Million Dollar Questions startups need to answer
I am a lawyer, a budding entrepreneur in my mid-twenties and have started a legal tech company and on the verge of releasing a SaaS. I am a keen follower of the startup world both in India and around the world and keep myself well informed about whatever is happening be it in the Artificial Intelligence space or in the Logistics space. I often discuss in detail with my father about the trends of the new age companies which my father out rightly frowns upon. I have a few questions and I seek to find answers and therefore I have written this article. Pardon me for my ignorance.
Often I am confused as to what a 'company' in today's business world means and why one starts a 'company'. Due to the old school mentoring by my father, my understanding is ‘a company is an entity that is run for profit and it is started with the intention to make profits’. Today, with the mushrooming of startups, people are forgetting the concept of making profits and are only looking to secure funds to fuel their operations and only to increase the topline/turnover. Today, before starting a company the founders already identify who a potential buyer of their startup would be.
I see various companies from Flipkart's to Ola’s to Oyo rooms raising money through various levels of investment on one hand and on the other, I see all these companies bleed money. I very well understand that this is a cash burning stage and they will raise another round of investment to take the company forward. I also understand that these companies are playing a valuation game and are not running a company for profits like old school entrepreneurs do/did.
The first question I have is, ‘if it were the founder's money, would you still take the risk of burning such enormous amounts, and bid your luck playing a valuation game to be bought out in the future by a bigger company?' Or, 'Would you run your company the old school way to make profits?’
My second question is ‘Is a small company that sells goods/services, that has a few employees under its name and make small profits actually the bigger company?' or 'is a company gaining a large customer base, burning crores of rupees the bigger company of today?’
If any company selling a product/service is given the unanimity to spend any amounts they want in order to get a stronger customer base, it could very well be done; These old school companies keep the Unit economics at hand and therefore grow slowly but steadily and remain profitable. The 'unit economics' is given least importance, leading to the closure of many companies today. Gozoomo, Doormint, Classverse (to name a few) recently shut their operations citing unit economics being the reason for closing down.
With the startup sphere receiving so much attention for half a decade or so, and with funding opportunities from Angel investors and Venture Capitalists, raising funds has become a lot easier today compared to the past. If you are connected with the right people or from IIT or IIM it becomes all-the-more easy. But, what happens when the money runs out? The businesses of today (Not all, Obviously) are not sustainable because they are dependent on what 'could' happen in the future, acquisition being their primary card.
New Companies that are making losses are like penny stocks and are solely dependent on what the future has to offer and the founder of the company. The upside of this is that the company/stock could be a multibagger. Majority of the Venture Capitalists and Angel Investors primarily invest in startups that are running on losses rather than companies declaring dividends year on year, with a proven track record. Would it not make sense for VC's and Angel investors to invest their funds in companies like these which have the potential to scale up with a proven track record?
The aim of raising money is to validate the idea, to scale up operations, to branch out in a few more cities and to help the company move forward. Every founder believes in his/her idea and therefore starts a company. After receiving a decent amount of funding, the company grows.If a founder believes in the idea/startup, would it not make more sense to take loans (retain more equity) rather than to raise another round of funds which dilutes the stake holding pattern when the million-dollar idea is at hand?
There goes my next question – ‘If the founder himself has invested his hard earned money into the business, would he/she draw hefty amounts as salaries?’ Or ‘would he/she take what is required keeping the business's state in mind?’ ‘Why do founders then draw exorbitant salaries inspite of losses when it is funded by venture capitalist’s/Angel investors?
What would be the state of today’s entrepreneurs if they had borrowed the money from banks in order to run their business? It is only in very rare cases like the one of Gozoomo where the founders were magnanimous enough to return the money to the investor rather than burning it further. Take the last five years for example and look into the number of bootstrapped startups that are still functioning and the number of startups that are funded which are profitable; that will tell you the reality of the startup culture.