The Entire Point was Innovation

Once upon a time there used to be two kinds of businessmen in our country

  1. Your neighborhood store owner, and
  2. The big shot rich family heir, who had the money, the connections, and the power to beat the license raj, the immaturity of the market, the lack of infrastructure and all other impediments to make more money.

[Allow me the above simplification and try to refrain from poking holes in it, because that is not relevant to the point I am going to make.]

Innovation

Then came the excitement of the 1990s followed by the awakening of the 21st century. We were introduced to a third kind of person – THE ENTREPRENEUR. His was the story of a well-educated (often) techie, who innovates, changes the face of an entire industry, or even creates a new industry altogether, generates a lot of value, and as a result not only makes tons of money for himself and his shareholders, but also creates a breed of well-paid, well-pampered, well-off and happy employees. What this guy’s venture does is scale well and quickly, thanks to the technological innovation he has brought in.

Blinded by some such one-off, spectacular successes, there came a crop of career investors, and in their wake similar entrepreneurs, who decided that they could scale the creation of well-scaling companies. It sounds like a great thing, but it isn’t. Because what they intend to do simply doesn’t happen. You can’t have super innovative, commercially viable unicorns at the rate that would justify the number of career investors in existence.

But that is not a problem for careerists. Theirs is not the only job in the world which we would have been better without. Learning from a number of such situations, we have, by now, well-developed systems to keep and justify such jobs. There is no innovation that these investors have to do there. They just have to keep looking busy. They have to keep going gaga over a new “industry” every six months and express great faith in business models which even a school student with basic arithmetic skills making a back of the paper calculation would know to not work.

But those suited-booted experts, those smooth-talking, confidence-oozing honchos must know something that the school student, and we, do not know, right? Wrong. If one could mathematically measure it, most of the expertise in today’s business world (and here I am not talking about just our career investor) would be rehashing of profound-sounding bits from the latest fad or, in case of those who claim more consistency than that, forcefully fitting every situation into one theory they are hung up on. The suited-booted, smooth-talking, confidence-oozing careerists are no exception to this.

The result? Startup investment decisions that even a school-student would not make with his own money, and rightly so.

So long as it is a game played among people who only have themselves to answer for, who have the cunning and understanding of the system to salvage personal financial gains even from the most doltish of the business decisions, so long as it is between the investor who would take his cut of management fees and move on to do more exciting things and the entrepreneur who will become an investor by virtue of having been an entrepreneur who got a (shady?) exit or will join another investor-funded cushy job with much fanfare and even buy an apartment worth crores in a posh area of the city using his exit money, I don’t care, I don’t crib. This is real life for you, kiddo. There is a system to be gamed. If you have the desire and the “street-smartness” to game it, get rich. Else earn you livelihood in small chunks the hard way or carry out the tough task of making some real innovation and changing things, where the chances of success are really thin. Don’t crib.

But the recent trends are disturbing on another level altogether. Now there are people in the equation who do not understand the game at all. And (lest I be declared too patronizing) even if they do gain the understanding, they don’t have the power, money or “expertise” to manipulate it in their favor. I am talking about the taxi-drivers, the delivery boys, the novice real-estate agents and the data collectors on the fields, who have suddenly seen a spectacular (considering the base) rise in their incomes through admission to the game being played by these career investors and their chosen entrepreneurs.

What? Am I moronic enough to grudge these guys a better income?

No. I grudge the fact that no one is paying attention to the basic arithmetic not working. Despite all these “world-changing innovators” in the picture, the basic economics of driving a taxi, delivering a package, or finding a match between a property and a potential renter has not changed. The same people are doing the same things in the same manner (oh yes – there is an app thrown in between, and a fancy team behind all this, but that doesn’t make a difference in the cost of providing the service), but doing it cheaper for the consumer. How?

Well Uber and Ola investors are subsidizing our rides, some others are subsidizing our food, and yet another set is subsidizing our e-commerce deliveries. Some part of this subsidy budget is also being passed on to those low-paid blue collar workers, so that enough of them can be hired to cater to the subsidy-induced demand.

So there is no real sustainable reason behind the increase in income that these people are seeing. Sooner or later the money will dry up (“industry will consolidate” to use official speak). And this time it won’t just be a game between our expert investors and hot-shot entrepreneurs. This time these blue-collar workers will get hurt. Those whose incomes have gone up from six thousand a month to twelve thousand or from twenty thousand to forty will be affected too.

So what, you say. They would be back to their original income levels, but at least in between they would have made that extra bit of money. If you do say this, then I am sorry, but I have no better way of responding to you: You are an insensitive brute.

That is not how things work, not even at much higher income levels, but definitely not so as such low ones. Twelve thousand a month is hardly a great income to have in a place like Bangalore, but going from six thousand to twelve thousand makes a huge difference. It will change their future plans and current lifestyle decisions. And when they are back to six thousand a month, they will be worse off than what they had started with, which itself couldn’t have been very good. Loss of the same amount brings more misery than the pleasure experienced by the gain of it (if you are fond of economics, please read Behavioral Economics for confirmation). To show them the dreams which would not sustain is more brutal than to have left them to their fate and status-quo.

What is even more infuriating is that many of the businesses where the mindless amount of money expecting 10x returns is being pumped in are not unsustainable in themselves. We have been taking cabs for decades, our food and grocery has been delivered to us for quite some time and these businesses have given employment to many people. It would be a noble idea, still, to make these businesses work in a way that gives better incomes to those employed on the lower rungs. But our money-bloated ventures are not figuring out a way of doing that. Instead they are destroying even the existing ecosystems with their subsidized offerings. Once you start subsidizing, everyone else has to either play the game or get rooted out.

When the money runs out, what will these changing-the-world-and-improving-the-lives-of-destitute entrepreneurs do? Will they stay on in rough times earning less themselves but supporting these employees until the business can be built back up the right way? No! They will do the financially prudent thing, cut their losses, participate in industry consolidation, come out decently well-off themselves and then move on with the proud tag of serial entrepreneur in their Linkedin profiles, leaving their once precious employees and “partners” to deal with their fate.

The bad news is already coming in. Firings in the companies that hired people without sustainable business models and unsavory (to our tastes) protests by employees (“partners” in some cases) who see their incomes vanishing. Despite that news stories like this one are happily being written with no one wondering if this is eventually good for those people.

What then? Should the income for these people not go up? Must they keep working with wages that don’t allow them to meet even the basic needs of their lives?

No. But if the change has to come the capitalist way, it should happen through innovation and sustainable business models. That route won’t show “results” at the same jet-set speed as pumping in money to subsidize products to an already over-catered set of cash-rich, time-poor people. But it won’t have such fragile, short-lived results either.

After all, the third kind of entrepreneurship was supposed to be all about innovation and not about mindlessly pumping in money like the Reliances of the world. Where is the innovation right now? Creating another app on bloated budgets should have long ceased to count as innovation. The last food-“tech” innovation was probably done at DRDO, using which the ready-to-eat packaging was created and brought to the market.

By all means, try to change the world, but for the better please! And sustainably.

This entry was posted in Business & Entrepreneurship and tagged , , , , by Jaya. Bookmark the permalink.

About Jaya

Jaya Jha is an entrepreneur, a techie, a writer and a poet. She was born and brought up in various towns of Bihar and Jharkhand. A graduate of IIT Kanpur and IIM Lucknow, she realized early on that the corporate world was not her cup of tea. In 2008, she started Pothi.com, one of the first print-on-demand publishing platform in India. She currently lives in Bangalore and divides her time between writing and working on her company's latest product InstaScribe (http://instascribe.com) with a vision to make it the best e-book creation tool. Blog: https://jayajha.wordpress.com Twitter: @jayajha Facebook: http://facebook.com/MovingOnTheBook

2 thoughts on “The Entire Point was Innovation

  1. You have raised an important issue. But is there a “regulatory” solution to this, or should we hope that entrepreneurs and investors would start thinking of social disruptions on their own (and hopefully such blogs raise their awareness). After all, every business, till it gets to a point of being monopolistic (which some of these so-called start ups have become), there is no regulatory framework to check “predatory” pricing as of now. But remember that even a local grocer indulges in predatory pricing for a few days when s/he opens a new shop. Selling at a loss is considered a justified business expense to set up a business. So where and how do we define a line, and when should a regulatory intervention happen?

    • If only there was a regulatory solution to this… How would one define “predatory” pricing? There genuinely can be products and services where the cost goes down with scale, where technology can handle that scale without corresponding increase in cost, and hence it would make perfect sense to offer them at lower prices in the beginning to build the scale at which those prices become sustainable. In the initial few days it would entail making losses. You can’t really ask that a business should never operate at a loss. And a government committee can hardly decide what is predatory pricing and what is a good business model in making.

      This is the kind of situation where “invisible hand” of the free market should have worked. That kind of money simply shouldn’t come to venture capital, when there aren’t enough business models that can give the returns they want. But it looks like our institutions have become too complicated for the invisible hand to find its way through them. Most VCs and investors are not dealing with their own money. If they are, then they see the scope of making a bakra out of the next round of investors, who are not dealing with their own money. Limited partners (LPs) providing money to these VCs are not pulling in reins. I am speculating about a territory in where I don’t have much visibility. But probably it is happening because LPs themselves are mostly institutions where individuals making day to day decisions are not going to be hurt. Regulation might need to look into the source of this money instead of the individual investment decisions. If pension funds from US are investing in venture capital in India, then US government should be worried. If it is the university funds, then they should be worried too. In short term the prevalent good practices seem to work. But those responsible for long term have to constantly question the goodness of those practices.

      Probably they will. In long term; as the idea of free markets promises. The only problem as Keynes said: In long term we are all dead.

      Meanwhile, as an entrepreneur myself, I have no hopes from regulation. They only make the lives of small guys difficult. The ones with money find a way around it. FDI is still not allowed in online retail, right? Flipkart and Amazon.in must be products of our imagination then.

      So, in the end, although it seems like the weakest, vaguest of the hopes, I will only hope for awareness and conscience in people. Media can help by questioning, instead of mindlessly celebrating whatever attracts money. Mentors and guides can remind the youngsters who are “passionate about food tech” that there is no industry like that really. And entrepreneurs, especially those who aren’t into it because they had no other options, but because they wanted to do something better than a well-paying job, will sit back and think if they are really bringing in any innovation in the market or just destroying what existed and was functional.

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