of those who subscribe to the view that you need to provoke in the extreme in the opposite direction to unsettle conventional wisdoms. It, therefore, follows that none of this is to overlook the significant achievements of start-ups in economic value addition and promotion of a culture of entrepreneurship. On the contrary, the objective is to initiate a debate on questioning the settled wisdom on our startups and innovation.

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