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Home / Opinion / Columns /  India’s growth story of unicorns worked very well until it did not

A few years ago, I was a part of a literature festival where Snapdeal founder Kunal Bahl was almost given the same billing as N.R. Narayana Murthy, the co-founder of Infosys. Narayana Murthy had co-founded and successfully run an IT company which had created value for its clients, shareholders and employees. Bahl, on the other hand, had raised a good amount of money from venture capitalists on a business model that was expected to work someday.

Nonetheless, this was at the beginning of the era when entrepreneurs who had raised money at extreme valuations from venture capitalists for businesses which were unlikely to make money any time soon were being given rock-star receptions. Bahl’s sheen wore off a while back, but many other CEOs of startups continued to be rock stars. Some even sold off their loss-making businesses and turned themselves into LinkedIn gurus giving full-time gyan on everything from investing to how to live well.

This story is now unravelling with valuations going gradually out of fashion and cash-flows making a comeback. In fact, over the last few weeks, Mint has regularly reported on startups firing employees to control costs. A few unicorns which had planned initial public offerings (IPOs) have postponed them. A few more have decided to get out of the unviable businesses they were in.

So, why is this happening? Central banks of the rich world have decided to raise interest rates in order to control inflation. Further, they plan to take out a part of the money they had printed and pumped into the financial system over the years. The US Federal Reserve plans to withdraw a trillion dollars over the next year. Hence, interest rates have risen and are expected to rise further.

Further, this is why foreign institutional investors are selling Indian stocks. This has led to three things. First, most unicorns and startups that had listed with a lot of hype are now down in the dumps as far as their current share prices are concerned. This is the stock market’s way of telling such companies, ‘Show us some cash flow.’ Second, this has made things difficult for unicorns and startups which were thinking of IPOs in order to allow their founders and investors an exit through that route. The days when they were going to get anywhere near the kind of valuation in the listed market as they had in the unlisted market are over. Third, any fresh fund raisers for startups will now happen at lower valuations.

Along with this relook, many more conversations are happening around the profitability and business models of such firms. In fact, Nitin Kamath, founder and CEO of Zerodha, a stock brokerage, recently put out a long Twitter thread on how the prospective market for Indian fintech companies may be rather limited.

The India growth story that has been sold to us over the years can be summarized in one line: There are a lots of Indians and we can sell them something. The trouble is that many Indians are not in a position to buy what fintechs or for that matter other startups sell.

Here’s how Kamath busted this bubble with data. There are 1.4 billion Indians but there are only 90 million demat accounts. This means only a little over 6% of Indians have demat accounts for investing. This can possibly grow to 25% in the years to come. This is a tremendous opportunity, we have been told. Nonetheless, as Kamath pointed out, less than 30 million of these accounts are active with investments of over 10,000 each. This after the stock market has rallied big time and fintech firms have come up with huge marketing campaigns and freebies.

The reason is straightforward. Most Indians do not make enough money to be investing in stocks or buying stuff that most startups want to sell. As a recent The State of Inequality in India Report pointed out, a monthly salary of even 25,000 would put the recipient among the country’s top 10% in terms of total income earned.

Of course, all this was known all along, but no one wanted to spoil a story that was working. As Alice Sherwood writes in Authenticity: Reclaiming Reality in a Counterfeit Culture, “The word ‘story’ can mean both a narrative and a lie. Every successful deceiver is aware of the power of a well-told tale." Hence, those selling the idea of 1.4 billion Indians and the huge Indian market that implies were either selling a narrative knowing fully well that it was a lie, or they had bought the narrative themselves. In this scenario, they didn’t want to be killjoys by poking holes in the story.

Also, when times are good, people like to believe what they hear. As John Kenneth Galbraith writes in The Great Crash 1929, “In good times people are relaxed, trusting, and money is plentiful… In depression all this is reversed. Money is watched with a narrow, suspicious eye."

While we may not be in a depression, the prevailing zeitgeist has changed; the era of easy money is coming to an end and the right questions are being asked. Finally, many more people are realizing that burning cash to rustle up sales can at best be a sales trick to impress venture capitalists and their fear of missing out, but not a business model.

In the end, it all turned out to be like the old lost-and-found formula of Hindi cinema. It worked very well, until it didn’t.

Vivek Kaul is the author of ‘Bad Money’.

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