Irrational Hiring in Indian Startups is a Big Deal

Off late there have been hot debates in India on Startup hiring practice, Burn rate, Deep Discounting, Valuations, Business uncertainties, Competitive pressure , problem of plenty and credit crunch.

After a sustained run for the past couple of years where in it was the era of credit boom peaked now we are seeing credit lanes settling down.

Debt has been the favorite way of growing off late and art of bootstrapping and Paced Growth was looked down upon as failure to raise funds. May be we borrowed this as a habit looking at US highly levered- debt based growth which actually in being questioned across the globe .

History has shown time and again that Rapid expansion based on premise of highly leveraged Debt does not pay off and most likely back fires especially when barriers to entry are lowered and there is problem of plenty- the margins will squeeze and remain un-sustained creating sunk costs, intensifying price wars and eliminating companies.

More over the evolving models of business, technology and new age channels to tap in consumers are still finding their feet. In the environment the debt based scale can easily spiral and mount and even paying of interest or covering fixed costs will become a challenge as we see Perfect Competition.

So,

If Business Models are not first thoroughly tested and soaked in to confined limited segments and regions in order to Validate, Learn , Grow, and Dominate in them and instead we choose to spread rapidly across then its calling for a disaster in the making. Leading to more chaos, employee firings and company closures.

There have been for and against arguments from both sides on Hiring Teams and Startup practice in new age startups.

With the recent fiasco around hiring at Zomato , Flipkart and many more etc the debate is on questioning - Business Environment for startups, Viability of Business, Risk and rewards and why its part and parcel of the game and not so different from Hiring drop in 2008-2009 during sub-prime crisis.

Before i make my point further i must say,

Not only Startups in India are evolving but so are the big guns of the world - The Fortune 500 are charting un-chartered waters and finding new ground.

Make no mistake today most industries from Tech, Manufacturing, Oil, Steel, Food, Banking, Healthcare etc are going through paradigm shift like never before.

With New business models,

Lowered barriers of entry for new players,

Easy access to consumer markets,

Availability of capital,

Lowered Pricing n Subscription based business models ,

Evolving technical n business landscape.

"Its never been easier to start a business,

But its never been more hard to sustain it"

As,

Vast Multiple channel reach, Information storm, diluted marketing, similar offerings, infinite choices makes customers the king.

Today Customers and Elastic and multi-loyal we must get that, so building in high switching costs by focusing only on business models that solve a killer pain point n not just convinience is the key.

Business growth is much harder to achieve than ever before as The Era of Perfect competition has begun and the next wave of S curve based growth yet to settle.

So, kudos to all Leaders and Entrepreneurs those who sustained , dreamt and walked the talk no matter the outcome.

Make no mistake Startups are hard, very hard and no entrepreneur i know of wants to just make loss or just hire employees and then fire.

After -all it not only does not go well with the employees and has adverse effects on Organization culture, its DNA and growth.

But on the same note its clear today that-

Startups often have bought-in to a myth that to be Profitable, to stay relevant in business and to eliminate competition the only way out is to expand quickly across all regions no matter the costs and risk.

Localization their growth to a few select markets markets is not the attitude of start-ups today, there seems to be a hurry to reach the top soon.

That the customers will stick to them even when the barriers are lowered is just living in fantasy wonderland.

Yet, i say this bcoz i see these myths as short shortsightedness and gaps in Leadership in Start-up ecosystem that prevails today .

Add to the current equation are Venture Funds that are sourced through various channels by Private Equity firms. They logically spread across different startups across the eco-system as make their spread diverse and hegde.

The understanding among Fund Manager remains that if out of 10 eggs even if 2 eggs become unicorns we make it big and also recover loss made on 8 rotten eggs. This presumption is not only deadly and speculative but is prevalent as the funds are routed through developed countries and matured markets to pump startups till the credit line was easily available.

The lack of fund transparency and pressure on Investment and Equity firms to perform make them to compel startups to grow even before validation . The thin spread across markets leads to higher costs to sustain and defend and outpace growth before achieving vertical chain stability.

This is the very reason why Startups are often X multiple times bloated as 2 eggs act as a hedge against 8 rotten eggs.

In the end the actual loss will be of the common investor who hard earned money has been invested though these fund routes. He is ignorant of the fact that his hard earned money is being burnt in a speculative game for hedging and by statups for buying in customers through deep - discounting at the cost of his cash.

This certainly, calls for greater accountability and transparency in the investment space.

Today with credit crunch kicking in, its just the tip of the ice-berg. - This assumption is based on economic , financial and geo-political data that currently pertains. It seems that it would be not so cozy to secure funding even if india market is growing and is currently the best performing market in the world.

Often Entrepreneurs were pushed to expand quickly even when their hold on a single market is not strong, cash flows bleed negative, business model still nascent, control over supply and value chain remain crude, and Product n services mostly remain un-differentiated.

We see today that customer repeat value without discounts is often missing and switching costs often don't exist in India.

Further I want to project this article as to why we can't Justify Indian Startup hiring fiasco and failure to just another usual business risk and rewards system and equate it to global downfall in hiring in fortune 500 in 2008.

The Startup fiasco is quite different from 2008-9 crisis or even 2000 crisis. What global banks faced in sub-prime crisis was very different and cant be compared to what Global firms faced in terms of down-sizing to what Startups are facing.

The Systematic risks which prevailed in 2008-9 was part of flawed financial practice and banking system, it allowed for high leverage exposure in some cases 40X times using CDO's to even people with Bad Credit history.

After all each transaction accounted for commission no matter the risks. So even back then economists knew that the pressure will erupt as cracks widen and the system would fail.

However timing is which is highly un-predictable in these situations , for once it started its butter fly effect made every thing fall like house of cards.

In such situations borrowing a leaf from human nature and Social psychology every one hoped that steep valley was far away back then and may not impact organizations in 2008 or soon.

This was the case because - Predicting economic crash is easy but its timing and velocity of crash is for more complex than just looking at 2 consecutive GDP numbers and IIP numbers and claiming it to be a recession.

The unknown of timing have multi-fold variables both macro, micro and geo-political . Even if it calls for an elaborate economic and business models where-in complexity of network effects in predictive modelling and forecasting is done there is no model in the world which can predict the timing of crash n slide down in motion.

Bottom line: In 2008 Flaws of the system were known always what was difficult was to predict was when it would time out , similar to an earth quake where u r aware about the fault lines but not when it would trigger the next quake.

However the position of Indian statups is different - We are not talking about systematic risks or external risks rather operational risks which don't evolve suddenly but over a period of time and can be easily predicted by even an under-grad.

So the difference - Timing here was quite predictable unlike the case stated above. What i mean by this ?

1. When you have cash-flows for just next 9 - 12 months for operations, and you are struggling to have positive [EBIT] cash flows for next comming consecutive quarters you can easily predict how much work force one can actually operationally sustain , keeping your burn rate in check. So this calculation would have been done i presume.

One can easily know even 12 months in advance on even 18 months how many people should we hire.

2. Yet , point 1 was ignored as a basic rule due to speculative hope oh we will get more funds. Really ? You can make plans based on probability of funds procurement however how oblivious can startups be to ignore the global credit situation n economic data, were they ignorant to that extent that global credit situation is ignored , i mean we all knew based on Economic data that credit crunch is boiling.

3. Thirdly - U dont hire or expand your business based on hope of getting more funds rather u first getting your house in order. Why will u want to hire more and expand more , scale more even when with existing segments and markets it is not clear about competitive advantage u have that allows build high switching costs for suppliers n consumers. Right now both parties are very elastic - highlighting Porters basic 5 forces here.

4. Rule u never reach profit by just getting GMV moving and rapidly expanding you need to learn to pace and time your run than just sprint hoping that economies of scale , vast spread across regions with take care of the bottom line in ling run..After all - economies of scale, vast geo spread and repeat customers only work when you have built in high repeat value and have high switching costs build in to do without that.. its just ridiculous and stupid and thats simply not the case today.

5. So, Find your core market - product fit , secret sauce that stands test of time, competition and extends customer willingness to pay rather than just give away to make people n customers stick and build GMV its not business thats just fantasy.

Rule: First make profits in narrow market than scaling every where . The issue of this not happening was bcoz of easy credit availability , cheap financing in global markets with little accountability which lead to bad practices and loomed huge debt based business financing has been developed . But it never works neither in Developed nor in Under -developed countries.

**One can just look at Debt to Gdp ratio to see the point of US, UK, China today , Petro-dollar crisis and Geo-political situation to understand future of credit moving forward - it will be tightly squeezed**

6. When your existing operations , markets and segments are not profitable for so many years it does not call for hiring new talent rather it calls for scaling down , operational alignment , tweaking every inch of your value chain as well as your supply chain and focusing on bringing + inflow of cash and trying to get close to + EBIT.

It definitely highlights Short-sightness in Leadership

Bottom Line: Surely yes Create Value , Be Disruptive , Use as much automation as possible , be lean , have unique business models but first -

Localize your growth to few markets first.

Spreading every where does not always equate to growth, success or Profit.

Be as close to your customer in focused markets to generate repeat value ultimately.

Try bootstrapping as much as possible and have grip over your finance.

Avoid spreading across rapidly without understanding what makes money.

You must understand the impact of scale on your strong hold markets, new ones and its impact on operations and its operational effectiveness.

Don't buy in seriously into your valuations, instead get real stuff done.

Build new forms of engagement across value chain .

Optimize your supply chain, network effects and cross-leverage ecosystem relationships.

Credit might be available but you must evaluate first is your business ready for it, is it tested for customers to increase their willingness to pay?

More than credit rely on Network effects, relationships, Upsell, Cross Sell.

Most important Who is your funder, can he sustain your cash flows if more is needed, does he backs your vision, Is he aligned with your firms dna and consciousness, all of these count a lot after all its about relationships.

We must first understand the rules of engagement in business rather the basics which have prevailed and been tested for millennium no matter how advanced we become.