Investment Banking

Search for the next Indicorn

October 2018

Read Time: 6 minutes

The stars seemed all aligned for the birth of digital unicorns from India. Let’s call them the Indicorns. The Industry 3.0, which was led by computerisation, helped India spawn around ten IT services unicorns and there are many more on the cusp of making that transition. Hence, its only logical, that in the incoming digital age, a nation famed for the technological prowess of its engineers, gives rise to a few truly spectacular technology companies.

Let’s also not forget that today, three NRIs – Sunder Pichai, Satya Nadella and Shantanu Narayen preside over some of the largest technology innovators of our times, whose combined market capitalization is nearly ~65% of the combined market capitalization of the entire Indian stock market!

If we deconstruct the factors that underlie the success of technology giants like Amazon, Apple, Google, Facebook and Microsoft, the following trends emerge:

Business models support network effect – enabling demand side economies of scale

The greater the number of users of these platforms, greater is the collective benefit to all users. A Facebook with a limited set of users would collapse. It’s also a modern-day club membership and for many, it’s free.

Angels did not fear to tread 

For technology innovation to reach its logical conclusion, the necessary condition is access to cheap capital. Angels, who truly believe that profits are passé, and it’s all about great vision and storytelling. Tesla’s market capitalization today exceeds that of Ford. It’s just a matter of detail that Ford is profitable, and Tesla makes huge losses. Amazon’s access to seemingly unbridled and cheap capital, by itself makes it invincible.

Premium positioning

Market places famed for the cheapest deals, can still command a premium positioning. Uber pricing could be cheaper than competition, but its cars have a premium feel. Customer delight is what drives all technology unicorns. They have all cracked the price to performance equation, at scale.

Consumer model is king 

Historically, the capital goods and heavy industries have been the barometers of industrial growth of nations. However, in this industrial revolution 4.0, it’s the search of a billion users, that is likely to define companies and the innovation index of nations. Today, there are around 30 virtual communities, globally, that have 100 million plus active user bases. It’s this user base that makes these companies almost omnipotent.

Indicorns – can we produce them?

In a capital constrained economy like India, a quick path to profitability and inability to make big bets, have restricted path breaking innovations that generally emanate from the west. Also, India does not ban Facebook and Google, like a China does, thus giving rise to Chinese clones like Tencent and Baidu.

A few structural, economic and social factors have also created barriers to innovation.

Capital constraints 

A true venture capital ecosystem is almost absent in India. The fear of misuse of tax breaks, has prevented Government from giving meaningful tax incentives for R&D and VC investing. The public markets hardly support the listing of innovation leaders. The severe constraints placed on delisting, say due to M&A, create another bottle neck to listing in the first place. We need to create a better ecosystem for listing of shares with differential voting rights, that provides better liquidity, opportunity for foreign listing, FII participation, etc. An effective system for separating control and profit is a defining feature of all global technology giants. It would also allow the Government to list and raise capital for PSUs engaged in core R&D without fear of loss of control.

Loose connection between academia and industry

One of the biggest failures of academic institutions in India is their inability to conduct cutting edge research and R&D, which could then be commercialized by industry or by start-ups. We need the equivalents of Stanford AI labs and other such centres of advanced research.

Lack of early adopters

Indians have a distinctive distrust for other Indian products. While we are happy to share unfettered information with foreign companies, we tend to shy away from Indian peers. We need to recognize this aspect, while building upon the recent successes of Paytm, UIDAI, Flipkart and even Patanjali etc., in convincing Indian consumers to try out an inherently new Indian product. Stricter privacy laws with punitive penalties for breach, could help bridge this trust gap.

Made in India, for India

Innovation requires a well-defined problem statement. This vision contextualizes the anticipated impact. For an Indian product designer to understand the “context” of a global problem, is an unlikely proposition. Hence, innovation in India has rightly focussed on the Indian middle class, but the middle class itself is not homogeneous. Any solution that addresses the problems of the lower middle class as well as the upper middle class, would look like an out and out winner – a la Paytm and Flipkart. That doesn’t always have to be the case though - RedBus being a case in point.

Freedom to fail

Life without a bit of a risk is devoid of fun. But, risk means the likelihood to fail. Indian society and regulations are harsh on failures. This is changing, but more is required. The ability to shut down a company, painlessly, is what we need to strive towards. If we cannot provide a blanket cover to corporate India, then this freedom should at least be provided to companies maybe, in specifically designated “innovation zones”.

But, when has the human spirit been chained? Our moon shot in the technology space is destined to succeed. Today, India has, maybe, the highest concentration of technical manpower in the world, trying to focus on innovation – a function of our demographic dividend. Our ranking in Global Innovation Index continues to rise, continually, reaching 60 last year. Our ranking, normalized for per capita income, is impressive. The disruption that AI, IoT, analytics, wearables, virtual reality, bio-technology and Nano technology, are going to unleash, would open unimaginable vistas for innovation. As the computing power of chips increase, while their prices drop, it should play into our strengths. The traditional barriers to entry will continue to fall, giving Indian companies a level playing field. AI driven capability, which is a buzzword today, will become a utility soon enough. The question is, what can we use it to create? And why limit it to creating only a Google – a next generation Genentech or Tesla would do as well.

Author: Amit Singh, Co-Head, Enterprise Technology & Services, Avendus Capital

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