Nikesh Arora and Destructive Creation

There is such a thing as too much of a good thing, asserts SoftBank president Nikesh Arora. Investors from around the world have ratcheted up valuations of Indian startups and this kills the discipline needed to run a sustainable business, says Arora. We agree. We would add that such open-fisted funding of startups has resulted in damaging brick-and-mortar businesses with which some of these web-based startups compete, often unfairly. Easy fortunes made on the basis of valuations that are yet to be validated by earnings create heroes and idols, attempting to imitate whom many aspiring entrepreneurs might shed their self-esteem and entrepreneurial energy, not because they fail to do business but because they do not see in the mirror the muscle-flexing, spandex-clad figure they adore and seek to become.

Of course, liberal startup funding has an upside. In a culture that bars society from taking on risk, save a few groups, forcing the majority to seek jobs rather than pur sue entrepreneurship, liberal funding prompts many more people to chase their dreams instead of chafing at their limiting roles in somebody else’s business. This is most welcome. But this cannot, by itself, offset the damage. Investors who give their investee companies the freedom to burn cash encourage organisational flab: Housing. com is preparing to sack 600. e-Commerce companies have created a huge delivery business, on the strength of orders prompted by steep discounts financed by liberal funders. Once the discounts dry up, as they have to, when investors in e-commerce start looking for returns, will the delivery business sustain with its present manpower? The longer the discounts continue, the greater the hurt to offline retailers who do not have investors who think in terms of `burn rates’ and valuation changes.

Joseph Schumpeter coined the term creative destruction, to describe capitalism’s inner dynamic that constantly revolutionises the production structure, destroying the old to create the new. Excess funding of startups probably deserves to be termed destructive creation.

(Source: Editorial in The Economic Times dated 11-08- 2015.)