Herding Local Capital for Local Startup
September 17, 2021
The whole debate revolves around control, innovation, research, creativity, new ideas, and such concepts nurture well in a free environment. — Alok Singh
We are the youngest nation and the biggest market on the face of this planet earth. The aging economies are relying more and more on internet-based technologies- such as the internet of things, artificial intelligence, machine learning processes, unmanned mobility services, robotics-based manufacturing processes, and so on. The Covid-19 pandemic has established these technologies as a boon in crisis and hence their existence can’t be ignored in the name of killing the traditional job market. We accept these technologies and we live with them. But there are sources of bane. We have to address them swiftly. The big question is who controls them? The older legally approved control tools available with the regulators and tax collectors are unable to match the speed of change in business.
The whole debate revolves around control. Innovation, research, creativity, new ideas, and such concepts nurture well in a free environment. An environment that is borderless, no interference from the regulators, no fund crunch, no one to question about what one is developing. But as soon as the product is accepted and control comes into the picture the fight becomes murkier. The freedom to do any business and conceptualize any idea without regulators’ interference fails. Individual freedom can’t be more than the freedom of society. The 2007-8 financial crisis is the biggest global learning for repercussions of the absence of strong and effective regulators.
The lab leak acceptance and non-acceptance of the 2019 new Coronavirus is the latest example that leads to necessarily regulate the science. Nuclear weapons are the drivers to control applications of nuclear science. Similarly, we have examples from the finance world. The small domestic startups, over a period of time, have become relatively big technology companies. Bu the bad news is that they are no more domestic companies for all or any, practical or business, or objective purposes. The control has been lost. The tax and trade have been corrupted. The system needs new software and a legal architect to reboot the trade and tax laws.
Finance has controlled technology, innovation, science. Now, the ideas are indebted to finance. Any idea which has applications in business can be produced and executed by the technology. The idea is the foremost important thing. Technology and finance follow them. Someone created “Orkut” the first well-known and broadly used social networking platform, a better idea “Facebook” came and killed Orkut. Today, there is no better idea that is visible, that can substitute Twitter. The cosmetic changes are easier to replicate. We are waiting to witness the idea which can kill Twitter.
The good news among all these concerns is that the shelf life of such technology companies is less. A better idea arrives and the older are gone. But the role of finance does not change. The big financial organizations are always in control whosoever the original promoter or the original idea creator be.
We had the illusion that Flipkart is ours, Paytm is ours, Zomato is ours, Swizzy is ours, Ola is ours, Oyo is ours, Cloudtail is ours, and the list goes on. The big question is who controls them. The finance-related companies whether it be financial institutions, commercial banks, private equity, venture capitalists, portfolio investors, or any other form from any part of the globe need to be given due diligence. The domestic promoters for domestic start-ups are pressed for funds for their survival and are easy prey to foreign financing-related companies. In the process, the promoters dilute their stake and the foreign equity owners ride with the profit by bypassing the domestic regulators. The rule of the game needs to be rectified. Till it is corrected the domestic start-up’s needs hand-holding in terms of financial obligations. Small domestic startups can rely on small domestic investors for the purpose and the government needs to design a process that is easily accessible. The role of mediators needs to be zero in this new channel of a variant of crowdsourcing finance, a crowd-finance that is not charity but equity. It has to be between the startup promoter and the investor with the government’s role being that of a monitor.
We truly need a not-for-profit platform where the financial resource crunch domestic start-ups and the domestic investors can come up together and mutually cooperate for the execution of the win-win game. The local capital can assure the control of the nation over the business practices of the technology-based start-ups. E-commerce has created troubles both for the trade as well as for the tax. Day after day new stories of such companies making losses but seeing a surge in valuation has become a magic box. This magic is happening on the foundations of foreign money, no responsibility but full control. Our tax laws and trade laws are obsolete to stop such business stunts which are risky to the domestic job market, domestic supply chain, domestic sources of revenue to the local government, state government, and the union government. The solutions have to be discovered and executed.
The solution is that controlling equity should be owned by domestic finance. We have a lot of capital in the unorganized sector and that’s the reason that the unorganized sector could support so many families by offering jobs and opportunities. The government needs to take measures to build the confidence of small local investors so that it motivates the local small investors to partner in local small start-ups. The government has succeeded on many occasions to drive the people in nation-building. The LPG give-up-subsidy campaign is a huge success story of voluntary participation in nation-building. There are stories of crowd-funding during Lok-Sabha elections for candidates who could generate targeted amounts within hours. The local capital is there, it is lying somewhere unutilized and we need a channel to tap it. Local capital is not for charity but is a substitute for external capital and partnering with local start-ups. A platform is needed and a regulator is needed.
A regulator specific for local startup business practices can be the responsibility of the city government or the state government or the union government, as the case be. If the reach of the start-up is within the district it should be the district administration who regulates it, if the reach is within the state then the state administration should own the responsibility to regulate it, and if the reach is across the nation then the union government should regulate it. There is an urgent need to support small domestic startups with small local domestic investors. There are already regulators for global aspirers and we need to support small start-ups with simplicity. The process should be so simple that a local investor can log in and do the transactions with the local start-ups.
(Alok Singh is a Fellow of the Indian Institute of Management Indore and currently is faculty of general management at NICMAR, Delhi-NCR Campus.)