The ongoing kerfuffle between Big Tech and the government has brought a stark fact to light. Despite there being 755 million internet users in India and the country being a hub of software talent whose engineers churn out billions of lines of code that keep Big Tech ticking, our so-called tech giants can barely measure up to either FAANG (Facebook, Amazon, Apple, Netflix and Google) or BATX (Baidu, AliBaba, Tencent and Xiaomi). Moreover, most Indian startups have been accused (with some justification) of either copying Silicon Valley models or simply converting a brick-and-mortar business into an online format without harnessing the truly transformative power of innovation and technology. While America and China have software champions, and Japan, Taiwan and South Korea have hardware champions, India, despite its bounteous market and human capital, is yet to give birth to a behemoth in either market.
The economics behind this depressing fact is quite simple. Tech is a ‘winner takes all’ game where outcomes are positively skewed. A large majority of firms fail, while a handful dominate the market. This is why the cash-rich Silicon Valley succeeds in producing tech giants. With a large pool of capital chasing innovative ideas, the likelihood of a transformative idea being funded, nurtured and developed to its potential is maximized and leviathans are born. With venture capital (VC)/angel funding in India a tiny fraction of that available in America, it is not unusual that Indian tech has not produced globally transformative startups.
On the other hand, realizing the highly skewed nature of tech, China chose to create barriers to the entry of foreign tech firms to its markets. This gave Chinese home-grown companies sufficient time to copy Silicon Valley models and gain scale. In Tech Titans of China, Rebecca Fannin outlines how Chinese tech firms that prospered initially using copycat models soon gained enough capital and confidence to execute genuinely innovative ideas, such as TikTok, which dominates the short-video market in the US, and the concept of bike-sharing, which has been copied by several American startups like Lime. Since 2016, China has also closed the funding gap for startups vis-a-vis Silicon Valley. Chinese state-guided funds, a euphemism for pools of capital owned by central or state governments as well as government-sponsored entities, have amassed and channelized $584.4 billion for venture capital investments in strategic technology, according to Zero2IPO Research. This massive pool of government capital, along with a vibrant private venture capital market, has provided extremely favourable conditions for the genesis of Chinese tech behemoths.
Unlike America, India does not have vast pools of capital. Also, while protectionism may have worked for China, it is unlikely to be feasible for India.
To truly harness the potential of its internet market and produce domestic champions, India should look at Israel and the Silicon Valley of the 1950s for inspiration and ‘crowd in’ venture capital investment through targeted interventions. Contrary to popular perception, Silicon Valley was not born of a happy and fortuitous union of freewheeling entrepreneurship and risk-loving capital, but in reality was meticulously midwifed by the US government. In The Code: Silicon Valley and the Remaking of America, Margaret O’Mara shows that generous research grants and hefty defence contracts to those working on the bleeding edge of technology created the ecosystem that became Silicon Valley. This was supplemented by access to government capital, with the US Small Business Administration (SBA) creating a 2:1 fund-matching programme, under which for every dollar invested by venture capitalists, SBA would put two.
Israel also became a startup champion with the highest per capital density of unicorns in the world through targeted government intervention. In the 1990s, it pioneered the YOZMA programme, wherein the government matched the capital invested by VCs and provided return-enhancement schemes to them. Realizing that early-stage funding is critical for innovation to reach a stage where VCs can take over, Israel provides generous seed-funding to startups as well as research grants. Recently, it also moved to offer loan guarantees to startups.
On the other hand, Start Up India, launched with much fanfare in 2016, has been muddling along like a drunk elephant. Despite the Department for Promotion of Industry and Internal Trade’s self-avowed “achievement” of “enrolling” 50,000 startups, little else has been done. As per its website, of the planned ₹10,000 crore investment in VC, only ₹56 crore has been disbursed so far. A seed fund has only recently been announced, and a credit guarantee scheme for startups is still under discussion.
Truly innovative ideas need massive capital to blossom. The government will have to significantly ramp-up the scale of indirect VC investments from the planned ₹10,000 crore, and disburse funds expeditiously. This will have to be supplemented with generous seed-funding for startups, fund matching programmes for VCs and return-enhancement schemes to induce ‘crowding in’, which will create the technology and financial ecosystem required to incubate future tech giants. If drastic measures are not undertaken to stimulate India’s tech ecosystem, India will remain a tech colony, supplying customers and labour to tech giants but never producing its own titan.
Diva Jain is director at Arrjavv and a ‘probabilist’ who researches and writes on behavioural finance and economics. Her Twitter handle is @Divajain2.
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