Why we now need to act fast on the policy front to ensure that most of the gains of current and future entrepreneurship remain with India.
The $16 billion Walmart purchase of 77 per cent of Flipkart, India’s No 1 e-tailing marketplace, marks a turning point in the evolution of Indian entrepreneurship. It is now obvious that great ideas will ultimately get taken over by Big Money from outside India. Even if there are laws to enable Indian entrepreneurs to retain higher voting rights after equity dilutions in the companies they founded, the trend is irreversible.
The reason is the fundamental change that has taken place in the world economy over the last two decades, and especially after the 2008 global financial crisis, which brought down the cost of capital to near-zero levels. The rise of technology as the largest wealth creator in history means that companies with very little real assets on the ground tend to have financial assets in billions of dollars. This means no matter which business bubbles up to the top, the companies with big cash hoards can snap them up by paying top dollar.
According to a Goldman Sachs research study last year, US companies alone had cash hoards of $3.1 trillion held offshore, with Apple, Microsoft, Cisco, Alphabet and Oracle being the top hoarders. At last count, Apple alone had nearly $285 billion in cash or equivalents.
In this kind of cash glut, Indian promoters have no chance in case any tech company wants to acquire an Indian success story. Amazon is believed to have topped Walmart’s offer to buy out Flipkart, but the offer was not taken up as the chances of that deal going through the Competition Commission of India were slim.
The Flipkart deal is an exception that proves the rule: it has been bought over by a brick-and-mortar retailer, whose shares tanked on news about the Indian purchase. But the acquisition went ahead precisely because Walmart’s business model has been impacted by Amazon, and buying Flipkart was a once-in-a-lifetime chance to take control of a market leader in an economy that is going to boom over the next decade. Since the future of retailing probably lies in mixing offline and online formats seamlessly, for Walmart this is both a defensive and offensive move.
So how will Indian entrepreneurship be impacted in an era where capital is flowing like water? Do we have policies in place to soak up a large share of the world’s excess capital?
The first and most obvious change is that there will be more cash for investment. We can see how this has played out in the case of Flipkart. The company has been valued at $21 billion after the Walmart deal, leaving all previous investors, including Tiger Global, Softbank, Naspers, and Accel with multi-fold gains, and founders Sachin and Binny Bansal as instant billionaires. While Sachin exits the company with his booty, Binny remains on board, but with a potential billion-plus that will be paid out to him over the next few years.
At one level, this represents a loss for Indian entrepreneurship, since Flipkart is now owned by Walmart. But the flipside of the Flipkart deal is that we now have many millionaires and at least two billionaires (Sachin and Binny Bansal) with oodles of cash to invest in startups. An Economic Times story today (10 May) notes that Walmart’s valuation of Flipkart has made stock options, both vested and non-vested, worth $2 billion, and some 100 current and former employees could become dollar millionaires.
This will offer a tremendous boost to India’s start-up culture, since one presumes that the new billionaires will not be spending their money buying castles in Scotland, but reinvesting most of it in building or promoting new businesses in India.
To convert the loss of Flipkart to foreign owners into a positive for India, we now need to act fast on the policy front to ensure that most of the gains of current and future entrepreneurship remain with India.
The next thing, of course, is to legislate laws to enable entrepreneurs to retain high voting shares even when they must dilute capital to investors. Only this will enable the Olas and Paytms to remain Indian in future, even though these companies are already substantially owned by foreign investors. If Uber buys out Ola’s founder, he will, of course, be a multi-millionaire, but the business becomes foreign-owned, and all future gains will accrue to Uber’s shareholders.
To make Indian entrepreneurship flourish, we need to give top priority to ease of doing business. We probably need a permanent task-force in states and at the Centre to keep simplifying rules and regulations until we reach Singapore levels of simplicity. States like Karnataka and Maharashtra should, in fact, drive this change by making ease of doing business their main focus. Once a couple of states become hotspots for start-ups, the rest will follow. In India, reform now has to be led by states.
Another idea is to open up potential government-owned tech and non-tech companies for private management, but not necessarily ownership. For example, companies like IRCTC, which has a monopoly in railway ticketing, should give stakes to future Sachin Bansals to run and expand through acquisitions and organic growth. If needed, the government can retain a majority stake through shares with higher voting rights, but it must leave the running of such enterprises to competent private managers. The government ownership is important to retain successful tech companies in Indian hands, but private management is needed to ensure that bureaucracy does not stifle such companies.
India does not lack for entrepreneurship. It will not lack for capital, too, in a world where capital is available in endless quantities at low-return rates. What we need to do is to ensure that this capital builds Indian intellectual capital that remains as far as possible in Indian hands, serving Indian interests.