venturing.in

Category: Essays

  • Bitcoin and Emerging Markets

    In my op-ed for Mint, I write about the potential applications bitcoin could have specifically for emerging markets like India:

    India’s banking and financial services industry has incumbents that are inert, sloth-like and highly risk-averse. The banking industry in particular is heavily dominated by public sector undertakings (PSUs). PSU banks still control approximately 80% of all deposits. The industry is rife with corruption and mismanagement, for government banks know that their owner will always bail them out. But this was not always the case—before Indira Gandhi nationalized banks with the stroke of a pen, over 85% of deposits in India were held by private banks. Since the nationalization of banking, all innovation in the industry has come to a standstill.

    For 2013-14, 63% of the total number and 35% of the total value of retail transactions was electronic. Average electronic transaction value has nearly tripled in four years, according to data from the Reserve Bank of India (RBI), India’s banking regulator. But Indian banks cartelize and lobby their regulator to punish consumers with outdated usage practices totally out of tune with the needs of mobile transactions and electronic commerce. Instead of prodding the banks to improve their fraud detection and redressal systems, RBI simply makes it harder for consumers to transact and introduces artificial friction by way of two-factor authentication requirements so that banks get away without having to improve themselves.

    …

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community.

    An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement.

    Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily.

    Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community. An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement. Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily. Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Read more at: http://www.livemint.com/Opinion/lv9RU1qcTVEA3MKSCXQsUJ/Cryptocurrencies-can-transform-financial-services.html?utm_source=copy

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community. An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement. Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily. Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Read more at: http://www.livemint.com/Opinion/lv9RU1qcTVEA3MKSCXQsUJ/Cryptocurrencies-can-transform-financial-services.html?utm_source=copy

    Besides enabling transactions with reduced friction and at lower cost, there are certain applications of the protocol that can enable altogether new use cases. Cryptocurrencies can be used to write “smart contracts”, or contracts that are digitally written and require no third party for enforcement. The value of this application is difficult to overstate in an environment like India, which the World Bank ranks 186 out of 189 countries globally on the enforceability of contracts. Given the slow, dysfunctional judicial system and the paucity of social capital, individuals have historically preferred to do business with people already known to them, or people who are from their own community. An alternate approach, outside the present broken system, that offers “self-executing”, tamper-proof contracts and does away with the need for third-party intervention for mediation or dispute resolution, could be truly transformational for countries like India by collapsing business risks and transaction costs. Cryptocurrencies like bitcoin could help dramatically improve contract enforcement. Consider a bank that gives a secured loan to a person wanting to buy a car, on the assumption that the person will pay for the asset in a fixed number of monthly instalments over a period of time. If the person fails to pay the monthly instalment in any month, the bank reserves the right to take back the car. When a person has reneged on such payments, Indian banks have been known to send strongmen and professional bullies as recovery agents to intimidate and threaten customers and even the relatives of such customers. With an integrated software solution built into the car that verifies whether the monthly instalment has been deposited, a self-executing contract could remotely brick the car, making it inoperable by the consumer should he fail to make the payment. The software “key” to activate the car again would lie with the bank, which can then take possession of the asset easily. Another game-changing application for cryptocurrencies specific to the Indian context is in the area of remittances. In 2013-14, India received nearly $70 billion in remittances from abroad. The volume of intra-country remittances is estimated to be some Rs.75,000 crore annually. In this digital age, anachronistic and expensive modes of money transfer such as the money order persist. Not only would the cryptocurrency protocol applied to a large market such as remittances be lucrative, it would also be a tremendous service to millions of bottom-of-the-pyramid migrant workers, who have been able to get the latest smartphones for a low price, but are still deprived of cheap, efficient and user-friendly banking and money transfer services.

    Read more at: http://www.livemint.com/Opinion/lv9RU1qcTVEA3MKSCXQsUJ/Cryptocurrencies-can-transform-financial-services.html?utm_source=copy

  • Horizontal Progress vs Vertical Progress

    In his new book Zero To One, entrepreneur and venture capitalist Peter Thiel writes:

    At the macro level, the single word for horizontal progress is globalization – taking things that work somewhere and making them work everywhere. China is the paradigmatic example of globalization; its 20-year plan is to become like the United States is today.

    The single word for vertical, 0 to 1 progress is technology . The rapid progress of information technology in recent decades has made Silicon Valley the capital of “technology” in general. But there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology.

    Elaborating on the theme of Globalization as “horizontal progress” versus Technology as “vertical progress”, Thiel writes:

    This age of globalization has made it easy to imagine that the decades ahead will bring more convergence and more sameness. Even our everyday language suggests we believe in a kind of technological end of history: the division of the world into the so-called developed and developing nations implies that the “developed” world has already achieved the achievable, and that poorer nations just need to catch up.

    But I don’t think that’s true…most people think the future of the world will be defined by globalization, but the truth is that technology matters more. Without technological change, if China doubles its energy production over the next two decades, it will also double its air pollution. If every one of India’s hundreds of millions of households were to live the way Americans already do— using only today’s tools— the result would be environmentally catastrophic. Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.

    As I’ve written earlier, this is a fundamental dichotomy: while advanced economies have the knowledge base and networks to deliver such innovation, the market for such innovation lies in emerging markets.

    Achieving higher resource efficiency and developing lower-pollution energy sources presents a considerable innovation challenge – and commensurately, an entrepreneurship opportunity. So far, major startup successes that have emerged from India and China have been adept at “globalization” – they’ve taken proven business models from abroad, and executed those models well in their own markets.

    The “technology” successes, especially in non-software or Internet areas, have been few and far between – and there are some very good reasons for why this is so. The question is whether emerging markets can become economically developed by globalization alone. As Thiel writes, this won’t be possible – “globalization without new technology is unsustainable”.

    Something’s got to give – either we have technological breakthroughs that enable sustained economic growth, or growth itself will become constrained. China is already facing enormous pollution and environmental issues – sample these news reports:

    Air Pollution, Birth Defects and the Risk in China (and Beyond)

    The pollution constraint on China’s future growth

    Environmentalism with Chinese characteristics

    China Needs Industry to Enlist in “War on Pollution”

    India is a fair distance away from China – and it’s already “choking on air pollution”. So the question is, where will the innovation come from, and which startups will deliver “vertical progress” to help sustain growth in emerging markets?

  • Liberate Higher Education To Compete In The Knowledge Economy

    In which industry does the US enjoy a globally dominant, almost unassailable position? No, it is not technology, pharmaceuticals, defence or aerospace. The one sector in which US dominance is near-absolute is higher education.

    Every year, some 80% of the top 20 best ranked universities globally are US universities. No country comes even close when it comes to attracting the best students, retaining the best researchers and producing output that pushes the boundaries of knowledge in practically every field of human inquiry. America’s commanding strength in higher education powers its whole economy and endows the country with a formidable strategic edge over rivals and competitors.

    Indian Institute of Management Ahmedabad’s Shailendra Raj Mehta published a comprehensive 47-page paper in 2012, studying what made US institutions so markedly better than others in the world.

    Mehta cites Harvard’s Henry Rosovsky, who writes that “national wealth, large population, government support especially of science have to be significant explanatory factors” along with the migration of talent from Europe to the US because of World War II, and the “American habit of private philanthropy”.

    Rosovsky also points to certain specific features in the governance structure, such as the fact that all senior and middle management for an institution “are appointed, not elected, and they can be dismissed”, and the “unitary governance” approach, with the university president being answerable only to the board of trustees and holding full executive responsibility.

    Freedom and autonomy matter deeply to knowledge creation — academic research and scientific inquiry cannot co-exist with dogmatism, top-down control and doctrinaire thinking. Finally, inter-institution competition for talent and resources spurs universities to do better. Mehta cites the following standards, achieving which universities can be said to be autonomous and competitive:

    1. do not need to seek government approval of their budget,

    2. select their baccalaureate students in a manner independent of the government,

    3. pay faculty flexibly rather than based on a centralized seniority / rank-based scale,

    4. control their hiring internally,

    5. have low endogamy,

    6. own their own buildings,

    7. set their own curriculum,

    8. have a relatively low percentage of their budget form core government funds, and

    9. have a relatively high percentage of their budget from competitive research grants.

    It is easy to see how India’s higher education system would rate abysmally on almost every single count. Mehta says that though many countries have tried copying the US system, they haven’t succeeded. He also writes that all the success-inducing factors identified by Rosovsky weren’t available in the mid-19th century, when many of today’s great US universities were founded.

    Mehta then identifies the “key innovation” that the US brought to higher education, which propelled its universities to the top ranks globally as “alumni control of the board of trustees” — not surprisingly pioneered by Harvard University, whose board was de facto controlled by alumni starting in 1710, with de jure control cemented in 1865. Harvard had been founded by the state of Massachusetts, and the Massachusetts legislature retained the right to appoint the board of trustees till 1865 (though it usually appointed only Harvard alumni) — thus, as Mehta writes, Harvard remained a public university or a “State School” for over 200 years after its founding.

    Securing de jure alumni control over the board of trustees was anything but easy — in a nail-biting win, as Mehta records, the “Act in Relation to the Board of Overseers of Harvard College” was passed on April 29 1865 by a margin of just one vote in the Massachusetts State Senate, and two in the House. The legislation expressly barred government officials from becoming trustees of the institution and insulated the trustees from faculty influence by preventing faculty from voting in trustee elections. Harvard was already America’s preeminent university in 1865, and accelerated its rise after this critical — and hard-fought — change in its governance structure. Seeing its effectiveness, other US universities promptly emulated the Harvard model, and the rest, as they say, is history.

    Why is this story relevant for India today? A new government has taken charge in New Delhi, on the back of an unprecedented mandate. There is a surge in technology entrepreneurship across India — there are huge expectations India’s youth have for their country to emerge as a leader in education, research and innovation. The policies the Narendra Modi government implements will have far-reaching consequences for India’s global competitiveness in these areas.

    India’s capacity for scientific research is linked inextricably to the quality of our higher education institutions. If America dominates the world in higher education, India would today win top honours for being a powerhouse exporter of outstanding human capital. Venture research firm PitchBook ranked universities based on the number of alumni who started US companies that were able to raise a first round of venture capital funding between 2010 to the end of the third quarter of 2013 — the Indian Institutes of Technology ranked number 10, the only non-US institution in the top 10, alongside Stanford University, Massachusetts Institute of Technology and three Ivy League institutions. The Pravasi Bharatiya Divas, an annual festival-conference organized by the Government of India, celebrates the export of such human capital.

    Much of our human capital ends up in US institutions, sometimes never to return. A study by Brookings Institution shows that 71.5% of Indians studying in US universities in 2010 were enrolled in science, technology, engineering and mathematics (STEM) programmes. Indians constitute 65% of all international students pursuing masters degrees in STEM programmes.

    But this is largely a self-inflicted problem. We have US-level economic aspirations with a North Korea-style higher education system. There is just one Indian university ranked in the top 500 in the world. Without world-class universities that are free to grow and compete with one another, tomorrow’s innovators and entrepreneurs who would strengthen India’s knowledge economy are often left with no choice but to move abroad.

    The alumni of our institutions who have proven themselves running governments and global corporations are surely capable enough of helping govern their alma maters too. Urgent, decisive measures are needed to change the way universities and research institutions are regulated – thick, heavy cobwebs that are strangulating our institutions need to be cleared, such that both quantity and quality can be expanded to fulfill a wellspring of aspirations.

    It would be a travesty if the new government repeats the errors of previous governments. Universities and institutions should not be treated as tools of political patronage. Knowledge creation cannot be substituted with indoctrination. It is puerile and self-defeating to replace one kind of dogma with another kind of dogma.

    The choice is our’s to make – do we want to be known for exporting brilliant minds, or do we want to create opportunities for these minds here in India, so that they can drive growth, create jobs and help India compete in the global knowledge economy?

    (Co-authored with Dr Shiladitya Sengupta.)

    Originally Published: Mint

  • Four Ways To Liberate Indian Science

    The economic liberalisation of 1991 was the second independence in Indian history. It represented a tectonic shift in policies, the start of the end of ‘licence raj’, and unshackled the growth of the country. Time has come for the third independence of India, the liberalisation of the academic, science and technology ecosystem in the country.

    Historically, the growth of countries has been driven by continual advances in science and technology. According to Robert Solow, Nobel Prize winner in economics, capital and labour are not the only things that drive economic growth, half the economic growth in the US since World War II can be traced to advances in science and technology. Even China has realised this. At the current rates, China’s commitment to R&D is expected to surpass that of the US by 2022, when both countries are likely to reach about $600 billion in R&D. Unfortunately, successive governments in India have only provided lip service to the science and technology sector. Moreover, simply allocating money for science and technology is not in itself sufficient to drive economic growth. The new Government has the opportunity and the mandate to liberalise the Indian science and technology ecosystem, which is the transformative step required to take the Indian economy to the next level.

    Academic and research institutions form the bedrock of the science and technology ecosystem, and are the fulcrum for creation of value. According to a 2011 report, sponsored by the venture capital firm Sequoia Capital, 39,900 active companies can trace their roots to Stanford University, creating an estimated 5.4 million jobs. If these companies collectively formed an independent nation, its estimated economy would be the world’s 10th largest. The reason that we do not have such institutions in our country is because our academic and research institutions are still stuck in the pre-1991 era. The new Government has the opportunity and the mandate to liberalise and transform this ecosystem so that our academic institutions move beyond producing skilled manpower to producing innovators and job creators for the nation.

    Give autonomy to institutions

    This will allow them to attract the best talents as researchers and faculty. This is critical as generation of new ideas require exceptional talent. New ideas can spawn industries that will generate employments for millions, creating a cascading effect on Indian economy. If institutions are given flexible grants rather than budgets under fixed heads, and allowed to compete for talent from all over the globe, we will see a resurgence of the sector.

    Nobel physics laureate C.V Raman also founded the Travancore Chemical Company in 1943
    Nobel physics laureate C.V Raman also founded the Travancore Chemical Company in 1943

    Capitalise assets and resources

    Most academic science and technology institutions and universities are endowed with significant land. These institutions should be encouraged and given the flexibility to build Innovation Clusters on unused land in partnership with the industry; academic institutions will own new infrastructure from where they get rent that can go towards building a corpus, while the industry gets access to knowledge capital. Such clusters will create jobs for graduating students and prevent brain drain, generate research partnerships and funding for faculty, and foster an ecosystem that supports innovation and entrepreneurship. Silicon Valley for example was seeded by Stanford University, while Massachusetts Institute of Technology owns the buildings in Tech Square at Cambridge, which house hundreds of companies.

    It is obvious that such bold steps will create a lot of anxiety in the current ecosystem, where ‘profit’ has been seen as a dirty word. Similar anxieties were expressed when the Indian economy was liberalised. However, few people realise that our finest scientists did not restrict their work to the laboratory alone-C.V. Raman, who won the Nobel Prize in Physics, started the Travancore Chemical Company in 1943. This model, where faculty commercialise research, was a pioneering move, far ahead of its time.

    Make policy friendly to R&D investment

    Start-ups form the backbone of translating scientific ideas and technological advances from academia into products that drive economic growth, and the process requires significant capital. However, the toughest stage in the life of a start-up is the first few rounds of investment that leads to a product. Early investments in this sector have been dismal. Between 2007-2012, India saw 11 private equity deals totalling $43 million, and eight VC deals worth a combined $55 million in the life sciences/biotech sector. In comparison, the city of Boston saw an early stage investment of $869 million in 2012 alone. The new Government can put science and technology R&D sector on steroids by granting special tax exemption status to investments in science and technology start-up and innovation clusters for the initial 7-10 years of their operation.

    Jagadish Chandra Bose was the first Indian to get a US patent

    Jagadish Chandra Bose was the first Indian to get a US patent

    Respect ownership of intellectual property

    Without this we cannot create a true knowledge economy, as we will never attract investments. Not many people know that the first Indian to get a US patent was Jagadish Chandra Bose, one of India’s finest scientists, for an invention that improved detection of electrical disturbances. Interestingly, Swami Vivekananda not only saw the importance of protecting intellectual property, but also influenced Tata group founder Jamsetji Tata to found the Indian Institute of Science in Bangalore. Time has come to emulate the visions of Vivekananda, and to liberalise our science and technology institutions such that they can truly reclaim their glory and transform the Indian economy.

    (Co-authored with Dr Shiladitya Sengupta.)

    Originally Published: India Today

  • Energy Innovation For Emerging Markets

    Energy and clean technology investing has proven to be disastrous for venture capitalists. Capital allocated to clean tech fell to less than half in 2013 from the $3.7 billion invested in 2012, and new clean tech-focused funds were able to raise less than $1 billion last year, compared to $4.5 billion raised in 2012.

    High-profile flameouts like Solyndra, A123 Systems, Konarka, Miasole, Better Place and Fisker Automotive have, appropriately enough, made investors very wary. Billions of dollars of equity has evaporated. Successes, such as Tesla Motors and Nest Labs, have been extremely rare.

    Clean tech and energy, once touted as a fecund sectors for entrepreneurship alongside software, life sciences and the Internet, are no longer mentioned in the same league. Risk capital has dwindled dramatically, with prominent venture investors either winding down energy investing teams or retrenching significantly, content only with managing existing investments and not making new ones.

    But why has clean technology blown a hole in investor’s pockets?

    From questions about the suitability of cleantech for the venture capital investing model, to heated debates about the validity of climate change itself, which became a moral basis for the promotion of clean technology, many a rationale has been offered for why clean tech didn’t succeed in delivering investment returns. There is still no clear answer to why companies led by top-notch entrepreneurial operators and commercializing promising technologies met with spectacular failure.

    It could be something more prosaic: clean technology companies and energy innovators have been in the wrong geographical market. Investors have unwittingly violated one of the maxims enunciated by venture capital pioneer Eugene Kleiner, who said; “Make sure the dog wants to eat the dog food.”

    Take any metric – energy demand, fuel consumption, pollution, power generation growth, electrical grid development or water demand. Over the last decade, North American and European countries don’t figure on the list of the fastest growing markets for any of these.

    Yet, clean technology companies have focused almost exclusively only on these developed world markets. The economies that have witnessed the highest growth in energy- and resource-related consumption are in emerging Asia, South America and Africa. Countries and cities in these regions also top global rankings for being the most polluted.

    Does it make any sense to build windmills in Scandinavia or solar plants in Germany and California, when those regions already have relatively low levels of pollution and are fully electrified? As Europe is discovering, moralistic grandstanding cannot become the basis for innovation. This discrepancy represents a fundamental misallocation on a global scale of both human capital and financial risk capital.

    The difficulty of commercializing innovation is compounded thanks to the cultural challenge innovators in developed economies face when working in emerging economies, which also inevitably have very different business climates.

    Frequently, the geographical markets that are amenable to innovation in clean technology have regulatory risks and present far more challenging conditions for building businesses, as evidenced by their low rankings in the World Bank’s ease of doing business study.

    This is an advantage “virtual world” businesses that are in consumer-focused Internet and mobile sectors have over others in that they have to contend with a lot less friction in developing markets.

    Consider China’s situation. Tens of thousands of environmental protests are reported annually, millions of consumers live in extreme pollution and smog is destroying visibility – so it is easier to make the case for higher rates for electricity.

    India’s growth has so far been predominantly services-driven. Manufacturing output has collapsed and saw negative growth because of unprecedented economic mismanagement by the current national government. This isn’t socially sustainable – as India promotes manufacturing and heavy industry to employ tens of millions of its youth, it’s inevitable that problems with pollution and environmental degradation will be exacerbated.

    These are markets where one needn’t be moralistic about why clean technology is required. As the prospect of unlivable communities and unbreathable air looms large even in the most important urban centers, the economic logic for clean technology is self-evident.

    Innovators outside these economies should take them a lot more seriously and find ways to overcome the cultural and business pitfalls of operating in emerging markets. There is also an unprecedented opportunity for inventors and entrepreneurs in emerging markets to build companies in clean technology.

    A reallocation of financial risk capital and human capital towards where the clean technology and energy innovation markets are would go a long way towards solving the world’s sustainability challenge – and in the process, would also deliver far better returns for investors.

    Originally Published: http://navam.in/1hmJSlU

  • Challenging Silicon Valley’s Innovation Hegemony

    For several decades, Silicon Valley has had a near-monopoly on innovation. The Valley emerged out of America’s deep commitment to higher education and scientific research, combined with the American will to maintain leadership in defence technology. Through the second half of the 20th century, China was disastrously experimenting with Maoism, India was embracing Socialism, a fragmented Europe was rebuilding after the Second World War and the other superpower, Soviet Russia, was persisting with its Communist economic model. The Americans invested public and private capital in fundamental research and development, allowing private enterprise to drive economic growth and entrepreneurial small businesses to commercialize publicly-funded scientific research. America invented the venture capital model to commercialize such research.

    It stood out as an oasis in a world where central planning and a state control of the economy was the norm. Owing to a liberal immigration policy, it became a magnet for talent from around the world. Scores of scientists migrated from Europe to America in the throes of the Second World War, including titans like Enrico Fermi and Albert Einstein. Nobel laureates Hargobind Khorana and Subramanyan Chandrasekhar, both of whom completed their college education in India, also made America their home.

    The migration of talent from other parts of the world to America continued through the 1960s and 1970s, with the best talent from China and India making the move, thanks to the economic havoc caused by the destructive ideas of Chairman Mao and Prime Minister Indira Gandhi.

    In this way, America managed to consolidate the world’s best scientific talent. It then gave them a platform and funding to invent and create. The scientists and engineers who went to America might not all have founded technology companies, but through their work at private research labs, government research institutions, universities and startups, laid the foundations for America’s technological prowess that underpins its military and economic might to this day.

    It is important to recognize that this was a historical aberration and cannot be sustained by design — America positioned itself to benefit from the poor choices that the rest of the world made. A reversion to the mean is underway, and the tide has started turning over the last two decades. Besides increased economic and financial integration worldwide permitting capital flows on a global scale, economic reforms catalyzing sustained growth in Asia and the creation of a common market in Europe have fostered economic blocks that can compete with America.

    Sector after sector has become more globalized. Venture capital investing, long the exclusive preserve of a clutch of firms on Silicon Valley’s famed Sand Hill Road and till recently heavily concentrated in the United States, is now unmistakably global. Risk capital flows to places that have talented people pursuing breakthrough business ideas — and sustained global growth over the last two decades has set the stage for a need for technological innovation across economies and geographies. The rise of the Asian consumer is creating opportunities for innovation in all kinds of consumer products. Transplanting ideas from elsewhere doesn’t always cut it with the taste and sensibility of consumers in Asian countries. With increasing consumption, there is a glaring need for efficiency in resource utilization and energy use.

    Challenging economic conditions combined with more stringent immigration policies in developed nations have made it appealing for accomplished scientists and engineers from developing nations to return home, where in many cases there is stronger economic growth alongside a new focus on nurturing and financing science and technology. This has set the stage for venture capital investing in emerging markets.

    America has a long lead, but the rest of the world is catching up. It will continue to maintain primacy in Internet innovation in particular because of the spending capacity of the American consumer. The Internet is a platform for consumption, be it consuming information which allows for digital advertising to flourish or purchasing products through Internet-based retailers. America’s consumption power allows it be the breeding ground for global Internet giants such as Google, Amazon and Facebook, and it will dominate in web innovation as long as the American consumer has clout.

    New York-based venture capitalist Fred Wilson recently wrote about how the Valley’s dominance could be upended if there was a new wave of technological disruption, far separated from the computing and Internet industry on which the Valley has been built. Wilson said that should Silicon Valley miss such a new wave, it could look like Detroit in a few decades.

    Just as a consumer-centric economy allows it to dominate Internet innovation, it also creates an insulation from innovation in non-consumer industries. The world has become a dramatically different place in the last few decades, and such innovations that define the next wave of technological disruption can come from any nation that has a sufficiently large pool of talented people working to solve the big challenges in energy, health care, clean technology and other sectors. That would weaken Silicon Valley’s grip on driving innovation — and further undermine America’s standing as a global power.

    Originally Published: http://navam.in/1omJBAj

  • Economic Development As Foreign Policy

    In this piece, Harsh and I write about the importance of economic strength in the foreign policy arena:

    Military strength, despite its great importance, offers diminishing marginal returns. Possibilities of asymmetric power projections preclude any simplistic linear comparison of military resources. This is especially true for those who have crossed the nuclear rubicon – notice how India and China have astutely said “No, thank you” to matching America or Russia when it comes to the size of their nuclear arsenals. When a weapon is so massively destructive, there is no real difference between having a hundred or having ten thousand. Moreover, economic strength and military prowess are inter-linked – the proceeds of economic growth when invested in creating military technology can generate a mutually reinforcing cycle of innovation, productivity gains and military strength.

    More here.

  • Derivatives For Farmer Welfare

    Harsh and I have co-authored a piece on using financial derivatives for replacing the minimum support price (MSP) system for farmer welfare:

    With reduced risk thanks to commodity options, there will also be less of a need to keep crop inventories as buffer stocks. Farmers will be able to increase their incomes rather than forcefully smoothing production for consumption. Moreover, by not coercing farmers to sub-optimally diversify into different crops and different plots, agricultural productivity would increase and more land could be reforested, providing significant cumulative environmental benefits.

    More here.

  • India’s Rapidly Evolving Technology Landscape

    Most investors who have put capital behind consumer internet startups trying to build commoditised businesses will lose money.

    India’s technology landscape can be characterized as having seen three waves of evolution and growth. The first wave was led by the likes of Tata Consultancy Services, Patni Computer Systems, Infosys and Wipro, who pioneered the outsourcing model based on labour cost arbitrage. These were firms founded in pre-liberalization India and took decades to establish themselves as global brands. The second wave occurred in post-liberalization India of the 1990s, when several IT firms adopted similar business models to the outsourcing pioneers. The small- and mid-sized enterprises that emerged during this period strengthened the foundation of India’s nascent software services industry and today form the backbone of that thriving sector. The third wave can be said to have begun with the advent of the Internet – startups such as Naukri.com, MakeMyTrip.com, InMobi and Flipkart.com who have emerged as category leaders in providing web services.

    The common thread to the three waves has been the domination of the services-oriented software and Internet companies, and in recent years, the preponderance of ideas that have worked in the West that were repackaged to suit the Indian context. The fact is India has seen more imitation than genuine product innovation.

    India’s technology industry has been dominated by IT and Internet firms, and venture capital investment figures for recent years bear out this trend. Since 2009, VCs have poured over $810 million into 113 deals in the software, mobile and Internet sectors. In contrast, early-stage health care and clean technology companies have received $292 million across 71 deals. It’s also interesting that average deal sizes are larger for early-stage companies in software and Internet than for health care and clean technology – one would have thought that the former is less capital intensive than the latter, and would hence require lesser capital to grow at the early-stage. By some estimates, India’s software and Internet ventures have been raising larger amounts of early-stage venture funding than American clean technology startups.

    The data points to a clear mismatch both in terms of funding size and sectoral capital allocation. My hunch is that most investors who have put capital behind consumer Internet startups trying to build commoditized businesses will lose money. Most of these ventures are pursuing unsustainable business models. As if having imitators of American Internet startups wasn’t enough, we’ve seen imitators of Indian imitators of US Internet startups successfully raise funding. These ventures have almost no pricing power and hence almost no profitability. A fund raising arms race is under way, and the vast majority of startups will lose out as capital providers cluster around the top 1 or 2 category leaders.

    In a more rational world, India’s VCs would bring together some of the outstanding engineers and scientists working at corporate research laboratories operated by Fortune 500 giants like General Electric, who are conducting key R&D work that is in many cases indispensable to the parent company. VCs should be willing to back stellar teams pursuing big ideas, and should invest capital in ways that harnesses the economics of outsourcing to deliver path-breaking innovation.

    The data also tells us that more India-focused venture funds will be forced to look in places other than the tried and familiar Internet and IT sectors. Health care, clean technology and energy are mammoth markets that are relatively underserved and in dire need of early-stage capital, particularly for areas with substantial technology risk. Investors are beginning to recognize this, and several new funds have emerged that are both willing to look beyond IT and are comfortable backing early-stage ventures with $1-2 million.

    The emergence of product-driven companies in sectors such as life sciences and clean technology in this decade will mark the fourth wave of the evolution and growth of India’s technology landscape. India’s talent base extends far beyond computer science and IT into fundamental sciences and engineering – it’s only a matter of time before risk capital connects with this talent base to deliver world-leading product innovation across more sectors. In order to achieve outsized returns, investors should skate to where the puck is going, rather than where it has been, to quote ice hockey player Wayne Gretzky.

    Originally Published: http://navam.in/1iL99U1