Startups fail to propel less developed countries!

Due to the astronomical rise of startups, a belief started growing that less developed countries have found a miracle development solution to reach high-income status. Besides, the rapid growth of the valuation of startups fueled the temptation of quickly multiplying investments. Hence, private and public investment started rewarding ideas and pouring money into startups. However, startup successes in less developed countries have been limited to valuing loss-making ventures as billion-dollar companies (unicorns) and raising investors' funds to expand market share or customer count through subsidies. Unfortunately, before scaling up as highly profitable corporations, startups in less developed countries have started suffering from staggering losses, funding drought, closure, and fraudulent activities. As a result, notable business publications like Nikkei Asia have recently reported startup winter in South Asia. Does it mean that less developed countries have missed the opportunity to reach high-income status through startups? Has the hope of multiplying investments in startups disappeared?

History tells us that startups have driven the emergence of advanced economies. For example, the core strength behind the rise of the USA's economic prosperity has been due to the rise of startups as mega powerhouses of wealth creation. Notable examples span from Edison's General Electric to Steve Jobs' Apple. Similarly, Japan's rise has been due to the scale-up of startups like Toshiba and Sony. On the other hand, Carl Benz's automobile startup has been the prime mover of propelling Germany into a wealthy economy. According to economic endogenous growth theories, as the flow of ideas appears endless, startups pursuing ideas have the potential to offer sustained long-run growth paths to less developed countries reaching high-income status.

On the other hand, despite hard work and plenty of natural resources, most less developed countries could not reach high-income status. More importantly, development thinkers appear clueless in crafting sustained growth paths for less developed countries. Despite progress in infrastructure, public service delivery, financial system, education, replication and imitation-based manufacturing, farming, and natural resource extraction, less developed countries fail to find growth paths to reach high-income status. More importantly, to demonstrate such apparent successes, they have become indebted to figure out the hollownwss in development prescriptions. In retrospect, the missing link for reaching high-income status appears to be startups.

Startups are on a mission to pursue ideas for leveraging emerging technology possibilities to offer better alternatives to existing means of getting jobs done. They are after unleashing creative waves of destruction. According to findings of studies like Why Nations Fail, creative destruction is at the core of finding one after another growth wave to propel economies to high-income status. Hence, as less developed countries did not patronise startups, they failed to sustain growth over centuries. Instead, they are caught in an inescapable growth trap due to the wrong move to scale up labour and natural resource extraction-based short-run growth through foreign borrowing.

Although startup has recently become a phenomenon in less developed countries, it has a long history. Since the Stone Age, the human race has been developing products and businesses out of them by pursuing ideas. However, they were not scalable till the 18th century. Notable, Edison's endeavour of pursuing systematic R&D in scaling up light bulb and power generation led to a new startup era-growing from a humble beginning into a mega-corporation through a flow of ideas. In addition to creativity, we need emerging technology cores amenable to scalability through a flow of ideas. Interestingly, despite the possibility of scaling up ideas around these technology cores into a highly profitable business through unleashing creative destruction, they emerge in primitive form. Hence, invariably, startups begin the journey at a loss. Therefore, turning this loss into profit is a critical issue.

To draw a lesson, let's look into a few examples. Uber emerged to offer an alternative to car ownership. Although smartphone app-based applications provide convenience and more innovative route planning, they fell short of unleashing a creative destruction wave. The underlying cause has been a lack of flow of ideas, failing to removing human drivers with sensors and software. Consequentially, despite the burning of huge investors' fund, its implication on wealth creation is minimal. On the other hand, despite the loss-making beginning of e-book delivery, Amazon's e-book idea has become a highly profitable business due to a creative wave of destruction. Its success in the continued flow of ideas has turned physical books into digital content and instantly delivers them over the internet.   

Until 2010, startup was not a well-known practice in less developed countries. However, the fusion of mobile internet, smartphone, and cloud platforms formed an emerging technology core to pursue ideas of digitisation of services and physical goods. Hence, money and foreign ideas started pouring in to fuel startups in less developed countries. Startups imitating ideas of ride-sharing, e-commerce, food delivery, and financial services began mushrooming. However, despite the latent potential, all those digitisation ideas started the journey in embryonic form, resulting in loss-making revenue. Ironically, unlike in the past, in making them better and less costly through a flow of ideas, startups pursuing digitisation have focused on grabbing market share through subsidies. Hence, many startup ideas like e-commerce, food delivery, and ridesharing are yet to grow as sources of new wealth. Consequently, upon receiving as much as $1 billion in funding, except in fund transfers through mobile networks, startups in a less developed country could not offer noticeably better alternatives, let alone crafting a sustained growth path to reach high-income status.

For the increasing closure of startups and growing barriers faced in scaling up, the steady drying up of funding is being blamed. But if additional funding does not reduce loss and show signs of profitability, is it not natural that investors will lose hope and cease funding? Many other factors have been cited, such as weak policy support, lack of customer loyalty, and infrastructure. Unfortunately, the lack of innovations in creating a flow of ideas for improving the quality and reducing the cost for turning humble loss-making into a profitable creative wave of destruction is hardly referred to. In retrospect, due to wealth creation capacity from a flow of ideas, advanced countries leveraged startups to reach a high-income status. Unfortunately, this fundamental reality is missing in startups in most less-developed countries. Notably, subsidies to scale up imitated ideas or great ideas by integrating imported technologies do not create much new wealth. Unless startups in less developed countries embark on a journey to create a flow of ideas for fueling the growth of reinvention waves out of technology possibilities, a sustained growth path for reaching high-income status will never be a reality.

Md. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation and policy.
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