Power Law for Start-Ups in India
Many entrepreneurs have struggled to convince venture capital firms to invest in their start-ups. Perhaps its due to the idea simply not being good enough, but sometimes a rejection can also be due to the power law in which an investment has to be evaluated in terms of its potential to return to the fund in the future. This pattern has been going on for over a decade in India.
People in the area have become enamored with the idea of building tech start-ups due to the relatively recent increase in tech moguls and their stories of their rise to riches. However, venture capitals (VC) hesitate to invest, their reasoning being the power law. Most venture-funded start-ups will fail and the few that do succeed must make up for losses and more. The power law means that small outcomes are most likely and the large outcomes less likely. Since VC firms first set up in India, 0 venture-funded start-ups have provided liquid exits worth over half a billion dollars.
While India has delivered 0 exits, the US has delivered thousands and China hundreds. For Indian venture capital, the power law remains a borrowed belief. The power law has almost become a fundamental belief even though it has not been specifically validated. It is prevalent enough that VC firms stick with it and have drawn in new money, so the “ecosystem evolves to survive” without the need to prove this theory. There was a time where start-ups in India rushed to replicate Chinese models after Chinese IPOS in US markets gained moments, but once that trend died down, India was back to dealing with the power law problem. Author Deorah states that the only way to fix this is for the focus of start-ups to shift from getting more funding to delivering returns.
I found this article extremely interesting as it displayed the struggle for many start-ups, specifically in India, to get on their feet due to an unfounded theory that many believe in. First of all, I did not think of the power law in terms of venture-funded start-ups to be a “borrowed belief” as it seems quite established. However, maybe that is the trouble with it. India has not seen the large outcomes that are expected, but they have hardly even had the chance to gain funding at all. With a shift in focus to how to deliver larger returns, perhaps that will change.
Source: http://www.livemint.com/Opinion/lLtbXZEDPHAz1vdb69GNgN/The-trouble-with-the-power-law.html