The Crane-Mongoose Theory of Public Policy

I have several favourite stories from the Panchatantra (which perhaps explains my lack of appreciation of modern children’s fiction). One of them involves a crane and a mongoose. And I think it is a good lesson on when and where to call for regulation, and government or legal intervention.

So the story goes like this. A snake lives at the bottom of the tree where a crane has built its nest. Each time the crane lays eggs, the snake slithers up the tree and devours them. And the crane doesn’t know what to do. Ultimately it receives some “brilliant advice”.

There is a mongoose living somewhere nearby, and the crane lays out a Hansel-and-Gretel like path of fish from the mongoose’s house to the snake’s house. The mongoose duly follows the trail of fish and finishes off the snake. The next day, the mongoose is hungry again, and it climbs up the tree and devours the crane’s eggs.

It is common political discourse nowadays to call for the government’s or court’s intervention to solve what seems to be private problems. The governments and courts are of course happy to oblige – any new source for intervention and rent-seeking are good news for the people involved. And then you get a solution that temporarily solves the problem (slaughtering the snake). And then in the long term, what you get is a bigger problem (mongoose eating the crane’s eggs). The only difference is that in real life it is not just the crane that gets negatively affected – the regulations hurt everyone.

The examples that come to my mind at this point in time are all “local”. Some residents in Indiranagar in Bangalore weren’t happy about the noise from nearby pubs. They asked the government to “do something”. And the government “did something” – it banned the playing of live music in restaurants, killing off what was then a budding industry in Bangalore.

Some other residents somewhere else in Bangalore were unhappy that their neighbours had dogs that barked. They asked the government to do something. The government did something – coming up with an elaborate document to regulate dogs that people can own.

And there are more involved (and dangerous) examples of this as well.

Don’t be like the crane.

Why VCs continue to fund me-too startups

In a previous post, I had written about how a large number of startups in India are “me-too” companies, and that a sector, once it becomes hot, gets overcrowded. I had also expressed incredulity at the fact that Venture Capitalists continue to fund such “me-too” startups despite knowing that they are copies of companies that exist.

Thinking about it, however, there is one reason that makes the decisions by VCs to fund me-too startups worthwhile – mergers and acquisitions. And this hypothesis is based on M&A activity in the “hyperlocal delivery” (one of those “hot” buzzphrases) space.

Nowadays, due to activity in the sector, the hyperlocal delivery sector has become the equivalent of from the turn of the millennium. At a conversation a month ago, for example, a bunch of us weren’t able to fathom how something like Swiggy is valued at what it is, given its decidedly low-tech business of taking packed food from restaurants and delivering it to customers. A couple of months before that, TinyOwl, which is in a very similar business, had raised similar money.

But then two events in the recent (and maybe not-so-recent) past have indicated why VCs continue to invest (and heavily ) in such sectors. Firstly, in February, Foodpanda acquired the Indian operations of Justeat. Both companies are in the business of delivering packed foods from restaurants to people’s homes. And last week, grocery retailer BigBasket acquired Delyver, yet another company in the business of transporting packed food from restaurants to homes.

There is this Panchatantra story about a Jackal and a dead elephant. Basically a jackal comes across a dead elephant, and wants to eat it. But for this, he has to fight off other competitors, and also get the elephant’s skin torn in the process. The story involves how he uses different strategies to outwit different animals. Here is a youtube video, not very well made, of this story:

This is the cover of the  Amar Chitra Katha edition where I first came across this story.

And this link has a good summary of the story, all you need to know. Exactly like how it’s in the Amar Chitra Katha story.

The moral I derive from this story in this context is that there are different ways to deal with opponents/competitors. Some opponents you just fight off and finish. Others you learn to coexist with. Yet other you simply “swallow” or acquire. Each of them has its own set of payoffs.

Based on the deals described above, what we notice in the “transport-of-packed-food-from-restaurant-to-homes” business is that companies are preferring to swallow each other (and coexisting with some others) rather than fighting. And when one company acquires another, investors in the target company get a “soft landing”, and don’t lose all of their investment (though it is well possible that the acquisition happens at a valuation lower than that when the investors invested, but ratchets might take care of that).

Apart from investors not losing too much, the advantage of acquisitions is that existing infrastructure of an erstwhile competitor can be leveraged. And when companies are in growth mode and profit and cash are not as important as growth, an acquisition works really well in generating significant inorganic growth. It is a win-win for multiple reasons.

The fact that mergers are the preferred way of getting rid of competition in the startup world puts a cap on the losses an investor might have to bear on an investment (and there are ratchets in any case). And since the downside is now limited, the risk of investing in a me-too startup is significantly lower. In other words, investors invest in a me-too startup since they believe that in the near-worst case it will get acquired rather than shut down. And as a further consequence, there is more incentive for entrepreneurs to set up me-too startups (assuming they can get funded) rather than venturing into virgin territory.