Entrepreneurs must also create conditions for success: Harvard professor

Tarun Khanna, Professor, Harvard Business School
In your new book, Trust: Creating the Foundation for Entrepreneurship in Developing Countries, you emphasise building trust is key to enterprise success, more so in an emerging market, and cite examples where entrepreneurs have gone out of their way to innovate and find solutions to local problems? Given the constraints they work with, how challenging is innovation in the developing world?

It's very challenging indeed, but also very exhilarating, with large personal and societal payoffs. One of the main initial challenges in my view has to do with accessing risk capital. Now, in countries such as China and India, this has improved a great deal in the past decade, where angel investors and incubators of all sorts are now into this business, and getting analytically better at it over time, but there’s still a long way to go, particularly for truly novel ideas. In the developing world, truly novel ideas still do not attract risk capital, as it’s difficult for our investor base to value ideas and their manifestation as intangible assets well (as opposed to counting unit sales, or store openings, or app downloads, or something very concrete). In more developed ecosystems, ideas get valued as they progressively develop, well before there is concrete manifestation and there is a ‘thick soup’ of investors who specialise in valuing such ventures at different stage of its going through such a life cycle. In India, and in virtually all developing countries, we don’t yet have the maturity of investor experience to do this. But we’re getting there!  

For an entrepreneur past the very early stages of venture creation, accessing talent is the key challenge.  As yet, we don’t have enough young talent that has requisite skill sets, nor do we yet have enough folks who have exposure to a broad set of life experiences, either through diverse professional backgrounds, or through travel overseas, for example, or other ways. Of course, all these will come with time, but currently it’s a real bottleneck to scaling a venture.

The book talks about Taobao and how it took the ethos of the prevailing Chinese market dynamics on an online platform and came up with a hugely successful business model. Do you think Indian start-ups lack that spirit of differentiation? Also, has Flipkart's majority stake sale to Walmart shaken consumer trust?

Well, when Taobao launched, eBay was the behemoth in China. Jack Ma realised that rather than import the look-and-feel of the US site, it was better to customise the experience to the desires of the Chinese consumer, and that, in my view, was one huge reason why Taobao got traction against the incumbent and eventually marginalised it completely. Now, the question to ask about the Indian online consumer and Flipkart and such is whether or not the Indian consumer is as different from the median Amazon consumer as is the Chinese one. If the Indian consumer desires a different look and feel, and the likes of Flipkart are just mimicking the US site, that would definitely be a lost opportunity.

I don’t think that selling to Walmart shakes the trust in any way. In some ways it might even strengthen it by showing a significant exit for an entrepreneurial venture from scratch. Having a lack of profitable exits is the bane of any nascent start-up ecosystem, so the more we have of that, the better for would-be entrepreneurs and providers of risk capital.

The book seems to suggest that compared to India, micro finance institutions in Bangladesh and Mexico scripted bigger success stories. Does the stranglehold of private moneylenders and hierarchies and differences within the society make the country’s ecosystem less receptive to community-driven models?  

I don’t think I said that microfinance in Bangladesh and Mexico is a bigger success story! It’s certainly different in as much as the institutional backdrop is different in both those countries from that in India, even though the basics of microfinance have been around for decades, even predating the well-known Bangladeshi efforts.

I do admire BRAC, started by Sir Fazle Hasan Abed, Abedbhai as he’s know respectfully. It truly is an example of entrepreneurship at scale. BRAC is the world’s biggest NGO, from a standing start in cyclone-ravaged and post-civil war Bangladesh in very early 1970s, to a multinational, self-sustaining venture in over a dozen countries in Asia and Africa and Middle East. There’s nothing like that in any other country, including India, by the way.

The Andhra microfinance crisis was really a revealing moment for me. There was widespread unsavoury behaviour, on the part of politically connected individuals and the vernacular media in particular. Further, while the rest of India’s institutional checks and balances did the right thing eventually, for the most part, the wheels of justice in India grind slowly. In the meantime, forget about shareholder value destruction, the poor microfinance borrower was the biggest sufferer as a number of microfinance firms went belly-up. That sort of egregious event has not happened in Mexico and Bangladesh to the best of my knowledge. In Mexico, there was angst about whether microfinance firms should be publicly traded corporations with private investors, and that angst exists in India also. It’s a legitimate question to ask always — are the private gains to investors resulting in even more social gains for society? In both India’s and Mexico’s cases of the microfinance industry, my answer is, yes they are, though we need to be vigilant in policing excesses at all times. That’s why we have to keep strengthening the institutional ecosystem.

Indeed, the central message of my book, Trust, is that the distinguishing feature of entrepreneurship in a developing country is that the would-be entrepreneur can’t just create, she must create the conditions to create. That is, she must enhance the institutional fabric. Tall order, but the most practical thing actually. Much more practical than relying on a fictitious ‘other’ to do the job for us, whether it be government or outsiders or whatever. No use pointing fingers, let’s solve our problems ourselves.

Do you feel the Indian government’s initiatives such as Atal Innovation Mission or even those aimed to expand financial inclusion will encourage more entrepreneurs to enter the market or does effective execution remain a concern?

I’m glad to see the ambition of the current administration with respect to startup activities in general – through StartupIndia, and Atal Innovation Mission in particular – and also the schemes like the one you mention. Whether the folks towards whom the Jan Dhan Yojana schemes are targeted become entrepreneurs, I can’t say, my sense is that these programmes are meant to ease folks on the margins of society more robustly into the mainstreams, they’re not meant to encourage entrepreneurship per se. AIM and so on should be evaluated as to whether it encourages entrepreneurship. It’s early days you know.

But there’s another sense in which all these schemes can encourage entrepreneurs. Be it Aadhaar some time back, or Jan Dhan Yojana, or the new Ayushman Bharat attempt for large scale healthcare ecosystem change, these can create platforms for entrepreneurs to put new services atop, that is they provide ways for you and me to create new entities to turbocharge the government’s efforts. At the end of the day, it’s the complementarity between public and private effort that will move this country forward.