In India, startups face up to the end of the feast

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The startup story in India has been a sort of fairytale, so far. So much so that it would not be wrong if we say that the ecosystem suffers from an embarrassment of riches. With valuation knockdowns and quick deaths of many rising stars, several stakeholders in India now think that companies should be wary about how they raise capital.

Last year saw many food tech companies falling apart. For example, Tiny Owl, the blue-eyed startup, had raised close to US$23 million before running out of options. “Food startups, last year, faced the problem of too early too soon as far as valuations is concerned. Large capital should be raised for scaling after one has been able to crack the product market fit,” says Rutvik Doshi, director with Inventus Capital Partners.

To be fair, putting the entire blame on Tiny Owl for its end is unjust. Thanks to the hype surrounding the delivery startups, there was a mad rush to invest in them and every investor seemed hungry to grab a food tech company for its platter.

“Food startups failed because they tried to scale up too rapidly without a core value proposition, poor unit economics, and competitive intensity. Because of easy availability of capital, people focused on vanity metrics like number of orders and gross merchandise value (GMV) without looking into the basic viability of the business model,” says Tarun Davda, managing director with Matrix Partners India.

While there are reports of a funding winter, there’s no visible shrinking in investments into Indian tech startups. The first half of 2016 saw US$3.2 billion invested in startups, compared to US$1.8 billion in H1 2015.

Frugality is an important lesson

We built a monetization model into our app-based business from day one and got our first paying customer in our first week of public beta with no marketing money.

Not too long ago there was a time when startups in India had primarily one complaint – lack of VC funding in the initial stages. Today, there are many angel investors who genuinely believe in the India story and are overtly bullish about it.

This, many believe, is not necessarily a good trend. Frugality is an important lesson which startups should learn at an early stage, they feel.

Rajiv Srivatsa, COO and co-founder of furniture startup Urban Ladder, says that limited access to capital has been one of the biggest reasons great companies are built to last. Less capital acts as a forcing mechanism for teams to think innovatively about solutions that are not dependant on capital infusion. He goes on to give the example of his own firm.

“When we launched, we raised US$1 million. It forced us to think about utilizing resources effectively. We did not go out with a big marketing splash on mass media, instead focused on targeting very high intent users on Facebook with great visuals. We focused our energy and capital into creating 35 unique products that stood out,” says Rajiv adding that the company has not changed its stand even after raising US$77 million.

Ritu Soni Srivastava, founder of Obino, a weight loss and health coaching app, says her company was bootstrapped in its first year. The sheer lack of money forced them to be realistic and harsh in evaluating the fundamentals of the product. For instance, though in India people tend not to pay for apps, Obino decided to charge users as they did not have a marketing budget for their product.

“We built a monetization model into our app-based business from day one and got our first paying customer in our first week of public beta with no marketing money. Since we did not have much money, there was no thought of building a base first and, monetizing later. Revenue was a priority from the beginning,” says Ritu. Today, the company has over 300,000 customers and has raised two rounds of funding from HealthStart and Round Glass Partners.

Even today the company focuses on organic growth. “Our marketing budgets are very low and over 50 percent of our user acquisition happens organically. Growth without money forces you to focus on product experience, retention, renewal, and organic channels of customer acquisition. For example, we focused heavily on App Store optimization and product experience – on being found by relevant and genuine users and giving them a great experience and letting those reviews and renewals fuel the business,” adds Ritu.

Monetizing from day 1

I won’t say we did not try for VC funding. But we soon realized that it is taking the focus away from improving our product.

For Ganesh Shankar, co-founder and managing director at FluxGen Engineering Technologies, visits to investors only helped the company gain customers. FluxGen, which is into energy and water management, has been around for five years now. So far, it has been completely bootstrapped. “I won’t say we did not try for VC funding. But we soon realized that it is taking the focus away from improving our product. Though we did not get funds, we always ended up getting customers during our pitching rounds,” says Ganesh. It was recently listed among the top 25 startups in IoT space, organized jointly by Nasscom and Dept of Electronics and Information Technology.

When it comes to managing funds, Ganesh has been smart not to put his hands on everything at the very beginning. “We started the company with a service model. We executed projects pertaining to energy and water management using off the shelf components and customized it by developing software according to the specific requirements of the customer.” Today it manufactures some of the components on its own after having gained competency in the domain.

Additionally, the company saved a lot by hiring interns. “We got into product development through internship programmes. Since some of our customers were part of big colleges, we managed to gets interns from BITS Pilani, NITs, RVCE, and so on. My stint as a visiting faculty at BMSCE also helped me get interns straight out of my class. The young minds added greater creativity to our work,” he adds.

Obviously, by no means can startups stop making effort to raise money. Sameer Brij Verma, VC with Nexus Venture Partners, believes that raising money is not bad as long as it does not act as your sole competitive advantage. “Raising money to give discounts or thinking it will help us find our business model is a definite No. Money should act like a catalyst and should not be your definition of success,” Sameer says adding that food tech startups should have been more careful using their capital.

Investors also caution against raising money to hire expensive talent from the market. “Startups, at least in the initial stages, should not even think of hiring in huge numbers or paying exorbitant salaries. Rather, they should focus on hiring people who believe in their product,” says Rutwik.

When VC funding is bad news

Photo credit: Tax credits

According to a report by Harvard Business Review, pandering to VCs can be a distraction for startups. “Why spend your time trying to convince investors to invest, when you could spend the same time convincing prospective customers to buy — or perhaps learning why they won’t — before you burn somebody else’s money,” the report states.

However, not all agree with that.

Avinash Saurabh, founder of employee wellbeing startup Zoojoo, feels availability of too much venture capital can never be bad for startups. “Lack of capital normally leads to bad term sheets which is neither good for the founders or for the investors. I, however, do feel that founders must have the rigor of building a product, acquiring customers, and generating revenue before they raise capital.”

Avinash advises against raising money from friends and family. “They are not investors and will have very different expectations. Also the pressure to save the relationship with friends and family is just an added distraction which can never be good. Raise money from them if you absolutely have to but tell them upfront that they are probably never going to see this money back,” he adds.

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