Value vs Valuation
“Chase the vision, not the money. The money will end up following you.” – Tony Hsieh, Zappos CEO.
The phenomenon of entrepreneurship is neither new to India nor the rest of the world. The introduction of the word “startups” for building brand-new businesses gave the face of entrepreneurship a glossy appearance. Everyone aspires to be an entrepreneur today and make their startup the next unicorn through the valuation of their ground-breaking business idea. But is just an idea enough to build a business?
No. Building a business requires leadership, execution, talent, communication, and a plethora of other factors. If an entrepreneur believes all it takes to build a business is to have that one disruptive idea, they live in a bubble. Let’s pop their bubble - even the very best ideas, even the disruptive ones, need proper execution to become a reality. Today, startups are willing to go to great lengths to look like a business, but only some are willing to do the work to become one.
Ideally, a startup should be an entrepreneur’s vehicle to (a) grab a business opportunity that may be open to them for only a brief time window or (b) to work on that dream project they have been passionate about for a long time or, (c) build something new, hopefully disruptive. Keeping this in mind, entrepreneurs now need a reminder that raising cash is fuel to drive this vehicle, but it’s not their destination.
The ideology underlying this fundraising frenzy is that once an idea has gained initial success, everyone wants to profit from it. Ultimately, all the bubbles deflate. We have all heard the regularly quoted numbers: 9 out of 10 startups fail. It’s true because most of these 9 are the “me too” startups hoping to get acquired by a bigger fish. Only a few of them succeed in doing that—the rest sink.
Another assumption entrepreneurs make is that tech innovation in their businesses will lure investors. This might be a dangerous assumption. Undoubtedly, a venture capitalist can be a common denominator of the most successful tech startups. Still, they cannot be a prerequisite to success, especially in the early stages.
The point here is that after coming up with an idea, the first thing that has to be done by an entrepreneur is not to make a pitch deck and hunt for investors. That is what Charlie O’Donnell would call “playing startup”. He says if all an entrepreneur has done so far is fundraising, and he is yet to do things like identify talent, build up his thought on leadership, design and test prototypes, he is “playing startup”. A simple math that governs this thought is, if an entrepreneur cannot efficiently turn his $1 into $10 with his business, how can investors expect him to turn their $1 million funds into $10 million?
ScaleFactor is an excellent example to prove this math. The startup was backed by significant venture capital funds like Bessemer and Coatue over multiple funding rounds and raised more than $100 million. They used aggressive sales tactics and prioritised chasing capital instead of building software that ultimately fell far short of what it promised. This shows us that as the product and company matures, this streak of ‘aggression’ in startups can lead to lapses in the culture, people management or the business model itself. It’s one reason why the likes of BharatPe, Zilingo, Bikayi, Pristyn Care and others have been in the headlines recently.
The Indian startup economy crossed a significant milestone as it added the 107th Indian startup to the unicorn club in 2022, but only 18-20 unicorns are actually profitable. They have raised over $94 billion to date in total funding. Yet, some unicorns still need sound business models, sound financial judgment, and proper marketing skills as they might be built on a business strategy based on ‘revenue-less, valuation-more’. Profitability runs, to a large extent, by solid business foundations and fundamentals, while valuation is market-led. Hence, we see only a few unicorns making money in the startup ecosystem. So, will we likely see a sea of dead unicorns in India? No, these unicorns will not go out of business, but they will no longer be relevant in the markets in which they operate. For the same reason Hike, Shopclues and Quikr are no longer unicorns.
A lesson for all of us here is that fundraising is no guarantee of success. The key to building a business that can survive in the long term is generating revenue through customers, not fundraising. A great example of this is the success story of GoPro. In 2002, with $10,000, its founder Nick Woodman led the company’s growth to reach a $2.95 billion valuation over ten years with three funding rounds. The company invested time and resources into developing a deep understanding of what the customer needs, i.e., an attachable camera for sports.
Cutting to the chase, to stop “playing startup” and to start building a company profitably, entrepreneurs need to:
Focus on building a sound financial model.
Planning product roadmaps.
Hiring the right people.
Creating marketing schedules and doing much more than just chasing funding and valuations.
You must believe it is possible to execute the right way and grow the company, albeit steadily.