Can start-ups really impact the economy?

At least in India, most of them are unstable and unsustainable. Let them be until they grow up

My answer is “no” if we refer to e-commerce type of start-ups and the time horizon is 10 years. For sure, technology can and will impact, for example, India’s health care and education access issues in the long run. Important folks in business and administration assert that current start-ups are India’s hope to stimulate employment and spur national economic growth; their view appears persuasive. Most likely, the emperor is wearing no clothes. Digital technologies are disruptive and important, they could build a great future. However, it is unwise to expect nascent start-ups to shift the national needle in the immediate future. 

What we see now as the valuations of start-ups reflects hubris, not business performance. In the next decade and more, economic growth and job creation require renewed industrial investment, fresh lending by non-performing assets-strapped banks and a revival of the agricultural economy. These are grown-up sectors, but they are the real movers and shakers of the economy. These sectors generate real cash, not mythical valuations. Their cycle of production and consumption is based on real, stable money and experienced entrepreneurs. On the other hand, start-ups are based on ephemeral, impatient capital and inexperienced entrepreneurs, largely copycat local firms, slugging it out with foreign venture capital money.  Scott Shane wrote in 2014 that entrepreneurship does not cause income growth.

Start-ups are abnormally growing corporate organisms. At least in India, most are unstable and unsustainable. Many are in the larvae stage of the butterfly, when the insect continuously consumes mulberry leaves, adding bodily burdens and undergoing complex hormonal changes. Among Indian start-ups, you can count the number of butterflies that have emerged from the chrysalis, like Infosys and Bharati, but both are from three decades ago. During their infancy, these companies grew credibly with revenue, cost and profit surplus. These “old start-up” companies spent hard-won investors’ money frugally to prove their product, their business model and their commercials before undertaking rapid growth. Current start-ups measure performance through unintelligible metrics such as gross merchandise volume, app downloads and merchants on the platform, not through profits and OCF!

There is far too much hoopla about Indian start-ups. Smart foreign VCs have arrived with their dollars, but smart people are known to sometimes behave mindlessly. There is an insane race to spend money to simulate the American dream of “winner takes all” through an imported business model that the limited partners understand. Entrepreneurs argue that the losses are investments, yet they resent the income-tax authorities treating the losses in that manner. These inexperienced entrepreneurs are called upon to advise on the nation’s economic policies and they adorn the juries to select daring leaders. However, they squeak for protection from muscular foreign boxers in the boxing ring, although they themselves are owned by foreign capital.

Policymakers and followers of economic matters must listen to entrepreneurs as indeed to many segments of the population. But please listen to entrepreneurs, who have a record of solving real consumer problems, servicing increasing customers, making investments in assets and generating jobs and cash. A minuscule number of today’s start-ups will get there, but the time frame will be a decade or more. The corporate graveyard will be like a Word War II cemetery with stones for the unheralded soldiers.

Young people are developing crazy apps because young people will be young! For example, apps that will pack your suitcase virtually, send a valet on a scooter to park your car wherever you may be, or a toothbrush to your mailbox to renew your dental kit regularly! And the media goes ballistic, policymakers work up a froth, while VCs chew their cigars purposefully awaiting an opportunity to sell to another VC in a ring-a-ring o’ roses game.

Let start-ups be start-ups until they become grown-ups, let young entrepreneurs be experimental and bold, let VCs do their job, but for God’s sake, the nation must prime the real grown-ups to solve the imminent issues.

The author is a writer, corporate advisor and distinguished professor at IIT Kharagpur; rgopal@themindworks.me