How Blitzscaling Doomed Some Of The Most Promising Indian Startups?

Blitzscaling, a term coined by Linkedin cofounder Reid Hofman in 2015 to define how companies prioritise speed over efficiency or sustainability to scale, had taken the startup ecosystem by storm during the pandemic. However, Blitzscaling has earned itself a bad name since last year. 

In India, over the last few years, the fortunes of many small and lesser-known startups turned, as VCs bravely flooded them with capital, completely ignoring the viability or sustainability of their business models.

Soon, a plethora of young startups started promising a 20x growth in their top line to lure VCs into investing in their half-backed ventures. Further, their claims of lapping up users in a tech-savvy market like India became an interesting proposition for the global investment community to bet on. 

After landing a few rounds of funding, the founders were seen surrendering the controlling stake of their companies to their new bosses (read investors), only to see the latter call the shots on their behalf. 

As the controlling equity was lost to incoming investors, a few startups fell prey to corporate governance challenges, involving funds embezzlements, fake appointments and other issues. 

Then came the funding winter of 2022, and the Indian startup ecosystem saw a sharp dip in big-ticket size investments. Despite this, the race to get the fancy unicorn tag became more intense.

Even though India’s unicorn growth story outshined its global peers like China, Japan, and the UK, the truth of the matter is that many big and small Indian startups fell prey to financial frauds and challenges related to corporate governance in their quest to achieve or sustain the unicorn tag, thereby jeopardising their core businesses. 

This ugly truth haunts the otherwise shining startup story of India to date.

Call it an oversight of investors, blitzscaling fervour, a unicorn fad, or founders’ fault, we are currently witnessing a situation where some of the most promising companies are on the verge of shutting down. 

Since last year, the Indian startup ecosystem has seen many startups bleed due to blindly following the aforementioned trend. Some of the prime examples are Trell, Zilingo, and now GoMechanic.  Some of these incidents led to the unceremonious exits of the company founders.

BharatPe’s Ashneer Grover, Zilingo’s Ankiti Bose are a few names that come to mind if we look back. 

What happens to these companies once their founders are forced to quit is another puzzle. But for now, let’s see why a few startups in India have ended up on the wrong end of the fence.

Pushing Growth In A Low-Demand Market

In a LinkedIn post last month, car servicing startup, GoMechanic’s CEO Amit Bhasin admitted to accounting irregularities at the firm. However, the truth behind the scene is that in its pursuit to grow at all costs, the company’s management got carried away, resorting to grave ‘errors’ in financial reporting.

The company was in talks with a clutch of investors such as SoftBank, Khazanah Nasional Berhad and Norwest Venture Partners to raise $75 Mn at a valuation of $1.2 Bn, a 4x jump from its last valuation. This was a big ask, and the company needed the numbers to back it up. So, it allegedly faked its revenue and showed fictitious assets and unrealistic growth targets to potential investors. 

It was only after due diligence by the investors that the financial irregularities were brought to the fore. 

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GoMechanic’s story is not the first. Similar was the case with startups Trell, Zilingo and BharatPe. 

“In any public company this would mean criminal fraud or cheating and would be subjected to penalisation and other punishments. In a privately held firm, especially VC funded, unfortunately, the accounting practices and grave errors (many times intentional) are still a norm. The absence of clear regulations has been a reason as to why we see recurrence of such incidents,” a Bengaluru-based chartered accountant turned early-stage investor told Inc42, requesting anonymity.

This investor maintained that the underlying problem has been due to the pressure from the board and investors to chase growth in a low-demand market. In other words, how could companies expect to achieve sustainable growth in the absence of demand?

“Expecting 4X revenue growth, aggressive customer acquisition in an impending recession environment – when some of the most profitable tech giants like Google, Microsoft and Apple have announced conservative allocations and laid off employees – is simply unachievable. This is when you resort to unethical practices,” the founder of a D2C startup said.

From Unicorn Dreams To Going Bust

The unicorn dream that many Indian startups have been living for the past couple of years has unfortunately exposed how a few companies ignore the business fundamentals while chasing their billion-dollar valuation dream.

“If you ask me about the unicorn fad, it has mostly done a disservice to some high potential startups and even eroded the reputation of their founders in the process. India’s unicorn minting story in 2021 has put us on a global map, but the aftereffect of the crazy rat race amongst the young companies, especially tech startups, to seek a billion-dollar valuation within a few years of their inception raises a red flag. No business can grow this fast. If this is happening, it is simply a cash burn exercise and nothing else,” the veteran investor quoted above said.

Consequently, we see examples of companies like Zilingo and GoMechanic, which are now opting for liquidation and bulk layoffs, losing out on the opportunity to build a scalable business.

Another example of a startup in distress is Sharechat. The valuation of the Google-backed vernacular social media platform zoomed to $5 Bn after it raised $500 Mn in a multi-tranche mega round from 2021 to 2022. The funds raised give enough runway to sustain at least one odd downturn cycle.

However, recently, ShareChat was seen laying off 20% of its 500-employee workforce. The Bengaluru-headquartered unicorn had said that the decision to reduce employee costs was taken after much deliberation and in light of the growing market consensus that investment sentiments will remain cautious throughout this year.

Sources close to the matter say that the decision to reduce employee costs has impacted key managerial positions, including brand marketing, communications head and several other executives.

Refuting the claims of ShareChat being in distress, a spokesperson of the company said that Moj and ShareChat together have an MAU of over 400 million users.

“The company is well-capitalized, and the decision to reduce employee costs was taken after much thought. This process has absolutely not affected any key managerial positions. In fact, in the past year, we’ve had various senior hires join us from various large companies,” the spokesperson said. The company said that none of the key managerial positions has been impacted.

Despite raising a huge amount, the financial health of the company seems to be unstable. The losses of its parent company, Mohalla Tech, soared 2x to INR 2,498.6 Cr in FY22, excluding non-operating losses of INR 490 Cr. 

Led by the increase in marketing, employee benefits, and IT expenses, Mohalla Tech’s total expenses shot up 119% to INR 3,407.5 Cr in FY22 from INR 1,557.5 Cr in FY21.

“The exponential jumps in valuation without any significant financial or fundamental growth in the company is very common. The practice gets its acceptability from veteran founders and VC firms in the startup ecosystem itself. The startup industry operates with a notion that there is a need for a jump in valuation with a new round of funding. Keeping up in this valuation game is a skill a founder is expected to have in the market to survive,” Nandu R Kumar, founder, ScaleX Business Private Limited said. 

He added that Indian founders usually look at Silicon Valley startups to justify the valuations of their ventures. 

“However, the fact that the rupee is a weaker currency, compared to the US dollar, is often ignored. The silicon valley textbook practices in valuation, as well as investments, may not be the right approach for a market like India. For example, the metrics like lifetime value (LTV) and retention ratio, which are used to measure the future value of a business, may not be relevant for the Indian market, where customers are more demanding and often not loyal to a particular brand,” Kumar added.

Dragons To The Rescue?

In a startup ecosystem, the fancy terms like unicorn, soonicorn, decacorn have been used so much that the exclusivity/rarity of these clubs is somewhere lost. The sentiments from both the investors and founders have undergone a shift since the latter half of 2022.

Billion dollar valuations — which the companies were chasing and the investors handed out freely — meant nothing except for a company’s worth on paper. It is no hard cash and is subjected to change depending on the product demand and the economic climate.

A classic case in point is Singapore-based technology and commerce platform Zilingo, which was close to becoming a unicorn in 2019 after raising $226 Mn from Sequoia Capital, Temasek and Burdal Principal. 

However, when it chased more money in 2022, due diligence by incoming investors followed, exposing many frauds, operational inefficiencies, and the $40 Mn debt that Ankiti Bose-led company owed to venture debt investors.

“Zilingo’s valuation of close to $1 Bn means nothing right now. The cofounders have taken an exit and the startup is being run by just a few,” an investor close to Zilingo’s developments said.

According to a report published by Inc 42 on January 20, 2023, Zilingo is set to enter liquidation after its months-long struggles to survive. 

So far, in 2023, we haven’t seen the birth of even a single unicorn, signalling the cautious approach of investors. However, far from the media coverage, cash-guzzling unicorns, the investors have now opened to pragmatic, resilient early-stage startups, or dragons, which at the most promise return of the fund’s money.

Early-stage investments saw a spiked interest from investors last year, compared to growth or late-stage startups, and the focus has clearly shifted from market dominance, mindless customer acquisition, and marketing to improving unit economics, building resilience and keeping spends in control.

Fortunately, the dragons have it under control. As against the blitzscaling of unicorns, dragons opt for sustainable scaling, build the demand for their product, and don’t go for quick growth hacks. Further, compared with the sky-high valuations that soonicorns or unicorns ask from their investors, dragons focus on building businesses and stay away from making promises of unrealistic returns. 

Experts believe that dragons will write the next big chapter of India’s startup growth story, as investors will now look to build dragon startups rather than cash-guzzling unicorns.