IFUNDING there are numbers of people and stories of people. Quants are the archetype of numbers: they only buy titles that meet statistical criteria. Venture capitalists are people of history. They must be. They provide funding to tech startups that may have great potential but don’t have – or don’t yet have – the numbers to back it up. Nothing speaks of potential like India with its vast, young and tech-savvy population. And no venture capital story is as appealing as Indian tech.
A flood of foreign money is sweeping the Indian startup scene. Flipkart, an e-commerce site, has just raised $ 3.6 billion in a record funding round. There has been a wave of public listings this year, as newbies take advantage of India’s vibrant stock market to raise capital and provide an exit for their venture capital backers. The recent initial public offering of Zomato, a food delivery company, was significantly oversubscribed. Paytm, a highly touted payment app, should be listed soon.
This growing interest in India owes much to the declining attractiveness of China, whose tech companies are facing regulatory backlash. To foreigners, India appears to be a younger and freer China. Take a closer look, however, and it doesn’t live up to the bill.
Start with what is meant by Indian technology. An ideal tech startup would give investors exposure to a few important things. One is entrepreneurship. India is a difficult place to make a living. Each owner of a kirana (a small store) has to overcome obstacles that MBA– managers educated in richer places. India’s difficult business climate thus generates a certain commercial flair, which is demonstrated by its best startups. The other element is the engineering of the chops. India’s IT talent lies in design rather than technology at the patent level, says a Bangalore-based technology investor. But this is a distinctive advantage. Add a pinch of venture capital to those pieces and, with luck, the result is a company with a real competitive advantage that can be leveraged in India and beyond.
In practice, however, Indian tech companies that gain attention fall into one of two types. The former performs routine tasks on behalf of companies in the rich world. The big names here are Infosys and Tata Consultancy Services, the backbone of Tata Group, a family conglomerate. They are not purely technological; you might think of them as engaged in technology-based wage arbitration. The second type is the copy business. These are versions of American or Chinese tech companies that require a field presence in the markets in which they operate. Flipkart is therefore the Indian Amazon; Ola is the Indian Uber; and Paytm is Indian Alipay. Much of the current enthusiasm is for copycat companies. It’s a story that investors who are relatively new to venture capital seem happy to buy into. If a business model has made money for others elsewhere, it can make money for them in India.
But can he? Flipkart was founded in 2007 by two software engineers who had worked at Amazon. The e-commerce market was then wide open. This is no longer the case. Amazon itself entered the Indian market in 2013. Former Indian conglomerates have realized that their mainstream franchises could be disrupted by startups. Reliance, one of India’s largest business groups, has invested heavily in telecommunications and broadband, and has an extensive network of supermarkets. Tenure is a particularly powerful force in Indian affairs. With that comes the lobbying power to tip the regulations in your favor.
It’s not the only hole in history. India has a population similar in size to that of China. But it is much poorer. The average per capita income is around $ 2,000 at current prices, compared to over $ 10,000 for China. The average figure in India masks a significant bias in favor of a wealthy elite. The vast majority of the Indian workforce has no formal job and earns much less than the average. And despite the strange flurry of awesome GDP growth, India is clearly not on track to keep up with China’s rapid economic development. Its addressable market is much smaller.
India also has undeniable strengths, of course. Its IT and commercial talent make it a natural territory for venture capital. The potential to generate game-changing startups is there. But the money pouring into venture capital around the world isn’t really looking for originality. Like a Hollywood producer, he prefers to support variations of ideas that have already made cards. India is a decent story, but only a few will make a decent income from it. The numbers just don’t add up.
This article appeared in the Finance & Economics section of the print edition under the title “A tiger’s tale”