A counter point to the “I told you so” type comments on the down rounds and investor pressure on Unicorns and their discounting strategies.
Whether the valuations of some of the technology companies in India were unreasonably high has been a matter of great debate over the past few years, and certainly picked up after announcements of markdowns, down rounds and low-value sell offs in some of the star startups.
It must however be noted that investment committees in VC firms take well thought out decisions based on their perception of risks and rewards associated with the investment under the given circumstances and market conditions. Some of these investors were willing to put money behind their belief that to have a reasonable chance of creating a star performer in some of these categories, they will have to bet on teams that had what it takes to build a large, formidable business. These are categories which typically have a couple of dominant players – may be 3 – with others merely co-existing in the market. In such categories, unless the company they bet on became a dominant player, investors were unlikely to get good returns on their investments.
No one pays a premium for ‘also ran’ companies. They were, therefore, willing to make large investments in strong teams in the categories like e-commerce, housing, hotel room aggregation, cab aggregation, etc. I.e. Investors had identified the race they wanted to bet in, and put their money behind the horses they felt had the best chances of winning.
If you reflect upon this approach, it is not unreasonable for these investors to conclude that unless the likes of Flipkart, Snapdeal, Ola, Oyo, etc. had access to very large sums of money, they might not have had a chance to even survive in the market in the face of formidable competition from global giants with deep pockets and established organizational competencies.
Investors were willing to bet large sums to enable their investee companies to dominate the market. That goal was achieved. The companies and founders they bet on DID demonstrate their ability to execute well. The model of discounting and incentivizing may or may not be the smartest decision.
Without discounts, these Unicorns may grow slower, may even lose some customers. Some may lose quite a lot. But that they have built formidable businesses cannot be questioned. If they stop discounting, they will have a strong business. It may be smaller than their current numbers in the short to mid term. But profitable they can be.
Yes, it is important that they build organizational competencies on areas that will impact profitability in the longer run – analytics, recommendations & buying assistance, awesome customer experience & service, supply chain, logistics, payment platforms, etc. But without the scale that they currently have, it would have been impossible for them to build the high-quality teams that are required to build competencies around these aspects of business. Almost all the ventures with huge investor backing have started building these competencies, and gradually they will attain organizational maturity in these aspects. At that time, there will be yet more investors willing to bet on the future potential of these ventures.
Investors who bet on these companies earlier may not necessarily be star performers in their funds today, but who knows… in few years they just might be. But certainly they helped create formidable businesses that have given global giants a tough time, and have an equal chance of dominating the Indian market, and perhaps gradually taking the fight to other markets.
In my view, it is not right to blame founders of Unicorns for the high valuations, including those that have been marked down. Instead, we need to celebrate these entrepreneurs for having built large businesses that are now well poised to become profitable in the mid to long term. Without the initial investments, Flipkart and Snapdeal, and Ola too, would have been ‘also-ran’ in the Indian startup ecosystem.
