Creating Social Capital in India

Venture capitalists add value to an enterprise at many levels and are not just financial investors. Good venture capitalists invest in smart entrepreneurs and big opportunities, and also bring to the table their network of relationships and connections. India is a preferred investment destination among emerging markets and has oodles of bright and hungry entrepreneurs who have built world-class companies across industries.

However, a culture of serial entrepreneurship and mobility of entrepreneurial talent across business sectors is absent. India’s social structure tends to promote business activity between people of the same community, and social class and family birth also influence one’s vocation, resulting in a dearth of what economists call “social capital.”

In the entrepreneurship and start up world, it’s common to hear people talk enthusiastically about “developing the ecosystem,” which is the same as creating social capital. Early-stage venture investing remains very risky and difficult despite the fact that India is burgeoning with first-rate entrepreneurs. I think this is because of the dearth of social capital – social networks in India are centered around family and identity. A culture of trust which encourages cooperation and profit-motivated, self-interested action has only just begun to take root.

Dynastic succession is one of the most pervasive and curious characteristics of Indian society, and can be befuddling to a casual observer. Whether it is business, politics, the fine arts or Bollywood, children inevitably do what their parents did, often with strenuous consequences for both the family and society. Some 3000 years have passed since the great war of Kurukshetra took place between the Pandavas and Kauravas to resolve a disagreement over succession and inheritance, and history continues to rhyme.

Lateral entry into a vocation outside the purview of one’s family and identity remains difficult. As Warren Buffett might put it, capital allocation in India is determined by the “lucky sperm club,” those who are born in certain families and communities.

Dynastic succession is not the most efficient way to allocate human capital. A poet who could have been an effective politician doesn’t necessarily make that choice, and a financier who could have made a better writer doesn’t pick that path. Talent ends up being sacrificed at the altar of societal norm, precisely because the opportunities for realizing one’s potential in “other” fields are very limited. In economist-speak, a Nash equilibrium exists and the net effect is that society becomes inertial and innovation is stifled.

The more social capital India can form, the faster the rate of innovation and idea exchange and ultimately, positive change – and this applies as much to politics and Bollywood, as it does to the startup world. We can be sure that such change will be positive because open and vibrant ecosystems allocate resources far more optimally and democratically than the almost-feudal system in existence today.

How can India create social capital? At the macro level, market competition creates social capital and trust. India is notorious among investment bankers for its low domestic mergers and acquisitions activity relative to the size of its economy, and it’s uncommon for small and medium-sized companies to sell themselves to larger competitors. Alok Kejriwal, entrepreneur and founder of Internet company, recently told me that the absence of markets that encourage M&A and dearth of liquidity events can be a serious innovation-killer. Entrepreneurs who can’t get a good price for their company won’t sell, and pricing is distorted because of shallow markets and an inertial system that rewards continuity rather than change.

Not being able to exit even if they want to means that instead of entrepreneurs owning their company, the company owns them.

The antidote is meaningful economic reforms, which reward productivity gains and encourage competition. India’s legal and economic structures promote inertia, rather than productivity and fluidity. Bollywood, which was recognized as an industry by the BJP-led NDA government in 1998, is one of the most visible and least talked about success stories to benefit from pro-market policy.

In the last decade, the film industry has become more organized and corporatized. Access to finance has reduced the influence of criminal elements and the infamous underworld. New talent has emerged and an industry which was once dominated by a few families is now far more democratic. Increased efficiency in movie production, distribution and marketing have grown the market for all and it has become possible to produce and release small-budget films which would have otherwise been commercially unviable.

This growth can be replicated in other sectors. The Congress-led UPA government has reiterated its commitment on this front, but the question is whether it will actually do enough, or hide behind the excuse of protecting India’s “mango people” once again.

At the micro level, the best way to create social capital is to pursue one’s dreams and ambitions, even if it seems difficult or impossible at first. Getting out of one’s comfort zone and trying new things, forming groups and organizations where none exist, and bringing together like-minded people whose values and ideas are aligned, though seemingly innocuous, can be deeply transformational. The generation of Indians that grew up through the watershed economic reforms of 1991 and the reform efforts of the NDA government from 1999-2004 is now coming of age. As has been captured by movies and popular culture, this generation is more confident, assertive and aspirational. Global investors and India’s “mango people” alike would be better off if they create social capital to dramatically alter India’s curious cultural calculus.

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