On January 26, we are looking to give Indian startups the most essential guidelines to navigate the downturn, from some of the veterans and luminaries of the ecosystem
January 26 and India’s Republic Day marks the day when India formally adopted its Constitution in 1950. And though it came almost three years after independence, the day is in many ways more significant, because it finally gave India the playbook to grow into the largest democracy in the world.
When viewed through this lens, this year’s Republic Day is a pivotal moment for Indian startups, after the initial years of ‘freedom’. Amid an unprecedented slowdown, we could even say that perhaps Indian startups adopt a few tenets of their own for 2023 and beyond.
These ‘commandments’ are not hard and fast rules, but guidelines from some of the veterans and luminaries of the Indian startup ecosystem on the best way forward. Of course, despite a Constitution, India’s democracy has faced hiccups and so it will be for startups. There will be more bumps in the road ahead but these tenets should hold startups in good stead for years to come.
With this, on India’s 74th Republic Day we bring you these 10 commandments for startups to navigate the downturn and funding winter in 2023 and emerge stronger.
Value Must Be In The Business, Not Just On Paper
While some founders might claim that valuation has never been their goal, they might change their stance when the funding is flowing. The funding winter has shown how fickle paper valuations can be.
Harshvardhan Lunia, founder & CEO of Lendingkart, believes that the game has truly changed for startups after 2022. “Value on paper is passé. Serving the right product to the right customer at sustainable unit economics is the key to growing the value of the business.”
To meet the high valuations, startups set off on a quest for so-called hockey stick growth. This approach often involves cutting corners and skirting the laws. As multiple cases of fraud and shoddy accounting practices of the past 12 months have shown us, this risks the reputation of the ecosystem and also leads to layoffs and loss of livelihoods.
“Growth at all costs directly impacts the company’s fundamental stability. Sustainability in terms of profitability and not valuation must become a fundamental tenet,” Manan Khurma, founder & chairman, Cuemath added.
Eliminate Short-Term Thinking For ESOPs
In the past two years, ESOP buybacks have become so common that they are also used as a retention strategy by startups. Ironically, many of the startups doing buybacks are also letting go of employees.
Zerodha cofounder and CEO Nithin Kamath believes this is the short-term thinking trap that many inexperienced entrepreneurs tend to fall into. He believes that there has to be a long-term plan when it comes to the issuing and buyback of ESOPs. Employee stocks shouldn’t be thought of as quick fixes to hire and retain talent when the going is tough.
“This is how I think you can create trust in the business. When times are tough, I don’t think it is a good idea to distribute funds through an ESOP buyback just to repose faith in key employees or to help the business extend its runway or take other bets to get through. What is the point of having faith in a business that doesn’t survive and affects everyone?,” Kamath told Inc42.
Prioritise Corporate Governance
In a bid for scaling up and growth at all costs, corporate governance has taken a backseat. Unfortunately, this is not a new phenomenon but rears its head every now and then when things get tough.
As Sathya Pramod, a veteran investor and the cofounder and CEO of KayEss Square Consulting says, “If you look at the ecosystem, everyone wants to show growth. The startup wants to increase its valuation, the VC wants to show better returns to his LP and the LP knows that startup investment is a risky asset class and puts pressure on the GPs for returns. So the whole system is under stress. When you are under stress, you will do anything to get rid of it and corporate governance is the last thing to worry about.”
There’s also this feeling among investors that for every company that comes under the corporate governance lens, there are many more that are unreported. Audits or due diligence don’t often address the core issue. “Talk about governance should start from the top. The governance aspect needs to be ingrained into the founders minds by the investors. If that can be done effectively, the ecosystem can grow,” Pramod added
Hire Only As Much As You Can Sustain
With over 22K layoffs since the beginning of 2022, we don’t need to explain why this is perhaps the most critical focus area for startups going forward. Hiring smartly and selectively will be a critical factor for startups that are looking to emerge from the slowdown without layoffs in the near future.
Satyadeep Mishra, CHRO, CleverTap believes that hiring has to be thought through from a design point of view as well as the cost point of view. Early-stage startups need to balance out the build vs buy equation and learn from the mistakes that some larger companies have made.
“When I say design point of view, this is about the organisation structure and the requirement at each level, and how a startup can leverage its talent pool at each level. And from the POV of cost, you need to create capacity internally for budding talent. Be mindful that 15%-20% of your hiring requisitions in 2023 factor in the early talent pool. Failing this, you would create an imbalance in terms of fixed costs, and then the only choice left for a startup is to reduce headcount,” Mishra added
Manu Rikhye, Partner, Merak Ventures adds that like all key business decisions, hiring and downsizing decisions need to be made based on sound business fundamentals, not lofty projections.
“Founders shouldn’t react with a feast and famine outlook towards talent. There needs to be a cohesive strategy that allows them to not over hire during good times, and not damage the muscle and bone, in the name of trimming fat. Startups also need to become sensitive to the socio-economic impact of downsizing and be empathetic,” Rikhye said.
Spend What Gives You 10X Returns
Indian startups have become so accustomed to living the cashburn life that when things get tough, the situation becomes far from manageable. But given the funding winter in 2022 and the focus on sustainable models, this is the time to evaluate the revenue impact of any and all spending.
Sanjay Swamy, managing partner, Prime Venture Partners has four mantras for founders of Series B or later companies. “Firstly, make sure you live to see June 2024 with whatever you have. Second, get to Default Alive status immediately, which means try to achieve profitability with your current resources before your runway ends. Third, stay laser focused on business metrics and unit economics, and lastly, factor in customer churn and reduction in spends. If churn hasn’t come yet, it will, so question all your existing revenue and projections.”
Merak’s Rikhye added, “Maximising returns and chasing higher ROIs on spends have to be a consistent yardstick for all spends, for a startup. Most startups focus on these only in the initial period, where they are very value conscious. In our view, a rational and value first approach to spending throughout the life cycle needs to be followed. This not only leads to better returns, but also helps the startup ride out rough times in a measured way.”
Know When To Expand And When To Scale Back
In 2021, we saw startups expanding into hot segments, but as soon as the funding tap shut in 2022, many of these verticals were shut down. The prime example of this was the craze for quick commerce, which has considerably slowed down. In the case of Meesho, the company laid off employees that were part of this vertical.
Now in 2023, new products and expansion into verticals has become secondary to survival. But at the same time, there’s a danger of startups trying to ape successful models because of FOMO.
The key to survival will be knowing when to expand and when to scale back, according to Harshil Mathur, CEO & cofounder of fintech unicorn Razorpay.
“2023 will be the year for businesses to showcase their resilience. As founders navigate macroeconomic headwinds, it is pertinent now more than ever to steer clear of innovation driven by FOMO. Giving into these distractions and thereby deprioritising your customers can be counterproductive. In other words, a customer centric approach should be the front and centre of how you address their current and future needs and challenges,” Mathur added.
Be Sharper On Unit Economics
When it comes to sustainable business models, the fundamental piece is unit economics.
“There is no denying the fact that strong unit economics is the key for sustainable and long-term growth and in maintaining the financial health of organisations, especially during economic downturns. In the future, it will become more crucial for startups, especially the ones in their early stages, to have the right understanding of unit economics for driving profitability and continued success,” says Marc Mathenz, chief financial officer of fintech unicorn Pine Labs.
Mathenz advocated for a data-backed approach that can unlock actionable insights and empower organisations to take informed decisions around unit economics.
In a similar vein, Padmaja Ruparel, cofounder of angel network IAN, added that while profitability is not always possible in the first few years, founders need to be focussed on key numbers. ”Gross margins, unit costs, EBITDA, cash flows. They need to have a real-time dashboard on these key parameters even if it’s too early for profits.”
B2B fintech unicorn Oxyzo’s cofounder and CSO Vasant Sridhar believes the stage has been set for Indian startups and now is the time to prove themselves. “This is the time for Indian startups to execute with intensity, build right and build tight. It is all about right unit economics at every product level and every category level, and building with prudence and frugality. After all, public markets have proved time and again, that you’ll get a PAT from them only if you’re valued on your PAT (profit after tax).”
Build A Culture That Fosters Employee Retention
While layoffs have naturally grabbed headlines among startups impacted by the downturn, one area that is often not spoken about is retention of those left behind in the wake of these layoffs.
Over the past year, we have heard from employees that have been retained after other layoffs about the increased pressure to perform, meet targets and also a feeling that another round of layoffs is coming. Employees who remain after a layoff may be concerned about their own job security
“Under these conditions, leaders should share future-oriented ideas as well as progress toward their plan of action on a regular basis. Most leaders communicate, but in times of stress, it is critical to communicate far more frequently than is customary. Transparent and regular communication should form a key part of a startup’s culture to prevent employees from quitting. Human Resources has a role to play in educating managers and helping them identify and address employee concerns as well as engagement setbacks,” says Ajoy Thomas, VP and Business Head-Staffing, TeamLease Service
Streamline HR Policies To Prevent Attrition
With talent being let go and many employees also quitting from unstable startups, the onus is on founders to clarify some of the HR policies that typically lead to attrition. One of the biggest issues in the past 12-14 months has been around mandates to bring employees back to the office after nearly two years of remote operations.
“In this volatile market, startups need to make their policies flexible in order to stay up to date and ensure that they are aligned with current laws and regulations. Leaders need to make the policies clear, concise and easy to understand. It is important to share the policies in a centralised location and make all employees aware of them. Regular open communication with employees will help in identifying areas of improvement,” according to Aditya Narayan Mishra, managing director and CEO of CIEL HR Services.
A survey by CIEL HR in December 2022 found that 64% of startup employees plan to move to a more stable job, mainly due to job security related concerns. The other problem is hiring for remote roles and then asking employees to come to a centralised office. “According to our study, 94% of job openings in startups are for ‘work from the office’. Given the fact that most employees continue to seek flexibility from their employers, startups should relook at their approach towards hybrid working style,” Mishra further said.
Collaborate To Grow Instead Of Competing
It’s very easy for founders to get trapped in competition mode when trying to navigate a tough time. But this can often make it more expensive to grow revenue.
To add to our points about a sharper focus on unit economics and return on spending, this is the best time for startups to look at collaborative growth. Collectives and industry bodies made a huge difference during the initial months of the Covid pandemic.
Dr Ritesh Malik, one of the most active angel investors in India and cofounder of OYO-acquired Innov8, believes such collectives can help startups believe they are not alone in fighting the slowdown. A rising tide will lift all boats. “There’s a proverb in Hindi, ‘Ek Aur Ek Gyarah’ (1 plus 1 equals eleven). The ability to collaborate is one of the most underrated possessions in a founder’s toolbox. There are emerging sectors where the demand is so high, that startups can co-work to tap this opportunity.”
Collaboration can have a real impact on go-to-market costs, reducing service overheads, creating more employment opportunities and also eliminating unit economics hurdles.
Dr Malik added, “Our core focus as founders should obviously be to individually succeed but also to achieve ecosystem growth. The responsibility of startups is to ensure standards that foster collaboration rather than walled gardens.”
