Deep discount model of startups cannot be viable in long run, warns Raghuram Rajan

With concerns being raised about cash-burn in burgeoning e-commerce sector, RBI Raghuram Rajan on Monday made it clear that getting revenues through deep discounting is not a viable business model for startups.

"If the only reason you are getting revenues, not profit, is because you are selling based on 50% discount, it can't be viable in the long run," he said.

He was quick to acknowledge that many businesses are in different stages of their life-cycle with some trying to establish the viability.

"All these businesses are trying to establish viability, some are still being financed in a big way," he said, adding that it is natural for some of them not to work which will lead to shutting down the business.

He was speaking after delivering the YB Chavan memorial lecture here at state secretariat.

The remarks come amid dwindling valuations of some successful Indian startups, which are being partly attributed to the high stress on discounting in the business model. Many of the startups depend on capital injections from venture capital funds and some have also closed down.

"I think this (shut down) is a natural process and we should not stand in the way and lament too much," Rajan said, making a strong case for policies which will make it easier for startups to exit so that resources can be used productively.

Given the competitive nature of things, it is also essential to have safety covers including health insurance, unemployment insurance and pensions, he said, adding that such nets can ensure "social peace".

Welcoming that it has become "reputable" for being an entrepreneur, Rajan made a plea for being resilient, saying "the enterprise started by an entrepreneur can fail, the people should not fail".

He said the conditions for starting up are improving by the day on the back of interventions by the government and regulators which have upped the infrastructure and logistics support.

However, there is a lot which needs to be done, he said, flagging skilled talent as a key prerequisite for the country.

There are many other soon to be introduced aspects which will help the startup ecosystem, Rajan said, pointing out to Bankruptcy Code which he expects to be introduced in the current session of the Parliament, and also the introduction of the Small Finance Banks.

He also said that the bankers while dealing with stressed loans with small businesses should also understand that the smaller firms do not have the same mettle to take every case to a court as a big business does.

"I said easy exit (for startups) but it should not be unfair exit. With respect to small firms, creditors often have draconian powers which large firms can limit in courts. Something like Sarfaesi. A large firm has a better way of dealing with it in the court than a small firm has.

"The banker may have much more power over the small firm with Sarfaesi than it has over large firms. Because we want to get the money back from the large firms, we continue to make the power harder. So, we have to be a little careful. Balance it out. The small firm should not be put out of business too fast while large firms stay in business too long simply because the large firm has easier access to good lawyers. 

Rajan said the credit to micro enterprises has gone up to 7.5% of the loans from the earlier 6.5%.

Pointing to the problem of malnutrition which afflicts a big number of Indian children, Rajan said it has a "devastating" impact as it makes kids incapable to taking right decisions when they grow up.

"We need to tackle malnutrition on warfooting," the academic-turned-central banker said, adding that the social sector programmes of the government are essential for entrepreneurship and the Startup India initiative.

He said introduction of the trade receivables system, TReDS, later this year with three entities participating, will also benefit the small enterprises by a big measure.

The central bank governor also welcomed the strides of Dalit entrepreneurs, underlining that none of these successful businessmen hail from reputed business or technology schools.

Making a strong case creating the enabling environment, Rajan said it is not government programmes but a favourable business environment which has helped such entrepreneurs succeed.