Startups are mainstream now. They weren’t so two years ago, but things have changed fast as startups dare to address major pain-points for the masses. Unprecedented VC support, strong consumer appetite, and indefatigable media coverage over the past couple of years have steered startups towards the mainstream.
Right from online blogs to newspaper and broadcasting, one can find substantial coverage on startups, their funding, valuation, and most significantly growth numbers. When it comes to growth, startups always talk about lofty milestones and mind boggling growth patterns. While some claim to experience 500 per cent growth on a weekly, monthly or quarterly basis, e-commerce and hyperlocal startups discovered GMV and GTV metrics to grab the limelight.
Is exaggeration a new phenomenon adopted by startups?
While talking to many startups in similar domain, we observed that majority of them usually quote inflated numbers and this hurts the entire ecosystem (primarily competition in the segment). So, is exaggeration a new phenomenon? Shailesh Vikram Singh of Seedfund points out that exaggeration has been there since the first dot com era.
He says, "This trend is not new and majority of companies in private domain have been in the habit of exaggerating data from the time of dot com days. Earlier it was pageviews, these days its transactions or innovative metrics like GMV or LTV which hide more than what they reveal."
GMV appears to be a highly abused term in the Indian startup ecosystem
One can often see entrepreneurs emphasizing about vanity metrics like GMV, average ticket size, and inflated number of transactions etc. Such vanity metrics have no correlation with the success of a company.
The root of the problem lies in an ecosystem-wide focus on vanity metrics such as GMV or number of installs (in case of app). These are pure user acquisition metrics. GMV does not take into account factors like discounts, couponing, and cash back. In such cases, buyers are effectively getting paid to buy a product, yet GMV reflects just the revenue from the sale (not compensating for the cashback).
Arjun Malhotra, Co-Founder of Investopad, states,“Growth stage companies understand how useless these metrics are on their own so exploiting that knowledge is simply a pissing contest -- my vanity metric being bigger than yours makes me sounds more successful from the outside but both of us know we might as well be making up the numbers.”
The bigger issue of inflating relevant numbers is simply an extrapolation of exploiting irrelevant vanity metrics. Startups enter into this practice because it's a grey line between inflating (vanity) metrics that look like but are not relevant to the business, with real metrics that tell that state of the business.
Vanity metrics are great for temporary public chest-thumping
Serial entrepreneur and angel investor Kashyap Deorah believes in the last 18 months everyone has become a cheerleader. Entrepreneurs, investors, and media -- everyone wants to attract attention towards their startup and win the race to big ticket funding from global investors. He stresses, “Vanity metrics are great for public chest-thumping.”
Company founders are entrepreneurs and entrepreneurs are positive people. They are always looking at big/good things happening in their companies and the hope seems to make the future look real. “The expectation appears like reality to them and they start quoting the future projections as if that is the present. This applies to most entrepreneurs and manifests itself in the form of exaggerated numbers,” adds Vivek Bhiani, Lead Partner at Bedrock Venture.
Does exaggeration help attracting VCs?
So the fundamental question is why do startups exaggerate their numbers? Does it help them to grab investors’ attention? Kashyap replies, “Yes, momentum is the primary driver of funding. When investors see a startup's ability to create a perception of being number one, it is a feature, not a bug.”
We at YourStory keep getting press releases in which startups claim new growth numbers and say they’re close to raising VC round and a possible coverage will help them warp it up fast. Such requests corroborate the fact that they try attracting investors. Vivek adds, “Probably sometimes startups do this to get the attention of VCs. However, such promoters would have realized that this does not help as when the VC meetings/discussions happen, they start looking for evidence of numbers and quickly drop the company if it is not able to substantiate the claims.”
Investors are experienced in this phenomenon and are therefore careful in their discussions with promoters. Investors don’t base their decisions on what they hear but on documentary evidence. Therefore, while the projections/exaggerated numbers are seen by investors as an indication what the promoter is experiencing and/or expecting, they get convinced only when they see evidence of these numbers.
Investors love their portfolio companies raising round after round
Good investors look at averages, percentages and ratios more than vanity metrics. It is easy for them to spot. As long as they know the reality, it helps them to see their startup perceived as number one so they can raise more money. “Unfortunately, in the exuberance of our times, investors love to see their startup raise more and more money. And unfortunately, the ecosystem looks at that as the ultimate milestone of success,” says Kashyap.
Why US-based startups don’t do chest-thumping like Indian startups?
When it comes to funding and valuation, Indian startups are likely to get compared with their US peers. However, surprisingly successful startups in the US don’t claim to be number one or a leader. On the contrary, Indian peers often quote such self conferred titles.
Companies in the US advertise why they have the best service and consumers don't care if they are numero uno in business ranking. However, in India, it seems to work. “If you tell the consumer that you are number one, it creates an affinity towards the service. It is a weird phenomenon that I need a behavioral economist to explain to me,” says Kashyap.
There is a high degree of accountability in the US ecosystem. If a competing startup, investor or media company decides to call the bluff, there is a swift legal process that works. “India does not have this system. The only way to compete with the fluff is to make up your own,” he adds.
Any advertisement about being top or number one in the US needs to be defended with far more rigor because of an efficient judicial system. That is not the case in India.
Onus is on media and investors to unravel truth
It is the role of the Press and of investors to ensure this doesn't happen -- and both parties are slipping in a big way. “I have seen many startups send out press releases - and these metrics are not at all verified or even questioned by the Press before publishing them. Similarly, I know first-hand incidents of investors telling startups to inflate the real size of the fundraise to put off competition,” says Arjun.
Exaggeration happens because there is a perception of competition with other startups. It's simple game theory - if I run a startup and you run a directly competing startup, and I hear you're inflating vanity metrics in the Press, then I assume you will also be inflating real metrics to investors. If I want a chance to survive, I will have to lie about the same metrics.
Too much focus by media on funding amount and overall valuation is creating a lot of challenges. There is little understanding of superior terms / LP rights etc. by the media houses. Despite this exaggeration, YourStory believes real entrepreneurs do not get carried away by competition quoting fake numbers and keep a clear focus on building an awesome product.
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