Our startups fail to grow into global giants and seem content to produce unicorns and a handful of deccorns
Published Date – Sat 17 Jun 23 12:30pm
by B Sambamurthy
India’s IT minister recently shared that more than 90,000 startups have been formed in the past decade. This reflects a strong broad-based innovation and desire among our young people, as well as a growing interest in entrepreneurship. These startups are in almost every sector, including agriculture, education, healthcare, financial services, transportation, Industry 4.0, and renewable energy.
In terms of private valuations and markups, more than 100 of them have grown into unicorns ($1 billion and above) and 5-6 decacorns ($10 billion and above). There are a few soonicorns (soon to be unicorns) and the rest are mostly minicorns (worth millions of dollars). This bodes well for our country, which will become a developed country by 2047.
However, one might not mistake these valuations as a reflection of profits/profitability. Many of them are burning cash instead of making profit. These valuations are private markups between founders and venture capitalists/private equity. Of course, the business models of these startups are far better and more useful than the dot-com boom and crash of the 1990s.
India is in the top club of the startup ecosystem and has attracted a lot of FDI in the past few years. It’s not just romanticism. Many of these startups are high on innovation, ambition and risk-taking, and job creation. Prime Minister Modi himself has invested heavily in this philosophy and approach. It is no exaggeration to say that global players have their sights set on India, if not attracted.
Meanwhile, one might not miss the lament that India has not produced a single global tech giant like Amazon, Alphabet, Microsoft, Meta worth trillions/hundreds of billions of dollars. We are far from the global market for products such as search engines, social media platforms, browser data management products, operating systems and office management. Our startups, unable to grow into global giants, seem content to produce unicorns and a handful of deccorns.
Durable
The mantra for startup success is product market fixedness, unit economics, and governance. This is necessary but not sufficient to create a sustainable economic engine and enduring value.
Jim Collins in his two international bestsellers, Durable (1994) and good to great (2001), in addition to being a powerful economic engine for entire ecosystems, advocated the merits of building institutions of enduring value. The essence of greatness, he argues, is not in cost-cutting, restructuring or pure profit motives, important though they are. Surrounding core goals rather than sacrificing the long term for the short term while winning in the short term are other principles.
He cites a few examples, such as Ford Motor, Intel, Hewlett-Packard, Disney, and Walmart, that built great institutions that survive decades after becoming global companies. He captures the success behind building enduring companies in a framework that includes striving for excellence, developing top talent, facing hard facts without being stubborn, learning but not dying of failure, simple steady growth (hedgehogs), Elements like big and bold goals Over 10-25, knowing what not to do, and expecting the unexpected.
Made for flipping
abandon Durable and good to great In principle, founders are selling equity to investors, and the two together are being sold to the public. When they do this at frothy/questionable valuations, it weakens the entire ecosystem. Collins lamented this new, less-than-ideal entrepreneurial model in Silicon Valley, the Built to Flip. He lamented that the entrepreneurial mentality has changed from one of risk-rewarding self-contribution to wealth entitlement. Abundant capital, low interest rates, and a booming Internet business foster a growth-focused culture for growth’s sake without unit economics. There are fears that the creativity behind the new economy is being replaced by bubbles and unsustainable valuations.
Dennis Caruso, a research scholar at Carnegie Mellon University and a well-known technology journalist, laments that many startups focus on selling business models and business plans rather than building long-term viable companies.
troublesome valuation
The huge disconnect between a startup’s value creation and its valuation is well known. Some of these companies exposed these huge frothy valuations to the public through IPOs and in many cases the value plummeted by 50-70% post-listing, in some cases they reached Rs 50,000 to Rs 1 trillion . Thus, causing losses to retail investors and undermining confidence in such future IPOs.
Second, large variances in valuation/markup are common even among investors in private markets. Sometimes these changes are 4-5 times. This begs the question: what valuation would these things be allowed to offer to the public?
Traditional valuations may not be relevant for new economy/startup stocks. But these can not be without any rules. Some proper rules need to be put in place to protect retail investors while providing an exit path for founders/PE/VCs. Regulators need to pay attention to this. In the current financing winter, only those companies with good governance, solid business models, and clear profit prospects can survive. The rest may become zombies, and some may even be ridiculed as unicorns.
Of course, all of these 90,000+ startups probably didn’t intend to build lasting companies, either by design or scalability. But India should seriously try to build at least a few trillion-dollar global tech companies of lasting value (Durable). Nandan Nilekani, India’s foremost technology czar, in his fascinating book restart india, referring to the early anchoring of major global projects, such as then-Prime Minister Jawaharlal Nehru’s atomic energy and space research. Because of this anchoring, India was in the courtesy of the top six countries in the 50’s and 60’s even though we were very poor then. Politics aside, Prime Minister Modi is now a global brand. We self-built global scale platforms such as Aadhaar, UPI (Unified Payments Interface) and PM Modi’s anchoring of these projects has largely contributed to the success.
NPCI, a global technology giant!
NPCI 1.0 has been a glorious journey. NPCI 2.0 is different. It’s not just waiting to calculate 3 trillion UPI volumes. Given its striking image and global brand recall, NPCI (National Payments Corporation of India) has many “Durable‘ company and become a global technology company. It has a full suite of digital, electronic and ancillary payment products on a billion scale. Its growth story goes beyond UPI. Its product range, volume and business model are unmatched in the world. This is another era, another opportunity is beckoning to us. Can I say that the ball to create a trillion dollar company with lasting value is in PM Modi’s hands?
Opinions are personal. bsmurthy123@hotmail.com
