The malaise in India’s start-up ecosystem
Is a clever structure whose only purpose is to bypass Indian law really an innovation?
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A 29 October report in Mint about Amazon.com Inc.’s joint venture with N.R. Narayana Murthy’s Catamaran Ventures is illuminating.
It points out that this joint venture is the largest seller on Amazon.in, the Seattle-based retailer’s Indian marketplace, which puts buyers in touch with sellers and facilitates such things as discovery, payment, promotions and delivery.
That’s the only kind of e-commerce, or “e-tail", that Indian laws allow entities with foreign investment to conduct. This is also contingent on the company running the marketplace not being related to any of the sellers in any significant way.
Then, barring the surprise of Murthy, widely renowned for sticking to the straight and narrow, allowing such a thing to pass, this is only to be expected.
As Mint’s report points out, Flipkart India does the same thing too (or at least, did).
The reason for companies to do so is India’s laws. Indeed, India allows marketplaces but doesn’t have a definition for the same, and it definitely doesn’t allow retail or so-called B2C e-commerce by foreign-invested firms.
Companies and their investors will probably explain their actions as being driven by India’s restrictive laws. And perhaps the government thinks so too. What else can explain its reluctance to act on such obvious and flagrant violation of the law.
In the business domain, such behaviour, instead of being condemned, is actually admired.
In his avatar as a minister in the National Democratic Alliance government (1999-2004), Arun Shourie—who in an earlier avatar as a crusading investigative journalist had pointed to Reliance Industries Ltd’s various misdoings—was gushing in his admiration of the company’s founder, the late Dhirubhai Ambani for just that.
“It could now be argued, Shourie said, that those restrictions should never have been there, and by exceeding limits, Dhirubhai had paved the way for reform and should be thanked, not once, but twice over," India Today magazine reported.
Shourie’s investigative series on Reliance (he was helped by chartered accountant S. Gurumurthy and supported by Ramnath Goenka, the owner of the newspaper he worked for, The Indian Express) was published three decades ago. That was a different India—or so one thought.
And so-called new economy companies would be different—or so one thought.
Maybe we were all being naïve.
Investors—and this includes some of the best-known venture capital and private equity firms, family offices and hedge funds in the world—are not really bothered about founders of start-ups fudging their résumés. Yahoo might have fired its CEO over this, but in India, this is a minor issue.
Nor are they bothered by business models that do not conform to existing laws. Sure, laws need to keep pace with innovation, but is a clever structure whose only purpose is to bypass Indian law, really one?
Most investors are only worried about exits. Partly because of this, most founders are only worried about valuations. Digital business models allow a separation of the information aspect of a supply chain from the physical one, but as Mint’s investigation on Foodpanda showed, this only makes it easier for companies to exaggerate the volume of their business. There are allegations, as yet unproven, that this is common practice in some e-commerce companies.
Start-ups (no matter how big they are) can be forgiven for building businesses and companies but not organizations—that will come later, just as it did for India’s IT services companies in the 1990s. But they and their investors will have to address the other issues.
R. Sukumar is editor, Mint.
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