Why Free Market For Startups is Bit of a Fool's Paradise That does sound fair but there at times, is need to refrain from being over ideological.

Monopolized market, stifled competition, job loss, restricted foreign capital, tax revenue loss, pro-start-up policy collapse, call for market regulation are connotations ascribed to recent uproar over capital dumping by its believers on one hand. On the other, we have cloned business models, desperate investor call to keep their returns intact, wasteful cash splurge, inflated valuation, need for free market, herd mentality that hyped up investment in few sectors, foreign direct investment in e-commerce marketplaces; from those negating charge of capital dumping as absurd. Precisely, hence, the question is would there be implosion of sectors dominated by foreign competitors in an unregulated market with mild tremors to entire ecosystem or a free trade driven robust ecosystem where capital's role is limited to being a commodity.

In hindsight, everyone is advocating the hackneyed phrases - need of a level playing field, free and open market, or even the argument that India is not a closed market like Russia or China. That does sound fair but there at times, is need to refrain from being over ideological.

Capital Awarded vs. Capital Earned

Let's look at it very objectively. The bone of contention is companies like Amazon, and Uber (that failed in China) are funding the negative gross margin sales or cash burn of their "Indianized' arms even as their "actual Indian copycats' like Flipkart and Ola "earning' investments from investors. The question hence, shouldn't be how foreign is Flipkart (the fact that it is registered in Singapore is a separate matter) or Ola (that like many other start-ups is backed by foreign capital) or other startups because eventually their investors are third parties unlike Amazon India or Uber India that are awarded with war chests from their parent companies. To be fair, there has to be a cap on how much of this awarded capital can be used by their companies and eventually striving to earn the follow on capital from other investors, whether domestic or foreign. That can be a level playing field.

"We are already bearing the brunt of the overpriced startup ecosystem. Whenever you go to raise capital from limited partners (LPs – investors in funds) they ask questions about Flipkart and Snapdeal. So the damage is already done," says Madhukar Sinha, Partner, India Quotient – Mumbai based early stage fund. The impact of capital dumping is visible on early stage funds too, though short term. "This is just a cycle and will not have a permanent impact on the ecosystem. Because LPs understand that it is a risky asset class, I don't see a lot of backlash from them. However first time retail investors will certainly get scared," maintains Sinha.

Here capital, quite unfortunately, is a differentiator led by biggest opportunity in sectors like retail and urban mobility and tapped by players like Flipkart, Snapdeal, and Ola that have become drivers for market sentiments. Not to forget, the wealth of global experience of the foreign businesses that has further powered up their Indian businesses against entrepreneurs that are first timers and hence there can be benefit of the doubt that their businesses will have gaps unfilled that its competitors will take advantage of. "No one can beat Amazon and Uber in the advantage of global experience they have. But the Indian companies also have an advantage of understanding local market. Still, more capital will always be advantageous," says Anil Joshi, Managing Partner, Unicorn India Ventures. It is also important to understand these businesses are built on technology and infrastructure that didn't exist in India before they ventured out unlike Uber and Amazon in the US.

An investor with a tier one early stage fund requesting anonymity argues, "These (foreign) companies are getting profits from their home markets and funding their growth in new markets which is an abnormal business practice. This is to say for Rs 200 cab ride, I will give Rs 200 per ride incentive to the driver."

One can agree to an extent that Indian companies could have even deeper optimized their investments on talent and customer acquisition - probably the two biggest reasons for their current state of affairs. "Of course Uber and Amazon are getting advantage of raising money from their company balance sheet in other market but the problem Flipkart and Ola is facing is that they themselves haven't been capital efficient with whatever capital they had," asserts Sinha. But there doesn't seem clarity on the argument of copied ideas leveled against them.

Indianized vs. Copy-paste Ideas

It is purely subjective of how one defines the word copying – a similar idea that exists somewhere else being re-imagined in local context or just copy pasting it from geography-to-geography. If latter's the case then Alibaba (China), Rakuten (Japan), and Ulmart (Russia) are nothing but Amazon's copy cats and similarly Didi Chuxing (China), Hailo (UK), GrabTaxi (Singapore), LeCab (France), and Cabify (Spain) are that of Uber. Yet, they all are leading companies in the respective economies like Ola and Flipkart in India.

Therefore, the investors' cry of capital dumping to ensure that the handsome returns they expect to make from domestic Internet firms aren't completely dumbfounded. As an outsider view, it is in fact a reaction to this "awarded' capital. It is like lending Rs x to someone to set up a small shop and then a rich guy setup his shop next to him and spend money profusely on its décor and services like home delivery that eventually attract more customers than the other guy who then starts losing customers and can't do much because of relatively less money and finally shuts shop. Would one expect the investor in that small shop to remain silent? Or would one call it a fair trade though you can't really stop the rich guy to invest in his shop because there is no one to regulate it?

"I don't believe in regulation, it should be self regulatory. If Competition Commission of India believes that a product or service, sold below its cost, subsidized from other markets is equivalent to dumping, I think that's fair," the investor adds calling for regulatory interference. "So if it is dumping, should there be barriers to stop it or should nothing be done? I don't agree with either of them. I believe we should do something around sustainable business practices rather than Indian versus foreign."

However, few venture funds sees it differently. "I don't see this any different than the license raj system that stifled India's growth for many decades. History is testament that the Indian consumer or business has suffered with such protectionist measures and I can't see why it would not be the same in this case," cautions Amit Anand, Founder and Managing Partner, Jungle Ventures – based in Singapore.

Echoing somewhat similarly, Srikrishna Ramamoorthy, Partner, Unitus Seed Fund – a Bengaluru-based seed fund, says, "You will always see the parent company pumping money into its subsidiary because it wants that to grow. Would you find a foreign competitor saying that he is not able to survive because that company has deep pockets?"

Not an Online -Offline Debate

There have been examples of investors like Tiger Global (invested in Flipkart) and German venture builder, Rocket Internet, burning their hands in Indian start-ups. But this too can be seen as part of the cycle. "Today India may not be their focus because they have opportunities in other markets to route their money. They alone cannot define the market sentiment. There are several other funds that have come up," adds Joshi.

Few industry experts question this cry of investors and entrepreneurs ill-timed and hypocritical in light of the fight between online versus offline retail stores and mom-and-pop shops. But importantly, there the question was between two channels of shopping where online was seen as a natural extension to offline through Internet with end-to-end overhaul of shopping experience, from search or discovery to delivery or return. That's the evolution of the ecosystem where there was room for both channels to co-exist. In domestic versus foreign companies and capital, it is about a cut throat fight for a particular channel, there is no evolution in this as one company is losing out to another instead of co-existing.

To sum it up, the call is for these companies to raise money from third party investors just like the home grown companies or have government sponsored funds and bank funding dedicated to domestic businesses, if at all it has to be a full-fledged war based on efficient use of capital. One can even argue if this bodes well for government's start-up India vision if large Internet companies dictate market dynamics.

(This article was first published in the March issue of Entrepreneur Magazine. To subscribe, click here)