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How is 2017 the Year of Inevitable Correction for the Indian Startup Industry

How is 2017 the Year of Inevitable Correction for the Indian Startup Industry
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

India in the recent past has witnessed an explosive growth of startups fueled by large business opportunities and strong VC funding. For some of the late-stage startups, it is time to deliver on the growth and profit promises. Consequences of not delivering are disastrous and in this environment the Snapdeal news should not have come as a surprise to many. The common thread connecting a lot of Indian Startups is year-on- year mounting losses despite them being heavily funded!

Investors have finally begun to take notice. Days of easy money and eye popping valuations are behind us. Seasoned leaders and investors are aware of the economic cycle that has been witnessed many times in their careers; from dot-com bubble to the telecom bubble, housing bubble and oil bubble. These bubbles fed investment frenzy without due diligence and extraordinary valuation. When things get so much out of alignment the severe correction may seem like a collapse. It’s prudent to point out that when the bubble bursts it wipes out companies and entrepreneurs who are not focused on building a sustainable enterprise and help consolidate the industry leaving healthy players with favorable future.

With each bubble burst, the free flow of investor money dried out. Although a lot of companies folded during those tough times, businesses with the right strategy in place and who were self-sustainable during the initial phase of the launch have not only been sucessful but also gained valuable lessons on using investor money wisely. These companies were diligent and smart about investing and growing which means salaries and marketing budgets were aligned and derived from profits. Growth projections were based on realistic assumptions rather than phantom models designed to raise the “final” round. This is a broad generalization but if you dig deeper you will see many parallels between .com era bubbles burst and current economic state of Indian startups. Moreover, reduced competition and winner takes all characteristic of digital economy propelled the survivors faster than ever before.

It will make everyone better

But not everything is doom and gloom. It’s time to go back to basics. For example, although we started Connect2India in an economic climate when money was flowing freely we focused on creating a sustainable business model. We were Infact approached by a tier 1 VC just a couple of months after launching our platform but, had to keep them on hold as we were keen to prove our business model and profitability before seeking external funding. Our laser sharp focus is to enable Indian MSMEs to go global by making them globally visible, globally aware and globally competitive. We understood the value that would be generated if we helped create viable business opportunities for MSMEs. This is a key factor that helped us make profits. The customer success is paramount for us and it’s the paying happy customers that allow us to invest smartly in growth and technology where it makes sense. Today our customers come from the bustling metros to small towns. Our success is derived from our customer’s success and that’s our marketing engine.

Separating reality from illusion:

A lot of companies postponed profitability in favor of growth. But they disregard the basic tenants and lose sight of the core objectives. One must remember that unless the unit economies work you can’t scale up. Scaling up a loss-making business makes situation far worse than it already is. The story of AOL is still fresh in our minds. The company was so focused on growth that at one point, half of the US households had their internet access through AOL. But the growth plans and projections fell flat when it failed to deliver what it promised and tried to cheat the system. The $226 billion market capitalization was reduced to $5.7 billion by the time of demerger making it “the biggest mistake in corporate history”.  

Investors are not the most patient stakeholders. Hence, they are bound to dig into lofty claims and questionable business practices. Once they do that, the party is over for everyone on board. It is our belief that VC funds are a catalyst to scale and are needed when you have proven the business model and it’s time to scale. It’s by no means a solution to fix and scale a broken business model.

Catalyst is technology and social changes:

The demonetization drive in last couple of months has led to a large of number of India businesses making a shift towards ‘going digital’ and subsequently going global and in this scenario , it becomes all the more so important for businesses to differentiate itself among its competitors.

Our respective experiences, unique culture equipped us to answer the confluence of social, political and technology changes. We saw that as Indian MSMEs are going online they want to harness the power of digital connectivity. The new medium is not only ubiquitous, but tested and proven in western world. Low cost and high efficiency of global reach through an integrated technology platform will allow MSMEs to surpass language, geographical and time zone boundaries. The Connect2India initiative revolutionizes the way companies invest to get on with their global strategy and growth.

There are startups which are bootstrapped but still doing well. We ourselves are operationally profitable within a year of our platform launch to Indian MSMEs without relying on investor money. And since we have the autonomy to grow organically we don’t need to resort to unsustainable models or practices to artificially bump up the growth rate. Profitability is core of any successful enterprise.

Pink slips have been flying around at lot of well-funded startups. As easy investor money dries out, the startups that survive and thrive in long term, will be built on strong foundation of culture, teams, market fit, competitive differentiation and creating value for its customers.

Those who don't know history are destined to repeat it. -Edmund Burke

 

 

(The article is jointly written by Prashant Jain  - Chief Marketing Advisor, Connect2India and Pawan Gupta – Founder, Connect2India)

 

 
Edition: June 2017

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