Not A Bubble – Only A Raised Bar For Funding
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
The drop in quantum of startup funding, write-down from a few investors of their investments in India, job losses and scaling down of operations by a few start-ups are being cited by industry pundits as important indicators of an ongoing meltdown in the ecosystem.
Nothing could be further from the truth and the gloom-and-doom scenario that is being played out in the public domain is overstated and similar to the euphoria that was the overriding sentiment in India’s startup ecosystem last year. Let’s first examine some of the reasons that led to a run-up in valuations last year and the entire cross-section of investors, getting carried away.
Firstly, we saw the first-time entry of a new category of late stage PE/ hedge funds who wanted to come to the Indian growth-party. Big cheques were being written based on quick decisions and there was a far lower sensitivity to valuations. Secondly, there was FOMO (Fear Of Missing Out) and the bull market fuelled quick and easy funding similar to any other “momentum” play in a rising public market. Thirdly, the massive thrust towards some models in the US created an appetite for similar models in India. For e.g., hyper-local logistics, marketplaces such as a uber of x sector, airbnb of y sector, food tech and so on.
What happened next
The reality check started with slowing economic growth worldwide, especially in China, which affected global sentiment adversely. Coupled with this were other factors such as the cascading valuation of IPO tech stocks that went public.
Investor attention moved to fundamental metrics such as path to profitability, unit economics, defensibility of the basic business model etc. marking a distinct difference from the scenario in 2014/15 where everyone around were singularly focussed on growth, GMV, market share etc. Yes, there have been mark-downs in valuation, but there have also been markups in the recent weeks – a reflection of a market that is course correcting after the frenzy of 2015 during which people were getting series A funding via Skype calls and video conferencing with potential investors! K Ganesh, Partner, GrowthStory
The new normal
Entrepreneurs that are just starting up will have to focus on sustainable business as other models are unlikely to get any funding in the near term. Focus must be on revenue, monetization, path-to-profitability and genuine business metrics. There is enough seed, pre-series A and series A funding available for these models. But the bar has been moved higher and funding will take more time to close. New start-ups should look at large pain points and try and solve large problems, and think disruption. Indians are willing to pay for solutions to a big problem area. Once you start, always ensure you have 18 to 24 months runway. The goal is to always ensure sustenance of the business.
For businesses that have raised capital during the earlier period, I will say “Well done!” Lock up your capital, throw away the key and work on core metrics and on building a real business. Businesses that have not yet raised money need to go back to the drawing board, look at a business model that will be able to raise capital, settle for lower valuation, lower expectations on the quantum of funds to be raised.
One has to accept the new reality and benchmarking the funding and valuations to previous rounds or other companies is unproductive. Just get on with the business instead of wasting time and effort in fruitless conversation.
There is no turning back of the clock or the bursting of any bubble. We have seen large, irreversible changes in consumer behaviour thanks to start-ups and a wholesale adoption of new products and services. While many of these have been by discounts in the earlier phase, the reality is that regardless of the drivers, a strong desire has been in consumers for new products and services. The transactions consumers have undertaken are real, the number of orders that have gone online are real, the number of rides through uber and ola are real, home visits undertaken in a month by clinicians from Portea are real. All of these reflect the reality of the situation.
This article first appeared in the Indian edition of Entrepreneur magazine (September 2016 Issue).