“Life can only be understood backwards; but it must be lived forwards,” said the nineteenth century Danish philosopher Soren Kierkegaard. In this piece, we will try and understand life backwards.
Piyush Goyal, the union minister for commerce and industry, recently said: “I know at least three or four billionaires whose children make one brand or the other, very fancy ice cream and cookies, and run a very successful business.” He went on to add: “And I have no complaint against that. But is that the destiny of India?”
Before Goyal, Uday Kotak, the founder of Kotak Mahindra Bank, had a similar complaint when he said: “What concerns me is that many in this generation are taking the easy way out, especially in the post-Covid world. They claim to be managing family offices and investments, trading in the stock market, allocating funds to mutual funds, and treating it as a full-time job.” He further added: “They should be creating real-world businesses. Why not start from scratch?”
Essentially what both Goyal and Kotak said was that the children of successful business people were happy taking the easy way out and were not creating businesses from scratch, like their ancestors successfully had. They didn’t want to start up.
The trouble is that a brief reading of business history of the world would have told them that this is how usually things turn out. As Gurcharan Das writes in India Unbound: “Pulin Garg, the thoughtful professor at the Indian Institute of Management, Ahmedabad…used to say, “Haveli ki umar saath saal [The life of a family is sixty years].”
The family in this case refers to family-owned businesses of India which dominated much of the business scene from Independence to the turn of the century. The last 25 years has seen the rise of quite a few businesses built by first generation entrepreneurs and by now their children should have been ready to take over and run businesses or build better and bigger businesses, at least that’s what the expectation from Goyal and Kotak seems to be.
But they are not. Why? As Das writes: “Thomas Mann…in Buddenbrooks…describes the saga of three generations: In the first generation, the scruffy and astute patriarch works hard and makes money. Born into money, the second generation does not want more money. It wants power…Born into money and power, the third generation dedicates itself to art.”
Of course, art in this case doesn’t literally mean art, but the fact that the newer generation, which was born into prosperity, wants to live life well. Indeed, those who are fortunate enough to win the ovarian lottery, and are born in successful business families, don’t always possess the same drive, passion, focus, interest, or even the talent that their parents and grandparents did – even though they’ve been handed opportunities on a silver platter to achieve something significant.
In this scenario, if the children want to sell artisanal ice cream and make money or manage money through family offices to preserve the wealth built by their past generations, then it’s a choice they are making, and nothing really can be done about it.
And it is worth remembering that in many cases in the past the next generations have made a mess of businesses that their ancestors built. So, selling ice cream is clearly better than that. These individuals don’t owe anything to anyone but themselves. It’s their life and they can choose to make whatever they want to make of it. Or as they would put it: “Okay, boomer!”
Value and job creation by startups
Now, Goyal just didn’t comment on the lack of business ambitions of scions of successful business people, but he also took a pot shot at the ambitions of the Indian startup ecosystem as a whole, or rather the lack of it. As he said: “What are India startups of today – we are focussed on food delivery apps, turning unemployed youth into cheap labour so the rich can get their meals without moving out of their house.”
At a superficial first order level, what Goyal has said makes immense sense though the startup wallahs haven’t really liked it. But in life a lot of things make sense at the first order level. It’s only when we start thinking of second order effects and beyond does real understanding happen.
Now, what kind of businesses do popular Indian startups, which have become a part of everyday conversation, operate? They are into food delivery, quick commerce (quick delivery of vegetables, groceries and what not), helping us find taxis, buses, autos and bikes, betting on cricket and playing poker – gaming or gambling – depending on how you look at things, incentivising trading in financial derivatives, foreign exchange, and cryptos, and delivering products through e-commerce. This is largely the set of different businesses that popular Indian startups operate and possibly led to Goyal saying what he did.
Now, there are several factors common amongst these startups.
First, they are building systems on top of systems that already exist. So, food delivery is from restaurants that these startups had no role in building. The auto and taxicab apps don’t own the autos and taxis that we end up booking. The e-commerce websites and apps largely don’t produce what they sell. The gaming/gambling companies and fintechs exist on top of the banking system not built by them.
In that sense, they are really brokers, who help bring demand and supply together. Of course, the existence of such businesses is also important given that at some level, it makes the economy slightly more efficient. Nonetheless, the startups are not building any new technologies as Goyal complained and he is right about that.
In fact, such companies rarely build physical infrastructure either. Now, there are exceptions like e-commerce companies which need warehouses to store their inventory and quick commerce companies which need local delivery centres to be able service orders in a matter of minutes. But such companies can always rent space as well.
Second, on the face of it, it looks like these companies are creating jobs. This is the argument that the startup founders have been making in their response to what Goyal said. Well, so many delivery jobs have been created. Then, there are people working on the back end and so on.
But is it really like that? Many Indian startups are funded by venture capitalists or VCs. The VCs basically want such businesses to scale at a fast pace and then list them in the stock market at fairly expensive valuations which have no link with the kind of money the company is earning or the viability of their business model. The scale comes from offering discounts, sometimes massive ones.
So, the question is: Are many of these businesses actually creating value at the level of the economy as a whole or are they simply taking away business from many small businesses which already existed in the particular space in which the startup operates?
Is the growth of quick commerce coming at the cost of local kiranawallahs? Are the food delivery apps fobbing the local restaurants? Did the app cabs help destroy many kaali-peeli cab operators in Mumbai?
Take the case of a startup like Lenskart. In their book Breaking the Mould: Reimagining India’s Economic Future, Raghuram G. Rajan and Rohit Lamba note that Lenskart, a major player in the eyewear industry, sells 50,000 frames a day. But what does this mean for India’s 50,000 traditional eyewear shops? Is Lenskart drawing customers away from these local businesses through its discounts?
It can be argued that that’s what competition does. As Thomas Sowell writes in Basic Economics, “Competition as a condition is precisely what eliminates many competitors.” But the trouble is that statements like these were written for a time when businesses didn’t have a huge amount of funding coming out of VCs and were usually looking to make a profit as they scaled up.
The larger point here is that whether many of these startups are adding value is highly questionable. Take the case of what the new age stock brokerages, many funded by VCs, have done. They encouraged derivatives trading, futures and options that is, in various ways, including subsidising this trading and incentivising financial influencers to promote the idea of making easy money through derivatives. This led to an explosion in the volume of derivatives traded and ultimately led to nine out of ten investors trading in derivatives losing money. How does that add value?
When it comes to startups creating jobs, we need to figure out whether the jobs created by such startups have been coming at the cost of jobs in traditional businesses already operating in such areas. That needs more research before we draw any firm conclusions.
Third, there are startups which operate in the rentier space. Take the case of the business which was sold to the world at large as edtech. Byju’s was the biggest operator in the space. Now, such startups basically feed on three things. One, the fact that our education system is what it is. Two, the insecurity of educated parents, who understand that huge competition awaits their kids, and want them to have any competitive advantage that money can buy. Three, it fed on the insecurity of the less-educated parents, and made them buy expensive courses and laptops by even taking on loans.
The surprising thing is that even with VCs throwing so much money into such companies, so many of them have collapsed. Again, this is not to say that such businesses should not be built. If public education is not up to the mark then an entrepreneur is bound to step in and try and make money from it. I mean we have all heard of tuition teachers making a lot of money. Indian edtech is just that.
Indeed, the way a lot of these edtech companies operated was absolutely abysmal. While they may have collapsed, the families which were cheated are still feeling the after effects. This was clearly an impact of being VC-funded and wanting to scale quickly at any cost so that they could come up with an IPO, sell shares to the public and cash in on their investment.
Need for research
Goyal also said: “What do Chinese startups do – work on developing electric mobility, battery technology, and with that they are today dominating the electric mobility ecosystem.”
This was the minister’s way of pointing out that Indian startups are not doing fundamental research to build technologies and products based on those technologies.
The trouble is that why blame startups for this. They are just the new kids on the block. New technologies come from research and development or R&D. How much money does India spend on it? As the Economic Survey of 2023-24 pointed out: “India’s R&D investment as a percentage of GDP [gross domestic product] stands at 0.64 per cent, compared to China (2.41 per cent), the US (3.47 per cent), and Israel (5.71 per cent).” GDP is the measure of the economic size of any country.
Further, large existing businesses remain reluctant to spend on R&D. As the survey pointed out: “The private sector’s contribution to R&D remains low at 36.4 per cent of the country’s GERD [Gross Expenditure on R&D] compared to China (77 per cent), US (75 per cent), etc.”
Goyal’s comment reaffirms my belief that no one really reads the Economic Survey, in government or otherwise.
So, Indian businesses don’t spend on R&D. They are more mercantile in nature. The startups are just a reflection of that. While the government makes a bulk of the R&D spend, as a whole even that is on the lower side.
It needs to be pointed out here that a lot of the US technological revolution was built on research carried out by people working for the government. The free market entrepreneurs – the startups ecosystem that is – then took that and ran with it.
As Jonathan Taplin writes in Move Fast and Break Things – How Facebook, Google and Amazon Have Cornered Culture and What It Means for All of Us: “The internet was conceived and paid for by the US government. It was not a product of the free market as we think of it today – the realization of some young entrepreneur’s dream. It was painstakingly researched and executed by a bunch of academics for whom IPO billions weren’t a reason to work. Rather, these people were fundamentally convinced that they could make the world a better place with inventions.”
This raises multiple points in the Indian context.
First, a VC-funded startup is not going to do fundamental long-term research. As mentioned earlier, people who run such firms are usually looking to scale quickly and sell shares to the public.
Second, the government needs to play an important part in redeveloping research institutions, of which India actually has quite a few. But then do these institutions encourage the smartest of the lot who want to do research? Typically, anyone smart in India who wants to do research also realises that their best bet is to leave India and do their research abroad. How do you solve a problem like that?
Third, Indian businesses are mercantile in their nature. Many are usually looking to arbitrage. Look at India’s very successful information technology industry. What business did they build? They sold India’s cheap labour cost to foreign firms and governments and built their business around body shopping. How many successful products have they launched?
This is not to criticise them, given that they built huge businesses, created employment and that led to economic prosperity for a small section of the population. But then that’s how things are.
Or take a case with what happened in the electric two-wheelers space. Many new entrepreneurs entered the space, bought dodgy stuff from China and tried selling it in India. The most storied of the lot launched what was largely an incomplete product and sold shares at a very expensive valuation and laughed his way happily to the bank.
To conclude, Piyush Goyal is both right as well as wrong. He is right in pointing out that much of India’s startup ecosystem today revolves around services that sit atop pre-existing systems. They are funded by venture capital and thus chase scale over substance.
He is also right in questioning whether these ventures are truly building the future or merely chasing quick wins and not creating much long-term value. But are the startup wallahs solely to be blamed for it? Goyal is wrong to lay the blame solely at their feet.
Indeed, the startups are simply products of a larger ecosystem that doesn’t incentivise original research, long-term innovation, or risk-taking in case of technology that takes time to build. Without a robust culture of R&D, government support for science, and a shift in the mercantile mindset of Indian business, expecting Indian startups to build batteries and spaceships is wishful thinking. Startups are mirrors, not outliers – and what they reflect is a nation still hesitant to invest in building the future, given that we still love to make a quick buck.
Vivek Kaul is a writer and economic commentator.
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