Why India needs more startup crorepatis

Globalisation and the spread of giant digital companies have fuelled fears of excessive concentration of wealth and power in a few giants like Google and Facebook. In past columns, I have highlighted how the same process now produces fast growing start-ups called unicorns, which have an estimated worth of over a billion dollars even before listing on stock markets.

Last week an Indian company, Freshworks, which provides Software as a Service (SaaS), had an initial public share issue in the US at a price instantly making crorepatis of 500 staff members owning shares, of whom 69 were under 30 years. Within days, the market price rose from $36 to $47, creating even more crorepatis. Far from concentrating wealth in the hands of a few, the explosive growth of unicorns is spreading wealth in ways earlier inconceivable.

The world has over 800 unicorns. India has over 50 by conventional measures (though Credit Suisse uses a different definition to get an estimate of over 100). This year has already seen the rise of over 20 new unicorns.

Historically, companies had to prove their profitability before they could attract massive outside funds from investors. This meant growth was slow and cautious, and the old business houses took up to a century to get to billion-dollar status. But now global venture capital and private equity funds (like Softbank) have sprung up, ready to channel trillions into promising start-ups across the world that have the ideas and verve to become giants. This enables them to grow at breakneck speed, and some reach billion-dollar status in just seven years. They focus on expansion without having to worry about profitability. The new breed of investors is betting on revenue growth that entails huge losses in the short run but massive profits in the long run. The dotcom boom and bust at the turn of the century showed that many start-ups would go bust but a few would become the biggest in history, such as Facebook and Google. The new global investors cast their nets wide, aiming for gains from a few superstars to compensate for others that fail.

There is no guarantee that Freshworks’ new crorepatis will remain crorepatis: some unicorns will go bust if they fail to keep growing fast, become globally significant, and eventually yield high profits. Freshworks has pared losses to $9.8 million on revenue of $169 million for the first half of 2021, against losses of $57.1 million on revenue of $110.5 million in the same period last year. That looks promising.

Many of the most promising unicorns are in the Software as a Service (SaaS) sector, also called cloud application services. SaaS uses the internet to deliver applications to customers through a third-party vendor. The vendors manage all technical issues, such as data, middleware, servers, and storage. The biggest companies may prefer to have their own hardware and IT staff. But small and medium companies don’t have time or upfront cash for hardware and IT staff. But small and medium companies don’t have time or upfront cash for hardware and sophisticated IT staff, and are happy to pay subscription fees to SaaS providers. SaaS is ideal for short-term projects that require quick, easy, and affordable collaboration; for applications such as tax software; and for applications that can be accessed through both the net and mobile phones.

Girish Mathrubootham, founder of Freshworks, says he has over 40,000 customers already. He thinks SaaS can rival the conventional IT services industry which has a turnover of $194 billion today. He believes many other Indian SaaS providers will follow quickly in his footsteps, fuelling explosive growth of the sector.

Global venture capital and private funds providing massive funding to start-ups will have majority control, with the Indian promoter being a minority shareholder. Ultimately the financiers may take over or ask the Indian promoters to sell out to a giant multinational, as Flipkart was sold to Walmart. Some say this is the wrong route, and companies should remain in Indian hands.

However, there is a plus side to sell-outs by promoters. They now have billions in their pockets and typically become financiers themselves of new start-ups by others. This reduces Indian dependence on foreign financiers and harnesses the skills of the early sellers to help newcomers. This will help accelerate the spread of creative wealth.

Many critics think India (and the world) have too many billionaires and want to reduce the number to check wealth disparities. I would go in the opposite direction, creating thousands of new crorepatis year after year. That too will reduce disparities, and reduce the Gini coefficient (which measures inequality). It means levelling up, not levelling down, and the ousting of old giants by the new. That’s the way to go.

This article was originally published in The Economic Times on September 26, 2021.

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