The link between corruption & early stage venture returns in India


As everyone knows, venture returns are determined by building innovative products and services that reach scale. The operative words being INNOVATIVE and SCALE. Stuff that has not been built or tried before, stuff that delivers much greater “value” to the customer. We also know that India early stage returns have not exactly been stellar. I’ll present one framework here which tries to link corruption to the challenge in venture returns.

I think everyone knows that the Indian consumer (and business customer) is very price sensitive. The question is why? I think in order to understand this, one needs to understand the concept of opportunity cost. Let me explain it through a small personal story. We had our first child in San Francisco and very close to our apartment there were good, but slightly more expensive, grocery stores. My wife and I would have to make a choice: should we spend extra 30-45 mins for groceries to get the cheapest price or pay the higher price but get that extra time with our daughter. More often than not we’d choose paying more because time everyday was finite and we wanted to get a lot done at home and at work. In other words, we appreciated “opportunity cost” – that our lives could be a little better by spending some money to get extra time at home. And there were similar examples where we’d spend the money so we could be more productive at work (and an implicit understanding that in the longer run that extra investment had greater returns). This was not always the case; growing up in India we were taught to be extremely price conscious. Pre-1991 reforms if you did not have a family business and worked for a public or private sector company, there was a very high correlation between age and salary. That was the result of a closed, license-raj driven economy. What that told the average worker is that no matter how hard you try your “topline” cannot grow all that much so the logical thing for each person to do was to really focus on cost management in order to get financial security. These behaviors were drilled into the Indian psyche for decades and such behaviors which have achieved scale are very hard to unravel. On the other hand, in an environment where your “topline” can grow rapidly depending on how hard & smart you worked, there is all the incentive to focus time and energy on growing the “topline” rather than cost management.

As the Indian economy opened up & wages rose, we have seen much higher levels of consumer spending. The challenge however has been that the habits of the past have been hard to break. While opportunity costs have risen, the appreciation of opportunity cost by a large percentage of the population will take multiple generations.

But the other big challenge in appreciating opportunity cost is also the quality of the day to day interactions. The reality is that daily interactions are very poor even today and therefore trust is very low. The bribery scandals, the rape cases, the worsening infrastructure, the hassles of dealing with law enforcement, etc all negatively impact a consumer’s trust. All of these in one way or another have roots in the corruption in the system: The roads are poor and not improving fast enough because there is huge wastage of invested capital due to corruption in the system; traffic indiscipline is getting worse because law enforcement is not consistent or reliable – drivers break the rules with impunity … etc. In the end all these examples are rooted in corruption and not having a common set of rules that everyone trusts and abides by. This then has an impact on consumer’s willingness to try something new or pay more for greater value: “will it work?” , “what new hassles will it bring?”, “can I trust this company?” , “I don’t believe this will have the impact promised!”, etc. The default trained mindset is to focus on what you can get today because who really knows what will happen tomorrow. The consumer is just trying to make his/her life better and protect his/her loved ones the best they can; this is not a “cultural” thing, it is a systemic thing and quite frankly the biggest failure in India has been our inability to root out corruption. In other words, extreme price sensitivity is an expression of lack of hope.

With that background let me come back to the topic of this post and connect the dots between corruption and venture returns. Here is how I see it:

corruption in the system -> daily poor experiences -> lack of trust/hope -> lack of appreciation of opportunity cost -> extreme price sensitivity -> no value for high order products/services -> work is primarily dictated by operational complexity (not innovation) which is not very valuable -> poor returns for early stage investors 

What do you think? Valid connection?


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