Startups are a form of finance capital

A FEW days ago, a ‘tech bro’ boasted on Twitter about how he had sacked 80 per cent of his support staff and replaced them with an AI chatbot. Understandably, he was trolled for being inhumane, heartless and even disrespectful of those who had been sacked. Surely, the gentleman had expected this reaction. In fact, it is quite possible that he wanted to position himself as a cut-throat, unemotional, macho entrepreneur, much like the hugely popular Elon Musk. Remember how Musk had announced that he had sacked 80 per cent of Twitter’s staff when he took over the microblogging site?

The Indian tech startup space is a great story to sell to First-World investors with a surfeit of cash.

The startup space is notorious for such brash behaviour. Bosses are supposed to be hard-hearted. Employees are expected to work long hours, and those who seek family time are considered to be sissies. Indeed, if you are a startup employee, your time is owned by your boss — the startup founder. In exchange, employees are rewarded with ESOPs (employee stock ownership plan), which hold the promise of making them fabulously wealthy.

This work culture comes from a specific sense of time. Industrial capitalism is slow. It takes time to incubate a business, build a factory, manufacture products, distribute them to the market, and then get returns on investments. The startup space is in a great hurry. Where industrial capitalism first sold a small stock of products and slowly expanded output as demand increased, startups almost always sell services at a massive discount, or give it away for free, with the sole purpose of ‘acquiring’ customers. Very few tech startups look to make profits, and those that do have relatively low profit margins.

Why do they do this? To understand this, we have to journey outside the tech world to the world of household savings in the developed world. Take America, for instance. Since the neoliberal reforms introduced by Ronald Reagan in the 1980s, the top 10 per cent of Americans have garnered all the gains of economic growth. Their average wealth has grown three times in real, inflation-adjusted terms, while that of the poorest 50 per cent has grown by just a quarter.

Over the past four decades, on an average, the top 10 per cent of Americans have accumulated assets worth $2.73 million. A large chunk of this wealth has got financialised, and is constantly seeking better returns. The trouble is that neoliberal policies followed by all contemporary governments seek to keep interest rates low. So, financial wealth has to perforce flow into equities and other non-debt assets.

But it is clear now that the American corporate sector cannot expand much. Gross inequalities might result in great wealth for a few, but it also dries up demand for goods and services that capitalists produce. Indeed, for several years now, equities in the US stock markets have been driven by corporate stock buybacks instead of higher earnings, where companies that issued shares buy it back from those who bought it, offering them a premium. According to Goldman Sachs, buybacks have accounted for most of the demand for equities in the American markets since 2010.

So, we have a problem of massive amounts of money floating around with limited investment opportunities, at least in the First World. Enter, the financial intermediary, the fund manager. For decades now, they have sold the myth of the great Indian consumption market, of the growing Indian middle class. They have told their investors that India’s billion-plus population is waiting to consume, only if India could solve its market inefficiencies and distribution problems. Tech has only made this proposition even more attractive. Apps are supposed to have the ability to bypass India’s infrastructure problems and directly reach customers without access to formal markets. So, the Indian tech startup space is a great story to sell to First-World investors with a surfeit of cash.

But once you have taken that money and given it to an Indian tech bro, what next? Now we enter the old financial trick of valuation. Startups became worth millions of dollars, on imaginary Excel sheet business projections, and a ‘customer’ base acquired by giving things away for free, or at deep discounts. This was a new definition of the word ‘customer’; in the startup world, it meant anyone who was willing to use a service even if he did not pay a penny for it. In old-school capitalism, such customers were called freeloaders.

Once a venture capitalist or a private equity firm has invested money in such startups, they have to constantly keep their valuations up. The objective is to either find a bigger buyer, with deeper pockets and a smarter handle on the game, or to simply find the bigger fool. The game ends when the startup lists and the original investors exit by passing on their shares to retail investors. Usually, this happens with founders and original investors making big bucks out of the IPO process. After a while, the shares tank and retail investors are stuck holding the baby — or, should one say, boo-boo?

In other words, tech startups are a financial instrument, much like derivatives of any kind, such as futures and options, or credit default swaps. They have no inherent advantage over brick-and-mortar businesses in making money. If they had, most startups in India would have been highly profitable, instead of being the massive money guzzlers that they are. Whatever potential tech has, it has already been cornered by Big Tech. Startups simply cannot compete with them. At best, they have the potential to be acquired if they come up with a promising tech innovation.

So, startup business and jobs should be treated as extensions of the global financial system. They will rise when there is excessive liquidity — mostly because of low interest rate regimes or government spending — and they will fall when liquidity dries up. There is no fundamental business case for tech startups to exist, except as proxy financial instruments through which finance capital seeks to grow its share of global income, at the expense of the rest of the world.

The author is a senior economic analyst