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Profits, positioning, partnerships – Bangalore Business LitFest authors dissect India’s startup ecosystem >
by Madanmohan Rao [August 31, 2024]
In two weeks, on September 14, the tenth edition of the Bangalore Business Literature Festival (BBLF) will kick off at Catholic Club. As network partner for BBLF 2024, MXR.world is delighted to present its second preview article, with insights on India’s startup ecosystem.
Other themes of BBLF 2024 include digital transformation, career planning, corporate governance, industry leadership, investigative research, urban habitat, and environmental sustainability.
In this article, we share insights from two authors on entrepreneurship: Dhruv Nath (The Earnicorns; The Dream Founder; Funding your Startup) and Pradip Saha (The Learning Trap: How Byju’s Took Indian Edtech for a Ride).
India’s startup journey
Both authors share their analysis of India’s startup story, particularly the road travelled thus far.
“India’s startup sector is a work in progress, and I think investors have a major role to play. For years, investors have been pumping money into loss-making startups. Corporate governance has also been overlooked as long as there was growth,” Dhruv Nath observes.
Today, however, investors are asking searching questions. “The recent fiascos such as Byju's, and the controversies with Rahul Yadav and Ashneer Grover, have made them sit up and take notice,” he adds.
Investors seem angry with constant losses and increasing cash burns. “Startups, all the way from early-stage ones to unicorns, are realising that such old habits will not work anymore,” Dhruv says. But it will take a while to see real change.
At the same time, there are also some founders who are always clear that they ae not going to be creating loss-making unicorns. “They are creating profitable companies – those that earn money, and therefore I call them Earnicorns,” he explains.
“I would say India’s tech startup sector is headed towards a more mature phase after a few years of rapid growth, fuelled by the pandemic and access to easy capital,” Pradip Saha observes.
It has come a long way over the last 15 years. “But there is still considerable ground to cover before we see best practices and effective governance taking over, and profitability becoming the norm,” he adds.
A large number of startups sacrificed ethics and good governance in the blind pursuit of growth. “The good thing, however, is that many people, including investors, have started asking questions that, in time, will hopefully lead to greater scrutiny and ethical practices,” Pradip says.
Myths and misconceptions
The startup journey is not without its ups and downs, twists and turns – as well as myths and misconceptions.
“The biggest issue is that founders have assumed funding will come in – at higher and higher valuations – provided there is growth and the company is moving towards dominance,” Dhruv observes.
That has now changed, and investors are demanding a path to profitability. “Otherwise, funders refuse to invest. And of course, revenues are not enough to demand high valuations anymore,” he adds.
Fundraising and valuations should not be depicted as if they are magic tricks. “A high valuation cannot solve all problems, and fundraising is not simply about finding the right investor,” Pradip observes.
“The reality is that valuation is a complex process involving many factors. Fundraising is a challenging task that requires careful planning and execution,” he affirms.
Many good companies across countries and eras have stayed bootstrapped and even undervalued until they listed. “Simultaneously, there have been companies with shaky fundamentals that have burned through billions of dollars in venture capital,” he says.
“Another critical factor is that fundraising and valuations during boom times do not present the real picture of a company or the sector. The fundamentals often get drowned in all the noise,” Pradip explains.
“For founders, the biggest learning from the Byju’s episode must be that there is no shortcut to success. If you don’t have strong fundamentals and a solid business plan, even billions of dollars in fundraising and dozens of acquisitions won’t save you. You can’t just raise funds and buy your way to success,” Pradip cautions.
Successful scale-ups
There is much more to the startup ecosystem than market corrections, pivots and acquisitions – several have broken through to sustainability and profit even without funding.
As startups with outstanding business fundamentals, Dhruv points to founders who have run profitable, frugal businesses such as Naukri, IndiaMART, MamaEarth, Zerodha, and Dream11.
“Nithin Kamath of Zerodha puts it brilliantly: We did not TAKE money, so we had to MAKE money,” Dhruv explains.
There are also market leaders who were loss-making earlier but have moved to becoming real businesses. “This includes Zomato and PolicyBazaar, who have great business models now. The fact that they are dominant players with huge branding helps as well,” he adds.
Governance and boards
It is important for startups to put in place governance frameworks right from early stages, rather than only after they achieve scale.
“Ethical behaviour, discipline, and good governance should be the first building blocks, parts of a company’s DNA—like second nature. It's very difficult to build a large company without these values and then try to implement them later,” Pradip cautions.
He likens this to trying to plant roots after a tree has already grown tall, or lay a foundation after a house has been built. “It just doesn’t work that way,” he observes.
Investors can play an important role in governance of startups and provide key inputs based on their experience. “Successful founders are those who are willing to listen to investors and take action when required,” Dhruv suggests.
Startup ecosystems
Effective global competitiveness and local relevance calls for greater industry, academia and government collaboration to advance the startup ecosystem.
“We can’t imagine a thriving startup ecosystem without meaningful collaborations between industry, academia, and government. Academia can contribute through research, talent development, and intellectual property,” Pradip affirms.
Universities serve as a feeder system, thus ensuring a steady supply of talented youth. “The industry can offer mentorship and market access to startups. The government’s role is to formulate favourable policies and regulations to create an environment where startups can thrive,” he describes.
He also stresses the importance of establishing two-way communication channels. “This allows industry, academia, and government to exchange ideas, share knowledge, and align their goals to build a vibrant startup ecosystem,” he explains.
“The 100+ Atal Incubation Centres (AICs) that have been set up in colleges have gone a long, long way in helping incubate startups,” Dhruv observes. He cites this as a good example of ecosystem collaboration.
All three – the government (which provides funds and support), colleges (which house the AICs) and industry (which provides mentorship as well as funding for appropriate startups) – work together, according to Dhruv.
But much more can be done here. “For instance, while colleges do house these AICs, faculty is rarely involved. Therefore, these startups do not get the benefit of their experience, and faculty do not get the benefit of real-life action, which could add significant value to their courses,” Dhruv says.
The road ahead
Both authors share insights on where India’s startup ecosystem could be in a year.
“I think there will be a maturing of AI. Today, it is a buzz word. Everyone – and his grandmother – is talking about AI,” Dhruv observes.
But many applications are not really AI. “Many founders use the term essentially to increase brand value and attract investors. It's a bit like the dot.com boom in the late 1990s,” he adds.
“I hope some things change. I hope people stop hero-worshipping and putting founders on a pedestal,” Pradip says. He hopes that the public, investors, and regulators all start asking more questions instead of taking everything founders say at face value.
He also hopes the era of ‘access journalism’ ends. “Journalists should focus on asking entrepreneurs about what they have done with the capital raised, rather than just celebrating fundraises,” he urges.
“I hope investors become more judicious with capital allocation and startups stop taking shortcuts. I hope the blind pursuit of growth ends, and that more businesses and startups start focusing on sustainable operations and profitability,” Pradip signs off.
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