The Indian Startup Circus

I wrote a blog long back in 2014 when there was ample euphoria about the startup buzz and I too was busy running my own startup. I was sold out on India's growth story and how startups are going to fuel the next wave of innovation and growth. But after spending close to 7 years in Bangalore, pretty much a part of the Indian startup ecosystem as an entrepreneur and as a mentor, my perceptions have changed completely. This post might cause heart burn to a lot of optimistic pundits who are extremely exuberant about India's startup ecosystem but facts speak otherwise. But before we delve deep in to this topic and dissect it bit by bit, let us first see how well are startups are doing. The picture below might not be cent percent authentic but it does enough to paint the right picture about the current market realities.

That is the topline and bottomline results for some of the top startups in India. While I say this, thousands have shut down over the last couple of years. But isn't the media speaking otherwise over the last years. Haven't we read a bunch of stories from our very favourite business mags and tabloids that keep publishing articles over the startup euphoria. If that is the case then why is it that we haven't really had one startup that crossed the 100B USD mark in valuation with sustainable growth and positive cash flow? It got me thinking a lot. I tried to find the answer by reading a lot of biographies or literature around some of the smartest entrepreneurs who built formidable empires that includes the likes of Sam Walton, Akio Morita, Tony Hsieh, Richard Branson, Jack Ma, Jerry Kaplan, Reed Hastings, Bill Gates, Michael Bloomberg, Dheerubhai Ambani, G.D.Birla, Andrew Carnegie, John.D.Rockefeller, Phil Knight, Warren Buffet, Larry Page, Elon Musk, Alfred Sloan, Henry Ford and many other luminaries who built successful multi billion dollar companies that launched thousands of products that touched the lives of millions of people and thus they created an unparalleled legacy of their own. We still owe a large part of our success to these free thinkers and change agents who created a dent in the universe, that we see today in the form of human progress. I thought hard about what could make these people click while several other startups die every single day? What separates the wheat from the chaff? Interestingly while its difficult to sum up a lifetime of experiences into a blog, there are definitive patterns one can pick up , if one were to learn from these super amazing people. Let me put forth a couple of things I learnt from them and then we might talk a bit about what really went wrong with our own startups.

1. One thing that is really interesting and which I noticed going through the biographies of some of the greatest entrepreneurs we have had till date is that they were experts in finance and accounting. Now be it Marwari, Gujrati, Sindhi or Punjabi entrepreneurs from India or American, European or even Chinese entrepreneurs, all of these gentlemen had deep knowledge about their books and ledgers. They tracked every dollar spent and how much money it brought back or didn't? Sam Walton writes about it clearly in his biography, where he talks about the initial days when they were busy building Walmart. One can see the same pattern everywhere, where successful entrepreneurs have tracked their ledgers to understand more about their financial health. They have banked on accurate financial information and have used it to make decisions that helped them grow. This is common to a majority of entrepreneurs around the world.

2. Almost every great entrepreneur who built a hugely profitable company was crazy about customer delight. All they did was think of ways to make their customers happy. They would even go down to the extent of embracing change if it meant making the the customers happy. Their razor sharp focus on customer delight and turning their processes, human resource, technology, management, operations and business to create that 'wow factor' for their audience so they can become loyal customers and brand ambassadors eventually. Some of these entrepreneurs hail form the pre internet era and most of their marketing was through word of mouth. Their service around their products was so seamlessly perfect that customers would flock again and again to buy their products and also pull in 10 more people from the neighbourhood. If one reads 'Delivering Happiness' , one can find what Zappos did to ensure the customers were always happy with their service. Same holds true for Amazon, Walmart, Ritz Carlton, Apple, Nike etc.

3. I also found that most of these entrepreneurs believed a great deal in hiring smart folks. They invested a lot of time trying to find smart folks from across the world. They always liked to be surrounded by smart folks. Hiring was taken in extreme seriousness by them and they would ensure they keep track of most of the people who the company hires. In fact Sam Walton or Akiro Morita, made it a point to meet with fresh hires before they started their careers and they would talk to them about the company and would hear about what their reasons were for joining their companies. It happens even at Google where Larry Page, before things were left to Sundar Pichai, took an active interest in every hire and would talk to them to understand more about their stories.

4. There is another trait that I found common to all these entrepreneurs. They would like to brainstorm on issues surrounding the company and kept most of their conversations around facts, supported by numbers. They were not bogged down by criticism. They'd love contrarian point of views. In a nutshell they wanted to make a final call after loads of brainstorming and that is what led to some of the most iconic moments in history. They were game for rational thinking.

5. They took organisational culture quite seriously. They did everything in their humane capacity to contribute to the organisational culture. They wanted it to be a culture all the employees owned with pride. The culture code percolated through the different layers of the organisation.It unified people and helped them focus on a shared dream, a common goal eliminating any type of chaos born out of hierarchical politics.

6. Their sole focus was on profitability and cash flow. Although they relied on borrowed money for some time but most of them soon were profitable enough to pay back their loans and use the profit to manage the NFO. There was ample working capital to take care of the expenses.

7. They did not believe too much in PR or being on the tabloids, unless it was necessary.In fact they were not particularly fond of media and most of them led a ferociously private life.

8. Most importantly , all of them understood the economics of their respective businesses very well . Their wisdom related to their businesses helped them scale up their businesses and make them large enough to be a dominant force.

9. They loved innovation. they were always ready to understand the pulse of the market. They understood , the only way to survive in a free market economy is by embracing creativity and innovation. Their efforts led to the creation of some of the most famous products which have become an inseparable part of our lives. They understood innovation could also mean failure but they had a stomach for risks.

10. One trait that I particularly found was that all of them were extremely humble even after they became such legendary figures. Its quite evident from their writings and from their speeches and from first hand account of people who worked with them. They led simple lives and loved simple things.They had utmost faith in charity and how they can give back. They even practised frugality in their respective businesses. If one believes what early Amazon employees have to say, one would know that Jeff Bezos converted some wooden doors to tables to save money on buying furniture.

Now when you take some of these traits and see if our desi entrepreneurs seem to have them or not, you might feel disappointed. Most of the startup movement in India is a passing fad. its about an alternate world where people are celebrating our success as a startup nation inspite of the truth staring right at them in the face. We haven't really established anything other than a string of flops, that have been sugarcoated and candy flossed by the media , to make it look like victory. We all know what the media says isn't true, at least in India, where media is perhaps the worst in the world. Even a company like Flipkart that has always been in losses ever since it was started, was celebrated when Walmart made a purchase. We all know Walmart wanted to get into India badly seeing Amazon having a gala time. The Flipkart deal was a strategic need that cost them 19B USD.

Now lets talk a bit about what exactly is wrong with our startup ecosystem? Lets start with the most basic one. I guess the reason why most startups aren't performing that well is because most founders, 20 something blokes with VC money, have absolutely no clue about finance and accounts and I won't really blame them. I would blame the money men too. Unfortunately the sole reason why none of these guys can see through the mist is because Silicon Valley and some of the prominent Paypal Mafia, Reid Hoffman being one of them, have propagated messages that seem to focus more on hyper growth as opposed to sustainable growth. They forget to mention that hyper growth happens at the cost of profitability. But why would they do that? They did that because if you see the career curve of these people, most of them have been serial entrepreneurs. The like to invest their time and money in a company, make them achieve hyper growth so that it would be acquired by a larger company devoid of organic growth. They never really wanted to build a large company and make it as big as possible. So this is what they have been preaching folks around the world to do. Indians being one of the biggest fans of silicon valley were perhaps the first to ingest that inconvenient truth. It started with the Venture Capital Industry in India where most Principal partners are ex investment bankers or consultants. Very rarely you'd find someone who has actually started a technology company, let alone scale it up to a 100B USD plus company. So their logic is governed by Silicon valley stories that reek of hyper growth, billion dollar acquisitions or IPOs. End of the day they are accountable to their LPs, who they have promised 8 to 10 percent on their invested funds. Now if you were a technology guy, you'd value the implementation of a specific technology towards solving a problem for a market which is astronomical in size, as opposed to investing solely on any startup that talks about the said technology. That is a cognitive bias but the fear of missing out(FOMO) is so deeply ingrained in the amygdala of these investors that they wouldn't want to miss out on investing in any company that seems like a bright prospect-why? because it has founders from IIT/IIT/Any Ivy League(with an accent) or because they picked up seed round from some Angel(who also seems to hail from an IIT/IIM/Ivy League) or their growth is impressive and everyone including the media is saying great things about it or their growth rate is amazingly impressive. This is what has happened over the last one decade. Kashyap Deorah in his book 'Golden Tap' talks about the time when Hedge Funds like Tiger Global, Soft Bank and DST had made a lot of money from startups in Western Europe and America, decided to invest in Asia starting with China. As most Chinese companies like Alibaba and Tencent became bigger and reached astronomical valuations and went for IPOs they got exponential returns on their investments. India was next on the list as it had a huge domestic market and they thought it would be the next growth story for them after China and thus they invested in Indian companies. What they did not know is that most of their investments would make the founders of the invested companies millionaires or billionaires but the companies would keep on incurring losses, till the founders were replaced by them. Let's actually see some metrics of hyper growth. For instance for some eCommerce players a convenient metric that they could show their investors in review meetings was GMV(Gross Merchandise Value). It talks about the value of merchandise sold by the eCommerce player. it could be a billion dollar of good sold in a day or 5 billion dollar of commodities sold in a week but it doesn't in any clear way show the effect of that on your income statement starting with gross margin and ending with net margin. It also doesn't show the current cash flow for the company or the return on sales or return on equity, NFO(Need of fund for operations) or working capital. It also doesn't show variables like leverage or sustainable growth clearly. So you might end up making a revenue of 3 billion a year but your net margin might be in negative as your burn out rate could be exponentially high thanks to your OPEX or your COGS( which might not be applicable in the case of a different software company). The reason why most of these VCs or Hedge funds kept on investing is because they were sold out on the hyper growth thing and were waiting for a potential acquisition or an IPO(chances of which were seemingly rare). Such kind of synthetic growth is not sustainable and always comes at the cost of profitability. Its a by product of flawed unit economics. So this cycle of raising money at a seemingly higher valuation kept on happening and one could hear about such micro victories all over the internet where it was shown as a sign of respect for the entrepreneur and the tremendous feat they had achieved. Money was flowing in abundance and it was spent ostentatiously on marketing, team building activities, foreign trips, expensive office spaces and some founders would move towards a lavish lifestyle and buy properties worth millions of dollars. The money would be splurged and it would be ensured that the vanilla North star metric was achieved so the investors can release another tranche of money at a higher valuation. But then as they say everything has its threshold. Soon Investment banks became wary of this fact and started cutting down the abnormal valuations associated with these paper tigers. It was then the market course correction revealed this anomaly that had befooled an entire community of investors for almost a decade. So what happened with WeWork or what might happen with OYO would merely be course corrections. The same holds true for a majority of startups in India that have never really had financially literate founders or have objectively tried to achieve profitability.

The second and perhaps the most important reason why most startups namely the consumer tech startups have not been able to crack the market is because they really don't understand the Indian consumer. Their hypothesis is pretty much hinged on the fact that Indians love discounts and that could be used to onboard them and engage them. This price based strategy becomes futile when the discounts have moved out of the system along with the customer, who perhaps would have gone and settled somewhere else(that is giving discounts). Winning customer loyalty through discounting is a terrible idea. But this was exactly the mantra for a lot of eCommerce vendors like Flipkart, Snapdeal and taxi hailing services like Ola. Rama Bijapurkar in her monumental book 'We Are Like That Only' remarks that the Indian diaspora is seemingly complex and way too different from people in any Western country or any South East Asian country. This is a multicultural country with diverse groups of people who speak 22 different languages, written in 13 different scripts with 720 different dialects. Every 100 Km the culture changes to something entirely different. If that be the case then running a focus group or a user interview in a couple of A Class cities does not prove anything. That was exactly the reason why Flipkart faced a lot of losses in the North with their CoD(Cash On Delivery) system when people would order and reject their packages. Clearly North was not ready for such a thing back then. So if we assume the company does not really know the demographic, psychographic and ethnographic details of its target market segment or relies on pointless data to derive insights, then clearly its a gigantic task selling stuff to people who don't want them or are driven by ulterior motives than an absolute need to flock to the service. Winston Churchill once said, "Politics is the last refuge of the scoundrel" and I could confidently say that ,"Data is the last refuge of the idiot". The seemingly unrelenting and overly gargantuan focus on data is perhaps the dumbest idea man has invented to fool himself. Human behaviour cannot be ascertained through data or should I say meta data. Even if you understand my body requirements it will not tell you specifically the rationale behind my buying decision which is a sum total of a plethora of events that would have shaped my world view towards something that could be called irrational. Data just tells a momentary story in space and time but it never weaves an anthology of events that could reveal someone's true human nature. David Hume's 'A Treatise Of Human Nature' and Immanuel Kant's essays on human nature point out how the sum total of the parts of human nature is always greater than the whole. Most decisions that humans make are deeply embedded in emotions that are again by products of chemicals running inside the body. Add 200 plus cognitive biases to it and it becomes increasingly difficult to predict human behaviour and the decision making process. They are type n chaos systems. Not that it can't be cracked, but the drills are radically different from what consumer tech companies indulge in.

On top of that with the current customer base most companies have, there is absolutely no concern about customer delight which is so far the most important part of business. The wild growth makes them ignore customer delight completely. I wrote an entire blog on it and so I won't be talking about it more.But the gist of the conversation is predated on this casual attitude towards customer delight. Most consumer tech companies are really not bothered about the 'Wow experience' a customer should get , as long as they have paid for the money. The focus on converting a first time customer to a repeat customer to a loyalist and to an ambassador is just not there. I believe it has a lot to do with organisational culture which I will touchbase next. Its surprising to find such reckless behaviour when there are companies like Amazon, Apple, Nike who are trying their guts out to keep their customers happy and ensure they have a delightful experience. What a lot of Indian startups forget is that customer centricity is quite different from customer service. It takes years of practice and a sound culture to touch those highs of customer delight through customer service. It took Amazon a while to become a complete customer centric company.

Let us move towards another important factor that is abysmally missing from the Indian Startup ecosystem. Its called organisational culture. I wrote a blog on this too as I felt its one of the most important thing that either makes or breaks a company. A majority of startups, although they boast of having a formidable culture are devoid of a culture code. Culture is something extremely sacrosanct to an organisation. It outlines the belief system of an organisation and has to be deeply etched on the psyche of every employee. It is the blueprint that guides the company as it moves forward. Cutting an example, Nike as a company has always focused on the needs of sportsmen. It has continually invested in innovation because it takes customer experience quite seriously. I am not the only one who says that. If you see this video by Michael Porter, he seems to articulate the same, when he says that the best strategy is when you compete with yourself in providing as much value to the the customer so that he is happy

https://www.youtube.com/watch?v=3Hd88eBgkw0&t=1s

If that is the underlying and implicit principle that drives a company then your goal is to first create a culture code that promotes your mission statement. Just like Nike, Apple has always focused on thinking different and coming up with some of the most visually rich, design centric, technologically superior products for a segment of consumers that have superlative taste. Their entire philosophy has been to appease the customers through their easy to use, beautiful yet powerful products, that seem to help consumers do their job effortlessly. Its imprinted right in their culture code and the entire company breathes the same culture code and believes in the fundamentals laid down by the late Steve Jobs. A company devoid of a culture is like a human being without a soul. Apparently not much importance has been given to culture building. There is also definitive debate between 'Culture Add' and 'Culture Fit'. In 21st century , modern organisational behaviour stresses on having a 'Culture Add' as opposed to a 'Culture Fit'. The reason is that the current business ecosystem is a product of globalisation. Thanks to technology, all geographical barriers have been broken and information today travels faster than light. Needless to say that also brings with it people from different ethnic groups, communities, fraternities, socio economic packs, religions etc and sometimes an organisational culture falls short of encapsulating attributes that might be relevant to a certain culture but isn't formally a part of the current organisational culture. It simply means that maybe the current cultural fit mantra might not be a function of diversity. Diversity and multi lateral thinking could create a far more intellectually stimulating environment.So its imperative for leaders and human resource professionals to focus on cultural add more since culture building in today's world is an iterative process. However it certainly carries the company on its shoulders. But I don't see startups paying due attention to building a unique and conducive culture. Its taken extremely lightly and since in the initial days everything is mostly top down, the same lackadaisical attitude passes on to the lowest common multiple in the organisational pyramid, thereby decimating any chances the company had of leaving behind a legacy.

Then comes hiring. Now I have personally started started 2 companies in the recruitment space and I consulted with a few tech hiring companies. I can recall from my experience that hiring is never taken seriously by the leadership of a majority of startups. Its taken as a casual activity that the HRs and a bunch of developers or engineering managers can take care of. I have been invited by a lot of startups for leadership positions who connected me to people who were much junior in experience and their questions were amateurish. If I did get an opportunity to sit with the founder, he probably didn't make an effort to see my profile or to understand more about my career curve. I spoke to a lot of leaders in the startup ecosystem and found that almost all had gone through the devil's butt when it came to interviewing startups. These discussions are supposed to be smooth and they are meant to break the ice between two leaders from different backgrounds. But unfortunately in most cases , it ends up becoming a one sided PR drill for a company, where the founder leaves no stones unturned to sing songs about how great the startup is. I could still empathise with it but only if its limited to a few minutes in the interest of time. But these interviews sometimes end up becoming extremely condescending., mostly because there are 20 something kids involved with high adrenaline drives, who are hyper emotional to take in contrarian POVs. They expect you to conform to a belief system they have devised and if you go against it and start probing, all hell breaks loose. I remember reading that when Eric Schmidt went to meet Google founders after a very successful gig at Novell, he started asking them all the hard questions related to their business and ripped them apart.But Larry and Sergei loved him. They could see him as the potential CEO of Google and somebody who could help transform the company for good. But you can't expect a similar thing in an Indian startup. Funders aren't malleable to other idea sets or belief systems. They are stuck on an ideological belief system and any repulsive school of thought can easily irk them. This is where a company majorly suffers in terms of hiring as such behaviour speaks loudly about the culture and the so called hiring practices. Sometimes you find that although you have been asked to come early , there is literally no one to take the discussion forward. So the entire hiring culture is quite primitive in India. It could be equated to body shopping. The behavioural intelligence and the empathy that one expects in such interviews is largely missing. I have had a person once who went down to perhaps the last level of being obnoxious and asked me,"Why the fuck should we hire you?". It wasn't the language that was offensive but the way it was said that was humiliating. I complained about it to the HR and her response was anything but genuine. She regretted the interchange that happened and would ensure people aren't treated like that ever. I mean I didn't buy a word of what she said but it spoke volumes about the said company's hiring practices and their culture code. So that is another area where Indian startups suck.

Then there is a dearth of innovation which is again connected to the lack of a healthy culture, great leadership, risk taking appetite and an ability to celebrate failure and learn from it. I would like to stress on leadership because its eventually the leaders that shape the path of an organisation. The biggest problem that I see is the singular fact that when startups start, its eventually these 20 somethings who end up starting a service, that gets lucky in getting a market-product fitment. They raise some seed money and keep on raising money going further. These are the guys who are responsible for building an entire organisation from scratch and turn it into a sustainable enterprise. However they have never been groomed in leadership. No one really taught them anything about the traits a leader needs to acquire. No one told them about the importance of empathy in leadership. The epiphany of commercial successes made them believe that anything that they have done is right. That is unabashed arrogance and that is an impediment to logical thinking and rationalisation. Most startup founders aren't willing to accept their mistakes. They are not open to new ideas. They are not flexible to new ideologies. Their mental blockade stops them from seeing the apparent realities. It might sound exciting to be called a CEO but it comes with a lot of responsibilities and you should be able to shoulder these responsibilities effectively. That was the reason why it took years of experience and talent in early 80s and 90s, to get the corner office. Some of the most successful business leaders grew organically and had the emotional maturity to fight or give up when it required. They were open to new theories. They were kind to people and their lives were frugal and simple. They understood the value of relationships. They evolved with time but they knew their deficits even when they were young. I don't see the same when I meet with startup founders in India or hear them speaking. Most of them are so full of themselves. Egocentric and narcissistic behaviour on the part of the leader at this juncture could seriously undermine a company's fate. Guess that's what is happening if we see all around us.

A lot of it could be attributed to a lot of silicon valley culture that we have picked up from Hollywood or from Streaming services that might not factually show what really transpires in silicon valley. I was in the valley for a couple of years but its quite different from what was shown in HBO's silicon valley. A lot of philosophy that Indians have chewed is from the valley. We have emulated American entrepreneurs, especially the tech entrepreneurs and have created a reality where we feel that anything Mark Zuckerberg or Elon Musk did in the initial years of Facebook or Tesla could guarantee success, only to fall flat on the face. I think entrepreneurs, especially the ones running startups have a long way to go in terms of emotional maturity. But we also can't deny the fact that the basic fundamentals on which a business is built are invariably wrong. Add to that the fact that most founders are financially illiterate, banking mostly on the wisdom of their chartered accountants or their actuaries .Then you got candy land media, that can't help but adore and sing stories about the achievement of Indian startups are prompting a culture of denial. Its like being inside the matrix and never realising what is wrong until Morpheus comes along and shows you.

Then you see a culture where millennials are jumping on the startup bandwagon without realising what they are getting into as most of them want to show entrepreneurial experience on their resumes to get a better jobs, which is seriously diluting the juice out of an entrepreneurial ecosystem already plagued by mediocrity. Entrepreneurship is a noble profession that should be taken seriously. It needs discipline that Indian startup entrepreneurs lack. It needs patience. Most startup founders are looking for an exit. They are so happy when they exit. You could see them blushing with happiness, and that explains why we have not had or perhaps will never have a 100 B USD plus company from India. No one intends to create a big empire like Amancio Ortega did or Bill Gates did. There is a severe aspiration deficit. But as I realised that's part and parcel of a rudimentary economy that has had merely a 30 year long industrial revolution. There would be many of these startups that will pack their bags in the next 10 years or so. The ones that survive or are built with the right intent and which have the right leaders, the right culture will perhaps become the Googles and Amazons of India. Till then keep your fingers crossed and hope the future isn't as disappointing as the present is.