The Golden Tap

Title: The Golden Tap – The Inside Story of Hyper-Funded Indian Startups

Author: Kashyap Deorah

Publisher: Roli Books, 2016 (First published 2015)

ISBN: 9789351941668

Pages: 248

India’s contribution to global trade consisted of spices, textiles and jewelry for a long, long time. Even when the West picked up momentum through Enlightenment and industrial revolution, India continued with the same product mix. We could add software and IT services to the basket in the early 1990s. This newly added item rapidly earned the country rich dividends in the newly globalized economy. As the world shrank further with the growth of enabling technology, capital flowed into India. The glittering success of many startup companies in the IT sector, most of them owned by young entrepreneurs from IITs, caught the imagination of a nation that was used to seeing a person acquiring enough wealth to live peacefully only at the end of a long career of back-breaking work. Fresh college graduates becoming multimillionaires in just a matter of a few years was something the nation watched in wonder. With the dot-com bust in 2000, it seemed that the edifice might come crashing down, but the agility and adaptability of the Indian businessman patiently tapped availability of capital from overseas. Indian startups found the international investors to be a golden tap through which the elixir of Indian startups flowed in. This book tells the inside story of hyper-funded Indian startups. There are only a very few books written about the Indian startup ecosystem and this one is especially noteworthy as it provides the perspective of an insider. Kashyap Deorah is an entrepreneur and investor who started his first company while studying in IIT, Bombay. After it was acquired by a Silicon Valley company, he started Chaupaati Bazaar, a phone commerce marketplace, and then merged it with India’s leading retailer Future Group. In 2012, he co-founded mobile payments company Chalo and sold it to another American company. Evidently, he is the ideal person to give us a feel of the industry.

The growth of Indian IT services industry can be split into three periods – the Internet wave (1994-2002), the Globalization wave (2003-2009) and the Smartphone wave (2010-present). There is a pattern to how the industry gets going. After a young entrepreneur starts, he issues a part of the shares to some angel investors. With the money thus obtained, the company grows and attracts the attention of venture capitalists (VC). More funds flow into the system and the company grows still further. It is then either acquired by a high-caliber US company or it goes for an IPO in the US, getting more money. How can this Win-Win system continue for so long? What makes VCs invest in startups even though most of them are loss-making? Deorah provides a clear answer to this riddle of venture capital philosophy. Only a few investments gave phenomenal returns, and most gave no returns at all. Suppose a VC firm splits its capital of 100 million into 20 investments with 5 million apiece. Out of this, the VC could get away with their money even if only a single investment could fetch the entire 100 million. If two firms returned the fund, it would be a hit and more than that would be a blockbuster. VCs saw the American scenario in which specific startups made a splash and thought that the same strategy may play out in other countries after some years. Just as the US was the time machine for VCs to predict India’s future during the Globalization wave, China became the time machine for global funds to predict India’s future during the Smartphone wave. Unicorns, as the companies with a net worth of $1 billion was called, proliferated in India, but no technology venture that was funded during the mini gold rush between 2005 and 2008 had gone public till now, because in India, you need to be a profit-making company to do so. Deorah states that none of them had been as much as acquired by a public company for any meaningful amount.

The author dwells on the specific features e-commerce has acquired in India and how the bureaucracy is strangling it with hefty regulations. Cash-on-Delivery is the preferred mode of payment in a county where the economy is still powered by over-the-counter cash payments. But the government is still throttling the financing channels of e-commerce companies by denying FDI to them. The administration remains silent while e-commerce companies restructure their entities to somehow get past the regulations using loopholes. Every time the company raised a round of funding, financial sleuths descend upon them with threats of a probe and subsequent prosecution. However, FDI was allowed in this sector in 2015 after a long wait. Deorah wants only minimal assistance from the government like ease of doing business, clarity in regulations, a favourable IPO environment and swift law enforcement to protect from fraud and piracy. These factors make India unique. India will not be the next USA or the next China. It will only be the next India.

The brightest students in India join IITs and there is no contention to the argument that they are the premier educational institutions of India. However, they enjoy an unfair clout among financiers which is guaranteed by the presence of many of their alumni in the topmost VC funds operating in the country. Deorah mentions the academic background of an entrepreneur only if he had studied in an IIT. Most of the companies these IIT-ians founded have fallen by the wayside, but they continue to thrive on the liberal patronage extended by their college mates. Deorah himself remarks that the confidence in IIT entrepreneurs was transforming to hubris en masse. It is seen that the JEE rank of an applicant decides the fate of his request for money from potential investors who have developed the stereotype of a North Indian Marwari boy with single or double-digit JEE rank as the ideal entrepreneur. Obviously, they end up with a lot of money, but the author cautions that excess funding kills accountability, customer focus, the necessity to innovate, organizational discipline and everything else that is needed to make a profitable, long-lasting company. The author himself is not immune from unnecessary boasting like his claim to have foreseen the US recession of 2008 a year earlier! But when VCs tightened their purse strings subsequent to it, Deorah fumes at them for the funding denied to his company. The IIT hangover seems to persist even after long years since Deorah left it. In one instance, he makes a statement in his chain of reasoning as something ‘seems to deny the laws of gravity as if they are in outer space’, but immediately butts in with a footnote saying that the author understands that gravity applies in outer space too, but felt differently. The author misses no opportunity to prove his IIT pedigree!

Most of the cases in which the founders found themselves millionaires do not represent a vindication of the business model put forward by them. Almost all of them are loss-making, but the pioneers could get away with it as they could off-load their shares for a huge sum to other investors eager to get into a much fabled startup. The book is not enjoyable for lay readers as many pages appear to be little different than copies of financial journals. As a whole, it looks like reading about five years of financial articles in one go. If you are still left breathing after this experience, you’d find that it has too many characters, names and numbers to be attractive to ordinary readers. This book is not at all suitable for general-purpose reading.

The book is not recommended.

Rating: 2 Star