What digital start-ups can do, and cannot do

Technology infrastructure solves many problems, but it cannot build roads or bridges and provide clean water. However, such activities are essential for human progress, and their creation provides jobs, says R Gopalakrishnan.

Businesses have been regenerative for centuries. Today’s established corporations were start-ups at some stage.

Modern start-ups are merely an alternative way to establish businesses compared to the traditional ways.

They do so by increasing the degrees of freedom and agility in the initial stages and giving a freer rein to the founder’s creativity.

Adventurous enterprises have been enabled by a rather recent model of wealth as with venture capital and private equity models.

Since the 1980s, the distribution of wealth developed differently from the 1950s, 1960s and 1970s.

Among the English-speaking nations, income inequality reduced after World War II until 1980 and then started rising again.

In 1913, for example, in the US-UK-Canada, the share of the income going to the top one per cent was about 18-20 per cent.

This share reduced to single digits by the 1980s; however, during the last 40 years, the share of the top one per cent has risen sharply, according to OurWorldInData.org.

There has been a gradual rise in the Gini coefficient in the US and UK between 1980 and 2013.

According to a Brookings paper, authored by three Federal Reserve economists in 2016, the share of wealth owned by the top one per cent in America reached 33 per cent in 2012, though other economists estimated it to be even higher at 42 per cent.

Whichever data you accept, the richest one per cent have gained disproportionately.

Since the 1980s, in pursuit of returns on wealth, the rich have sought risky ways to deploy their rising wealth.

They sought new domains and geographies that would give them a better yield on their money.

The rapid development of American venture capital and private equity owes a lot to the quest for a good return on this increasing wealth.

The newly emerging technology space has provided the domain diversification sought by the wealthy.

The dramatic economic changes in China and India have made those economies a natural magnet for a part of American wealth, providing geographic diversification to investing.

What is a small part of rich American wealth is a big part of Indian foreign investment cash flows.

The amount of foreign money entering India as foreign institutional investment (FII) has grown fast in recent years, albeit on a small base.

India receives about $ 5-6 billion of FII each month nowadays, a large part of which goes into public equity markets, but some amount into venture capital as well.

Venture capital and private equity are driving start-ups and valuations of start-ups in India.

In last month’s column, I commented that the impact of start-ups, especially the digital ones, on India’s growth and employment may not be significant over the next decade.

It elicited a large number of reader comments. Seventy per cent lauded it because it called a spade a spade and they wholeheartedly agreed with both the content and the style of the article.

Fifteen per cent disagreed that start-ups would have only a small impact, though they were unsure of the time frame for the impact to be palpable.

Another 15 per cent felt that the message is correct but should have been expressed in a more constructive way because it is not appropriate to put down start-ups as though they are irrelevant.

I am sensitive to the view that arguments and facts must be stated in an “acceptable way” if they are to be meaningful.

In short, the message matters, but the way it is said also matters.

It is important for innovators to say the right thing in the right way. A great idea that is inadequately expressed faces rejection -- think of the arguments married couples have, they are rarely about the content, but about the manner.

Nikhil Raghavan, a Wharton-educated private equity professional, made specific suggestions on how to discuss the impact of Indian start-ups more constructively.

He pointed out that much of the benefits of the start-up ecosystem accrues to the haves, the upwardly mobile youth. There are hundreds and thousands of have-nots.

It is the job opportunities of the have-nots that dominates the national concern. Digital start-ups may not help in creating jobs for the have-nots.

Technology infrastructure solves many problems, but it cannot build roads or bridges and provide clean water.

However, those type of activities are essential for human progress, their creation provides jobs and they require big financial investments.

China progressed by doing these kinds of things, recognising that BAT (Alibaba, Baidu and Tencent) cannot do such things.

Photograph: Thomas Peter/Reuters.

R Gopalakrishnan is a writer, corporate advisor and distinguished professor at IIT Kharagpur.