Opinion | Startups need to stop looking at funding as ultimate badge of honour3 min read . Updated: 13 Mar 2019, 10:30 PM IST
My advice to all entrepreneurs: don’t get blinded by the gleam of billion dollar valuations
And they got funded and lived happily ever after…", this is the glorious startup dream that has launched at least a thousand or more ventures and continues to spur many more. Today, valuation and funding are value-defining parameters of success. Taking a step back, it’s important to see funding for what it is and separate it from true business potential.
Every business needs money to grow. There’s a healthy level of funding that can fuel expansion, a technology upgrade and gather better resources for an organization. For any successful business, funding needs to be supported with the right plans and vice versa. An entrepreneur must know how to balance both.
But what happens when a business starts with the singular aim of becoming a unicorn? What happens when aspiring entrepreneurs put potential investors at the centre of everything right at the beginning of their journey?
In my view, you can’t build a unicorn unless you build a sustainable business. Yes, some people get lucky enough to find an investor who decides to fund them extensively without a strong reason to do so. But sheer blind faith like that achieves precious little for both parties in the long run.
The chase to be a unicorn creates an unrealistic set of goals and in turn, increases the failure rate of entrepreneurs. It leads founders to take decisions that only help to raise the next round of funds without any real value addition to the business. In a vicious circle like this, prioritizing sustainability of the business is disincentivized.
“Funding is no sign of success in my view, it is just an input. Business impact and value creation is. Funding is a means to an end. Funding is important and is a sign of validation, not success," explains Peyush Bansal, co-founder of Lenskart, an online eye-wear brand talking about this worrying trend.
The second problem that I attribute largely to investors is the belief that money is your strongest competitive advantage. That the higher your burn, the better your growth and the longer you will run. This is a fallacious belief, proven wrong by several cash rich organizations that have collapsed and fallen by the wayside.
Money can be a moat if you’re actually sitting on a substantial pile of cash. It allows you to make costly mistakes with someone else’s money. You could outlast your competition because you have more money to burn. However, it can never make up for what you lack in foundation.
“Actions that may seem to create valuation shouldn’t be mistaken for creating value. Acquiring customers by burning money and hyper-growth fuelled by discounts create arbitrage and opportunity for savvy shoppers and suppliers, but no lasting value for the business or its users," says Kunal Bahl, founder of Snapdeal, an e-commerce company.
Investors in many cases are fair weather friends. If high funding and high burn allows the next fund raise, great. If not, its an overnight change of mind and heart to, “lets conserve cash and break even".
The unicorns of the industry caution against this idea-trap. Shishir Modi of Niki.ai, an AI company says, “Funding is never a moat. No matter how much money you raise, there will always be a company with more capital. Focus on real business moats—product, network, etc."
The whole fund-rush as I would call it has led to another kind of disruption in the industry. Today, entrepreneurs feel that they cannot start a business without an “angel investor". To me, the whole idea of entrepreneurship is about having your skin in the game and this dependence on an investor is in complete contradiction of that.
The first round of funding is usually the easiest one, so let’s assume you get that first round. But from that point on, every subsequent month will be riskier and tougher. Would your business be ready to face that? Challenges are going to be an integral part of the journey and you won’t always have an investor at hand to pull you through. That’s why focusing on a sound business foundation is more important than you think.
My advice to all entrepreneurs is that do not get blinded by the gleam of billion dollar valuations and lose sight of the real purpose of your venture. Look for value in terms of mentorship, experience and strengths that the investor brings to your table. Have the right fundamentals in place and if you do it right, who knows, you could be the angel to a unicorn someday.
Entrepreneur 4.0 is a column where successful Indian entrepreneurs discuss various aspects of startups.
Ronnie Screwvala is a first generation entrepreneur and chairman and co-founder of upGrad, an online educational platform.