Stop chasing funds, work on a sustainable business model!
Aug 7, 2022
Most startup founders I have met over the years are not looking at creating an enterprise with their innovation they are looking at raising money, getting a good valuation and exiting from their startup innovation. Entrepreneurship is not a new phenomenon to India or for that matter to the world. The face of entrepreneurship got a glamorous look with the coining of the word startups for new enterprises. The advent of technology driven enterprises and the high stakes game of valuation led to a surge in global startups. Everyone wants to be a startup entrepreneur because most startup founders want to raise millions or billions through valuation of their innovation. Not everyone in the startup space wants to build an enterprise or an industry. Those that endeavoured to build an enterprise have survived and those that failed to build an enterprise have been forgotten. After raising USD 1.7 billion, Quibi shut down its operations. The company had planned on releasing short-form content only to mobile devices. It never took-off as planned. Innovation needs a market and not money. A considerable number of startups fail because they may have innovated with new technologies; but they failed to market their innovation; more importantly they did not succeed in building a sustainable revenue model around their innovation. Startups often make the mistake of assuming that their technological innovations or startup ideas will raise investors. This however is an dangerous assumption because investors will not drive your revenue model or your business; as a startup founder, investors will want you to create a revenue model around your startup company. Take the case of the startup company Bite Club. The startup enabled users to order meal from a dynamic changing menu through its Android app. The company sourced food from aggregate chefs like professional chefs, home cooks and then delivered it to consumers— lunch and dinner. It received seed funding of 1.5 crore from prominent investors including Powai Lake Ventures but within a year the startup after serving more than 1 lakh meals shutdown after failing to make in the business. If you are going to be the soul behind the success of your startup businss, then there is no need for a startup investor. Build a revenue model around your startup idea, market that idea effectively and raise money for the growth of your own startup business. Used car marketplace GoZoomo that raised USD 7 million from top venture capitalists, two-years after starting its operation decided to return the money its investors. Reportedly, the founder opined that the unit economics of the business were not adding up, therefore they decided to shut shop on an unsustainable business model. Most startups lack the drive to build an enterprise around its startup idea. Founders do not want to build a company with financial prudence and unique marketing strategies. Founders want to play the valuation game. Their focus is to create a perceivable value for their innovation and not a real value for their enterprise. India is home to 100 unicorn companies, most of the companies have reached a unicorn stage because of perceived valuation and potential revenue as their measurement yardsticks. However, if you closely study the month-on-month performance of most of the unicorns in India; lack of financial prudence, mediocre marketing prowess and revenue-less valuation-more business model is the primary cause that has led to some unicorns struggling to survive even after reaching a USD 1 Billion valuation. Some of these companies post becoming a unicorn will witness poor performance, eventually cutting-of-corners will come into play, investments in human resources, research and development will dwindle and overall, the entrepreneurial spirit will be dampened. Take the case of the startup StayZilla. It was a successful homestay network and it raised USD 33.5 million in funding. Stayzilla had over 15000 stays in about 1100 cities across the country. When StayZilla operations paused, its founder Yogendra Vasupal had told media, “The initial 7 years were all about having negative working capital, positive cash flow, and a sustained ability to fund our own growth. Those were the only metrics we tracked. In the last 3 to 4 years, though, I can honestly state that somewhere I lost my path. I started treasuring GMV (gross merchandise value), room-nights, and other ‘vanity’ metrics instead of the fundamentals of cash flow and working capital.”
Of course, you must raise money from investors. But its timing is important; and to know what is the pound of flesh you will have to give up for the round of investment. RoomTonite – a mobile app for last minute hotel room bookings had to close down operations as funds dried up following a failed fundraising bid to raise USD 1.5 million. You can raise money from an investor but without a strong business model no investor will invest and if you have managed to create a strong business model, there is no need for an investor. Most startups fail because they are not building business enterprises with a strong business model. Founders lose their focus and with founders losing their focus, startups begin to take a southward dip. Hyperlocal delivery startup PepperTap shut down its operations in India and laid-off reportedly over 400 staff. The company had raised USD 51 million in funds to grow its business from various investors like Sequoia Capital, Saif Partners, Snapdeal within 15 months of their operations.Analysts opine that with investors putting pressure on start-ups to improve financial metrics, hyperlocal delivery startups like PepperTap were spending less on discounts and other marketing initiatives. More so, while PepperTap was focused to on-board customers they failed to take care of their technology. The integration of their app with their partner stores was not great, sometimes customers were unable to see the entire selection of items from a store and sometimes even essential items were missing from the catalogue visible to them. You do not need funding to make your startup successful. You need a revenue model around your startup idea, you need a small effective team to market that innovative idea and most of all you need to replough your money back into your business to further research, innovate and develop. Successful startups are those startups whose founders have held on to their startup ideas and have created an enterprise coupled with value and brand around their innovation. Like I said earlier, a founder is the soul of the startup business if the founder is not focused on creating an enterprise but focused only on a valuation that startup is bound to fail in the long-run even if it tastes success in the short-term. Create an enterprise, create jobs and not just be a startup looking at creating a valuation. When people talk about that India and other nations being homes to thousands of startups, I am amused because it is not the quantitative number of startups that define the robustness of the startup ecosystem but the qualitative year-on-year overall performance and growth of a startup that accelerates a startup ecosystem that matters. The error of most incubation centres in India, that I have personally seen, make is that they are not preparing startups to create enterprises or create jobs while solving societal concerns. They are preparing startups to raise money through perceived valuations. There are no real business models in most of the young startups. That is why 9 out of every 10 startups fail because they might have a great innovative idea but they do not have a revenue-based focused business model and they mostly focus of preparing their business to raise funds. Don’t just be a startup. Create an enterprise. Become an industry. Don’t chase the money from the investor, instead build a sustainable financial model that allows for yours startup to be economically viable.