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Wednesday, 3 February 2016

Startup Bubble - Yes or No?

Startup BubbleIf we were to list top ten most talked about business stories of 2015, at least five of them would be about startups. Startups were all over the news throughout the year. Some startups received astronomical funding and were valued at astonishing amounts, while others had to lay off hundreds of employees; some of them even had to shut their shops down. 2015 was indeed a year of startups.
The year commenced with optimism about startups gaining traction, with some fledgling players like Ola, Paytm and Snapdeal getting some staggering funding. However, the optimism started drooping as the year progressed. The news of layoffs, cash-crunches at the erstwhile invincible startups became commonplace. The billion dollar question started haunting our minds: Is the rise of startups a bubble in the making?
The answer to above question is yes and no. The unviable business models and unbelievable valuations of most of the startups are unsustainable in the long run. Most of the so called unicorns – startups with valuation upwards of $1 billion – are yet to make profits.When companies like Flipkart and Snapdeal with valuations of $16 billion and $4billion respectively - more than respective valuations of Tata Motors and Yes Bank – are nowhere close to being profitable in the near future, course-correction is imperative.
So, what has led to the popping of the bubble? One of the primary reasons is incessant burning of cash. The startups have been burning the investors’ money as if there is no tomorrow.When the users talk about the cash backs and discounts associated with a product instead of its utility or experience of using it, there is something seriously wrong with the business strategy of the company. Most of the tech startups are acquiring customers by offering discounts, which is justified, given the huge technology-adoption potential in India. However, if a company has to pay users to keep using the product, there is a serious problem.
Moreover, marketing and human capital costs are also prohibitive. Imagine a company that is yet to make profits spending a whopping Rs 200 Cr in bagging cricket sponsorship rights. One fundamental question the startups need to ask themselves is: Would they have burnt the cash the same way had this money been their own?The elementary motive offrenzied spending is gaining market share over competition. But once these discounts are gone (which have to go, sooner or later), who will the customers stick to? They will stick to the one who offers the best service. Hence, to build a sustainable business, superior service, not discounts will help startups create value in longterm.
As of now, only thing startups are eyeing is growth. Profitability is not in the picture. But how long can they ignore profits? Sooner than later, the investors will ask for the path to profitability. So, it is high time that startups started focusing on making profits.
So, is it really a bubble in the making? Yes, it is. Will it burst? The chances of bursting of the bubble are minimal. However, the write-downsin valuations and layoffs are inevitable in the process, as many of the smaller players will get acquired or consolidated, with three-four big and efficient players remaining in every business area.Indian startup ecosystem will shift to course-correction.
To control the magnitude of impending damage, startups – small and large players alike – will have to rationalize their costs and move towards a profitable business model. Moreover, the time is ripe for them to chase retention of customers along with acquisition. And to build brand loyalty, they must transcend customer service.
Therefore, the cynicism around the future of Indian startup ecosystem – the fastest growing and third biggest in the world - is misplaced. The startups are here to stay, for the potential of technology penetration in the lives of more than a billion Indians is unparalleled. The layoffs and ramping down of services is a result of much-needed course correction for Indian startup ecosystem to come of age. The startup ecosystem will still reward great ideas with efficient implementation. We have already witnessed the disruptive ideas Indian youth has come up with in the recent past; an orderly implementation of these ideas will see Indian startups going places in 2016 and beyond.