A friend was down from Silicon Valley a couple of months ago. Works for a large software outfit, and is currently mulling whether to join a software start-up. Conversation naturally veered to chances that it would fail; after all, even in their heyday (late nineties), 18 out of 20 start-ups went belly-up. Of the two still up and running, one managed to sell out to some larger company (so employees of smaller company got stock in the larger company), and one managed to go public. In these two cases, everyone could get stock options that were somewhat meaningful (somewhat meaningful because in both cases, the stocks employees own obviously have a lock-in period, and the value of the stocks can halve in a few days if you fall in the cusp of some big change from one buzzword to another: B2C to B2B to P2P to R2R or html to vrml to xml…To return to the conversation, my friend said: "That’s OK, it doesn’t matter too much if the company shuts down. I mean, of course, it does matter, it’s a wrenching experience, but then you move on. Part of the game and all that."

Driving back home a few hours later, as I thought about the conversation, a realisation struck me with epiphanic force. Forget the dotcom busts, the bloodbaths of April when boo.com and drkoop.com and valueamerica.com shut down, and market capitalisations of dozens of companies sank to 15 per cent of what they were in March. Forget the hiccups and corrections waiting to happen; they are a historical necessity.

»A core value embedded in the Silicon Valley system is that to change the world, you have to take high risks.«

One of the core values embedded deep in the Silicon Valley system is that to change the world, you have to take high risks. If you don’t allow entrepreneurial talent to pursue wild ideas, you will not get dramatic progress. If the system does not allow that entrepreneur to pursue his dream and fail -- and yet maintain his dignity -- you won’t generate great ideas too long. The system backs 10 ideas, knowing fully well that statistically, nine will collapse, but the one that survives will be a truly robust scalable breakthrough entity. When you are in the business of creating the future, you know that trial and error will be a crucial strategy. Above all, you must have the faith that the entrepreneur will learn from his mistakes and not repeat them. For, if you penalise a person because his company went bankrupt, you will scare a host of other young people from taking the entrepreneurial plunge. And bid goodbye to progress.

This is what the Indian system has assiduously, for 53 years now, refused to give its talented people: the freedom to fail in pursuit of a dream. Today, it may seem absurd that a firm had to take permission from the government to raise its production capacity of cars by 20 per cent, but that was exactly the situation for 45 years! If Mr Birla is an adult businessman, he can surely decide for himself whether the market is ready for more Ambassadors. If he is right, let him make his profits; if he is wrong, let him take the losses. In India, we do not allow a bankrupt moribund company to close down, we point it to the BIFR and ponder over its future for years, while employees starve and the owner keeps making merry. Many Indian businessmen happily turn their companies sick so they don’t have to repay their bank loans, so they can get cheaper loans, which they can blow up on themselves, or route the money to other profitable businesses. We prefer firms in years of coma to swift euthanasia, so people can move and do something better than stare at the living corpse.

Even today, if two people set up a private limited company on a whim, and then decide not to go through with their plan after all, they have to pay a chartered accountant Rs 5,000 every year forever to file the company’s zero tax returns. Why? Because they can’t close the bloody company down! Oh yes, the Indian system does give some people the freedom to fail: big businessmen who raise public money and run their companies to the ground because they have siphoned all the money out. And then reappear a few months later, and have our financial institutions bend over backwards to give them larger and larger loans for their next big failure (which is actually a personal triumph for his bank balance). But the small entrepreneur, who passionately wants to set up something audacious, something different, finds it extremely difficult to raise seed capital, and if his firm fails -- even for reasons totally beyond his control -- that’s the end of his entrepreneurial career.

Things were changing here with the arrival of VC funds, but now Sebi intends to regulate the whole scene. I am not sure whether the aim is to protect wide-eyed entrepreneurs from rapacious VCs, or gullible VCs from crooked entrepreneurs, but it all seems quite unnecessary to me. Venture capital, by definition, is high-risk capital, and the VC and the people who are funding him know that better than anyone else. The entrepreneur who goes to a VC is also someone whose idea is riskier than normal. No one goes to a VC to fund a market research agency.

These guys are all adults, they know the risk they run, they know what they are getting into. Give them the freedom to fail. And do not trash them if they do screw up. Makes not just economic sense; more than that, profound moral sense. Only then can we hope to change the world. n