Billionaires are widely seen as undeserving exploiters. Thomas Piketty, author of the bestseller Capital in the 21st Century, says the global system is rigged in favour of old wealth, so inheritance rather than productive work begets great riches. The 2008 global financial crisis created huge public mistrust of financial giants like Goldman Sachs, seen as cronies that flourished even as economies withered. New technologies with network effects have created a small clutch of new companies (Facebook, Google, Apple, Amazon, Netflix) so dominant that they are now feared.
Many critics like Oxfam claim India too is sinking into terrible inequality. They cite Piketty to claim India’s system is rigged in favour of inherited wealth, while cronyism favours a few unfairly. They say talented people without political, financial or business contacts have little chance of success.
I have contested this earlier on many grounds. Today, let me argue that the rise of “unicorns”— start-up companies that have risen meteorically and are worth over a billion dollars — shows we have a new, fairer capitalism that enables talented newcomers to thrash influential but less talented oldies.
Inherited wealth is a huge advantage for acquiring capital and political influence. Families like Tata, Ambani and Birla dominated great wealth till the 2000s. Economic reform brought in new billionaires, notably in computer software, even as many old giants faded into oblivion (Hindustan Motors, Premier Automobiles, DCM, JK Synthetics, NOCIL).
Today a completely new set of unicorn billionaires has arisen. Globally, there are almost 300 unicorns today. India had at least ten in 2018, including e-retailer Flipkart (worth $21 billion), mobile-wallet company Paytm ($15bn), hotel aggregator OYO Rooms ($5bn), ride-sharer Ola Cabs ($4bn), learning apps company Byju’s ($3bn), and food deliverers like Swiggy ($3.3bn).
All these were started by bright young Indian entrepreneurs with no links to big business or politicians, no access to inherited wealth or cronies. In the old days, you could not start a business without lots of your own money. Persuading banks to lend to newcomers was a Herculean task. Today, private equity funds and venture capital funds have come up across the globe, anxious to pour money into promising start-ups, eager to help them scale up exponentially to become the next Google or Uber.
Once, businesses needed a track record of profitability for several years before raising money from banks or stock markets. Today venture capitalists will pour millions into firms that have never made a profit but have the potential to expand ultra-fast, using the internet and smartphone.
Once, billionaires made high profits and were therefore viewed as exploiters of consumers. But most unicorns lose money, since they use low prices to gain market share, and are willing to run at a loss for years. As users of Flipkart, Ola or Swiggy will tell you, unicorns bring down prices, not up. For the first time in history, losing companies can be worth billions of dollars, because they have great prospects. Anybody with a good idea can attract angel investors and venture capitalists. Some start-ups even raise money through crowd-funding, advertising their idea on the internet and waiting for individual contributions to flow in.
This is a much fairer form of capitalism than the old model. You do not have to be born with a silver spoon in your mouth or golden political connections. You do not need to part of an old-boy network, caste network or religious network.
Many start-ups sell out at a huge profit (as the founders of Flipkart have done). They then use their capital gains to get into venture capital, mentoring new entrepreneurs. Never before has so much free technical and managerial advice from top-notchers been available for newcomers.
There is a dark underbelly to the new system. Because of network effects, a few companies may end up with gigantic tentacles spread over the personal data of billions of people. This can be dangerous for privacy, national security, business ethics, and much else. A stage may come when the new tech giants have to be broken up. But that does not diminish the value of the system in enabling a million new ideas and entrepreneurs to bloom.
Critics will say that the creation of hundreds of new billionaires increases inequality. So what? I cheer the unicorns for the same reason that I cheer the rise of 3,000 Dalit millionaires who have formed the Dalit Indian Chamber of Commerce and Industry. Rags-to-riches stories are a sign of a fair, healthy society that is excitingly mobile, where talent and productivity triumph over inherited wealth and cronyism. Bravo.