Insightful article by Kurikose Abishek on how IIT/IIM wallahs are causing damage to start up funding ecosystem of India. I have invited him to this circle so he can know ppls views on his article.
There exists a serious problem here that nobody is talking about and that is the unique nature of the Indian market which itself is an opportunity to innovate and thrive. Recent graduates from top notch schools in India believe they can clone businesses from other countries and that they will prove to be profitable in their entirety in India as well. Venture capitalists blinded by the founders’ alma mater have been following a hackneyed strategy to provide funding to entrepreneurs who are attempting to clone an idea or business model from USA or China. Their strategy goes something like this for early stage funding:
1–2 founders from IIT/IIM fitting the criteria receive 1–2 million dollars.
3–5 founders from IIT/IIM fitting the criteria receive 3–5 million dollars.
7+ founders from IIT/IIM fitting the criteria and you’re in for a lottery.
Investors overlook the fact that Chinese entrepreneurs can afford to clone because their economy is closed, thus providing little or no competition. European entrepreneurs too can effectively clone, because the European pattern of consumption is similar to that of US(and the Rocket brothers are exceptional at their job).
Having failed to realize this, entrepreneurs, are squandering their funds on businesses that are completely unviable in the Indian market. It is impossible to imagine how you can fail so fast with so much money. The more people I talk to, the more apparent the problem becomes. This parochial approach to starting a business is what is causing investors to tighten their purse strings and this is going to hit the diligent entrepreneur hard. Given the current uneasiness in the market, this slump in investment is likely to continue for at least a year.
From my various conversations with entrepreneurs, investors and employees of startups, I have gleaned the following three fundamental issues contributing to the downturn.
1. High Customer Acquisition Costs (CAC)
There are startups (not taking names) spending close to 5000 bucks for customer acquisition. This is what FMCGs spend years into existence. The age old strategy of door to door marketing which the founder has to do is forgotten. As a result, founders are unable to reduce the CAC and end up spending an obscene amount on acquiring one customer who might only sign up without spending much time on the website or make just one transaction. Apart from the 5K spent on luring the customer to the site to conduct a single transaction the company ends up discounting the price of the service or the product to show higher Gross Merchandise Value (GMV). This in turn adds to the cost.
2. Media attention
Another issue I find in the startup ecosystem is the media attention startups and founders seek. Some founders forget that PR is a means to an end and NOT THE END itself.
Publicity is only a tool to be used to get the word out. An article in the paper does not amount to increased revenue. It is thus important for founders to be involved in the day to day functions and probably work more than any other employee at least for couple of years instead of focusing on media presence.
3. Slacking and expensive employees
Often as a startup begins to receive increased funding, the founders become lax and this results in slacking. Sometimes funds are mismanaged and disbursed as salary hikes or used to recruit expensive talent that may not really be required. Large amounts of money is also spent on food travel and entertainment for the employees. For God’s sake it’s still a STARTUP. What’s more important is to realise that a business takes 4–7 years to build and even then, money needs to be spent wisely.
Off the top of my head, here is a list of startups who have raised unnatural amounts as funding and have failed or are close to doing so:
Peppertap (IIM founders)
Grofers (IIT founders)
Housing (IIT founders)
Purple Squirrel (IIT founders)
Tinyowl (IIT founders)
Foodpanda (IIM founders)
Fabfurnish (IIT founders)
Amber wellness (IIT founders)
This shows one thing and that is, given the poor education system in India with no practical application of what you learn, the university tag doesn’t really matter. What matters are the soft skills, the ability to put pieces together and the hunger to learn.
Most people in this game are hoping to become wildly successful instantaneously without having to put in the hard work. Some entrepreneurs readily accept invitations to talk in events (not a problem if there is a business strategy linked to it) where they harp on about how they faced hardship in raising funds and the difficult time they encountered. If I was an investor, I would never invest in a founder who calls this a difficult time. It is an adventure, a story you are carving and this has to be enjoyed to the fullest. Entrepreneurship is not for the weak minded.
Maybe the time has come to look beyond the IITs and IIMs to find real entrepreneurs who can sense the pulse of the Indian market. The time for a new generation of entrepreneurs who can cause a metamorphosis in the startup ecosystem in India. The time for a revolution. more
There exists a serious problem here that nobody is talking about and that is the unique nature of the Indian market which itself is an opportunity to innovate and thrive. Recent graduates from top notch schools in India believe they can clone businesses from other countries and that they will prove to be profitable in their entirety in India as well. Venture capitalists blinded by the founders’ alma mater have been following a hackneyed strategy to provide funding to entrepreneurs who are attempting to clone an idea or business model from USA or China. Their strategy goes something like this for early stage funding:
1–2 founders from IIT/IIM fitting the criteria receive 1–2 million dollars.
3–5 founders from IIT/IIM fitting the criteria receive 3–5 million dollars.
7+ founders from IIT/IIM fitting the criteria and you’re in for a lottery.
Investors overlook the fact that Chinese entrepreneurs can afford to clone because their economy is closed, thus providing little or no competition. European entrepreneurs too can effectively clone, because the European pattern of consumption is similar to that of US(and the Rocket brothers are exceptional at their job).
Having failed to realize this, entrepreneurs, are squandering their funds on businesses that are completely unviable in the Indian market. It is impossible to imagine how you can fail so fast with so much money. The more people I talk to, the more apparent the problem becomes. This parochial approach to starting a business is what is causing investors to tighten their purse strings and this is going to hit the diligent entrepreneur hard. Given the current uneasiness in the market, this slump in investment is likely to continue for at least a year.
From my various conversations with entrepreneurs, investors and employees of startups, I have gleaned the following three fundamental issues contributing to the downturn.
1. High Customer Acquisition Costs (CAC)
There are startups (not taking names) spending close to 5000 bucks for customer acquisition. This is what FMCGs spend years into existence. The age old strategy of door to door marketing which the founder has to do is forgotten. As a result, founders are unable to reduce the CAC and end up spending an obscene amount on acquiring one customer who might only sign up without spending much time on the website or make just one transaction. Apart from the 5K spent on luring the customer to the site to conduct a single transaction the company ends up discounting the price of the service or the product to show higher Gross Merchandise Value (GMV). This in turn adds to the cost.
2. Media attention
Another issue I find in the startup ecosystem is the media attention startups and founders seek. Some founders forget that PR is a means to an end and NOT THE END itself.
Publicity is only a tool to be used to get the word out. An article in the paper does not amount to increased revenue. It is thus important for founders to be involved in the day to day functions and probably work more than any other employee at least for couple of years instead of focusing on media presence.
3. Slacking and expensive employees
Often as a startup begins to receive increased funding, the founders become lax and this results in slacking. Sometimes funds are mismanaged and disbursed as salary hikes or used to recruit expensive talent that may not really be required. Large amounts of money is also spent on food travel and entertainment for the employees. For God’s sake it’s still a STARTUP. What’s more important is to realise that a business takes 4–7 years to build and even then, money needs to be spent wisely.
Off the top of my head, here is a list of startups who have raised unnatural amounts as funding and have failed or are close to doing so:
Peppertap (IIM founders)
Grofers (IIT founders)
Housing (IIT founders)
Purple Squirrel (IIT founders)
Tinyowl (IIT founders)
Foodpanda (IIM founders)
Fabfurnish (IIT founders)
Amber wellness (IIT founders)
This shows one thing and that is, given the poor education system in India with no practical application of what you learn, the university tag doesn’t really matter. What matters are the soft skills, the ability to put pieces together and the hunger to learn.
Most people in this game are hoping to become wildly successful instantaneously without having to put in the hard work. Some entrepreneurs readily accept invitations to talk in events (not a problem if there is a business strategy linked to it) where they harp on about how they faced hardship in raising funds and the difficult time they encountered. If I was an investor, I would never invest in a founder who calls this a difficult time. It is an adventure, a story you are carving and this has to be enjoyed to the fullest. Entrepreneurship is not for the weak minded.
Maybe the time has come to look beyond the IITs and IIMs to find real entrepreneurs who can sense the pulse of the Indian market. The time for a new generation of entrepreneurs who can cause a metamorphosis in the startup ecosystem in India. The time for a revolution. more
Viewed by 1243
View all 18 comments Below 18 comments
Indian customer cannot be bought, but government officials (for bulk purchase) can be bought- that is the feeling. As long as the entrepreneur is confident, has an excellent product (will know by instinct/ hunch, cross checking in some way with sample survey etc- I cannot write lot on this here)- funds will also flow. It is only when the entrepreneur himself has doubts, problem arises. Similarly the venture capitalist also uses his instinct/ hunch. It is unfortunate that- we have come to know new terms- WILLFUL Defaulters. The rich, powerful politically connected are the willful defaulters. That is why we have NPAs, high interest rates, high inflation etc. more
May 19
Experience and knowledge of local market is must to sustain in a country like India. Indian consumer is very practical. Ground realities are the basics for success and in our culture we use to say 1000 days require to establish a business. You cant buy a customer with money or freebies... you have to buy his faith by providing quality service or product. more
May 19
I think marketing excesses and banking of success theatrics (publicity stunts) are universal issues. In the international scene alma mater seldom gives an advantage, as university dropouts are seen as good founders. But location is important - being in silicon valley pushes up the valuation 2-3 fold than being located say in Noida or Rio de Janeiro. But in the end many startup exist in the land of living dead - they think they are doing great, until the day comes when they have to close shop and go. IITs and IIMs will not matter when you reach that point. more
May 13
There is a lot of sense in what Mr Suri has mentioned. I have seen some people giving advice to young, raw engineers to start their business saying if you jump into water you will definitely learn to swim. My comment is that in most cases they will drown. Knowledge and experience are essential components for a successful venture. more
May 13
I'm in broad agreement with Mr. Rajesh Suri about the kind of startups that get funded, and the pros and cons of their busines models. I'd even go further and say that in a country like India, we should focus more on plenty of lower investment, high employment-generation MSME ventures. However, in a free market economy, you can't deny private investors their right to make their own choices, even if foolish. At least some of the moneyed people looking for short-cut methods to become ultra-rich in quick time in understandable, even if not considered good. Over time, the market will learn, even if at a cost. This is inevitable. I think targeting IIT and IIM grads is misplaced. I think the Govt should make it easier for ordinary people to create startups, with sufficient precautions against frauds. Honest failure should be fine. more
May 12
