Companies like Apple, HP, Microsoft, GE, Sony, or Daimler corporation came from the garage, university dormitories, or workshops. The seed of these companies had been great ideas– startups. But the market capitalisation of many of these companies is far more than the GDP of some countries having even more than 100 million population. For example, the market capitalisation of Apple is several times higher than the GDP of Bangladesh. Fortunately, in this age of the internet, ideas flow freely. A simple google search pops up dozens of ideas. Moreover, science, engineering, and business students, in even less developed countries, are highly technology-friendly. They also appear to be creative. Furthermore, initial physical facilities required by Apple or Sony could easily be provided to local startups in most of the less developed countries. Hence, is it not the time to tap into the miracle power of startups?
Although development planning of the least developed or developing countries has so far focused on the commercialisation of labour and natural resources, recently, there has been increasing priority on the miracle power of ideas. Hence, starting from academia, politicians, net worth individuals to development thinkers, more or less, everybody is after patronising ideas-forming and grooming startups. They are now considered to be a silver bullet of development. Particularly, it appears to be a miracle solution to solve the problem of growing unemployment among university graduates and tapping into their creativity and the power of youth to turn ideas into hundreds of large, highly profitable large corporations. Therefore, measures are being taken for organising idea competitions, awarding lucrative prize money and offering seed capital to winners, mentoring winners to incubate startups, offering office space to nurture them, celebrating each round of fund raising, and offering many other incentives. Startups have become a new hope of leapfrogging in less developed countries. Does it mean that conventional development theories are no longer valid? Has startup unfolded as a miracle development model? It seems that the old risk of getting caught into growth tarp does no longer exist.
Well, let’s look a bit further. Often, analysis of history offers us repeatable patterns to comprehend the unfolding reality and predict the likely future. From the historical context, the startup journey could be divided into four distinct phases.
PHASE 1: During the 19th century, out of tinkering, Edison and many others came up with ideas, got patents, and started rolling out innovation-even through craftsmanship. Despite the greatness, more or less, none of those ideas offered a scalable path for creating increasing wealth and forming large corporations. For example, Edison’s phonograph idea sat on the shelf for a decade-let alone showing miracles right after the invention. Similarly, Edison’s light bulb or Carl Benz’s automobile had no economic value at the beginning. Subsequently, they embarked on scientific R&D for scaling up those ideas-leading to corporations like General Electric or Daimler. Hence, great ideas or giving subsidies in creating the customer base of their primitive emergence did not create wealth creation or the formation of a large corporation.
PHASE 2: In the USA, just right after WWII, institutional R&D for war agenda led to the formation of some technologies for rolling out innovations for defence and civilian applications. Consequentially, it led to new companies (spinoffs, startups) by R&D staff members, graduate students, and professors. Further R&D led to scaling up initial ideas and forming corporations like Digital Equipment Corporation, Hewlett Packard, and more. Furthermore, the chain reaction triggered by some great ideas like Transistor or RADAR catalysed the formation of technology clusters like Route 128 in Boston and Silicon Valley in California.
PHASE 3: The growth of silicon technology led to the ideas and formation of startups around personal computers, handheld devices, and software applications. The scalability of silicon and software was the underlying force in turning some of these startups into highly valuable corporations like Microsoft, Apple, and many more. But it was not naturally occurring. It did not happen due to the sheer benefit of technology integration and kept promoting innovation out of subsidies. Hence, to leverage it, all these success stories made a substantial investment in R&D to leverage latent potential of silicon and software. Yes, some of them required risk capital. But companies that used that risk capital in producing ideas for increasing the quality and reducing cost became success stories-of offering higher quality substitutes at less cost, paying attractive dividends to shareholders, and paying taxes to the government.
PHASE 4: Digitisation of ideas around the smartphone, mobile internet, and cloud computing led to the formation of the latest startup rush. This time it propagated to the developing part of the world. Mainly, startups in less developed countries got after copying ideas and rolling out them out of the integration of imported technologies. The underlying belief has been that the sheer benefit of digitisation is good enough to offer better quality alternatives at less cost. But unfortunately, those digitisation of ideas have not been emerging as better quality, less costly profit-making alternatives. Hence, they are after burning investors’ money for buying customers to address the experience gap and practising predatory pricing for monopolising the market. It happens that this practice of customer acquisition is leading to inflating valuation and raising funds.
But it seems that the benefit is not good enough to create profitable means for offering better quality at less price. Furthermore, investors are getting increasingly reluctant to keep funding to buy customers to show inflated valuations. Hence, they are now after another model to show miracles-particularly, some e-Commerce companies. They are buying merchandise at credit and promoting them at a deep discount to allure customers. However, customers need to make payment first and wait for the delivery. This model is leading to taking away money from suppliers and customers in a fraudulent means, because the liability of these miracle e-Commerce startups has been exceeding net assets-leading to the likely failure of payment to be made to the supplier and product to be delivered to the customers.
Startups are supposed to offer better alternatives at a lower price. But how can e-Commerce providers offer them? There has been a recent report that an e-Commerce startup in Bangladesh has far more liabilities than assets. Its liabilities to customers and merchants had risen to Tk. 403.80 crores, while its current assets were worth only Tk65.17 crores. Does it mean that this startup is not in a position to make the full payment to the suppliers and deliver the products to all customers for which it received advance payment? Is it an innovative, miracle idea for e-Commerce startups?
It’s time to go back to the basics of wealth creation. We have three primary means for creating wealth: i. natural resource stock, ii. labour, and iii. ideas. The startup concept came for creating wealth out of ideas. It’s about generating and harnessing ideas for offering higher quality at less cost by substituting material, energy, labour, and other inputs with ideas. It does not matter how creative someone is and how great an idea one comes up with; invariably, ideas will emerge in primitive form. The sheer benefit of the idea of digitisation out of the integration of available technologies is not good enough to offer better quality at less price while generating a profit and paying taxes. Great ideas must be complemented with a flow of ideas. And they do not keep coming out of informal work setting, brainstorming, or idea competition. It demands systematic research. Instead of it, subsidies in increasing customers for inflating valuation run the risk of burning investors’ money, failing to create wealth, and indulging in fraudulent practices.
M Rokonuzzaman, Ph.D is academic and researcher on technology, society and policy.
