Is The Indian Start-up Boom A Bubble Now? Or Is It Here To Stay?

Entrepreneur-investor Kashyap Deorah takes a candid look at the technology ecosystem in India, and asks how much of the current exuberance is sustainable.

Global funds had increased the momentum in India by betting on start-ups representing market spaces likely to grow exponentially as the country went online. This resulted in the birth of Indian unicorns—private companies with a valuation of over a billion dollars. The unicorn phenomenon was relatively new to the world and not just to India. By September 2015, there were more than a hundred unicorns in the world: 2/3rds of them in the US, followed by China, and then India.

If the speculative bubble of 1998-99 was about loss-making Internet companies going public, the speculative bubble of 2014-15 was about loss-making Internet companies becoming unicorns. In 2000, the bubble burst showed up as a spectacular crash of public company stocks as Nasdaq dropped nearly 80 per cent over the next 18 months. In late 2015, a 40 per cent fall in Chinese stocks and a correction of over 10 per cent in US stock market was expected to show up as the death of many unicorns. Billion dollar companies that were hooked to funding and were unable to raise their next rounds or get profitable with what they had were likely to die or phase out into oblivion over the next 18 months. The phrase being thrown around was unicorpse.

I had personally interacted with the founders of all Indian Internet unicorns up until that time. Most of these interactions have been as fellow entrepreneurs many years ago when they had not yet raised their first round of funding from a VC. I had interacted with Sachin Bansal and Binny Bansal in 2009 when they had bootstrapped for over two years to bring 10 per cent of India’s Internet population on their website without spending on marketing. Their fantastic customer service was exemplary for the industry and reminded me of my experience with Amazon in the US.

I had interacted with Kunal Bahl in 2009 when he was pivoting his business from coupon booklets to becoming Groupon of India. His resilience and ability to steer the company through change during tough times was phenomenal. I had interacted with Bhavish [Aggarwal] in 2012 when he had spent over a year competing with Meru Cabs, Tab Cab, and Easy Cabs by building a better product experience despite local transport regulations and national RBI regulations for payments. I had interacted with Naveen Tewari in 2008 when he was wrapping up his tiny office in Vile Parle to move to Bangalore after he had pivoted from a local deals search company mKhoj to a mobile ad network inMobi.

His courage to say ‘fuck-it’ to the Indian ecosystem and instead build a global mobile ad network company out of India was inspiring. The Chaupaati team had done business with One97 for voice and SMS solutions in 2009. It was impressive how Vijay Shekhar Sharma had created a leadership position in a crowded market by sharply focusing on a platform that enabled simple end customer experiences.  

And then they got hooked to the golden tap. Flipkart became Amazon/JD of India. Snapdeal became Ebay/Alibaba of India. Ola became Uber/Didi-Kuaidi of India…Their rapid growth as consumer brands made them undeniable successes in the eyes of the nation. Their products could be touched and felt by everyone, and the blinding valuations of these companies made them the heroes that the country had been craving for.  

The next generation of start-ups and entrepreneurs followed their lead and started emulating the playbook of getting hyper-funded in hot market spaces as fast as possible. Market spaces like e-commerce, taxis, classifieds and payments were spoken for. Real estate, travel, automobiles, financial services, healthcare, education, etc were still up for grabs. The Indian unicorns started defining the identity of Indian start-ups.

A start-up’s identity in the Silicon Valley was their product and team. A start-up’s identity in India had become their market space and funding. Having done business with some of the unicorns in Silicon Valley during my tenure at OpenTable, my feelings about the Indian unicorns were mixed. The US unicorns seemed to be born out of innovation (0 to 1). The Indian unicorns appeared to be born out of globalization (1 to n). US unicorns had been subject to criticism for their high burn rates and lack of focus on profitability to the point of fault. Indian unicorns were a blown up caricature of the same phenomenon and were yet being celebrated, probably because the ecosystem had not been through a cycle of exuberance and bust, and did not know any better.

There was a jingoistic nationalistic undertone about the Indian unicorn phenomenon although they were foreign owned and a direct outcome of globalization. The government, entrepreneurs, investors, media and consumers at large saw the big sale of market spaces and the mass import of technologies and funds as the model for Indian entrepreneurship. The ecosystem seemed extremely sensitive to anyone shining the light on the manner in which these companies were being built. The reaction seemed no different than the time when Bollywood bigwigs poo-pooed Slumdog Millionaire for portraying India in poor light even as it won the Academy Award in 2009. The ecosystem seemed hypocritical and self-serving.

If it were really about improving incomes and bringing convenience, then Uber and Amazon were no different from, if  not better than, their ‘Indian’ counterparts Ola, Flipkart and Snapdeal. The leaders and management teams in both sets of companies were Indians with similar profiles and educational backgrounds. The owners of the company were foreign corporations or funds. The product experiences and business models were similar. They were all adapting the technology and operational flows invented in the US for the Indian market. In all cases, the funds being invested were primarily generated in US stock markets and the returns would lead to more value creation in the US stock markets. They were equally creating employment and income opportunity in India. They were equally bringing convenience and better prices to consumers in India. If Google was the Google of India, Facebook was the Facebook of India, Twitter was the Twitter of India, why would Uber not be Uber of India, and Amazon not be Amazon of India?

If we choose to have these technologies in India, isn’t it nice that those who created those businesses through innovation were now interested in bringing it to the Indian markets through globalization? If we choose to close domestic consumption spaces from foreign investors, why were we disguising foreign-owned companies as Indian companies instead of actually closing the market? If we had the confidence in our indigenous ability to innovate for our own national needs, why were we playing by the rules of global technologies and funds as if it was a war when the winner takes all? Why were hyper-funded start-ups being celebrated as the model for Indian entrepreneurship at the cost of isolating innovative start-ups that were building unique products and services for the country and the world?…

…But then, who was I to judge the Indian unicorns anyway? My companies have been 0 to 1 and I had sold each one of them instead of building them out. I had not raised a single round of investment from VCs in any of my companies. Was it my competitive gene as an alpha IITian calling the grapes sour because I failed to reach them? I had bid to scale their heights in terms of reach, impact and scale on multiple occasions and failed. Was it my defense mechanism as a frustrated entrepreneur trying to belittle them? What was wrong with globalization if it brought the world’s best technologies and funds into the country? What was wrong with borrowing the world’s playbook to improve the incomes of millions of service providers and merchants, and bring convenience and lower prices to hundreds of millions of consumers? As I thought about these questions, a theme emerged.

There were lesser public Internet companies than unicorns in India, compared to 40 for every unicorn in the US. The start-up ecosystem showed no urgency to take companies public so they could return money on investments and fulfil promises made over the last decade. Instead, the past was being buried in the past, and new money was being raised on hefty promises that were several years or a decade out. I had seen this theme play out in India several times before.

Every time, the investors lost their shirts, India lost credibility, the ecosystem got permeated with bad habits, everyone involved got disillusioned and the eventual goal of improving people’s lives got set back by many years. Lesser the accountability in the ecosystem, lesser the likelihood that anyone would benefit in the long term. It seemed like rank opportunism. Of all cultures in the world, Indians were expected to deeply understand how the karmic cycle worked.

(Excerpted with permission from The Golden Tap: The Inside Story of Hyper-Funded Indian Start-Ups by Kashyap Deorah, Roli Books, Rs 595)