Why society gains when start-ups fail

Context: Start-up culture should be promoted in India. It is economically beneficial without any harm. 

Status of start-ups investment in India in 2021

India attracted $77 billion worth of private equity investment in 2021. Out of this around $42 billion was gone to early-stage ventures.

Why do we need to have start-ups?

Most start-ups are expected to fail: Indeed, most start-ups fail. But this high failure rate is not a problem per se. It is because society only needs a few successful start-ups. These few are enough to compensate for the losses of others as they alone can harness the gains of innovation, productivity, and job creation.  Therefore, start-ups failures should not be treated as a disease as discouraging them will never create innovation, immunity, and jobs.

Startups don’t socialise their losses: Corporate bank loans to crony capitalists create a huge amount of bad loans, leading to the need to bail out banks with public money. Whereas the cost of start-up failure is borne by consenting adults (entrepreneurs) with the support of foreign institutions, angel investors, and entrepreneurs with successful previous exits. The coming venture capital losses leave behind assets, generate learning and breed valuable alumni, unlike NPAs.

Startups will solve real problems for Indians: India’s poverty is not because of a shortage of land, labor, or capital. But it is due to issues in total factor productivity (combination of three factors).  Therefore, we need higher productivity regions, cities, sectors, firms, and individuals. Startups can play a major role and can pledge to solve the problems of India.

What are the issues associated with startups?

First, the global capital supply for funding start-ups is facing challenges due to fiscal and monetary policy normalization. For example, Investors are now not investing recklessly, they ae looking for financial sustainability and capital efficiency along with addressable markets. For example, the risk-free return in the US bond market.

Second, the explosive start-up funding has created excess of funding for many start-ups by using manipulative methods. For example, criminal fraud done by Elizabeth Holmes, founder Blood-testing company (Blood-testing company) Theranos by raising $700 million by acceptable hyping of her product and lying about performance.

Conclusion

We only need a few startups. Their survival will raise India’s soft power and prosperity by using improbable ideas to solve impossible problems.

Source: This post is based on the article “Why society gains when start-ups fail?” published in the Indian Express on 10^th March 2022