Saturday, October 22, 2005

Private Equity Investment in the Indian Economy

The Indian Economy Blog has an interesting piece on India and Private Equity. But amidst what is said and what is not, there are a few untold facts that have been chewing my brains for a while. For one, it would seem that these investors seem to prefer investing (or are being encouraged to do so) in the larger companies. Of course, I've been told by more seasoned economists that there is a reason for this. Primarily, there is no system in place in India to check upon folks who set shop today and disappear tomorrow. To this end, larger companies offer a kind of security of investment. Not much, but definitely a tangible one. As a direct consequence of this, the government would prefer the investors investing in these larger companies simply because if they fell prey to every other small-time crook, the investor confidence in India would go down. Finally, the government can't have a large piece of the pie (i.e. the "cost of doing business" - roughly translated as bribes) with the smaller companies. Does anybody else see the flaw in this? Leave alone the fact that the investors should know better than investing in a company without any tangibles - this leaves the rich richer and there is no outlet for smaller companies to come around. Let me narrate a story here - a particular software company approached a certain large communications company in India with an idea that would be mutuall beneficial, and offered to implement it for them. Six months later, this company approaches them again asking them if they've thought about the idea, only to be told that they've already implemented an in-house version of this idea. Intellectual property has absolutely no respect whatsoever in India, so smaller companies with killer ideas just have no option - they either get gobbled up by the larger ones or worse, trodden upon and their ideas stolen. One of the primary reasons why the US is so successful is that ideas have merit. Despite what the Slashdot and liberal hippie crowd may cry out loud, this is true. Everybody from Microsoft, Netscape, Yahoo!, Google and a million other companies were small-time ones who had great ideas, and who made it big because of a handful of ideas - or sometimes, even just a single idea. Heck, even Slashdot was once nothing more than a simple, elegant idea that's now grown so big. Some die out, some don't and some make it big - but the bottom line is, an idea is worth investing in. What is Blogger, really, that Google was willing to invest so much in it? Contrast the more successful companies in the US versus those in India - most of those in India are nothing more than slaves of the software services industry, helping maintain the status quo by doing the boring stuff. Most folk working in Infosys, Wipro or TCS are nothing more than code monkeys that slave away writing code that's not going to change the world. In an age gone by, folks did pointless physical labor, these days, these folks do pointless intellectual labor. Do not mistake me - I'm not undermining the importance of their work. Folk like that are necessary to run the world, but quite honestly, they're nothing more than peons doing the work that nobody else will. Their work will not change the world, and therein lies the problem. (I mean, someone doing a graduate degree in mechanical engineering ends up doing Cobol programming for an insurance company for a pittance? Come on!) If you want to be a front-runner in technology, you need to innovate. And while innovation does happen in larger companies, it is much more easily achieved in smaller companies. It is wise to remember that most of the companies dominating the industry today were tiny startups by folks with great ideas until a while ago. Despite what folks say, Apple and Microsoft changed the face of the PC industry, but started out as garage companies. Yahoo! brought a new meaning to searches and portals and Google revolutionized searching and redefined how we perceive web interfaces - and both were graduate project endeavours. And these are not the only ones, Amazon and eBay have completely changed how business is done online - these days, I prefer buying most things online than from a store. There are thousands of other smaller players, including those like 24 Hour Laundry who bring simple but elegant ideas to board. I do not know if Ning will ever make it big, but I do know that it's a fantastic idea, neverthless. India will miss out on all this - for the simple reason that they're encouraging only the bigger players. When I was fresh out of highschool, I was part of a startup - which now has several thousand employees. I was one of maybe 5 people at the outset, today it's grown so big that I'm at a loss for words. I doubt most people even remember me, let alone know my contribution. Not to undermine folks who helped me (and I'm thankful to those mentors), but folks like me in the US went much a longer way during the boom. Unless any person (immaterial of age) with a killer idea can implement it and sell it at a price without having to worry about bureacracy and plagiarism, India will lag behind. Bharti and Reliance can take care of themselves plenty - they're very rarely fountains of innovation. There's enough red-tape in them to strangle Cthulu. On the other hand, schools and other places are where innovation really blooms. During the course of my graduate school, I've had several amazing projects - almost each of which could become a good startup, if I did a little more work and market research. In the course of a little more than two years here at Georgia Tech, I've started two startups - while they're not making millions, they most certainly are doing quite well. I know for a fact that if I came up with better ideas, I'll at the very least have angel investors to help me through. This fact by itself encourages me to innovate and do things I'd not even have thought about. None of this will happen in India - because you are not helping the small guy. It's not the big guy who changes things, it's the small unseen guy who is. Most importantly, it would appear that the investors who want to invest only in the bigger companies are going to make things worse for India. And like I said, the rich get richer, the big get bigger and the small guy cannot even raise his head. And Indians will become even more of wage slaves than they ever can be. It was the public sector that they used to work for, now they work for equally bureacratic, useless, mass of private sectors. You've traded one devil for another. You've traded one set of masters for another - you've not come out of the shell in so long that you've forgotten that there is an outside world. You've forgotten that you can have a cool idea and be your own master, rather than work for a nameless corporation. Entrepreneurship simply does not exist in India. If you're an investor who's thinking of investing in India - why don't you spend the time seeking out innovative early-stage companies or startups with funky cool technology? There is enough and more intellectual capital out there - and folk are definitely hardworking and enterprising. But they do need that light at the end of the tunnel. The socio-economic structure does not encourage free thinking. Folks want their kids to work for a big-name company, kids want to work for big-name companies to get that hot chick and the government cares about bribes under the table for its ministers to care two hoots about innovation. Religion and personal gains run the political establishment in India - not innovation. The educational system, despite everything, is in shambles and I doubt if most people even know what innovation means. Oh sure, they produce quintillion technical graduates every year, but what are they really worth? How many of those can truly create groundbreaking things, how many of those can truly innovate and bring about change? Heck, how many of those even work in their own area? People study Chemical Engineering and go work for Infosys. The only way to break out of the rut is to reward independent thinking and enterprising nature. Encourage that small guy to do big things - even a few hundred thousand dollars would go a long way in India and can help change things. I'm not saying that one should ignore the big players, that's almost next to impossible, especially given the returns. But do not ignore the small guy - they're the ones who'll help you change the landscape of a third world developing country.