The potential positive economic impact of investment bubbles
From the tulip mania in the 17th century to the global financial crisis of the last decade, investment bubbles can have devastating consequences such as economic recessions and job losses. But there have been instances where financial bubbles have had long-lasting positive economic impact.
For instance, the tech bubble in the late 90s resulted in significant investment in global telecommunication infrastructure. While the resulting overcapacity resulted in massive losses for the companies that installed the fibre, the lower cost of data communications made the internet more accessible for billions of new users.
During the same era, flameouts such as Pets.com and Webvan served as examples of the excesses of the dotcom bubble. However, internet pioneers including Google and Paypal were also spawned during the same period. More recently, the investment boom in shale oil in the US resulted in several bankruptcies but also made the country energy independent and its manufacturing industry more competitive.
In India, over the last few years, the level of activity in early stage investing in consumer internet businesses has increased significantly. The rich valuations secured by companies with questionable business models and no hope of future profits has generated comparisons to the dotcom area. For instance, more than a dozen so called food-tech companies have received institutional funding over the last two years. More than half of these companies have since disappeared along with the investors’ capital. Similar excesses have occurred in e-commerce and the so-called sharing economy.
But there is an upside. While a majority of these new-age businesses will fail, a handful of winners will emerge as sustainable enterprises, create jobs and generate attractive returns for investors. Some of these new businesses are already changing consumer behaviour and improving lives. Residents of small towns in India do not have to travel several hundred miles to purchase a book of their choice or buy the latest fashion products. Residents of big cities don’t need to brave the traffic or deal with parking when buying groceries or clothes. It is all delivered to your doorstep with just one click. These innovative online businesses are also forcing the traditional retailers to up their game, and improve their selection and price. Regardless of who wins the e-commerce wars, the real winner is the Indian consumer.
My hope and wish is that the ambitious entrepreneurs and VC/PE investors will develop businesses outside the e-commerce and tech sectors. While we may not need more hotel aggregators or marketplaces, we do need better primary education, modern agriculture techniques and better roads. We need to deliver better healthcare to rural India.
There are some promising signs. The success of micro finance is spawning new rural finance businesses in areas such as agriculture and SME finance. These new-age financial services business are nimble and more innovative than banks and are providing credit to previously unbanked customers. New and innovative business models are also emerging in the agriculture sector, where intrepid entrepreneurs are disrupting inefficient supply chains and delivering high quality agricultural inputs to farms. The beneficiaries are the Indian farmer and the Indian consumer.
I hope that mini bubbles will emerge across these underserved sectors, and the young women entrepreneurs of India will not just copy Amazon and Uber, but build business models that solve India’s real problems.
Mukul Gulati is the co-founder and managing partner of Zephyr Peacock Management India Pvt. Ltd and responsible for the overall leadership of the Zephyr Peacock Funds.