In the last few years, the huge influx of investor funds encouraged nearly everyone with entrepreneurial aspirations to give wings to their dreams. As a result, the startup ecosystem in India was thriving. But with the passage of time, while many startup unicorns have been born, at the same time, the failure rate of startups has also been fairly high.
Reports by analytics firm Tracxn suggest that as many as 212 startups shut shop in 2016. Notably, the list included several renowned and funded startups as well. Even now, many unicorns, once perceived as ‘rabbits’ in the rat race, are in the dock, owing to sub-par performance and lower valuations. This compelled investors to tighten their purse strings and get more stringent in their screening process, when considering startups for funding.
Amongst the key concerns, of course, was the fact that while most startups were high on cash burn, and therefore, successful in terms of customer acquisition, there was no clear indication in terms of when these startups would turn profitable and start yielding returns from them.
In that sense, they had almost become like black-holes that were sucking other people’s money (OPM) and not creating any real value that could make them sustainable in the long run. So, in their quest to scale up fast, they were putting their own future at stake!
Rather than doing them any good, OPM actually ended up making them dependent on others to keep the business running rather than focusing on becoming self sustainable. While founders were busy celebrating round-after-round of getting funded, little did they realize that while they were scaling up faster than they had probably imagined, it was at the cost of building a strong foundation for the business that was crucial for them to stand the test of time.
For instance, amongst the many dreams that came crashing down are established names like Snapdeal, Peppertap, Tiny Owl and Stayzilla that were once rabbits leading the race, and therefore, have left the startup ecosystem almost in a state of shock and disbelief.
Most of these startups had raised funding from investors, but with funds drying up of late, they were unable to keep the momentum going, which put them on the backfoot, while even forcing some of them to shut down operations.
With dwindling valuations and drying up of funding lately in startup ecosystem, such news was inevitable. Nevertheless, there are some valuable lessons that startups can learn from the these cases:
- Better off being a cockroach startup or a turtle: Most of these startups were sufficiently funded and had a good marked lead. But in the course of scaling up and making a mark, their cash outflow outstripped the inflow, thus hampering their operations.
- Had they adopted a cockroach way of doing business, things might not have looked so bad. Cockroach startups may not become the darlings of the media and might not be noticed as a contender for the top spot but they will be around longer and in a sounder position than their flashier contemporaries.
- Startups should adopt the frugal, no fuss approach of cockroach startups, keeping their spending low and scaling up only once the business become self sustainable.
- They are sensible enough to focus on their business model and revenue stream. While adopting this approach might make others view you as a laggard or a ‘turtle’ in the race, the fact remains that it’ll actually pay off in the long run, since although you’ll be treading ahead cautiously, you’ll be focussing on the right aspects to build a business that can withstand the test of time.
- Responsibly spend investors money : Indian startups were fortunate to have attracted a good amount of funding in the last couple of years. But, the current investor caution and tightening of purse strings is largely due to misuse of other people’s money (OPM) by quite a few of them.
- Spending OPM to gain marketshare, launch expensive campaigns, and costly acquisition sprees with total disregard to unit economics has spelled doom for quite a few startups that are now faced with a drought for new funds. For instance, what went wrong so fast for Stayzilla will gradually emerge, but some events indicate they were caught napping on their situation or were just hoping for miracles.
- As per Bluebot Digital, Stayzillas digital provider, they were signed on only a few months before their winding down decision and were blindsided by the “shocking” decision. The Jigsaw Advertising owner has, on the other hand, publicly accused them of misappropriating funds for themselves.
- Pepper tap, a leading n-commerce player until last year, too shut shop almost overnight last year, when they ran out of funds to sustain the venture. Clearly, it is time for startups to reverse the trend of lavish spending and hyper expansion and treat investor’s money as their own.
- Know your financial and legal responsibilities: The husband-wife team of Stayzilla had launched a dream startup, and a successful launch it was.
- However, they failed miserably in successfully managing their winding down. Its advertising agency was able to get away by dragging the founder to jail for a month for a civil liability of a much smaller pending due than what was originally owed. We can only hope that other vendors with pending dues do not join the chorus, since there is still no clear cut plan from them on how the liabilities are going to be cleared.
- Running a startup is not just about a great product, technology or service. The founders and staff should lay equal emphasis on acquainting themselves with various compliances, contracts, taxes and other financial and legal responsibilities that businesses are accountable for.
- These obligations have to be fulfilled and any laxity can have negative repercussions in the long run, given an environment which can be manipulated by people in a position of power.
Conclusion:
The fact that investors have become more cautious about investing in startups could actually turn out to be a blessing in disguise for the startup ecosystem in the country. It will compel them to adopt a slow and steady and a more frugal approach and introspect their every move to build a solid foundation for the business and focus on profitability first as a means to become self-sustainable.
If the course correction is not undertaken now, many more startups like Snapdeal etc. that were once ‘rabbits’ will end up losing ground or even bowing out.
Not to forget, while the journey may be more slow and steady for turtles, they will stand to gain in the long run once they are self-sustainable and ready to scale up, since then they will be in a better position to negotiate terms with investors and create more value for the startup and other stakeholders.
To conclude, here’s the golden rule all entrepreneurs must remember, “A winner is not someone who is ahead of you. It’s the one who reaches the finish line first.”