Home / Opinion / Columns /  Sharks on TV are a result of easy money and the Cantillon effect

The actor Vidya Balan’s character in The Dirty Picture says a very interesting line: “Films work only because of three reasons, Entertainment, Entertainment, Entertainment."

What is true for films is also true for reality shows like Shark Tank, a show in which budding entrepreneurs pitch their business ideas to investors (or sharks), who decide whether they want to invest in the idea or not. For the show to appeal to large primetime audiences it has to be entertaining before anything else. And entertaining it is.

Nonetheless, the question is whether the sharks on the show in India deserve to be there. A recent LinkedIn post by Ankit Uttam, who calls himself an authorpreneur, pointed out that most of the current and past sharks on the show, run, or ran businesses which aren’t profitable or are barely profitable.

Given that the entire idea of any business is to make money then how can those who haven’t really made any or much money, be judging others pitching ideas. This is a question well worth asking.

In fact, the sharks are another unintended consequence of the era of easy money that has prevailed over the last decade and a half. They are in a position to run loss-making businesses or businesses which barely make any money but have huge valuations, primarily because they are backed by venture capital money in search of high returns.

Indeed, these sharks are an excellent modern day example of something that Richard Cantillon, an economist who lived during the early eighteenth century, had suggested.

So, what was Cantillon’s theory? When an economy is about to get into a major recession, one way for central banks to tackle the situation has been to print money and pump it into the financial system, drive down long-term interest rates and encourage people and companies to borrow and spend, thus initiating an economic recovery.

In fact, the American economist Milton Friedman had suggested half in jest that a recessionary situation could be even fought by printing and dropping money out of a helicopter into the economy.

Indeed, when central banks print money and pump it into the economy, they do so with the belief that it doesn’t really matter who is closest to the money, that is, standing under the helicopter when the money is printed and dropped.

Now Cantillon lived during the time when Spain was mining a lot of gold and silver from South America. This was a period when gold and silver was money. And when money supply increased thanks to the new gold and silver coming in, Cantillon believed that it would first benefit the people closest to this new money, that is people associated with the mining industry; the owners of the mines, the adventurers, the smelters, the refiners, etc. These individuals would end up with a greater amount of money.

So, what’s the modern day equivalent of this? In 2008, when the investment bank Lehman Brothers went bust, and threatened to pull down many other large financial institutions with it, the central banks of the rich world started printing money and pumping it into their respective economies.

What started as a rescue of financial institutions, finally became a habit. Since 2008, these banks have been printing money almost regularly in order to drive down long-term interest rates to encourage borrowing and consumption.

This has benefitted those who are closest to the money being printed, primarily, banks, hedge funds, venture capitalists (VCs), private equity firms, etc. Such firms have been in a position to raise huge-funds and invest them all across the world. VCs falling over one another to invest in startups is one impact of this.

In fact, the money chasing startups has been so huge that until very recently running a profitable business wasn’t really an important parameter of success. VCs are more interested in the ability of the entrepreneur to achieve some scale. And for that if the business has to burn cash and be unprofitable, then so be the case.

A firm which has achieved some scale can be then sold off to other investors (or another firm). Or the firm can carry out an initial public offer (IPO) and sell off shares to retail and other investors. In fact, this is something that quite a few VC backed firms did through 2021 and the first-half of 2022. The share prices of such firms tanked after the IPO.

To conclude, the sharks on Shark Tank have benefitted from all this. While they and many other startup CEOs weren’t exactly standing under the helicopter when printed money was being thrown, they were quite near it. And given this, these sharks and other VC backed startup CEOs are a good modern day example of what Cantillon suggested.

The trouble is that these sharks are now getting into the drawing rooms of people. In fact, the traditional and the social media has hyped many CEOs of VC backed firms, turning them into role models. Some former CEOs have written books, made Instagram reels and YouTube videos and turned themselves into influencers.

But the question is do they really deserve to be role models. There is no denying that the sharks and others like them, spotted an opportunity to get financed and were at the right place at the right time, but most of them haven’t really run a profitable business. Their achievements are limited to raising multiple rounds of money. And should that be getting as much importance as it currently is?

Vivek Kaul is the author of ‘Bad Money’.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout