Indian VC Mahesh Murthy rips apart 'hollow arguments' of Vani Kola on 'capital dumping'

India’s home-grown technology companies Flipkart and Ola have been long rooting for policies against what they feel is “capital dumping” by rivals such as Amazon and Uber. Latest to join the debate are venture capitalists Vani Kola and Mahesh Murthy.

Vani Kola: Local tech innovation at stake

It started with Kola, Founder and Managing Director of Kalaari Capital, calling for “designing better policies” that would require the foreign firms like Amazon and Uber “to sell at positive gross margins and net take rates in India.”

“… after a period of operating in India a firm cannot fund burn in India from operations abroad: like Indian firms, they would have to raise capital for the Indian entity from third parties. This ensures that at least some wealth creation in internet accrues locally, critical to the birth of a tech ecosystem,” Kola wrote on her blog on Medium.

She feels that an “unregulated market” has allowed the foreign companies to operate on negative gross margin sales in India funded by positive gross margins abroad. She calls for a thought to be given on “how capital might also be used in a way conceptually similar to dumping?” The consequences of not providing a policy response, according to Kola, may include:

“Modi’s (Indian Prime Minister Narendra Modi) Startup India Standup India initiative is unlikely to succeed and India’s startup ecosystem won’t take off, if a dumping-like strategy can be used against Indian startups. Take Micromax for example; its market share has fallen from 20% to 10% in just 20 months due to a dumping by MNCs. There is precedence in Europe: the market value of internet in the US is $2 trillion and China is $1 trillion (larger than auto, pharma, telecom), while in Europe it is only $50 billion (1/40th of US, 1/20th of China). This alarming disparity is because China supported its firms (Google Twitter and Facebook were effectively banned), whereas Europe did not.”

However, she does say in the same vein that she is “not an advocate for bans, but it is an important point to ponder.” She feels that if India’s home grown internet firms fail, millions of jobs won’t be created. According to her, the homegrown companies provide more jobs than the foreign companies.

“In India OLX has 300 employees to Quikr’s 2,700; Uber has 1,500 employees to Ola’s 7,000; Whatsapp has 20 employees to Hike’s 500; Amazon has 24,000 employees to Flipkart and Snapdeal’s 45,000.”

She warns that allowing a dumping-like strategy could cause foreign investment in India tech to collapse” and that “India has its local tech innovation future at stake.”

Mahesh Murthy: Protection for what? Bad investments?

Mahesh Murthy, Co-founder of early stage investing firm Seedfund, not only calls the entire “capital dumping” debate as “bizarre” but calls the pitches for “level playing fields” and the need to stop “capital dumping” as “hollow arguments” and “hypocrisy”. He asks on a post on LinkedIn, why the same level playing fields were not deemed necessary by the same venture capitalists when offline retailing giants like Big Bazaar petitioned the government for them against homegrown e-commerce players like Myntra and Flipkart, and when small shopkeepers asked for them to protect against another e-commerce player, Snapdeal. He feels that Flipkart and Ola (and Snapdeal and Myntra and Shopclues and Truly Madly and Food Panda and many other startups in India) have entirely been set up on a copy-paste model. He argues that unlike China and Russia, India is an open market and “copy-paste” job does not work here.

“We’ve enjoyed the world’s best services simply because we have not had to force our people to use sub-standard products from some copy-paste guy who studied at IIT or IIM and then figured he could make a quick buck. “The BRICS theory – copy from the first world and paste into Brazil, Russia, China, India and South Africa – is more MBA twaddle, and just doesn’t work. “And nor has the government forced us to be nice to the VCs who made decisions to invest in copy-paste companies. The biggest of them all, Tiger, put a billion dollars in Flipkart, and on seeing that the bet didn’t work out did the right thing, one by walking away from India and this flawed thesis – and two, by putting a billion dollars in Amazon to perhaps atone for their sins. When you fail, you accept your failure and then make amends. “Another company too, Rocket Internet, came to India with this copy-paste thesis. But they’ve exited too, after the failure of this thesis in virtually every single company they funded in India: Food Panda, Jabong, Asasa, FabFurnish and the like. Though in all fairness it was not just a flawed thesis but crime-prone management in India that led to their demise here. “Neither of them asked for protection. Investments in startups are risky, and when you have a bad thesis, a bad business or a bad team, then you lose. They understood that. “But apparently our VCs want quotas and protection for the bad investments they’ve made. “As things stand now, nobody is willing to take these companies off their hands at the prices they’re quoting. Current investors in Flipkart have cut its on-book valuation from $15 billion to $5 billion. Snapdeal is apparently doing the rounds in a humbled, fraction-of-former-demand mode asking for money. As is Ola. “This makes the VCs sad, and delays, if not entirely destroys their pay day. “Hence the request to grant protection and ask the government to let them put foreign money in Flipkart and Ola and not let foreign money go into Amazon and Uber.”

Murthy is also scathing on the “ridiculous” salaries that the home-grown companies pay and terms the practice as “rip-off”. He claims that the HR head of Flipkart, “a gent with 8 years’ total experience”, earned INR 35 crore (approximately US$5,158,818) last year. And the founders get much more. So should the government step in to force Amazon and Uber too “ridiculously overpay” their people? Murthy asks. He calls for fellow investors to “take the responsibility for” their investment decisions. He also calls on the founders “to grow up, and accept that their attempt at some short-term arbitrage or mercenary jugaad didn’t work.”

Is innovation the key?

Ananth Padmanabhan, a fellow at Carnegie India, states on a blog on Economic Times that in a digital economy, algorithm is policy. Self-regulatory measures by digital economy players to open up algorithms for technical inspection can go a long way in building trust. It was at at Carnegie India’s Global Technology Summit late last year, that Flipkart Founder, Sachin Bansal and Ola Founder, Bhavish Aggarwal took up cudgels against their foreign competitors and accused them of ‘capital dumping’. Padmanabhan feels that ‘capital dumping’ is no longer about foreign companies versus Indian companies but bigger versus smaller players. He gives examples of Facebook that managed to “upstage Orkut,” and WhatsApp that “triumphed over several earlier and bigger players, because of low switching costs coupled with smart innovation.” He believes that ‘capital dumping’ may minimize the growth of competitor networks, and works well during the nascent stages of the business cycle, purely from a consumer standpoint. But it is innovation cycles that “often act as a check on digital economy players from hiking prices once the battle is won.”