It’s a Tough Time to be a Startup

By: Dana Craig

In 1932, Franklin Delano Roosevelt gave a speech dissecting the economic state of America. He declared that, “Area after area has been preempted altogether by the great corporations [and now] the small man starts under a handicap.” Roosevelt went on to predict with eerie accuracy a time in our history when most of the market would be monopolized by just a handful of massive corporations that could push smaller competitors aside, thanks to their wealth of resources. In his speech, Roosevelt predicted the fate of small businesses in the United States. What happens, though, when giant American businesses start cajoling their way into international markets? An Indian startup called Flipkart ended up answering this question directly when it went head to head with Amazon over the control of India’s online market. Flipkart’s story helps to reveal exactly how giant companies like Amazon flex their financial muscle when facing startup competition. 

Flipkart began as a book delivery service in 2007 under the direction of Sachin Bansal and Binny Bansal. Despite the site’s seemingly humble beginnings, both entrepreneurs had their eyes on a much bigger goal: dominating India’s growing online consumer market. In just seven short years, Flipkart became “the first Indian internet retailer to register $1.9 billion in gross merchandise value.” By 2016 Flipkart had over 100 million registered customers, and its two founders were included in TIME Magazine’s list of the world’s 100 most influential people. All told, the company grew quickly, and this rapid growth brought Flipkart into Amazon’s path.

At the same time that Sanchin Bansal and Binny Bansal were shaping their business to become India’s preferred online retailer, Jeff Bezos had his eye on India. From a business perspective, India’s market is notably attractive because of its rapidly growing user base. As more and more of the country’s population gains access to the internet and buys smartphones, millions more consumers can become online shoppers. Realizing the long-term value of this consumer market, Bezos was ready to spend up to $2 billion ensuring that Amazon would beat out any competitors. 

Flipkart became Amazon’s main rival in the fight for India’s online sales. Suddenly, a company that had fought so hard to build up user support in its home country was being heckled by a much larger foreign competitor. The fight that ensued featured brutal price-cutting battles where each retailer tried to tempt customers with the best deals and the largest diversity of products. Amazon had the upper hand in both of these areas due to its wealth of resources. Not only could the company better bear the costs of selling with a smaller return margin, it was also better able to tempt new producers into partnering with them and selling on amazon.com.

Flipkart’s biggest advantage in this competition was its knowledge of the local market, but that knowledge ultimately couldn’t stand up to Amazon’s superior resources. After a valiant fight, Flipkart was purchased by Walmart in May of 2018, a sale that Flipkart had to agree to in order to prevent bankruptcy. In his statement on the deal, CEO Dug Macmillan called the acquisition a positive one because “India is one of the most attractive retail markets in the world, given its size and growth rate.” Walmart’s purchase of Flipkart gave another American business giant direct access to this market, while India’s former prodigy Flipkart was swallowed in the process.

What happened to Flipkart speaks to a larger global trend of American business pushing its way into foreign markets. No matter the level of success that Flipkart could’ve reached in India, it was up against a company that has become a global powerhouse. Amazon’s pre-existing business models and tech resources allow the company to infiltrate and dominate new markets rather than building infrastructure from the ground up. From years of practice and deep dives into mountains of data, Amazon knows which strategies work and, as a result, spends much less time in the trial and error process once it breaks into a new market.

Startups have none of these benefits, and in countries like India that are just now coming into the age of e-commerce, startups can’t even examine the strategies of other successful companies in the local market. The Harvard Business Review dove into the predatory practices of giant corporations and outlined how they’re able to take down new companies by either buying up competitors or copying their popular products and services. When faced with these challenges, it’s no wonder why many startups fail to last for long.

On an international level, big businesses often use semi-successful startups to gain a foothold in a new market. Amazon did this when it purchased an e-commerce retailer called Souq in 2017, allowing Amazon to expand into the Middle East for the first time. In other cases, American tech giants acquire smaller international companies in order to use their technology. In 2019, Google’s parent company Alphabet acquired Alooma, an Israeli company focused on streamlining and connecting cloud data. As part of the merger agreement, Alooma will no longer provide new customers with the ability to migrate cloud data to any of Alphabet’s competitors. 

Through these acquisitions, giant American corporations like Amazon, Alphabet, Facebook, Apple, and Microsoft can dominate markets on a global scale. In his analysis of the U.S. economy, FDR was worried that “all American industry [would be] controlled by a dozen corporations, and run by perhaps a hundred men.” Now, through the practices of big businesses, we’re facing the reality that most global industry falls into the hands of a small group of massive corporations. With these companies persistently trying to break into the markets of other nations, startups around the world are finding it harder and harder to gain a foothold.

Many nations have created commissions that attempt to protect their local markets from the advances of these big corporations. The Competition Commission of India presents its purpose as follows:

“Competition is the best means of ensuring that the ‘Common Man’ or ‘Aam Aadmi’ has access to the broadest range of goods and services at the most competitive prices. […] Our goal is to create and sustain fair competition in the economy that will provide a ‘level playing field’ to the producers and make the markets work for the welfare of the consumers.”

Meeting this goal to increase competition involves both supporting startups as well as preventing takeovers by a single entity. The commission regulates acquisitions, the practice of one large company buying a smaller one, and it also has specific policies that reward Indian businesses while setting up more barriers for foreign competitors. In the case of Flipkart’s struggle with Amazon, some of these regulations were in place, but Amazon had the resources to meet all extra requirements without issue. When faced with big companies that have the power and resources to work through political barriers and access semi-protected markets, nations struggle to keep foreign business away and internal competition alive.

The domination of foreign markets by a few giant American companies ultimately creates a type of economic neocolonialism. An imbalance of international relations starts to form as the United States is effectively able to use its economic leverage to build influence. Rather than allowing developing nations the time and space to construct their own economic infrastructure, these businesses are pushing in and stifling local growth. Because economic activity forms the bedrock of much of a society’s day-to-day life, these practices ultimately bring other nations under some level of control by American business. Many of the markets that are affected by these issues also happen to be developing nations that don’t have access to the same economic and technological developments that the United States does. When American corporations push into these markets and stifle local startups, they are effectively preventing these nations from building this valuable infrastructure and benefiting from competitive economic growth.

Competition in markets breeds creativity, ingenuity, and allows for healthy economic expansion. The practices of a few large corporations that squeeze the life out of startups or buy up all potential rivals interrupt the competitive nature of global markets and place an undue amount of economic power into the hands of a few individuals. Franklin Delano Roosevelt worried about the implications of companies amassing power in 1930s America, but the issue has now moved past the borders of the U.S. and into the realm of global affairs. It’s time that we start to focus on how best to regulate the power of business giants on an international scale.