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Is India's start up boom a bubble that has begun to burst?

By Zoya Brar, Founder & MD, CORE Diagnostics

Is India's start up boom a bubble that has begun to burst?

Thursday January 19, 2017,

5 min Read

With young entrepreneurs re-writing the rules of the business game, an entrepreneurship revolution has swept India in recent years. In a much publicized report in 2015, industry body NASSCOM put India among the first five largest start-up communities in the world with the number of startups crossing 4,200. With the buzz following the introduction of the ‘Start-Up, Stand Up India’ and ‘Make-in-India’ initiatives and the promises made by the government to ensure a start-up friendly environment, the entrepreneurial community has brimmed with anticipation and confidence.

However, lurking behind this positive talk about the start-up boom is the discourse about an eminent doom. Are our new businesses overvalued by a mile too far? Are we staring at a repeat of the disastrous dotcom crash of the 2000s? Is the booming start-ups market in India a bubble that is about to burst? Well, the answer lies somewhere between yes and no!

Much of the talk about an impending crash in India has been generated by the inflated startup bubble in the US where new businesses have been seriously overvalued as investors look to outbid each other in the anticipatory search of the Next Big Thing on the market. To be fair, the market in the US is much different from India; having a much more experienced, mature and aggressive investor community. By contrast, investors in India are still relatively cautious and wary of risks. However, it would be naïve, even foolish, to deny the fact that the much-touted Indian startup space has heated up beyond the prescribed limit. And every heated up market inevitably gets a course correction, rather it needs one.

The trickle down of business energy

With an expanding economy opening different avenues and technology revolutionizing the way people conduct businesses, there has taken place a greater democratization of entrepreneurial space in India in the past 10 years. Putting a new business idea into action is no longer the preserve of a select few business families. Leading the bandwagon of change are some of India’s best know startups. Be it Flipkart, Snapdeal, Zomato, Paytm, Ola or OYO rooms, the common underlining factor behind them is that they have been started by the first generation of businessmen in their families.

This radical shift has also made entrepreneurship a lucrative career option, with many young minds hoping to create their own successful business story one day. However, it is important to remember that entrepreneurship is much more than nurturing an idea and putting it into practice; it is a process, rather a journey of breaking inertia, gaining momentum, and institutionalizing the process to make it self-sustaining. Startups that have a sound vision and business acumen behind them, not just the thrift of a lucrative idea, are the ones that ride past the rough tide in the long run.

Bubble burst or course correction?

A market bubble happens due to uncontrolled speculative investing when large investors decide to invest in anticipation and inflate the values of startups. Due to the self-regulating mechanisms of the market, a bubble is unable to sustain for a long time, and bursts eventually, leading to a reshuffling of market space.

India’s startup boom has largely been driven by online ecommerce vehicles that have inundated the market space. With intense competition in a limited space, most startups have been spending profusely for some time now, without clocking profits. The idea is to capture the market share and change consumer behavior over the long term. A lot of Indian startups are also facing stiff international competitions from global companies that have much wider market base internationally and much more firepower to last a long drawn battle of attrition. Selling at much lower prices than they are buying, offering highly lucrative flash sales, are strategic tactics to build a steady consumer base. With investors in the sector lending money not on actual profit bases but on a speculative future, the question that naturally arises out of the situation is when will profits actually start coming?

No doubt profits will come for some, but not for all. And this is where the course correction will come. Market gossipers would like to call it a bubble burst but in context of the Indian market which is still not as mature as the American market, bubble seems too harsh a term.

Tough time for some; Redemption for others

What sets apart sustainable startups from unsustainable ones is the longevity of vision and ability to adapt quickly to the changing needs of the market. The recent talk of a bubble burst in the Indian market was also set aflame by news that a number of ascendant startups were suddenly downsizing their workforce. The fact of the matter is that long-term ready startups are ready to adapt quickly to the changing demands of the market, alter their business models, cut down the workforce when necessary and even be open to selling the organization to a larger business conglomerate if it becomes unsustainable.

Any enterprise should not only be viable in the short-term but also sustainable in the long term, with enough potential of scaling up the pyramid. In doing so, it becomes imperative to offer something that is not only innovative in the current scenario but also has enough potential to improvise in the face of changing social and economic needs.

The near future

Coming back to the moot question on whether we are looking at a bubble burst in context of the Indian startup space, yes it is time to be cautious if you are an investor. However, much more is looking positive for the startup space in India than naysayers say. The startup revolution has been credited to an ecosystem which is conducive and rewards innovative ideas. The still unsaturated nature of the Indian economy with plenty of scope of business maneuvering and a supportive government policy will ensure that the explosion of entrepreneurial energy will continue. Yes, some unviable businesses will fall by the wayside as the market corrects itself, but many others will ride the rough tide successfully.