A few years back, I was part of a literature festival where Snapdeal founder Kunal Behl was billed almost the same as Infosys co-founder NR Narayana Murthy. Narayana Murthy had co-founded and successfully operated an IT company that created value for its customers, shareholders and employees. Bahl, on the other hand, had raised a good amount of money from venture capitalists on a business model that was expected to work someday.
Nonetheless, this was the beginning of the era when entrepreneurs who raised money from venture capitalists at exorbitant valuations, who were unlikely to make money any time soon, were being given rock-star reception. Bahl’s brilliance had faded shortly before, but many other CEOs of startups remained rock stars. Some even sold their loss-making businesses and turned themselves into LinkedIn gurus full-time knowledgeable on everything from investing to living well.
The story is now unfolding as valuations are slowly going out of fashion and cash-flows are making a comeback. In fact, over the past few weeks, Mint has regularly reported sacking employees at startups to control costs. Some unicorns that had planned for an initial public offering (IPO) have been postponed. A few more people have decided to exit the impractical businesses they were in.
So, why is this happening? The central banks of the rich world have decided to raise interest rates to control inflation. In addition, they plan to withdraw a portion of the money that they printed and pumped into the financial system over the years. The US Federal Reserve is planning to withdraw one trillion dollars next year. Therefore, interest rates have risen and are expected to rise further.
Also, this is the reason why foreign institutional investors are selling Indian shares. Three things have emerged from this. Firstly, most of the unicorns and startups that were listed with a lot of hype are now down in the dumps in relation to their current share prices. This is the stock market’s way of saying to such companies, ‘Show us some cash flow.’ Second, it has created trouble for unicorns and startups that were looking to IPO to allow their founders and investors to exit that route. Gone are the days when the listed market was about to approach the kind of valuation they had in the unlisted market. Third, any new fund raisers for startups will now be at lower valuations.
Along with this review, there is much more talk about the benefits and business model of such firms. In fact, Nitin Kamath, founder and CEO of stock brokerage, Zerodha, recently put out a lengthy Twitter thread about how the potential market for Indian fintech companies can be limited.
The India growth story that has been sold to us over the years can be summed up in one line: There are too many Indians and we can sell them some. The trouble is, many Indians are not in a position to buy what fintechs or other startups sell.
Here’s how Kamath busted this bubble with data. There are 1.4 billion Indians but only 90 million have demat accounts. This means that only over 6% of Indians have demat accounts for investments. This could possibly increase to 25% in the coming years. It’s a tremendous opportunity, we’re told. Yet, as Kamath pointed out, less than 30 million of these accounts are active with investments of maximum 10,000 each. This has been followed by a huge boom in the stock market and fintech firms with massive marketing campaigns and freebies.
The reason is simple. Most Indians don’t make enough money to invest in stocks or buy stuff that most startups want to sell. As explained in the recent The State of Inequality in India report, even the monthly salary 25,000 would put the recipient in the top 10% of the country in terms of total earned income.
Of course, all this was already known, but no one wanted to spoil the working story. As Alice Sherwood writes in Authenticity: Reclaiming Reality in a Fake Culture, the word “story” can mean both a fiction and a lie. Every successful fraudster is aware of the power of a well-told story. ” Therefore, the 1.4 billion Indians selling the idea and the vast Indian market were either selling a narrative knowing full well that it was a lie, or they had bought the narrative themselves. In this scenario, they didn’t want to be a killjoy by piercing the story.
Plus, when times are good, people like to believe what they hear. As John Kenneth Galbraith writes in The Great Crash 1929, “In good times people rest, trust, and money is plentiful … In depression it all reverses. View money with a narrow, suspicious eye goes.”
While we may not be in a depression, the prevailing zeitgeist has changed; The era of easy money is coming to an end and the right questions are being asked. Finally, many more are realizing that burning cash to accelerate sales may be a sales ploy to impress venture capitalists and fear missing out, but a business model is not.
In the end it all turned out to be like the old lost-find formula of Hindi cinema. It worked great, until that happened.
Vivek Kaul is the author of ‘Bad Money’.