The startup ecosystem in India has never been more conducive. Startups that have received funding are lucky, since their idea or product has been validated by investors. However, while in 2014-15, when the startup scene in India exploded and investors jostled to grab a piece of the pie by pumping in billions of dollars, 2016 is a different story. Marked by a significant drop in startup investments (24%) and a new air of caution, there are only a precious few who have made the cut this year.
The much touted hyper-funding has not had the desired impact with many startups falling. In 2015, about 13 startups closed shop. Others like Tiny Owl and Zomato, scaled down. This year, PepperTap, Zippon, Frankly.me and many more closed operations while quite a few like Grofers, an online delivery platform, scaled down operations.
The truth of the matter is not a shortage of funding; there’s plenty of that going around. But, fund managers are tightening their purse strings, smartening up from the lessons learnt from past excesses. To avoid repetition of what went on in the gold rush in the previous year, founders need to fall back on disciplined guidelines.
Here’s how startups can regulate their spending before they lose their chance at success:
1. Treat the money as your own
Learn to run lean and mean. If the startup works on a calculation factoring in expenses for the next 12 to 18 months, whatever excess funding is received should be spent judiciously as per a blueprint where essentials are prioritised. Some funds need to be put aside and saved for unanticipated expenses, if further funding is delayed or turns out to be insufficient.
For instance, in an era marked by unrealistic valuations disproportionate to the value of the actual holdings of dotcom companies, many received funds in excess. Airbnb, which was pegged at a valuation worth more than the Hyatt and Wyndham hotel chains, without any physical assets, is a perfect example of this trend. With such flush money many startups splurged on temporary one-upmanship games. Investors who put in so much money in return expected a higher than normal rate of growth.
As the CEO of PepperTap admitted, “In a race to pepper the whole country with PepperTap, we had brought too many stores online far too quickly.” They were not equipped with the technology and know-how to handle such a rapid scale up. Ideally one should not accept a disproportionate amount of flush funding as it comes with equally disproportionate investor expectations which, in turn, put undue pressure on the startup to deliver and scale up.
2. Plan fund outlays keeping the ROI (return on investment) in sight
When planning your hiring strategy, product development or market spend, always calculate your ROI (Return on Investment). Utilise the funds wisely so that you have enough funds and logistical framework and expertise to grow the startup to a sustainable break-even phase.
The furore in 2015, over the discount and freebie wars among ecommerce startups is a lesson for new startups with fresh funding. All these companies were focussed on market share, through predatory pricing undercutting rivals. But, the very fickle nature of the model was self-defeating. As a result, there was no lasting customer loyalty. They were only as good as the last discount.
Take, for example, the case of food delivery startups which went bust. Companies were buying at 100% prices and selling below cost price. This led to negative gross margin.
The money should instead be spent on ensuring that the business is able to self-sustain in the long run, with no dependence on investors.
3. Move away from copycat ideas and invest in creating original value
In the new investor climate, the way to go for any company is digital with a clear go-to-market model. For me-too ideas, future growth seems bleak. Innovation will be the name of the game, and unless you are delivering some real value to customers and addressing some gaps in the market or major pain points, you can’t sustain for long in the market.
Remember, how difficult it was to get this funding – right from building the product, fine tuning the business model, networking, doing up presentations and pitching for money. Spending it of course, demands double the care. So, spend judiciously to create more value for all the stakeholders in the long run and to ensure that the business stands the test of time.