Startup Funding or Social Welfare?!

Its raining discounts for online shoppers and cab riders as e-comm biz is wooing the indian shopper with big discounts. However, the scene on the startup street is glum especially after the recent fallout of snapdeal sale to flipkart and its subsequent layoff of 1000 employees out of the present 1200 (it was 9000 last summer). This contrast prompted some questions about startup funding and its economic value add to the nation.

Funds - whopping $21bn (Rs.1.36 Lac crores) & counting..
Startup funding statistics (http://trak.in/india-startup-funding-investment-2015/) reveals that India has received a total of $16bn from 2014-16 and additional $5bn just in Q1'2017. The top four supposedly unicorns - Flipkart, Snapdeal, Ola & PayTm have received about half of all this funding ($10.4bn). But none of these companies are making profit yet, infact they are so heavily loss-making, that without burning $20-50mn a month, they may not even be in business. This monthly "cash-burn" is sponsored by private equity & venture capitalist firms via the FDI (Foreign Direct Investment) route.

FDI stats
According to this government, India needs $1Tn in FDI flows, however it has managed to get only up to $60bn in 2016. Due to its liberalization of FDI policies, inflows have steadily risen from $31bn (2014) to $55.6bn (2015) & $60.8bn (2016), but that did not result in job growth in the country. Startups have received about 10-15% of the total FDI flows. An RBI analysis of FDI-funded companies against the non-FDI funded companies shows no substantial difference to growth, revenue or profit margins.

Who are the top investors?
  1. Snapdeal - SoftBank, Alibaba, Foxconn, E-Bay, BlackRock, Kalaari, Nexus, Ontario Pension Fund
  2. Flipkart - Microsoft, Tencent, E-Bay, Morgon Stanley, Qatar, GIC (Singapore), DST Global, Naspers (Snapdeal is trying to buy a fresh stake)
  3. Ola - SoftBank, Baille Gifford, DST Global, Didi Chuxing, GIC (Singapore), Matrix, ABG, Vanguard, Sequoia, Falcon
  4. PayTm - SoftBank, Alibaba, Ant Financial, Sapphire, Mountain Capital, Silicon Valley Bank
Where do the funds go?
There are about 4200 startups registered although only half of them are active. This sector is predominantly located in Delhi-NCR and Bengaluru and roughly employs 2-4 lakh people. Most of the funding goes to pay for ads, customer discounts & salaries but a few of them like PayTm claim that they also invest the funds in long term capital infrastructure. While the initial PE / VCs exit with huge profits (they get away without paying tax to the government as they are incorporated in Mauritius), a late entrant PE / VC firm ends up counting the write-offs in billions..

Bubble?
A fintech startup like PayTm with revenues of Rs.337 crores & losses of Rs.1500+ crores is valued at $7bn, while a comparable fintech Freecharge has been sold at a paltry 1/18th the price at $385mn. Some of the PE / VCs are now pooling $100-200bn just to invest in startups worldwide - it sounds like a case of too much money chasing too few assets, which is also popularly known as a "bubble". All over the world, these "unicorn" startups are basically just e-aggregating businesses, customers and their transactions. The question now is for how long would the PE / VCs fund the discounts?

Social Welfare
The answer lies in Welfare Economics - Economists Kaldor & Hicks in their "compensation principle" have said that even if a small part of the wealth gained by the gainers of the (capitalist) economy comes back as compensation to the losers of the economy, then it leads to an overall increase in social welfare. Perusing the list of investors reveals that money made in the top 2 economies of the world is now getting distributed in India, South east Asia & few other emerging economies - may be the discounts will keep coming in so long as the gainers choose to compensate (unintentionally)!

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