Every “startup” in India wants to be the next “unicorn” (read achieving a billion-dollar valuation). Revenues are negligible for most, profits remain ever elusive, and business models are being tweaked every other day as if in search of a miracle drug to cure self-doubt while hemorrhaging cash! Yet, there are hardly any discussions on the fundamentals of business, as entrepreneurs are focused on valuations while investors are focused on finding an exit.
There’s “big daddy” Amazon with its deep discount business model and own deep pockets. Then there are wannabe Amazons like Flipkart and Snapdeal. All three are losing 1-3 crore rupees a day, but Flipkart is being valued at $15 billion based on its latest $700 million funding round, while Snapdeal is being valued at $7 billion. Moreover, with easy money doing the rounds, the market is increasingly getting flooded with copycats and bad ideas. Every “startup” in India wants to be a Flipkart or an Ola!
Thus, most companies are on ventilators from day one with no visible signs of a recovery. The survival, after all, is dependent on their ability to outlive the cash hemorrhaging. On the surface, the valuation game seems like a grand Ponzi scheme – create a pitch to find a fool, and before the coffers dry up, find a bigger one. The chain continues to expand until you run out of fools. But are VCs fools? Not really! For them, the cost of doing nothing could be even higher.
The Sage of Omaha had once said, “The investor of today doesn’t profit from yesterday’s growth” – which in essence means metrics related to a company’s historical numbers – user growth, traction et al — are nothing but vanity metrics. The hard truth lies in their ability and potential to generate free cash in the future. It is all about sticking to the fundamentals.
If that is the case, how could Facebook pay $19 billion (cash + restricted stock) to buyout Whatsapp when it hardly had any revenues? Even the $1 billion buyout of mobile photo-sharing app Instagram was termed “outrageous” in 2012. Today, it seems Facebook got Instagram damn cheap as Instagram has dwarfed Twitter and even its parent Facebook in brand engagement. We thus should not be worried about the current scenario, right? Wrong.
Valuing pioneers with a technology platform that is hard to replicate is a different game altogether. Whatsapp was changing the social messaging game at that time, and with Facebook’s own messenger proving to be a dud, the mobile messaging service was threatening Facebook’s leadership itself in the social-mobile platform. However, valuation is not a “one-size-fits-all” methodology – what is applicable for pioneers may not be valid for wannabes or copycats.
Thus, behind this glitz of million-dollar fund raising and billion-dollar valuations lurks stories of eventual doom. A visit to the autopsy.io website is a revelation of sorts. Autopsy aggregates stories of failed startups launched with much fanfare. The reasons of failure are quite diverse – from “not being able to find a market” to “not something people wanted” and “cofounder disagreements”.
For example, Housing.com, once darling of the VCs, had raised $100 million from Softbank at a $400 million valuation a year ago, but when its existing investors wanted to sell out in October, they reportedly got sub-$50 million offers. The main problem is the absence of a sustainable and scalable business model!
Confusions about the right model reign supreme even among Indian startup “legends”. For example, Flipkart sold its logistics arm to WS Retail in 2012 only to buy back the division a few days back as it completes its transition to a marketplace model from an inventory based model. Ola, India’s largest cab aggregator, has started buying cabs and lending them to new drivers, as it moves to a part inventory model (to differentiate itself from Uber?). In India, the first to go out of business could be the online grocery stores and food tech startups – the reasons again are largely fundamental – wafer thin margins, inventory and logistics issues, and inability to compete with hyper-local Kiranas.
For now, bubble or no bubble, the party is still on. Look around, you will surely find either a startup entrepreneur or an angel ready to take the plunge. However, the art of attending a party is in knowing when to leave. In the absence of an exit route, there’s need to keep the party going by allowing more and more to hop in. Until then, let the consumers make merry on investors’ money strategically called, “customer acquisition costs” – simply put, a bribe to buy customer loyalty, which is again a myth. Aren’t Unicorns a mythical animal too?