Indian startup ecosystem liquidity

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The ispirit foundation recently released a report regarding liquidity in the indian startup ecosystem between 2012 and 2016.  The  report compared capital raised in India , Israel and USA are compared to the total exits (M&A’s) in India, Israel and USA.  The report can be found here.

Summary of the article:

a) About 391 firms contributed to $4 Billion in exits. It seems the top 7 firms accounted for $2.5 Billion and the rest 384 firms contributed to $1.5 Billion in exits. This was about 20% of the capital  invested in the same period.

b) Contrasting this to Israel’s startup ecosystem – about 448 companies made exits with $29.5 Billion.   This was about 180% of the capital invested in the same period.

Reasons for this:

  1. The proportion of VC funded  startups to startups funded by other means,  in india is much smaller than that compared to US or Israel.  Most of the entrepreneurs in India –  do not depend on VC’s, except in the high tech sector where there are possibilities of huge growth.   Refer the graphic here. This proportion is not captured in this article. Liquidity attributed to only  the difference between VC capital and exits is not a fair representation. The overall lending  (startup financing) system has a much higher liquidity – as shown in the above figure.
  2.  India’s VC funded startup ecosystem – is an ecosystem – mostly driven by a combination of idea arbitrage and solving problems of market inefficiencies e.g. A well established business model is ported to the local context to solve a completely different set of problems. These problems often deal with unique  legal and institutional frameworks. Such problem solving has probably been challenging for both the startups, their founders and their investors.
  3. Exits ; either M&A based or IPO based are controlled in India historically to protect the masses from exploitation. Kudos to SEBI for that. Because of such tight controls, there are fewer delistings on bourses – compared to other global markets.  Similarly, ponzi schemes such as penny stocks don’t happen. However,  capital controls prevent firms from IPO’ing without operating profits for a few consecutive quarters. A Snapchat or a Salesforce could not have IPO’ed in India. Many profitable companies prefer not to either IPO or merge because that brings additional pressure and burden on the team.
  4. Primarily software product export businesses have thrived more successfully.  This is slowly changing ; local technology markets are growing by the day. This can only increase the rate of exits.

The future is  definitely brighter

Eventually, a much larger number of successful exits – either via IPO or via acquisitions are bound to happen. The startup ecosystem funded by VC’s in India –  is definitely the youngest in the world -( about 10 years old ). Infact India saw its first big (> $100 million ) investment in 2010. India is also the youngest country by mean age in the world (average age of 28 years) and this will create ample macro-economic avenues for the entire ecosystem at a scale not present anywhere else in the world.  In this context, I do have a question: Will the financial institutions (lending/venture capital/other capital forms) raise to this occasion?

Because of this opportunity there could be another possibility. The VC/IPO/Capital markets are being disrupted by Cryptocurrencies and smart contracts. Will India’s fledgling and highly entrepreneurial ecosystem latch on to alt-coin based ICOs to raise capital faster globally. Only time will tell.


Land registry on Blockchain

According to  a report here, two municipalities in Brazil are trying to put their land registries on a public “colored coin” Blockchain. This is not the first instance – Sweden is at the second phase of its implementation of the Blockchain for its land records. Such a move is supposed to save the public exchequer somewhere between $100 million and $200 million.

Two years – ago- at an invited seminar at Takshashila foundation – a policy think tank , I had suggested idea of putting up land records on the Blockchain, in big counties. One of the largest sources of dysfunctional (or inefficient) societal institutions globally is this one factor –  the asymmetric competition for  natural resources such as land, that lead to inefficient transactions. More so in developing economies, where urban land (and other resources such as wireless spectrums, waterways, etc.) is rare, and demand is so high that prices are unjustifiable.

This leads to several problems – chief among st them corruption in land bureaus, land grabbing, illegal occupation, sale of zoned land, occupation of lake beds, etc…  With a Blockchain (and alt-coins) based approach this entire registry and series of transactions – not only becomes transparent, but also eliminates the unwanted middle men or official who sits in the land registration office.

Transactions, can, at some point happen directly between the buyers and sellers, with a proper record of the transaction being stored perennially on a publicly accessible – secure and verifiable-ledger. Not only can sale deeds be recorded on the Blockchain, but also, contracts for long term leases and other “specialized” contracts can reside on the Blockchain.

I am sure, after this pilot, many other states, counties and countries will seriously consider moving their land registries onto an alt-coin backed “public” Blockchain.  Transforming land based transactions will be the very first step at stemming large unaccounted cash flows globally.

Voice for “device” input

Voice is slowly replacing touch as a medium for device input. However, many common operations  e.g. starting an app , sending an email, replying to a phone call, even answering a phone call  are mostly done through touch.

It dawned on me that if you had voice capabilities on apps – specifically for doing things like reply back or to answer the phone without needing to physically touch the device, or your handset, or the headset it would be so much more convenient.

The “voice out” part of devices, by means of speakers are awesomely developed. The “voice in” is still being developed. I’m pretty sure that over  the next few years, as voice will become the key driver for device I/O it would develop significantly.

The brainwave driven device can wait – instead of leapfrogging “Voice” that sound waves as the primary interface to devices.

Overall, I think the human – device interface will progress from keyboard/mouse/IO peripheral -> touch -> voice ->brainwave…..

The role of Access to Information in governance

In this post Raghuram Rajan, the Governor of RBI and Professor of Finance, Graduate School of Business- Chicago looks at the root cause of Why corrupt politicians keep winning elections in India. (I referred some of  Raghuram Rajan’s work on behavioral finance for my doctoral dissertation)

Dr. Rajan lists the vicious cycle of dependence of the ordinary citizen on a politician who serves as a broker (or intermediary) who enables delivery of public services, such as food ration, or roads, or acceptance of complaints ,etc.  All of this is done in exchange for a VOTE. The surprising anamoly, Rajan identifies in this article, is the failure of the public distribution system which in fact causes the dependency.

His solution however is simple to state and see but difficult to implement. a) Put the money in the hands of the needy – a food stamp like approach. b) Eliminate or reduce the role of the Public distribution system (or other channels of distribution) which accounts for massive leaks c) make information  accessible to the masses ( – if possible in real time.) These achieve the goal of eliminating the dependence of the middle man on the politician for what was necessarily a right.

Making Information accessible to the masses is a great way to empower the citizen and make him compassionate.  And as with the variety and diversity in India – there are a few niches where these happen.  The district collector of Kozhikode Prashanth Nair  uses social media – Facebook and Twitter to provide access to information in real time to his citizens.  He also runs schemes for the needy and poor whereby he provides food coupons that are honored by private enterprise.

Ofcourse,  as he says compassion and a caring society can happen,  and the network effects which drive these are sometimes seeded by caring individuals in the administration. This seeding is critical to   enable effective governance.