Last month, a two-year-old Indian startup raised US$7 million from top VCs and had more than half of it left in the bank. But it decided to shut shop because it could not scale.
In the southern Indian state of Kerala, about 99 percent of the startups in the state’s incubators – Startup Village and Kerala Startup Mission- are turning out to be just web design shops which barely make any money.
And then there are the many mergers – led by Flipkart’s buying of Jabong, which was earlier running the risk of running out of funds – offering the fig leaf of protection to startups that are otherwise stuck in a rut.
See: Flipkart just acquired Jabong. Here’s what it gets with the big buy
Welcome to the age of zombie startups in India – a bunch of companies that are not dead yet, but are desperately looking for a way out. Industry insiders say about 40-70 percent of the startups currently active in India would fall in the category of the un-dead.
“From an investment standpoint they should be closed down, but you can’t be absolutely sure because you don’t know, because there could be something going on,” explained Ravi Narayan, Global Director of Microsoft Accelerator, which counts ZoomCar and Voonik among its graduates.
A tell-tale sign? The sudden rise of mergers.
A rise in mergers and acquihires can point to rising zombies. Photo credit: lightwise / 123RF.
“In the last 18-24 months there have been a lot of acquihires in India. It’s not led by a Microsoft or a Google, but startups buying other small startups. That kind of a phenomenon is happening under our noses as we speak,” he said, explaining that such mergers are often a way for startups and investors to get an out when organic growth has stopped.
See: Fashion tech gets skinnier in India with ecommerce site’s fifth acquisition of the year
In 2015, Indian startups got US$62.94 million in seed funding for over 245 deals, according to Traxcn. This year till August, that figure fell to US$38.92 million, spread over 157 deals.
That lack of easy money will lead to more zombie startups in Bangalore, Delhi, and elsewhere, investors said. But there is more to be considered than just a lack of funds.
“Do remember, having money in the bank does not mean you are not in Zombieland. You can have money and zero innovation and can be a fat zombie. Founders can be very innovative [and] have money in the bank but can have such a trashy culture that smart people don’t want to join them,” explained Ravi Kiran of accelerator VentureNursery, which counts OYO Rooms as a graduate.
How to spot a zombie
Photo credit: lightwise / 123RF.
Because of the fast moving and fluid nature of startups, it isn’t easy to call them out – why investors and startup founders Tech in Asia interviewed for this article refused to name names. After all, there could always be a pivot the world does not know about, or restrategizing that is taking time to show results.
You keep telling yourself let’s watch one more quarter. It’s a cultural thing
“You need to be intimately familiar with startups to know that, but I will say that the basis of how startups get into this mode is where the original hypothesis that the founders and investors had for the company doesn’t really play out,” said Matrix Partners’ Tarun Davda.
It is the founders’ responsibility to make a call and talk to investors about their problem. Trouble is, cases like GoZoomo, where the founders made the adult call of not squandering away investor money, are rare.
“It can take a long time to die. I’m not going to name any names, but you could simply cross reference yclist.com with alexa.com, and any company that shows little to no growth in web traffic in the past year that claims to still be operating is probably a zombie,” Danielle Morrill, CEO of research firm Mattermark, says in her blog.
The process can be long and sad. Photo credit: Pixabay.
Microsoft’s Ravi said it’s typical for investors to allow no more than four quarters as a rope to founders.
“If your growth has stagnated for three quarters, it becomes evident that you need to consider options, and by the fourth quarter if you’ve not taken any drastic action, either you change your business model completely, or consider an exit option.”
For VentureNursery’s Ravi Kiran, if a startup has less than six months of money left in the bank at the current burn rate and the founder neither has a term sheet in hand nor is able to take hard calls, that’s the beginning of the red zone.
Mattermark’s Danielle has a more comprehensive list. How do you know if you startup is falling into this trap? Here are some hints:
- You don’t want to get out of bed in the morning.
- You don’t want to go out in public for fear you’ll have to explain what you do.
- You haven’t hit 10 percent week-over-week growth on any meaningful metric (revenue, active users, etc).
- You’re working on the same idea after 12+ months and still haven’t launched.
- You’ve launched a consumer service and have less than two percent week-over-week growth in signups.
- You’ve launched an enterprise service and have less than two percent week-over-week growth in revenue pipeline.
- You are the CEO and hole yourself up in the offices so you don’t have to talk to employees and can read TechCrunch. (Or Tech in Asia, depending on where in the world you are, may we add!)
- You’ve hired consultants to figure out revenue, culture, or product in a company of less than 10 people.
- You’re at SXSW right now reading this post and trying not to cry.
Update: I’m not saying you need to hit 10 percent growth every week, but you should have hit it at some point like launch or some other PR event.
The investor’s dilemma
Photo credit: Pixabay .
Like with any other problem, the first step towards fixing a zombie startup begins with the founders accepting they are stuck. But even when an investor has spotted trouble, the Indian culture and ecosystem stops VCs from ruthlessly cutting cords. This complicates things.
“The level of objectivity that you’d have definitely reduces quite a bit once you’ve been with the startup for long enough time. So you start being the frog in hot water,” Ravi explains.
Don’t kid yourself that if you just chug along, things will self-correct; they don’t
“You keep telling yourself let’s watch one more quarter. It’s a cultural thing, but I think it’ll change once we have have enough of a history and track record. When the maturity starts setting in, like we see in the west, we will see VCs pulling the plug much faster.”
There is of course more to this than just being helpful money-bags. All investors are looking for an eventual exit, and while most these days do have a clawback clause, early stage backers can still lose all their money if the startup shuts shop. Pivoting can be a better option.
For Matrix, which counts Ola and Practo in its India portfolio, it’s about backing the founder.
“We’ve had our share of startups that haven’t worked out, but at least the way Matrix thinks about it is, we are backing the founder. We are less of idea and market backers and more of founder backers. So as long as my conviction in the founder stays the same, we are happy if they come back to say they need a rethink,” Tarun said.
The way out
Turning around is possible, but needs a lot of introspection. Photo credit: lightwise / 123RF.
With as many as 70 percent of startups in India running in Zombie mode, it becomes imperative that the industry looks at ways to get out of the funk. Here’re some to-dos if you secretly fear you are plodding through a dark tunnel, as advised by Ravi Kiran of accelerator VentureNursery and Ravi Narayan of Microsoft Accelerator.
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Look within yourself for advice, stop talking to too many people and stop reading about the Death Valley and watching Zombieland.
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Take stock of the market opportunity ahead of you and see if there is a good pipeline to serve that opportunity. You could still have a couple of million dollars in the bank but don’t spend any of it if it’s not going to help pick your pace up. Taking stock is basically saying, are you sitting on something that is looking up?
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Ask yourself some simple and fundamental questions. Why did you start this thing really? How well did you really understand your customers? Did you somehow manage to suck up to your investors and have partnered with them to blow someone’s money? Did you make promises to your employees on a dreamy view of the future?
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Check yourself. What kind of resources do you really have to overcome the opportunity if it’s looking bad, or to pivot?
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Drop the ego and selfishness like hot potatoes. If ever there was a time for ego not to have a place in the business model, it’s when things are bad. If you can see the end of the road, admit it, share with your people, do what you must, even if that makes you hate yourself. Don’t kid yourself that if you just chug along, things will self-correct; they don’t.
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Having made those decisions, go about it in an unemotional way and make those changes that are necessary to run the business.
This post How to spot a zombie (startup) and bring it back to life appeared first on Tech in Asia.
from Tech in Asia https://www.techinasia.com/rise-of-the-indian-zombie
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