Openomics

Start-Ups Need Bust-Ups

Devangshu Datta is a Delhi-based columnist who writes on economics and finance
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In praise of risk

ONCE UPON A time, a young person studying in a well-known college decided to drop out. This was not because that person was incapable of doing course work, or passing exams. That individual was a wannabe entrepreneur with a clever business idea.

That person thought, ‘Why not focus on developing that idea rather than waste time passing irrelevant exams?’

The dropout managed to find some backers to fund the idea and set up a company. After some initial struggles, the business took off and then grew rapidly. The dropout eventually became a household name with a gazillion-dollars of net worth. The company hired thousands of people who also became rich riding in the billionaire’s wake. And they all lived happily ever after.

This is a fairy tale, of course. It is also true. The name doesn’t matter. It’s all about one’s risk-taking ability.

The name could be Bill Gates, Mark Zuckerberg, Steve Jobs, Jack Dorsey, Larry Ellison, Mike Dell, Oprah Winfrey... all household names. All are first-generation entrepreneurs. Everyone has featured in the Forbes list of billionaires. All of them dropped out to pursue dreams.

The global billionaire list features a lot of people who check those boxes: first-generation entrepreneurs who found focus early and took big risks. Some (like Oprah) are rags-to-riches stories. But many billionaires (like Gates and Jobs) come from comfortable, middle-class backgrounds. They could have sought cushy, stable careers instead of opting for the high-risk road to billionaire-hood.

The risks of entrepreneurship may, comparatively speaking, be higher for somebody who has the choice of a relatively easy ride.

That preponderance of risk-takers in the billionaires’ list masks one thing: most risk-takers fail. Each of those household names is an exception that proves a rule. You cannot become a first-generation billionaire without taking risks. Hence, a very large proportion of billionaires are risk-takers. But a vanishingly small proportion of risk-takers actually become rich. One in a hundred startups gets to the stage where it receives some funding. Perhaps one out of every ten companies that get funded actually becomes successful.

Many thousands of infotech-competent kids have opened businesses in their parents’ garages in emulation of Gates and Jobs; many young women have tried to break into the world of broadcasting like Oprah. The overwhelming majority have failed. The failures have gone through gut-wrenching bankruptcies and lost years of their lives. Some of them have never managed to put their careers back on track again.

Life can be terrible for the risk-taker who fails. But society gains because people take risks. Gates’ company, Microsoft employs over 110,000 people directly; Apple employs around 70,000. Both companies generate employment for many millions more. Both have created thousands of dollar millionaires.

Instead of being praised for his risk-taking, RAHUL YADAV of Housing.com is held up as an example of what the bright young Indian must not do. ‘Get your degree,’ is the first refrain of the middle-class Indian parent

Even if only a small percentage of risk-takers eventually manage to pull it off, it makes sense for society to actively encourage such behaviour. The positive fallout from one success over-compensates for the misery caused by many failures.

This is where the US really scores as a society. America salutes entrepreneurs and American society allows individuals who go bankrupt to pick themselves up off the floor and try again. The current US President has been castigated for his many failings. But his six bankruptcies were never considered a deal-breaker, even by his detractors.

India is different. That fairy tale? The name doesn’t matter. Gender doesn’t matter. But environment does. Nationality does. Rahul Yadav of Housing.com is among the very few Indians who actually took the risk of dropping out of a good college to float a high-profile startup. Unfortunately, Yadav’s career crashed and burned.

Now, instead of being praised for his risk-taking, the poor chap is held up as an example of what the bright young Indian must not do. ‘Get your degree,’ is the first refrain of the middle-class Indian parent. If you can, become a professional—a doctor, a lawyer, a chartered accountant, an engineer. Once you’ve got the qualifications, try and get a government job. If a government job is not available, try to bag a salaried private sector position. If you absolutely can’t do this, well okay, you may as well go into business.

Indian family life is built around that single paradigm: ‘Do Not Take Risks’. If you fail, your parents will bear the brunt of derision, commiseration and fake sympathy from their friends and from your extended family. Your siblings will have trouble finding spouses if you suffer the shame of going bankrupt. So, if you must dare what mustn’t be dared, create a safety net first. Never mind the fact that somebody else might launch Facebook, or create a hit talk-show, while you’re getting a passing grade.

This judgmental attitude makes India an unforgiving environment for entrepreneurs. Forgiveness matters when it comes to going against family wisdom. It’s not that bright young Indians don’t take career risks. But they don’t do it as a matter of course, and they usually spend years building safety-nets before they dip their toes into potentially turbulent waters.

The bright IIT-IIM type often opts to sell soap (as the President caustically pointed out), rather than run startups. Or, as in the case of Infosys, our bright young men hang around for years in dead-end jobs before they decide to spread their wings. Some of the IIT-IIM persons migrate abroad and take risks there, as Vinod Khosla did. In those cases, the bulk of the beneficiaries also tend to be located abroad.

The bright IIT-IIM type often opts to sell soap, rather than run startups. Some of them migrate abroad and take risks there, as VINOD KHOSLA did. In those cases, the bulk of the beneficiaries also tend to be located abroad

The risk aversion feeds into the lack of a certain kind of business within the Indian ecosystem. There are multitudes of Indian infotech services firms. But there are almost no infotech product firms. An infotech services model is not considered too risky. But creating and marketing an infotech product? That’s risky. Yet, every technology products multinational is staffed by a large number of Indians. It’s not as though Indians have a problem creating and marketing products. But they prefer somebody else to take the risk, or they create a safety net first.

There are many generic pharmaceuticals manufacturers in India. But there are very few Indian firms into cutting-edge R&D for new drugs. Yet, there are multitudes of ethnic Indians employed across drug-research labs abroad. The keyword is ‘employed’—that is, not taking risks.

Those holes in the business ecosystem result in a lack of national competencies in certain areas. Maybe it feeds into sectors like defence research and defence equipment as well. Indians working abroad design military avionics systems, target radar systems, infantry weapons and night-vision goggles. But Indian firms are reluctant to invest in these areas.

There are other sectors where I suspect that the national aversion to risk-taking also leads to a crippling lack of national performance. Sports, for instance. This is the ultimate high- risk, pointed-pyramid business.

Even in well-funded team sports like cricket, less than 200 cricketers make a decent living globally. The vast majority of first-division cricketers will at best survive with a clerical job in some Public Sector Undertaking.

Every sportsperson has a short career; every sportsperson risks crippling injury; there is little point in being second-best.

Anybody who wants to make it to the top in any sport must focus on that to the exclusion of all else. There is no time to create a safety net and get a degree.

It’s no accident that very few Indians opt for a career in sports. Nor is it a coincidence that most Indians who challenge sporting barriers come from lower-income backgrounds. People from financially stable middle-class backgrounds find it more rational to focus on getting a degree and a job. It’s much safer than trying to make a living hitting a ball, or turning cartwheels, or twisting other people into odd shapes.

The risk resistance also shows up in saving patterns. Indian households save, and save obsessively. India has one of the highest savings rates in the world, with household savings amounting to 19 per cent of Gross National Disposable Income (GNDI, the part of all incomes added up that’s available for consumption and savings).

But the composition of those savings is very conservative. Over 70 per cent of Indian household savings consist of ‘safe’, non-productive assets such as real estate and of gold. Less than 1 per cent (0.7 per cent of GNDI according to the latest RBI data) is in risky financial assets like equity. Equity has consistently given huge returns in excess of inflation. But the ‘sharebazaar’ has a reputation for being risky and most Indians shun it as a kind of ‘gamblers’ den’.

More risk-taking would be good for our economy in many ways. Only risk-takers can create new businesses that generate the sort of employment that is required.

Policy changes can make some difference. The ‘Ease of Doing business’ has to translate from mere slogans into better infrastructure, cleaner tax systems, faster legal processes, less red tape, easier access to credit, etcetera, to encourage entrepreneurship.

But the core of the problem remains societal. There is no forgiveness for failure. Shaadi.com will not countenance the dropout who tries to build a new business and fails. There is no sympathy for the wannabe Wimbledon champ, who returns to the classroom at 25, after failing to crack the ATP Top 100. The young man who advises his ‘family patriarch’ to invest in the stockmarket is referred to with contempt if the market falls. The forensic auditor who quits her Big Four Accounting firm to start a leather business (yes, I do know one) is treated as though she’s mentally ill by her family.

Until Indian society learns to encourage risk-taking and to tolerate entrepreneurial failures, no amount of policy change will be enough to create a start-up mindset.

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