Bursting the valuation bubble and creating a real startup ecosystem
Starting up a venture requires a lot of determination and courage, undoubtedly. However, with a fast growing startup ecosystem like in India, corresponding problems also grow. After reading this piece, one may get an insight about the current startup ecosystem and how it is deviating from its goals!
Entrepreneurship is a massively growing field in India. Unfortunately, the current Indian startup ecosystem is primarily focused on increasing the startup valuation and creating unicorns. The success of a startup is merely equated to its valuation. As a consequence of this trend, young startups are resorting to shortcuts for quick growth and success. An increasing number of startups are turning to external investors for funding at an initial stage, simply to increase their company’s valuation. While external funding can undoubtedly catalyze the growth of a business, it is crucial to remember certain things before one goes searching for potential investors:
1) Optimum utilization of existing resources: One must not go looking for funds until all the available resources have been optimally utilized.
2) Being Frugal: Companies with a positive approach don’t raise more money than they require.
3) Choose the right investor: The investor will essentially become a part of the company, so choose wisely.
However, in the race of valuations, most young startups are trapped in greed and focus their energy on raising the highest funding possible, even beyond the quantum required. In the past, several Indian startups have diluted a large share of their equity to raise massive funding from foreign giants. Consequently, the company’s valuation and scale increases, but the founders lose control of their own company and controlling share of the company goes to the foreign investors.
Most startups are so focused on raising funds and fast forwarding their development that they forget that "Rome wasn’t built in a day". A strong foundation for a startup is highly critical if a scalable business is envisioned. Every startup must build a self-sustainable business model, a decent customer base and a great deal of market research before it starts looking for investors and funds.
The Indian market has presented enormous need and opportunities for new startups. With the advent of Startup India Program, multiple grants and policies have been introduced to create fruitful startups and to build a strong startup ecosystem. With the government offering aid and disbursing several different funds to support startups, numerous private/university incubators and accelerators have come into existence.
These incubators and accelerators usually work with young students and budding entrepreneurs. This provides them an exceptional opportunity to create the right model and change the current startup ecosystem for the better. However, to make profits and become sustainable, most of these privately owned incubators succumb to the trends of the industry and prioritize on disbursing government funds to prepare the startups for more external funding.
In addition to this, several university/private incubators fund majority of startups just to add numbers to their portfolio. They expend funds without thoroughly analyzing the startup and the potential of its product or service, market demand, customer traction etc. Such lack of diligence and screening adulterates the quality of emerging ventures in the market and further damages the ecosystem.
Some of the most "successful" companies in India are still struggling to maintain profits and might collapse if their investors withdrew the funding. This is because the current Indian ecosystem is not emphasizing on building a self-sustainable business model for startups. Startups are getting funded hastily and untimely, making them vulnerable to falling through. When funded at such an early stage (even ideation in some cases), startups fail to experience what it’s like working with bare minimum resources and become creative. Young entrepreneurs today are more tempted by the funding than by the idea of running a purposeful profitable business. A number of startups are started with the intention to raise funds, whereas the idea of funding and investments was developed only to catalyze the growth of potential businesses and not to give birth to them.
The utmost priority of any successful startup is the development of the company and not the perks for the founders and team or the expanse of external investments. Therefore, it’s high time that we stop working on unrealistic valuations and start evaluating startups based on their business model, financials, customer traction, retention, etc. We need to redefine the parameters of success when it comes to startups so that the next generation of entrepreneurs does not repeat the same mistakes.
Build, Sell, and Scale! But don’t forget to keep innovating!
-- authored by Vridhi Sharma (writer, curator, Startup Enthusiast)