Startup is Entrepreneurship now!

This kind of entrepreneurship is daunting. There are those plodding initial years that would inevitably entail tremendous hard work, putting up with hardships and sacrifices at all levels. Yet the payoff may not be great, even after several years or even decades. This is a dampener and would stop most in their tracks.

Business building used to be such a long haul that it took a generation to establish the business over the decades into a smoothly running business. The next generation took it up as a going concern, worked some more on it, and made it bigger, and better. Sometimes, the next generation does a radical transformation and what you get is a Wipro, MTR, Haldirams, Godrej, Manyavar, Dabur etc. pitchforking the company/ brands into household names. But all these happen over generations and one does not associate these with live-wire entrepreneurship that characterise startups, but rather a part of the societal landscape that organically grows overtime. Even the businesses that people started were fairly mundane and did not have the sexiness of the startups of today.

There was another problem in the earlier era. The business community was supportive of those within their fold and supported them with capital, mentorship, subsidised or free space to start a business etc. Even if there was a failure, the community would support them and help them get a second chance. This support system was however limited to those within that community only. This meant that all others had an enormous barrier to entrepreneurship.

The social context was also different in the past. Most people wanted their children to get educated and land a job. They wanted the security of a monthly salary. Entrepreneurship was frowned upon as it was anyway quite challenging with the possibility of failure being quite high, without proper access to capital, lack of domain and business know-how and absence of a support system. Failure was looked down upon and people did not want to be branded a loser. Hence, the only other people who will become entrepreneurs are those who are driven and want to do their own business or someone who is crazy or desperate to do something different in life.

Start-up phenomenon – The startup in the tech space in the past started from Universities. There were research labs of government and corporates that had linkages with Universities which resulted in new innovations, around which a business could be built. The research projects of students or even their side hustle at the Universities sometimes turned into a business. For the most part, the scale up was gradual in the past, unlike the rocket propelled scaleup that we have seen in the past two decades.

There is a sea change in the situation over the years. The startup culture is a global phenomenon where there is an enabling access to money, talent, management acumen if one has a great business idea to work with. That has meant that even normal guys could start a venture – if they have a credible idea or a problem to solve, which will then become their business. 

The startup ecosystem has spawned some really innovative and amazing companies, which have not been there ever before. Infact, many of the startup firms in existence today would not have come into being, but for the startup ecosystem.

However, in this ecosystem, connections matter a lot. Whether one gets funding or not depends on the pedigree ( which college you passed out from ), the alumni networks and hence the reputation one has built in the startup space. The old boy club is very strong indeed which makes it a kind of a closed ecosystem. Those outside of these marquee colleges will find it infinitely more difficult to get attention and funding. This is the modern day version of the closed business community support system of yester years. People from the venture capital space may vehemently deny this, but this is the reality.

Today’s startups –  The startup culture has spawned some great companies built on breakthrough ideas. Some have become successful and have become profitable businesses as well. 

But most startups are built with an amazing central idea that solves a major problem like local mobility ( like Ola, Uber ), scale up to millions of customers, employ thousands of people but do not make money!

The focus of startups in most cases is massive scale-up. They are intent on operationalising the business and are looking at rapid customer acquisition. In their quest to ramp up customers, they invariably offer services free or below cost. The thought is that once one has acquired enough clients, the model can be tweaked and the charges can be hiked to make the business viable. 

But, that is not as straightforward as it seems. Customers are used to a service at a certain price point; when the price changes, they start looking around. Startups think that customers will stick on as they have got used to the service. This does not happen in most cases as a cheaper option ( usually from another funded startup ) comes along and customers move to that! There are very few instances where moving away is not an easy option and they are forced to continue.

Scaleup needs a tremendous amount of capital, as the product/ service is mostly being sold at a loss, to drive this scaleup process. Hence, the more customers they acquire, the more will be the losses. 

The venture capitalists who fund such ventures value the business as an enterprise and take a stake in the firm while they infuse capital. These capital infusions keep happening at regular intervals at higher and higher valuations, while the business is still losing money. This happens for years, while the business gets bigger and bigger and is losing more money, while the valuations go north! Rarely it changes hands privately and the initial investor gets to make  money and sometimes it gets listed, at which point the existing investors can exit – all this when the business is not making any money!

Very few businesses make money – even marquee names like X, Flipkart, Ola, Uber all lose money after more than 10 years in the business and after they are recognised household names, which all of us use! Customers are benefitted as the prices are subsidised with the VC funds and they get wonderful value where such startups operate.

This is the problem today with startups. They are not doing what a business is supposed to do – make money! 

So, startups of today are not worth while?  It is not that. There is a rush to startup and scale the business in double quick time. For that, huge amount of venture capital is required. In the haste to scale up, the pricing models chosen are cash-burning models with no way of making money in the foreseeable future. Businesses are built with the idea of scaling up to a certain level and selling it off. This mindset is what spawns the wrong business model, where customer acquisition alone is given priority and profitability is not given much thought. Businesses cannot be built that way. 

There is a school of thought that says that in the earlier era, one invests capital and waits several years for returns. Today, one invests much less of their own capital, uses venture capital and spends the time on customer acquisition and wait for returns. The difference is that in the former, the business model is designed to be profitable one from the start. With startups, their focus is on customer acquisition, scaling and flipping – not building a business. That is the problem.

Very few have profitable business models. Even Airbnb that was started in 2007 and is a household name, had the first profitable year in 2022! Most others have not been this lucky! Yet venture funding is chasing legions of startups.

Startups upsetting business landscape?  There is no question about this. Startups have definitely impacted businesses in their domain – mostly adversely. They have been accused of predatory pricing and of value propositions that a typical business cannot match. 

In fact, some of the businesses claim that the pricing of some of the startups is well below the cost for some business categories. To that extent, they have been disruptive and have affected existing businesses. Startups have also brought in more efficiency, convenience and better pricing for the customer. This has helped people get access to better value, like in case of medical supplies, groceries, electronics etc. 

So, startups have both positive and negative sides to it. The other important positive of startups is the number of jobs it creates. It brings in dynamism even in staid sectors like milk distribution, grocery purchase, general delivery etc. 

Also, startups attract very good talent lured by the prospect of doing some innovative/ pioneering work as well as the prospect of getting sweat equity. This is a major positive for any economy. 

Jobs @ Startups – While many are lured by the prospect of ESOPs in a startup, there are many things one needs to carefully evaluate while considering starting up or working for a startup.  Many are attracted to a startup due to a lively, can-do-it workplace ethos. But, this would entail  very long work hours which is characteristic of startups, which many gloss over while considering joining a startup.

Depending on the startup and the funding it has got, salary disruptions can happen when the funding is exhausted. New funds have to be raised from time to time to keep the startup going. Hence, income disruptions can happen when working with a startup.

There is even a possibility of closure of the startup if the funding dries up and the business is not able to generate sufficient income for sustaining itself. This would mean income disruptions, lower income than was promised, loss of income, ESOP value moving to zero etc., which could be quite traumatic and bring in a lot of despondency and volatility in one’s career and finances. 

While working with startups can be rewarding in some ways, the downsides need to be considered before joining a startup.

Investing in a startup – Startup investment is a very high risk investment. Many people get carried away when it comes to investing in an exciting startup. Startup ideas are mostly interesting. Even their business models look interesting. But, whether the business has a chance of success is the question which needs to be answered; but that is very difficult to assess. 

The ticket size for investment in startups have come down to just several lakhs of rupees, these days. This is ofcourse not across the board. Some platforms that facilitate such investments, accept much less.  But, one needs to understand that such investments are not liquid, are very high risk with a very high chance of losing the principal.

There is another way to invest in startups… after they get listed. This is probably a much safer way to invest. There is price discovery and can be bought and sold on the stock exchanges. Admittedly, the number of such firms that are listed are very limited.

In conclusion – 

Overall, startups are an interesting area. It is part of the landscape today, whether we like it or not. The good part is that funding is available for interesting ideas, which was once very difficult. Any really good idea would receive mentoring and HR support as well today, apart from the monetary support. 

Hence starting up today is not that difficult. But, is that what you want to do? Is that an area where you would like to invest? These are questions which one needs to answer for oneself.

There are still a lot of people who are doing it the plodding, old fashioned way. This route may be taking a lot more time and may be the only way for the aam janata and  not-so-well-connected. Due to this, a lot of successful businesses that actually make money are getting established. They may be small, they may employ a small number of people and they may not scale very well. But they are there. 

And some among them scale well too, over time. Not by burning money, but by getting the model right and doing it step by step. D-Mart did that. Reliance did that. Virtually all the big businesses that we see around is built on solid business principles

There are positives and negatives with startups. They have ambition. They attract talent and money. The jury is still out whether venture funded startups are a boon for the economic & social landscape.

This article was a broad roundup of this space from multiple points of view. Hope you found this interesting!