Indian Startup Founders Need to Have a Revenue-First Mindset
Most of them have a higher burn rate but less revenue
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The start-up ecosystem in India is constantly evolving, or should we say, innovating? With the government too pushing for entrepreneurship with not just policies but also bringing international events like Global Entrepreneurship Summit to the country that brings along with it entrepreneurs and investors from across the world, it's creating the right environment for start-ups.
However, with the growing start-up enthusiasm, every day a new start-up idea is pursued by an entrepreneur thus, also increasing the failure rate. A recent report released by NASSCOM even stated that 55 per cent of failed start-ups had even received funding.
A major reason why start-ups often fail is that they refuse to build revenue first. They are so caught up in expanding the operation side of things or building more avenues for growth, they often don't mind the cash burn that comes along with it.
Don't Just Back on Funding
For most start-ups, as soon as the idea and team is in place, the next worry is about funding. Moving from friends and family, entrepreneurs turn to investors, whipping up valuation reports and projections that will ensure a funding for future growth. And once they do secure the funding, they swiftly look at acquiring customers and building partnerships or marketing.
So, most start-ups have less revenue yet a higher burn rate. And experts say that they can afford to be in this situation because they are funded by external investors who pump in money during an early stage. "These start-ups are funding driven organizations instead of being revenue positive. Their valuation is governed by metrics where it's accepted even if they are not profitable in the first few years as long as the customer acquisition is encouraging enough," said Vikrant Varshney, Managing Partner, SucSEED Angel Network.
Varshney also added that start-ups draw their benchmark against large companies which continue to have increasing revenues along with increasing capital and operational expenditure. This leads to the same or reduced operating margin. With bigger rounds of funding, there are bigger equity stakes involved which often leads to non-core activities.
Focus on the Business; the Rest Will Follow
The core point for a start-up should be to build revenue and increase profitability. While investments are an important part of their growth, their sole objective for growth cannot rely on the same. Revenue cannot be a part of the things a start-up does to garner more investments or impress investors, believes Rama Iyer, Sr VP, Strategic alliances and partnership, T-Hub.
"Dealing with investors and going through various rounds of due diligence is both painful and time consuming without giving a guarantee that you'll be able to raise the round," he said and added, "It's best to spend all your time and energy on building revenue."
Break Even Point Cannot be a Far-fetched Dream
For most Indian start-ups the break-even point, where their revenue matches up to the money pumped in if not surpassing it, is a distant thought. They all want to accomplish the difficult task but it takes them years. Experts believe that the focus should be on that now. Varshney believes that in the start-up world, the break-even point has had very limited significance so far. "In conventional businesses, companies focus on defining their break-even point withing two-three years and that's part of the project plan at an early stage," he said. Many investors are now preferring start-ups which have plans of breaking even soon and are okay with having lower returns on their investment instead of investing in riskier companies.
Agreeing with him, Sanjay Enishetty, founder and CEO of 50K ventures, said that the effect was seen most in B2C start-ups. Most of their time and energy is spent on customer acquisition, building traction and that's the reason why many start-ups died. There are also start-ups that have emerged successful but those are the exceptions, believes Enishetty.
Marketing Can't Have it All
A lot of the cash burn that an entrepreneur faces is also tagged along with the rising costs of customer acquisition and plans to expand operations too soon. While customer acquisition too needs a well thought out marketing strategy, one cannot put all of their money on just getting new customers on board. "Exorbitant marketing costs in conventional methods have moved to digital now, but even then the cost for advertisements is increasing," said Varshney.
Being an investor, Enishetty often advises start-ups that they cannot take a chance with revenue and if they see none in the first two quarters, a pivot should be considered. "There's a huge difference between having 1,000 users with no revenue and having 100 users paying to use your product. Entrepreneurs need to recognise this difference," he said.