Ajit Balakrishnan: Start-up season

It is widely but wrongly believed that the more inactive the Indian state, the better the chances of a start-up culture flowering

It is the start-up season. It looks like every self-respecting business school and every self-respecting engineering college must suddenly have a conference on start-ups. It also looks like every print newspaper suddenly must devote a page to covering start-ups. What's afoot? Is it one more season of hype, like the winter of 1999 which celebrated entrepreneurship - only to end in the famous dot-com crash of 2000? Or is it a harbinger of a bold new trend? Is something about to change from the past where, in the 1950s, the best graduates of our colleges joined the public sector and the administrative services caught up in the euphoria of Nehruvian socialism, or in the 1990s, swarmed to financial services jobs lured by stories of stock-option millions?

To be sure, some part of this trend is driven by harsh economic realities. The corporate sector in India, as elsewhere in the world, is no longer creating the well-paid jobs-for-life at the scale such sectors did for a long period - from the end of the Second World War to the global financial crisis of 2008. Even economies like the United States, which in the popular imagination, is driven by giant companies, "existing firms are net job destroyers," write Jason Wiens and Chris Jackson of the Kauffman Foundation, in their paper, "The Importance of Startups in Job Creation and Job Destruction". Large firms in the United States, they write, are "…losing one million jobs net combined per year. By contrast, in their first year, new firms add an average of three million jobs... New businesses account for nearly all net new job creation and almost 20 per cent of gross job creation…"

Unfortunately, the road to start-up success is paved with the bodies of start-ups that either become becalmed or fail outright. And this is even more so in India. Look at all the odds against a start-up in India. To start with, there is in no domestic venture capital industry to speak of. Practically all the venture money available to Indian start-ups is of international (read US) origin. The positive aspect to this is that the international connections that these firms have make them open to technology and business model trends that they have seen in other countries; the negative side is that they are closed to business models that may be valid in India but examples of which they have not seen elsewhere in the world.

What could be the reason that Indian policy makers look the other way on the issue of nurturing a domestic venture capital industry? Part of it is that today's 50-somethings who dominate the policy-making circle are from families where getting a well-paying job in the government or in a multinational company is seen as the ideal. And of course the business families that dominate our economy don't see the need for early-stage venture funds - their family resources, or those in their family network, jump in when their children need start-up capital.

Perhaps the most misunderstood aspect of what it takes to create a vibrant start-up scene in India is the role of the state. It is widely (and wrongly) believed that the more inactive the Indian state, the better the chances of a start-up culture flowering. Or alternatively, that the main action of the state (or of its institutions) in encouraging start-ups should be to provide office space. Nothing could be further from the truth.

Take, for example, where that world-shattering innovation of our lifetime, the iPhone, came from: "the very smart, revolutionary bits about the iPhone, are… all government-funded... the Internet was funded by the Defense Advanced Research Projects Agency of the United States, the GPS (geographical positioning system) was funded by the [United States] military's Navistar program... the touchscreen display was funded by two public grants by the Central Intelligence Agency and the US National Science Foundation", says Mariana Mazzucato, a professor of science and technology at the University of Sussex and the author of The Entrepreneurial State - Debunking Public vs Private Sector Myths.

In the United States, their vast defence research spending is handed out to universities or even private companies on competitive bids, whereas India's own very large defence research funds are channeled into our state-owned research labs - who, after the post-1991 hiring freeze, no longer have the youthful, energetic talent needed to fight these innovation battles. Maybe the first place we need to start is to channel such state funds to our universities and then establish a vibrant venture capital system to pick and choose the winners from among potential start-ups. That's when we will see the true flowering of start-ups in India.

Ajit Balakrishnan is the author of The Wave Rider, A Chronicle of the Information Age.
ajitb@rediffmail.com