The truth behind the cult of the start-up
It seems a bit premature to celebrate start-up successes before the sector has proven itself
This year hasn’t been kind to India’s start-ups. After the go-go years of the recent past when funding was plentiful and valuations were generous, current sentiment is decidedly dull. With the inevitable consolidation underway, a generation of employees is experiencing a central maxim of start-ups for the first time: Nine out of ten start-ups fail. Frequently, the shutdowns are messy and employees are left holding worthless stock options.
Yet, it’s paradoxical that as the sector braces for a prolonged downturn, fascination with start-ups remains at an all-time high. Valuations, exits, open offices, game rooms, catered lunches—these are the terms typically associated with start-ups. In popular culture, start-ups are portrayed as trendy workplaces with a work-hard, play-hard ethic. It’s not uncommon to find billboards hawking their products as perfect complements to the “start-up lifestyle”.
For most of us living through the grime and struggle of a start-up, the reality is very different. The novelty of open offices and quirky perks is fleeting. To work in a typical start-up is to take a chance that the long hours will eventually pay off. And while the independence and challenge are motivating, the uncertainty can be taxing.
So why does the myth of the start-up life persist?
For one, the notion of 20-something engineers suddenly striking it big is seductive. As Indians, we have long placed a premium on an education that guaranteed a good middle-class life. Those pursuing traditional businesses cornered the outsized returns. Start-ups, in theory, offer an opportunity to upend that dynamic and achieve something bigger.
Most people are also partial towards start-ups because the dynamism and audacity of these companies are infectious. There’s a certain positivity to the types of problems start-ups tackle, especially in India. By using technology to unclog archaic systems, these companies are dragging the country into the future, one app at a time. And unlike other businesses, the technology sector, and start-ups in particular, are perceived as “clean”. They aren’t engaged in rent-seeking behaviour or environmentally degrading activities.
Finally, it’s hard not to be swayed by the heady coverage of this space in the media. It’s de rigueur now for most publications to have separate sections on start-ups, focused primarily on the latest fund-raising round. Beyond the media, there is a retinue of accelerators, incubators and mentors which ensures that this sector is disproportionately more visible than other parts of the economy.
But the attention and adulation can be distracting, if companies aren’t careful.
In 2016, though India placed third overall in the number of start-up exits, the actual number was a measly 86. When compared with the thousands of start-ups founded every year, the odds of a return are very, very low. And while there isn’t any denying that technology-enabled businesses are the future, the Indian market is still nascent. Very few start-ups have demonstrated a path to a sustainable business model.
Even among companies that engineered successful exits, the deal values weren’t that high. With the IPO market largely non-existent for start-ups and profitability elusive, acquisitions remain the best bet. But most acquisitions are structured through stock swaps; the cash component is a small percentage. Consequently, liquidity for founders and employees remains exceedingly rare.
This isn’t a polemic against start-ups; far from it. India needs more start-ups; India needs ambitious entrepreneurs. There are too many inefficiencies in our economy that can only be fixed by disrupting the status quo. Start-ups, with their wilful ignorance and youthful confidence, are best placed to engineer change.
Yet in building our start-up ecosystem, we seemed to have arrived at it in reverse. It seems a bit premature to celebrate start-up successes before the sector has proven itself.
Start-up founders and employees need to focus on what matters—building a product that adds value. Paul Graham, the founder of Y Combinator, described start-ups as just any other business, with one key difference—growth. Start-ups are designed to grow fast. Everything else we associate with start-ups follows from growth.
And that’s where it gets hard. Growing a start-up requires obsessive thinking. It means constantly questioning if things can be done better, if there are white spaces in the market that can be exploited. Engaged advisers, whether investors or just well-wishers, can help start-ups ignore the noise outside and focus on company building. Successful start-ups are also paranoid, they are cautious that good news is a harbinger of bad and don’t celebrate successes too early.
But perhaps the biggest factor between start-ups that succeed and those that fail is persistence. Building a business is hard. It also takes time. Successful companies have conviction in their ideas to persevere through the down days. Everyone loves to read the story of overnight successes, but chances are, the company you’ve just heard of has been plugging away in the background for years.
Unfortunately, obsession, paranoia and persistence aren’t desirable traits in most settings. They certainly aren’t attractive vanity metrics like gross merchandise value or total page views. But in the context of start-ups, they are the difference between success and failure.
Shailesh Chitnis is head of product at Compile Inc., a data intelligence company