Entrepreneurs’ survival guide for the nuclear winter - investor's perspective
Tuesday April 19, 2016,
4 min Read
It would seem crazy to jump into entrepreneurship just when the entire startup world seems to be crumbling and words like “down round” are entering popular vocabulary. But that’s exactly what I did. After co-founding the venture capital fund AngelPrime (now Prime Venture Partners) five years ago, I quit it late last year to start my own venture.
Why did I? A part of it is my deep conviction on the idea that I’m working on, which I believe will change many lives in India. Having seen many, many bubbles and their bursts, it’s also my deep conviction that the best companies are formed during the downturns.
Here is the life cycle of a bubble:
- Some massive rapid tech-driven consumer behaviour change (US: PCs in early 90s, Internet in late 90s; India: Smartphones in the last three years)
- Hungry capital starts flowing in
- Smart entrepreneurs taking advantage of both the consumers and the hungry investors
- Everybody wants to be the smart entrepreneur. All the geeks suddenly look cool
- Better ideas and lower hanging fruit get quickly gobbled up, but the momentum of capital and new entrepreneurs is unstoppable
- Things go over the top (San Francisco circa 1999 or Bangalore circa March 2015) – crazy parties, unbelievable salaries, mass migration to the money centres like Bengaluru, Gurgaon, Powai
- Smartest of the wallets get shut quickly. Memo doesn’t go out fast enough to everyone and the party still continues, but cluster of people in parties start asking questions. (When I started writing the article last December, we were in this phase.
- Air starts going out fast. Down rounds and layoffs start happening (We are in this phase now).
- Media, which was joyously glorifying entrepreneurs, now gleefully report their misery. General public LOVES this schadenfreude – it was never thrilling to watch 24-year-olds give big lectures in the first place
- Venture Capitalists who encouraged unbridled spending three months ago, now, “want to see a path to profitability”.
- Flight to safety:“Consolidations”, which is a fancy investor buzzword for selling the dogs in your portfolio for whatever you can get, starts happening.
- The smarter startup employees start asking questions about company finances and “negative gross margins”. Quietly update their LinkedIn profiles.
- Entrepreneurs wake up with night sweat.
- Panic and over-correction.
- A year or two passes and sanity returns.
- Back to Step 1.
Here is my advice to fellow entrepreneurs; this is the time to be very hard nosed. Forget about what everyone is telling you. This is yours and yours alone to figure out.
- Keep a very close track of the money in the bank and your expenditure.
- Grab every bit of money you can get your hands on. Don’t worry about valuations, optimisations, etc.
- Make a plan to cut down your spend. And then tear up the plan and make a new one to spend half the amount you spent on the previous one.'
- Don’t consider how you appear to your friends, parents, etc. You’ll look and feel a lot worse if you don’t make the hard calls now.
- If your business fundamentally needs a lot of money to scale or your unit economics are bad, then orchestrate a graceful exit for yourself and your employees.
- Don’t join a large company once you quit. No matter what you’ve done and how badly you’ve done it, you’ve had the guts to quit your job and take this journey. You’ve definitely learnt a lot. At least put it use in another/better startup that is well funded. You can repair your finances at the same time monetising your learning’s
On the flip side, if you do think you have good unit economics and you have enough money to ride out the storm, congratulations on making it this far! This is the best time to build a great company. Yes, you’re not becoming a “unicorn” tomorrow. But without the froth, everything is going to get easier. You don’t need to pay the one crore in salary to get great people or spend crazy money in marketing that you never believed in but just had to. Your competition is going to thin out. You can put your head down and build a great company!