It was a Sunday morning, and I was skimming through InShorts, a content discovery app, to get a quick overview of what is happening elsewhere. Amongst the 60 odd unread stories, I was not surprised to read of two startup shutdowns. Then, later in the day, I heard of another startup shutting operations. This one happened to employ a close friend (obviously he lost his job).
There exists a serious problem here that nobody is talking about, and that is the unique nature of the Indian market which itself is an opportunity to innovate and thrive. Recent graduates from top notch schools in India believe they can clone businesses from other countries and that they will prove to be profitable in their entirety in India as well. Venture capitalists blinded by the founders’ alma mater have been following a hackneyed strategy to provide funding to entrepreneurs who are attempting to clone an idea or business model from USA or China. Their strategy goes something like this for early stage funding:
- 1–2 founders from IIT/IIM fitting the criteria receive 1–2 million dollars.
- 3–5 founders from IIT/IIM fitting the criteria receive 3–5 million dollars.
- 7+ founders from IIT/IIM fitting the criteria and you’re in for a lottery.
In 2015, investors pumped $9 billion into Indian startups, which is 50% of the total amount invested between 2010 and 2015. Most of the investment were made into Mobile or eCommerce Startups that have cloned the startups of the US or see another country.
Investors overlook the fact that Chinese entrepreneurs can afford to clone because their economy is closed, thus providing little or no competition. European entrepreneurs too can effectively clone because the European pattern of consumption is similar to that of US (and the Rocket brothers are exceptional at their job).
Having failed to realise this, entrepreneurs, are squandering their funds on businesses that are completely unviable in the Indian market. It is impossible to imagine how you can fail so fast with so much money. The more people I talk to, the more apparent the problem becomes. This parochial approach to starting a business is what is causing investors to tighten their purse strings, and this is going to wallop the diligent entrepreneur. Given the current uneasiness in the market, this slump in investment is likely to continue for at least a year.
From my various conversations with entrepreneurs, investors and employees of startups, I have gleaned the following three fundamental issues contributing to the downturn.
1. High Customer Acquisition Costs (CAC)
There are startups (not taking names) spending close to 5000 bucks for customer acquisition. This is what FMCGs spend years into existence. The age old strategy of a door to door marketing which the founder has to do is forgotten. As a result, founders are unable to reduce the CAC and end up spending an obscene amount on acquiring one customer who might only sign up without spending much time on the website or make just one transaction. Apart from the 5K spent on luring the customer to the site to conduct a single transaction the company ends up discounting the price of the service or the product to show higher Gross Merchandise Value (GMV). This, in turn, adds to the cost.
2. Media attention
Another issue I find in the startup ecosystem is the media attention startups and founders seek. Some founders forget that PR is a means to an end and NOT THE END itself.
Publicity is only a tool to be used to get the word out. An article in the paper does not amount to increased revenue. It is thus important for founders to be involved in the day to day functions and probably work more than any other employee at least for a couple of years instead of focusing on media presence.
3. Slacking and expensive employees
Often as a startup begins to receive increased funding, the founders become lax, and this results in slacking. Sometimes funds are mismanaged and disbursed as salary hikes or used to recruit expensive talent that may not actually be required. A significant amount of money is also spent on food travel and entertainment for the employees. For God’s sake, it’s still a STARTUP. What’s more important is to realise that a business takes 4–7 years to build and even then, money needs to be spent wisely.
Off the top of my head, here is a list of startups who have raised unnatural amounts as funding and have failed or are close to doing so:
- Peppertap (IIM founders)
- Grofers (IIT founders)
- Housing.com (IIT founders)
- Purple Squirrel (IIT founders)
- Tinyowl (IIT founders)
- Foodpanda (IIM founders)
- Fabfurnish (IIT founders)
- Amber wellness (IIT founders)
This shows one thing and that is, given the poor education system in India with no practical application of what you learn, the university tag doesn’t really matter. What matters are the soft skills, the ability to put pieces together and the hunger to learn.
Most people in this game are hoping to become wildly successful instantaneously without having to put in the hard work. Some entrepreneurs readily accept invitations to talk in events (not a problem if there is a business strategy linked to it) where they harp on about how they faced hardship in raising funds and the difficult time they encountered. If I were an investor, I would never invest in a founder who calls this a difficult time. It is an adventure, a story you are carving and this has to be enjoyed to the fullest. Entrepreneurship is not for the weak minded.
Maybe the time has come to look beyond the IITs and IIMs to find real entrepreneurs who can sense the pulse of the Indian market. The time for a new generation of entrepreneurs who can cause a metamorphosis in the startup ecosystem in India. The time for a revolution.
Disclaimer: The opinions mentioned above are solely of Author. The article was originally published by the author on Medium.