India’s purported ‘investment caste’ and what it means for crowdfunding

In his new book, Failing to Succeed: The Story of India’s First E-Commerce Company, K. Vaitheeswaran discusses the failure of his former business, and compares the Indian startup ecosystem to the country’s caste system.

Indiaplaza was launched in 1999 as a pioneer in the Indian E-Commerce space but closed its doors in 2013 after falling revenues. Ironically, the losses were seemingly a part of Vaitheeswaran’s broader strategy – growing the gross merchandise value (total sales of merchandise) at the expense of short-term profit.

This strategy, in fact, is reminiscent of the curious case of Amazon, that since its inception, has touted a business model of near-zero profit in pursuit of sales and cash flow growth.

Interestingly, Amazon experienced losses each quarter until the end of 2001, and remained in the red until 2009. The company even experienced a quarterly loss as recently as 2015, though it remains to be seen as one of the most valuable companies around, in spite of its impressively low profits.

Though the mentalities of Vaitheeswaran and Jeff Bezos in regard to profit may coincide, the fates of the two companies were markedly different. So, the question remains: what caused the disparate outcomes between these two companies?

One striking difference is that Amazon has always been able to maintain positive revenue growth, despite its profit losses. In contrast, Indiaplaza was not so fortunate: despite 174% business growth in 2012, the company experienced a decline in revenue of 25%, which caused funding wells to dry up, and ultimately led to its closure.

While the declining revenue may be one explanation as to the company’s failure, Vaitheeswaran’s postulate that venture funding in India is much like the country’s caste system suggests a second possible explanation.

In his book, he writes, “The typical profile of an Indian technology entrepreneur is of a young person from a premier technology or management institute in India or abroad and with work experience in an MNC or overseas.” He continues by describing a sort of pedigree investing, in which “you have this nice closed loop where investors and entrepreneurs are all from the same batch of the same institute.”

As a government college graduate who had never worked for a multinational company nor in a market such as the United States, Vaitheeswaran did not fit the bill.

Therefore, if his claim is to be believed, it is possible that Indiaplaza’s ultimate failure was not due to the company’s financials, but rather to the existence of an “investment caste” whereby only certain types of people have proper access to venture funding.

Ultimately, he argues that this type of investing isolates many talented individuals with potentially game-changing ideas who do not fit the stereotype of what investors are looking for.

Regardless of whether or not this “pedigree investing” was the cause of Indiaplaza’s demise, Vaitheeswaran’s claim, if true, poses an interesting and lucrative opportunity for crowdfunding platforms to fill the funding gap that those outside the “investment caste” currently face.

Some crowdfunding platforms already exist in the country, but the room for growth is huge. Currently, India’s share of the global crowdfunding market is just a small fraction. Anshulika Dubey, co-founder of Indian crowdfunding platform Wishberry and former McKinsey analyst, estimates the current Indian crowdfunding industry to stand at a mere Rs 300 crore (about $50 million).

Additionally, now that India ranks third globally for number of startup incubators and accelerators, and also ranks third for number of technology startups, there seems to be a bright future coming to crowdfunding, pending the results of further government regulation.