What Dravid’s role as a gooey says about the world economy

A few days ago, a statement starring retired Indian cricketer Rahul Dravid, unaware that he would lose his coolness, broke the internet. The ad spot shows Dravid jumping into the road rage. In one of the commercials, Dravid threatens a cricket bat and shouts, “Hoon main through Indira Nagar.” The area where he declares himself a hooligan is in Indira Nagar, Bangalore. However, Dravid must have paid a bombshell for this statement, perhaps needing to be shot on his side that does not exist.

This ad is for a unicorn called Fintech Startup and Credit. Unicorn is basically a billion 1 billion startup. The Bloomberg News article of April 12 stated: “Over a period of four days, [India] Printed at least six new startups worth $ 1 billion or more. “

Unicorns are raining in India. However, the question is: how can a startup that has no revenue and cause huge losses be worth over a billion dollars? Large global venture capitalists (VCs) are buying up stakes in Indian startups, valued at over a billion dollars each.

This is happening in an economy where bank loans to industries have been flat for the past five years. Of course, bank loans cannot be compared to whistleblowing investments. Banks lend to what they consider to be safe and relatively low-risk business entities. Banks consider startups very risky.

Visas know that most of the startups they have invested in are likely to collapse. But they are betting that some of these will work well so that they can offset their losses in other ventures, thereby leaving the overall profits on the table.

However, the businesses that finance the banks and the businesses that VC invests in operate in the same economy. So, what makes visas so promising and banks so pessimistic?

Banks lending is mainly because most corporates are not interested in borrowing. The profits of listed and unlisted Indian companies have been falling for years; This has led to mistrust over their financial future, thus slowing bank lending to industries.

On the other hand, interest rates in large areas of the rich world are low or negative. Interest rates have been low in the United States since the onset of the 2008 financial crisis. Japan has had lower interest rates since the 1990s after real estate and stock market bubbles burst. Some parts of Europe are seeing negative interest rates, and all the money floating around the rich world doesn’t seem to be of much use.

Following the financial crisis of September 2008, the rich-global central banks, led by the Federal Reserve of the US, printed a lot of money. They resorted to the same strategy in early 2020 after the Kovid epidemic. The US Fed alone has printed more than $ 3.5 trillion since the end of February 2020. This has reduced interest rates to a very low level.

Therefore, in the world of the rich there is a large amount of money. VCs have access to this money and are betting large sums by investing very high values ​​on new-age Indian startups.

Most of these startups work on the topic of ‘Network Effects’, which makes each additional customer network more valuable than a simple addition. Take the example of food distribution applications. The more people who use food-delivery apps, the more it makes sense for restaurants to stay in those apps.

To achieve network effects, startups must first build scale. This means more people are using their apps. This explains why many apps initially offer huge discounts to users.

In fact, these discounts can end up costing startups a lot of money without earning much in an attempt to establish themselves, thereby incurring large losses. Despite the growing losses, they continue to be in operation. VCs make this possible by constantly investing fresh money in startups with high values.

Huge discounts on offers are usually designed to deny competitors easy access to the relevant market and to achieve a monopoly (or duality) in the process. Once that is done, the idea is to make money in this market and make huge profits. If that doesn’t happen, it’s time to dump her and move on.

This business model is the result of the times in which we live — that is, easy money and cheap internet access. This is not possible at any other time as the huge losses that startups make in their early stages are likely to bankrupt them.

It also shows the inflationary impact of money printing by central banks around the world. In the past, money printing has led to inflation affecting the entire population, with more money chasing the same amount of goods and services as the prices of essential goods rise.

During this time, extra money-printing led to asset-price inflation and not the traditional sort. Startups that may or may not make money one day are worth more than a billion dollars. Stock markets around the world are in the foam zones. Home prices are rising in the rich world. And Bitcoin… let me go there too.

Vivek Kaul is the author of ‘Bad Money’

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