Friday, April 04, 2008

Notions in India on Startups

There is a prevailing notion in Indian startups that the minute you get heavily invested by a VC, you are successful. The fact that some VC has deemed your business worthy of investing is a good enough reason to feel that you are successful as a business.

Now, that you are invested, you feel a bit special. Since you are no longer scouting for money like other entrepreneurs you think you are now a serious company. That feeling is good enough to put a stop to all that hanging around with other pauper entrepreneurs. That also means putting a stop to attending the Barcamps, MoMo, Headstart events, etc.

I attended a NASSCOM event on products and innovations. In one of the panels showcasing successful product startups, they also invited social networking and other dotcoms. I was sitting there wondering – what is the common element in all these startups? Some of them were not innovative and some were not even making products. Why are they considered successful? The only thing that was common was that they all got funding recently by some big name VC in the order of few millions.

The fact that you got invested is a good enough reason to believe you are already successful. Even the VCs, the media and observers will believe that.

So what happens once you get invested?

There is another prevailing notion that once you get invested, somehow all your financial problems are solved. The new startups which get heavily invested start looking for a swanky office with nice carpets, interiors, woodwork, cabins and cubes. They go back to getting cushy salaries with luxurious perks. Overnight, you are no longer a poor boy. In fact, it’s like getting married to the only daughter of the Sultan of Brunei. You travel luxury class, stay at five star hotels, get into all kinds of forums, wear suits, and rub shoulders with biggies. You can now go about thinking about that new apartment, that new swanky car, and that investment into real estate that you have kept on hold when starting the startup. Now you go to work as if it’s a regular job, filling excel sheets, project plans, as you did before the startup. The hunger is already gone and now it’s replaced by satiety, too soon too fast.

I see a dangerous trend in Indian startups. I am not comfortable with it.

Startups in India see their first round of heavy investment as a major achievement in itself. They see it as an end in itself. They see it as a major milestone after which all problems are solved. This particular single-focus goal is detrimental to its long term prospects as a business. Usually the startups go through a process of exhaustion and starvation and the thought of a gush of money is a welcoming prospect, so much so that, their entire focus is now shifted to raising that money instead of concentrating on other business goals. Once that investment is made, you back to your old style of working.

I know of few companies in Bangalore which are setting very bad examples. These companies have ‘successfully’ raised many rounds of funding and yet, there is no product release or source of income. Most of the time is spent in partying and celebrating little achievements which have no consequence in business.

In a city of very few successful product making companies, to have a few bad apples will have negative effect on prospects of future investments. Unlike Silicon Valley which spawns thousands of startups which are VC backed, India produces very few. And if out of those very few we start seeing bad examples that sets a negative outlook on future prospects for Indian product startups.

Some VCs who witness these trends, instead of correcting them, are actually casting a blind eye, and are believing themselves into a delusion that everything is going alright, when in fact it is not. They cover up the inadequacies of their startups and keep promoting them in all forums and events as if they are best companies on the planet. The first round VCs think their startup is successful if it is in a position to raise the second round. And second round investors in turn believe it is a successful company if it raises the third round, and so on. Nobody is bothering to check if these companies are actually creating value as a business, in terms of market share, revenues and profit margins.

This trend of blowing up the VC money may work well in Silicon Valley where there are thousands of companies being started every year, and few bad apples will not make a big difference. In India, where there is dearth of startups and where a paltry number of companies get invested, this trend does not bode well.

A startup should have the same hunger even after they raise their round of heavy investment. That hunger should keep them going after pursuing the markets, getting the cash into the company. They should not squander the money. Instead they should continue to use the art of managing the cash flow wisely as they did prior to their investments. They should not let go of this innate strength all in one episode.

Indian startups need to set successful examples of using India as a cost-effective way to launch global brands of high quality products.

4 comments:

Gagan said...

I have not witnessed nor heard of this trend in Indian startups. Thanks for the insight.

sam_the_ram said...

We Indians, for all our "great" culture, have some fundamental issues. We only worship success and not the path to success. That is why if a startup has got funding, every one will consider them successful.

In India, crooks are worshipped if they are successful. Indian corporate world is full of them, and they *are* our role models.

I cannot immediate the low self-esteem such a pathetic society must be having.

regards,
Samir

Vijay Anand said...

hmm. Might not be just isolated to India, It happens in the valley as well. There is still a lot of awareness and maturity required among entrepreneurs to know that getting funded is not a goal, but just the beginning of more promises and hardwork to follow. It's unfortunately going to take its time.

Puneeth said...

Hey Sujai, Nice post. Dharmesh Shah, a Boston area serial entrepreneur who just raised a Serie B funding has a jotted down a nice post on similar lines. Check out http://onstartups.com/home/tabid/3339/bid/5307/Why-Raising-VC-Funding-Does-Not-Equal-Success.aspx