Billion seems to be the new $100 million at least as far as startups go. While the world is reeling under the deleterious effects of the coronavirus outbreak and India has been hit hard by another wave, startups are raising hundreds of millions of dollars at billions of dollars of valuation. A new unicorn— businesses valued at a billion dollars and more—seems to be born every day.
So is the question: are we in a bubble?
The answer is that no one knows until the bubble bursts. As Warren Buffet so colourfully puts it, “It’s only when the tide goes out that you learn who has been swimming naked.”
The valuation of a startup is nothing but what someone is willing to pay for it, the price at which new investors are willing to invest into the startup. You and I don’t need to agree with the valuation. Some of the smartest investors in the world are doing the investing and setting valuations. That doesn’t stop them from being wrong as evinced by the dotcom and other busts. But if they are consistently wrong, they will soon be out of business.
Timing is everything.
Venture capitalists and private equity firms are investing their LPs ’ money. Large pension funds and other institutional investors are traditionally conservative investors but with bond yields at negative levels in Europe and very low levels in the rest of the world, they have been forced to take on more risk to fund their liabilities.
If the US one-year treasury rate was yielding above 14 percent in 1981, why bother with investing in anything else? The ultra-low interest rates coupled with the unprecedented trillions of dollars of stimulus due to COVID-19 has caused valuations to increase across the board—startups, stock markets or cryptocurrencies.
Also read: Gupshup becomes 10th unicorn of 2021, Tiger Global leads $100 million round
Indian startups are lucky to play in a large market, one of the largest in the world. Whether it is in B2C or B2B, the sheer size of our domestic market gives every startup a very high TAM to start with. Large unicorns and decacorns can be built in such a huge market. India is one of the largest smartphone markets, has digital payments and has a very poor physical retail presence.
Using websites and apps, startups can reach hundreds of millions of customers easily across the country. Ecommerce companies can ship across India to the remotest pin code. Hyperlocal companies like Ola, Swiggy and Zomato can quickly operate in 500 cities or more given enough capital.
Payment companies like Paytm and PhonePe can get millions of customers as digital payments have taken off, especially after the viral outbreak. Given the size of the market, the only thing stopping these companies, and other startups, is capital.
Global capital is flooding to India because the US and China consumer markets have become highly mature and are now dominated by large players. India is the largest consumer market still open in most sectors.
Global investors can deploy large amounts of capital in India, help entrepreneurs build huge businesses across the country and see good returns in a short time.
Startup founders have to show hypergrowth to attract these funds and show that large rounds of funding will lead to sustainable mega-enterprises. It is normal to run huge losses in the initial years as they spend on discounts, marketing, technology and teams to scale rapidly once they have product-market fit.
Also read: Listen all ye startups—ignore USOs, keep calm and carry on building
It’s the (different) economics, silly
People who don’t understand startup economics keep wondering why loss-making companies are getting so much funding, while profitable real-world businesses are not. The answer is scale, scale and scale.
Real-world businesses can only scale linearly, while tech startups can scale exponentially. Investors want exponential growth and large outcomes in a short time and only tech startups can do this.
Net net, it is a good thing for India to attract such a huge amount of funding. Consumers benefit from lower prices, more convenience and more choice. Tens of thousands of jobs get created by each unicorn as it scales. More success stories lead to even more investment coming into India. The ingenuity and hard work of founders should be celebrated, not questioned.
At the same time, founders should not fritter away the funding they raise. It is easy to chase the wrong metrics. Growth at any cost can lead to no growth or collapse when the funding runs out. It takes a rare founder, level heads to use the money raised to build a genuine, sustainable and long-lasting company. We are seeing the Indian startup ecosystem mature and great young founders are doing wonderful work.
Ultimately, it's a win-win for everyone. Founders have to ignore the armchair critics who rub their hands in glee when a down round happens and share on Twitter and elsewhere old financial data on how this startup or the other has negligible revenue but huge losses.
Why startups need funding
Yes, that is why startups need funding. To get to product-market fit, to build their tech platforms, to hire world-class teams and to scale step by step by acquiring millions of customers. Every great company that we use today—Apple, Google, Amazon, Flipkart, Paytm, Swiggy, Zomato, CRED, BigBasket and others—were tiny startups once with zero or minuscule revenue and huge expenses. Not expenses but an investment for the future!
We should all cheer the intrepid founder who instead of being an MNC employee took huge personal risks, lived through periods of deep depression and euphoria, sometimes both on the same day and took a shot at entrepreneurship. Thanks to them we have almost everything at the click of a button—fresh food, medicines, healthcare, payments and unlimited entertainment. They deserve our support and accolades, not second-guessing or criticism.
For the 99.99 percent of the founders toiling hard, remember that unicorn valuations are extremely rare. Valuations are a matter of timing and luck, of being in the right sector and finding the right investors.
As founders, all we can do is focus on building a lasting company by meeting the deep need of our customers. Use the power of compounding to your advantage—keep plugging away one customer at a time and slowly but surely will build a large, lasting business.
Chasing vanity metrics, trying to find shortcuts, looking for the latest growth hacks, trying to grow at any cost by incurring huge burn is not the way to go. Value is different from valuation. Founders should focus on creating a lot of value for all stakeholders. Success will surely follow.
Here is wishing more such stories among the gloom and doom of the pandemic.(K Ganesh and Srini Rai are serial Entrepreneurs, partners at GrowthStory.in and promoters of startups such as BigBasket, Portea Medical and Bluestone, among other businesses. )