Having their cake and eating it too
Recent news reports indicate that India’s biggest startups want foreign capital, but no competition from abroad. “I think what we need to do is what at some level China did: [tell foreign players that] we need your capital, but we don’t need your companies,” e-commerce major Flipkart’s executive chairman, Sachin Bansal, said during a panel discussion in Bengaluru earlier last week. Bansal is reportedly in talks with several Indian entrepreneurs and prominent investors to create a lobby group that will represent the interests of Indian consumer Internet start-ups.
Ola founder Bhavish Aggarwal has also claimed that the consumer Internet market is currently “being distorted by (foreign) capital”. “What’s happening in both our industries (is that) there is narrative of innovation that non-Indian companies espouse but the real fight is on capital, not innovation. The markets are being distorted by capital,” he said.
It’s no surprise that this clarion call to the government for greater protection from foreign competition comes at a time when the shining examples of home-grown tech startups like Flipkart and Ola are in a fierce battle against international players like Amazon and Uber respectively for greater market share. They believe that the presence of foreign competitors is suffocating the domestic market.
In response to growing competition, major domestic players in the start-up habitat want the government to introduce greater protectionist policies. With efficient e-wallets built into their mobile apps, the likes of Flipkart and Ola have been life-savers for a section of the Indian populace with access to digital payments in the age of demonetization. More importantly, their stupendous growth in the past decade has inspired young entrepreneurs from across the country to establish innovative products that have brought much succour to segments of urban consumers. Nonetheless, this call for protectionist policies is akin to having their cake and eating it too.
Rewind four and a half years ago and it is imperative to remember how a New York-based hedge fund called Tiger Global Management invested $5 million on Ola’s bid to make a splash into the largely unorganised domestic taxi market. The hedge fund’s decision to invest such a substantial sum inspired other international investors to look into the potential of other domestic start-ups. Bengaluru-based Ola has so far raised about $1.2 billion from a clutch of investors. Even Flipkart has been a major beneficiary of this sort of foreign funding. Since its inception, the e-commerce marketplace company has raised approximately $3 billion, mostly from foreign investors.
Beyond the above mentioned domestic players, a whole host of consumer internet start-ups has surfed on a wave of substantial foreign capital over the past few years. What the likes of Flipkart sometimes tend to forget is that e-commerce companies have eaten into the profits of domestic brick and mortar retailers. This is not to suggest that it’s not a good thing. For consumers, these e-commerce platforms have provided greater convenience, choice of products and better prices. Aren’t the likes of Amazon and Uber also providing Indian consumers with the same thing—choice, better prices and convenience? Ironically, these brick and mortar retailers are probably more Indian-owned than their e-commerce counterparts. The majority ownership of these companies (Ola and Flipkart) rests with foreign investors. In other words, their desire for greater protection from the government seems to be rather self-serving and convenient.
What is the context for their clarion call for greater protection? The last time both Ola and Flipkart had raised capital from investors was a year ago. In their relatively short histories, one year is indeed a long time to go without a significant infusion of capital. Since then, they have suffered from losses, valuation markdowns and write-downs. Of course, it does not help matters when the likes of Uber and Amazon with significantly deeper pockets, eat into their market share. In fact, the progress made by Amazon in the e-commerce market has made foreign investors hesitant to write big cheques to local players. What’s at stake here is the valuation of these companies, and access to capital.
But without foreign money that came through venture capital, these companies would not have been able to make the strides they make. In a recent column for Scroll.in, Devi Yesodharan, a writer and entrepreneur, writes: “Asking for greater protectionism for Indian firms is not good for the Indian economy. Favouring nationalism over growth, innovation and competitive forces is the wrong road to take. Over the last two decades, India’s Information and Technology industry successfully created jobs and wealth for millions of Indians thanks to low trade barriers that allowed these companies to compete in global markets. Protectionist measures hurt employment, result in higher prices for customers and benefit businesses disproportionately.” Of course, this isn’t the last word on the subject. Greater regulation is indeed needed in the consumer internet market. But should the government pay heed to Flipkart’s specific call?