Context

As per the Economic Survey 2021-22, India has become the third-largest startup ecosystem in the world after the US and China.

Start-up ecosystem in India

• India attracted huge investment in startups in 2021: Private equity investment was $77 billion, of which $42 billion went to early-stage ventures.
• Every startup where salaries are paid by investors rather than customers is breathlessly rethinking business plans.

How do startups benefit society?

1] Innovation, productivity and job creation:

• The high failure rate of startups is not a problem per se — society only needs a few successes to harness the gains of innovation, productivity and job creation.
• A new book, The Power Law makes the case that startup investing is unlike public market investing.
• He suggests public markets follow a “normal” distribution like human height — most people cluster around the average with a few exceptionally low or high.
• But venture investments follow a “power law” of distribution, that is, most go to zero but the tiny number that succeeds more than compensate for the losses or mediocrity of the many.

2] Losses caused by startups are not passed on to society

• Startups don’t socialise their losses, Corporate bank loans expanded from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014.
• Such high corporate bank loans created bad loans that needed many lakh crores of government money to recapitalise nationalised banks.
• This money was diverted from government spending on healthcare, education and defence.
• The current venture capital binge will also create many write-offs but this cost will fall on consenting adults with broad shoulders — foreign institutions, angel investors and entrepreneurs with successful previous exits.

3] Startups will solve real problems for Indians:

• Ending our poverty needs higher productivity regions, cities, sectors, firms and individuals.
• A modern state is a welfare state that does less commercially so it can do more socially.
• It needs allies in reimagining financial inclusion, supply chains, distribution logistics, employability, retail, transport, media, healthcare, agriculture and much else.
• Many of our startups shall redeem their pledge to solve these problems “not wholly or in full measure, but very substantially”.

Three issues related to startups

• 1] Fiscal and monetary policy normalisation: The global capital supply fuelling startup funding faces challenges from fiscal and monetary policy normalisation: The rate-sensitive two-year US government bond recently touched a 1.6 per cent yield after being at 0.4 per cent as recently as November — because the risk-free return cannot be return-free-risk forever.
• Investors are returning to weighing financial sustainability and capital efficiency along with addressable markets.
• 2] Excesses: This explosive startup funding has created excesses.
• 3] A different approach of public markets: Private markets are not only delaying IPOs — Amazon went public within three years of starting with less than half the value of a unicorn — but unicorn IPOs’ underperformance suggests that public markets have a different calibration.

Conclusion

The few startups that survive will raise India’s soft power and prosperity by using improbable ideas to solve impossible problems. What we need is to ensure the policy environment for the startups to boom.

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