Notions in India on Startups – Are Few Startups Spoiling the Ecosystem?
[Guest post by Sujai Karampuri, CEO of Sloka Telecom. What is this post about? Tons of realities and observations. Better read the entire article and share your comments.]
There is a prevailing notion in Indian startups that the minute you get heavily invested by a VC, you are successful. The fact that some VC has deemed your business worthy of investing is a good enough reason to feel that you are successful as a business.
Now, that you are invested, you feel a bit special. Since you are no longer scouting for money like other entrepreneurs you think you are now a serious company. That feeling is good enough to put a stop to all that hanging around with other pauper entrepreneurs. That also means putting a stop to attending the Barcamps, MoMo, Headstart events, etc.
I attended a NASSCOM event on products and innovations. In one of the panels showcasing successful product startups, they also invited social networking and other dotcoms. I was sitting there wondering – what is the common element in all these startups? Some of them were not innovative and some were not even making products. Why are they considered successful? The only thing that was common was that they all got funding recently by some big name VC in the order of few millions.
The fact that you got invested is a good enough reason to believe you are already successful. Even the VCs, the media and observers will believe that.
So what happens once you get invested?
There is another prevailing notion that once you get invested, somehow all your financial problems are solved. The new startups which get heavily invested start looking for a swanky office with nice carpets, interiors, woodwork, cabins and cubes. They go back to getting cushy salaries with luxurious perks.
Overnight, you are no longer a poor boy. In fact, it’s like getting married to the only daughter of the Sultan of Brunei. You travel luxury class, stay at five star hotels, get into all kinds of forums, wear suits, and rub shoulders with biggies. You can now go about thinking about that new apartment, that new swanky car, and that investment into real estate that you have kept on hold when starting the startup. Now you go to work as if it’s a regular job, filling excel sheets, project plans, as you did before the startup. The hunger is already gone and now it’s replaced by satiety, too soon too fast.
I see a dangerous trend in Indian startups. I am not comfortable with it.
Startups in India see their first round of heavy investment as a major achievement in itself. They see it as an end in itself. They see it as a major milestone after which all problems are solved. This particular single-focus goal is detrimental to its long term prospects as a business. Usually the startups go through a process of exhaustion and starvation and the thought of a gush of money is a welcoming prospect, so much so that, their entire focus is now shifted to raising that money instead of concentrating on other business goals. Once that investment is made, you back to your old style of working.
I know of few companies in Bangalore which are setting very bad examples. These companies have ‘successfully’ raised many rounds of funding and yet, there is no product release or source of income. Most of the time is spent in partying and celebrating little achievements which have no consequence in business.
In a city of very few successful product making companies, to have a few bad apples will have negative effect on prospects of future investments. Unlike Silicon Valley which spawns thousands of startups which are VC backed, India produces very few. And if out of those very few we start seeing bad examples that sets a negative outlook on future prospects for Indian product startups.
Some VCs who witness these trends, instead of correcting them, are actually casting a blind eye, and are believing themselves into a delusion that everything is going alright, when in fact it is not. They cover up the inadequacies of their startups and keep promoting them in all forums and events as if they are best companies on the planet.
The first round VCs think their startup is successful if it is in a position to raise the second round. And second round investors in turn believe it is a successful company if it raises the third round, and so on. Nobody is bothering to check if these companies are actually creating value as a business, in terms of market share, revenues and profit margins.
This trend of blowing up the VC money may work well in Silicon Valley where there are thousands of companies being started every year, and few bad apples will not make a big difference. In India, where there is dearth of startups and where a paltry number of companies get invested, this trend does not bode well.
A startup should have the same hunger even after they raise their round of heavy investment. That hunger should keep them going after pursuing the markets, getting the cash into the company. They should not squander the money. Instead they should continue to use the art of managing the cash flow wisely as they did prior to their investments. They should not let go of this innate strength all in one episode.
Indian startups need to set successful examples of using India as a cost-effective way to launch global brands of high quality products. They cannot start behaving like Silicon Valley companies just because they got invested by a Silicon Valley Investor. Both the entrepreneurs and VCs should realize this.
About the author - Ashish Sinha is a Startup Mentor/Product Strategy Coach, and the founder/chief editor of pluGGd.in.
He has launched/managed couple of products (consumer as well as enterprise) in US and India, and now consults with startups/small businesses on their product/media strategy. He can be reached at: ashish (at) pluGGd.in [+91 98452 06443]
He has the right vocabulary and tone to set things right, hats off to you Sujai !
superbly written and unfortunately true
i keep scratching my head on what the revenue model for a lot of these newly funded startups really is – have asked this to a lot of VC’s, entrepreneurs and no one has been able to give me a satisfactory answer yet!!!
why does having a swanky office and staying in a five star denote a good product or a successful company? its the idea or the product that you have which counts and NOT these shenanigans or trappings of self appointed or assumed glory
[...] Notions in India on Startups – Are Few Startups Spoiling the … In a city of very few successful product making companies, to have a few bad apples will have negative effect on prospects of future investments. Unlike Silicon Valley which spawns thousands of startups which are VC backed, … [...]
Very true and very well written. Nithya and I both share the same sentiment and have written about it in our personal blogs. Good to know some other people share these views too
Please checkout the following posts for something similar but from people who are into a web 2.0 business
http://prateekdayal.net/blog/2008/04/03/are-you-serious-about-your-startup/
http://www.nithyadayal.com/blog/2008/04/02/whats-the-measure-for-success-for-a-web-20-venture/
A very well written post. I agree to most and disagree to some of the points mentioned.
I agree that many companies which do get funded do not have an innovative product or a solid source of income but innovation according to me is a relative term. While something may sound innovative to me, it may sound stupid to you. Similarly some business model may make sense to you but be illogical to me.
What I mean to say is :I may not understand an idea but that may still do a rocking business.
Another thing I know from personal experience is that if you need to hire people you need if not a swanky office, at least some decent place. For not all people will work at a startup just for the work. We have tough time convincing people to work with us for this very reason.
While there is no doubt that startups should have unending quest for newer markets, opportunities and funding is like adding fuel to fire not dousing the fire…
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These companies have ‘successfully’ raised many rounds of funding and yet, there is no product release or source of income. Most of the time is spent in partying and celebrating little achievements which have no consequence in business.
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Hi Sujai. You seem to be very much affected with this investment thingy. I read something simillar in your blog as well. To start with, forgetting the social networks, most of the startups that got funded in India, do infact have a better business model/product idea than the some of the ones in the valley.
Secondly, what is wrong with partying. Infact, I would like to see all Indian startups happily partying, which is not happening, strangely. Most of the startups I know, work crazy on all the weeks and are like totally geeky kind of atmosphere. As a startup, the first impression you should convey is “Startups are cool” and not “Startups are worse than services industry”. So please plan your next party at the earliest.
Third. Please don’t repeat that word “Cost effectiveness” any more. I want to see people in India earn more salary or atleast a decent salary. It doesn’t make sense to work for $420 starting salary. Any company would be willing to spend even on pay, if they see enough value. I want all Indians to be so sound enough that they should be offered the same level of salary, a typical american engg (who needs a calculator for summing “10 + 2″) would be earning.
Lastly, please encourage VCs to invest more by writing something positive. Last year, the total investment our entire nation got was equal to some 20 sillicon valley company’s total funding.
-Prabhu
#5, Prabhu:
‘Cost-effectiveness’ does not necessarily translate into ‘low salaries’.
@prabhu
“please encourage VCs to invest more by writing something positive”
if there is something positive everyone will talk about it… no need to nudge
a LOT of people write positive things even if theres nothing really to write about… which is sad enough..
This post is awesome… reality checks like these are necessary in the Indian scenario cos there are more.. strike it.. PLENTY of bad apples here…
As far as I know- VCs do have a performance clause – i.e. the entire fund is not given away for fun/parties – there are milestones defined (every 5-6 months).
My only qn is what makes you think that VCs aren’t monitoring the progress?
“Most of the startups I know, work crazy on all the weeks and are like totally geeky kind of atmosphere. As a startup, the first impression you should convey is “Startups are cool” and not “Startups are worse than services industry”. So please plan your next party at the earliest.”
Are we doing it to eliminate service industry or to compete with them or look cooler? I don’t think so. Who is our enemy here. Every other giant that we want to steal a piece of the pie from. Will our customers pay us more if we are a cooler company and are not so geeky or will they pay us if we have the most useful set of features they want. If its the latter thats only possible by working like crazy (or may be I am too dumb and need to work too hard to get a good feature out)
“. I want to see people in India earn more salary or atleast a decent salary. It doesn’t make sense to work for $420 starting salary.”
How about wanting to see people making a million dollar, which is why in the first place you are working for a startup. Its not another job if you believe in your company. Its a ticket to big money .. but more like a lottery ticket .. only much better that that.
“Lastly, please encourage VCs to invest more by writing something positive. Last year, the total investment our entire nation got was equal to some 20 sillicon valley company’s total funding.”
And the numbers of successful exits ?
Finally I don’t understand what you mean by “investment thigy” ? You mean saying investment scene in India does not make sense is wrong? Don’t you agree with that? Also on one of your blog posts, you write about how Indian startups are not competitive enough
http://desistartups.wordpress.com/2008/03/28/top-5-excuses-indian-startups-prabhu/
and then you recommend, don’t be all geeky, party and don’t just work hard. May be we need to discover how to get a product out in limited resources without really slogging it out.
Please take this positively … may be we are not on the same plane. I think you need to get together with some of the Indian startups and see how they work and where is the disconnect.
Regards
Prateek Dayal
Muziboo.com
These companies have ‘successfully’ raised many rounds of funding and yet, there is no product release or source of income. Most of the time is spent in partying and celebrating little achievements which have no consequence in business.
@ Prabhu, Let me tell you how this is very true from my personal exp.
I have been part of a product company. In ‘99 they raised their first round of funding for their idea in blue tooth and a few months back when they shut shop they were desperately trying to play a catch up game in the wireless space. They had successfully managed to bust something close to $50 mln.
The following are the typical symptoms of VC funded losers
1) They always talk about future projections. They never accept the dismal present
2) They always sell job on the ‘cool’ factor
3) When asked about revenues, they talk of the next round of funding thats soon coming through.
And in ‘99, a bunch of geeks from Bangalore started off with some angel investment on their bluetooth idea. They cudnt manage to impress the VCs. Their office was not swanky, they didnt look cool or party.
They sailed all through with the limited investment and product sales. In 2004 they had 3 offers for buy-out and they chose what they wanted.
Cant you differentiate a loser from a winner?
@sujai
By “cost effectiveness” if you didn’t mean “low salary”, then I appreciate that. I misunderstood you on this one.
@Jagannath
Yes I agree. Few people are not proceding in the right direction. It is upto bloggers like us to pinpoint them to the right direction.
@Nithya
You have rightly pointed out two out of 4 possible options. Let me list down all options.
Winners
1. Those who get invested.
2. Those who dont get investment (or doesn’t want to)
Losers
3. Again, those who got invested.
4. Those who didn’t get any investment.
You’ve given good examples for (3) and (2). You want me to give examples for the other two?
@Prabhu
This post by itslef does not discredit the existence of funded successes or other failures. It talks only about a few rotten apples in the industry. Hence other examples would be superfluous.
@Nithya My point is this. “How do you tag an apple as rotten”. Just because they are partying doesn’t mean they are rotten. Just because they dont have revenue or Finished product, doesn’t mean rotten.
Also having 4 buyers for a company doesn’t necessarily mean the best exit. We have companies like Webchutney which the founders have been running for long and long. They could have easily become the so called “Serial entrepreneur” right?
The whole point I am trying to convey is simple. If you feel some startup is not going the right way, and you know the market or know of some better ideas, present them to the founders in a friendly way. The founders listening to those ideas or not listening is a different issue.
For people happy/not happy with my view, I am prabhu.subramanian in gtalk.
Interesting points Sujai – I know which startups are you referring to
I have one qn for you – are VCs really that dumb to not monitor a startup’s progress?
If yes, I believe India will go for one round of blood bath and that will set the things straight!!
@Prabhu – you are in a diff. world dude ..I couldn’t stop laughing after reading:
” If you feel some startup is not going the right way, and you know the market or know of some better ideas, present them to the founders in a friendly way.”
- Always remember that just because somebody has startedup doesn;t make them more friendlier – humility is part of one’s character – u either have it or not.
@harpreet. Agree with you. Not everyone listens to what you say.
#14, Harpreet:
“I have one qn for you – are VCs really that dumb to not monitor a startup’s progress?”
I don’t think they are dumb. I wouldn’t say that.
However, some VCs, who join hands with many other investors, are just allowing these startups to raise more money in spite of any tangible progress. Its not that they don’t realize what’s happening. Its just that nobody wants to admit it. Its more like not able to admit Emperor has No Clothes.
By raising more investments that includes more number of investors, they like to share the risk, and in this case, they like to share the burden of failure, in case a failure happens. If there are say 10 big investors and the deal has gone bad, then a VC can easily say, ‘Look, there was no way I could have known this. So many other big investors could not foresee it either’. I think its more to do with saving one’s ass.
Its not unique to India. It happens in Silicon Valley as well. But then in Silicon Valley, they chase so many deals that even if some fail after repeated funding, they have no problem. I am not sure if India has so many deals that it can afford to do this.
Can a VC say, ‘Yes, this deal is going bad, I don’t think we can make anything out of it’. Not really. Instead he likes to either get an exit by delivering the burden to a big tier-1 company through an acquisition, or make the project attractive to get more investments through new investors and hope the team will somehow create the magic which is now long overdue.
And if the founders or the management team is composed of people who-have-already-done-it-before, it becomes tough for the investors to confront them.
Regular ppts showing some kind of progress (even though there is none) sometimes does the magic of making people believe that Emperor is clothed in Gucci.
One reputed ex-entrepreneur once told me, ‘When it is a ppt, your startup is worth $30M. When you actually start it, it is is $20M. And when you actually make the product it is worth only $10M. And when you actually start making revenues it is not even $5M’.
All of the above mentioned words make lots of sense to me as well but I’m still wondering if the strong appeal in the words is biasing my mind too much?
After all its the personal opinion of Sujai in the way he came across to people, talked to them, observed them, analyzed them etc. etc.
Why should the notion he believes exists really are negative?
What is so negative about coming out to a comfort zone, once you are funded?
What is so negative about thinking yourself successful, when you receive your first round of information?
What is so negative about VCs lobbying for the startups, which they have invested in and aren’t really getting expected business? Aren’t they supposed to do all this irrespective of the fact that what the status really is (which they know very well internally)?
I agree that there are a couple of examples, which are perhaps being targeted but then isn’t it really okay? Who guaranteed that all the initial investments will really turn out to be the most successful ones? After all everyone wanted money always, they still know it very well.
Sometimes I wonder if these observations will really hold good at all after India has seen one cycle of successful entrepreneurs? We’ll have more investors, more angels, better focus on startup business etc. etc.
Till then it is perhaps okay to have such observations to keep startups under check realising that strong conviction makes an observation a rule, which we as entrepreneurs shouldn’t believe too much.
Guys and Gals,
Time to drop some names…
Give it some time. After VCs get burned for awhile, won’t expectations change?
@ Piyush: perhaps the key is to have a complete boom AND bust cycle. That’s when investors and entrepreneurs tighten up and focus.
@ Taylor
“perhaps the key is to have a complete boom AND bust cycle.”
That didn’t help the silicon valley either.
cheers
nilesh