Opinion: Build value institutions
Our startups are unable to grow as global giants and appear to remain content with producing unicorns and a few decacorns
By B Sambamurthy
India’s IT Minister recently shared that over 90,000 startups were established over the last decade. This reflects intense widespread innovation and aspirations of our youth, and increasing interest in entrepreneurship. These startups traverse almost all sectors, including agriculture, education, healthcare, financial services, transport, industry 4.0, and renewable energy.
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In terms of private valuation and markup, over 100 of these have grown to be unicorns ($1 billion and above) and 5-6 decacorns ($10 billion and above). There are several soonicorns (soon-to-be-unicorn) and the rest are mostly minicorns (in millions of $). This augurs well for the country in our journey towards being a developed country by 2047.
However, one may not mistake these valuations as a reflection of profits/profitability. Many of them are burning cash and not earning profits. These valuations are private markups between the founders and venture capitalists/private equity. Of course, the business models of these startups are far better and more useful than the dotcom rush and crash of the 1990s.
India is in the top club of the startup ecosystem and has attracted a lot of FDI over the past few years. This is more than romanticism. A good number of these startups are high on innovation, ambition and risk-taking, and job creators. Prime Minister Modi himself has invested heavily in this idea and path. It is no exaggeration to say that the global players look, if not hooked, to India.
At the same time, one may not miss the lament that India did not produce a single global tech giant of the likes of Amazon, Alphabet, Microsoft, Meta with trillion/hundreds of billions ($) of valuations. We are nowhere near the global product markets like search engines, social media platforms, browsers data management products, operating systems and office management. Our startups are unable to grow as global giants and appear to remain content with producing unicorns and a few decacorns.
Built to Last
The startup success mantra is product market fix, unit economics and governance. This is necessary but not a sufficient framework to create a sustainable economic engine and enduring value.
Jim Collins in his two international bestsellers, Built to Last (1994) and Good to Great (2001), advocates the virtues of building institutions of enduring value besides being powerful economic engines for the entire ecosystem. He argues that the essence of greatness does not lie in cost-cutting, restructuring or pure profit motive, though important. Building around core purpose and not sacrificing the long term for short term, while winning in the short term, are among other principles.
He lists several examples like Ford Motors, Intel, Hewlett Packard, Disney, and Walmart which have built great institutions that endure even today after several decades as global companies. He captures the success behind building enduring companies in a framework with elements like striving for excellence, grooming top talent, facing brutal facts and not getting opinionated, learn but don’t die from failures, simple steady growth (hedgehog), big and bold goals over 10-25 years, know what not to do and expect the unexpected.
Built to Flip
Jettisoning Built to Last and Good to Great principles, founders are flipping the equity to investors and both together are flipping to the public. When they do this, at frothy/dubious valuations, it weakens the entire ecosystem. Collins bemoans this new and not-so-desirable entrepreneurial model in Silicon Valley viz Built to Flip. He laments that the entrepreneurial mindset has degenerated from one of risk, contribution to reward oneself to wealth entitlement. Abundance of capital, low-interest rates and booming internet business have promoted the culture of focusing on growth for growth’s sake with no unit economics. There is a fear that the creative drive behind the new economy is getting superseded by frothy and unsustainable valuations.
Denis Caruso, a research scholar at Carnegie Mellon and well-known tech journalist, laments that many startups focus on selling business models and business plans, rather than building viable companies for the long run.
Troublesome Valuations
The huge disconnect between value creation by startups and their valuation is too well known. Some of these companies have flipped these massively frothy valuations to the public through IPO and in many cases, the values post listing plummeted by 50-70% and in some cases they run to Rs 50,000 cr-Rs 1 lakh crore. Thus, causing losses to retail investors and denting confidence in such future IPOs.
Secondly, huge variation in valuation/markups even among investors in the private markets is common. At times these variations are 4-5 times. This begs the question: at what valuation these would be permitted to be offered to the public?
Traditional valuations may not be relevant to new economy/startup stocks. But these cannot be without any rules. Some appropriate rules need to be framed to protect retail investors and, at the same time, provide an exit to founders/PE/VCs. Regulators need to look at this. In the current funding winter, only those with good governance, robust business models with a clear sight of profitability would survive and the rest may become zombies, and some may derisively be called Unicorpses.
Of course, all the 90,000-plus startups, either by design or scalability, may not aim to build enduring companies. But India should seriously attempt to build at least a couple of trillion-dollar global tech companies of enduring value (Built to Last). Nandan Nilekani, India’s foremost tech czar, in his fascinating book Rebooting India, refers to the anchoring of globally significant projects, in the earlier era, like atomic energy and space research by then Prime Minster Nehru. Thanks to this anchoring, India was in the comity of the top half-a-dozen nations in the 50s and the 60s even though we were extremely poor then. Politics apart, Prime Minster Modi is a global brand now. We have indigenously built global-scale platforms like Aadhaar, UPI (Unified Payments Interface) and PM Modi’s anchoring these projects contributed in large measure to the success.
NPCI, Global Tech Giant!
The NPCI 1.0 is a brilliant journey. The NPCI 2.0 is not more of the same. It is not just about waiting to count three trillion UPI volumes. Given its spectacular profile and its global brand recall, the NPCI (National Payments Corporation of India) has many ingredients of ‘Built to Last’ company and be a global tech company. It has the entire suite of digital, electronic and assisted payment products at a billion scale. It has a growth story beyond UPI. It has no parallel in the world for its range of products, volumes and business model. It is another era, and another opportunity beckons us. May I say that the ball of creating a trillion-dollar company of enduring value is in Prime Minister Modi’s court?
Views are personal. bsmurthy123@hotmail.com
