The rise and fall of the startup heroes

Photo: iStock
Photo: iStock

Summary

We mustn’t confuse easy money driven euphoria with business acumen or startup profit prospects

Almost every day, news reports appear on technology startups firing people. Leaked letters have emerged written by venture capitalists (VCs) to companies they invested in that suggest India’s entrepreneurial party time is over. Further, massive joining bonuses are not happening anymore.

The times are changing. The situation is aptly explained by paraphrasing a line attributed to Vladimir Lenin: “There are months where nothing happens; and there are months where years happen."

Until just a few months ago, all was well. Fresh money was being raised. Initial public offerings (IPOs) were happening or being talked about. Billion dollar valuations, creating new unicorns, were happening every other week. The media was fawning over startup entrepreneurs. And politicians were using them to tell us that India’s economic story was going great guns.

Suddenly, everything seems to have changed. The easy money that was flowing into the sector, thanks to the central banks of the rich world creating money out of thin air, has slowed. The number of unicorns is falling. Today, IPOs at extreme valuations don’t stand a chance. The media is asking questions.

There are a few lessons we can learn. Technology entrepreneurs drew on the marketing lesson offered by the success of a few international firms. As Al Ries and Laura Lies write in The Fall of Advertising and the Rise of PR: “All the recent marketing successes have been PR successes… To name a few: Starbucks, The Body Shop, Amazon.com, Yahoo!, eBay, Palm, Google, Linus, PlayStation, Harry Potter, Botox, Red Bull, Microsoft, Intel, and BlackBerry." Indian technology startup entrepreneurs drew from this insight and sold their purported ‘success’ stories to the news media and on social media.

The news media, perpetually in search of heroes, bought their stories and took them mass market. As Phil Rosenzweig puts it in The Halo Effect: “Our most compelling stories often place people at the center of events. When times are good, we lavish praise and create heroes."

This turned many startup entrepreneurs into societal heroes. The views they hold on various things, from the state of the nation to investing money, are somehow deemed to be important. This ignores the basic facet of life that human expertise is in very narrow areas.

These entrepreneurs have caught the attention of ordinary Indians. A major reason for this lies in the fact that their stories have been presented to the world with great simplicity, almost saying that if they could do it, so can you. As Rosenzweig writes: “The test of a good story isn’t its responsibility to the facts as much as its ability to provide a satisfying explanation of events."

In that sense, the stories of these new age heroes have not taken into account aspects like being at the right place at the right time, or the fact that there was so much easy money going around and waiting to be invested. We have been told that the ‘success’ of these entrepreneurs is on account of their individual competence and hard work.

Further, the hope that these businesses will make some money someday has been passed off as a business model and rarely been questioned. One analyst even went to the extent of projecting earnings until 2041 in order to justify Zomato’s extreme IPO price.

But all that was yesterday. In his book What Goes Up, Eric J. Weiner quotes fund manager Jerry Tsai as saying: “The trouble with getting a little bit of good publicity is, when something goes wrong they love to kill you on the way down. The media like to build things up so they can tear them down." Or as Rosenzweig puts it: “When things go bad, we lay blame and create villains."

While that teardown hasn’t started yet, the media has been reporting startup layoffs and also questioning the regulatory arbitrage that some of these firms have been indulging in. In fact, about two decades ago, the media did a stellar job of unravelling the excesses of the dotcom bubble once it burst. Something similar happened after the sub-prime crisis broke out. The media did a great job of explaining the why, what and how of that financial crisis.

The biggest lesson here is that just because something has lasted for a while, it doesn’t necessarily make it workable. Technology startups mostly had a cash-burn model, by which they offered goods and services at a discount to build scale. Their revenues and losses went up at the same pace; VCs funded these losses, until now. They can’t continue to do so, given that money is no longer as cheap as it was.

To conclude, there are three ways in which startup entrepreneurs can make money. The first is to sell out to other entrepreneurs. Many of them managed to do that. The second is to come out with an IPO and unload a part of their stake to ultra-bullish retail investors. That happened as well. Now the time for the third and only sustainable way has come. Startups must ensure their revenues are greater than their costs.

This leaves us with two lessons. One, the era in which access to easy money was passed off as the competence of entrepreneurs is now over. And two, a big valuation doesn’t mean that the business will be profitable one day.

Vivek Kaul is the author of ‘Bad Money’.

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