Monopolized market, stifled competition, job loss, restricted foreign capital, tax revenue loss, pro-start-up policy collapse, call for market regulation are connotations ascribed to recent uproar over capital dumping by its believers on one hand. On the other, we have cloned business models, desperate investor call to keep their returns intact, wasteful cash splurge, inflated valuation, need for free market, herd mentality that hyped up investment in few sectors, foreign direct investment in e-commerce marketplaces; from those negating charge of capital dumping as absurd. Precisely, hence, the question is would there be implosion of sectors dominated by foreign competitors in an unregulated market with mild tremors to entire ecosystem or a free trade driven robust ecosystem where capital’s role is limited to being a commodity.
In hindsight, everyone is advocating the hackneyed phrases – need of a level playing field, free and open market, or even the argument that India is not a closed market like Russia or China. That does sound fair but there at times, is need to refrain from being over ideological.
Capital Awarded vs. Capital Earned
Let’s look at it very objectively. The bone of contention is companies like Amazon, and Uber (that failed in China) are funding the negative gross margin sales or cash burn of their ‘Indianized’ arms even as their ‘actual Indian copycats’ like Flipkart and Ola ‘earning’ investments from investors. The question hence, shouldn’t be how foreign is Flipkart (the fact that it is registered in Singapore is a separate matter) or Ola (that like many other start-ups is backed by foreign capital) or other startups because eventually their investors are third parties unlike Amazon India or Uber India that are awarded with war chests from their parent companies. To be fair, there has to be a cap on how much of this awarded capital can be used by their companies and eventually striving to earn the follow on capital from other investors, whether domestic or foreign. That can be a level playing field.
“We are already bearing the brunt of the overpriced startup ecosystem. Whenever you go to raise capital from limited partners (LPs – investors in funds) they ask questions about Flipkart and Snapdeal. So the damage is already done,” says Madhukar Sinha, Partner, India Quotient – Mumbai based early stage fund. The impact of capital dumping is visible on early stage funds too, though short term. “This is just a cycle and will not have a permanent impact on the ecosystem. Because LPs understand that it is a risky asset class, I don’t see a lot of backlash from them. However first time retail investors will certainly get scared,” maintains Sinha.
Here capital, quite unfortunately, is a differentiator led by biggest opportunity in sectors like retail and urban mobility and tapped by players like Flipkart, Snapdeal, and Ola that have become drivers for market sentiments. Not to forget, the wealth of global experience of the foreign businesses that has further powered up their Indian businesses against entrepreneurs that are first timers and hence there can be benefit of the doubt that their businesses will have gaps unfilled that its competitors will take advantage of. “No one can beat Amazon and Uber in the advantage of global experience they have. But the Indian companies also have an advantage of understanding local market. Still, more capital will always be advantageous,” says Anil Joshi, Managing Partner, Unicorn India Ventures. It is also important to understand these…