I am venturing into an area where even angels are afraid to tread! For a long time, I have felt lost with the terms mentioned in the title. To my understanding as an oldie, anyone starting a new business is a start-up. Investopedia definition of a startup is below:
A startup is a young company that is just beginning to develop. Startups are usually small and initially financed and operated by a handful of founders or one individual. These companies offer a product or service that is not currently being provided elsewhere in the market, or that the founders believe is being offered in an inferior manner.
If we go by the strict definition of startups then the names like Uber, Airbnb, Zomato, Oyo and their likes come to mind. These companies have provided a service or a facility which was never offered before. These facilities became possible because of the internet and IT. I won’t call Tesla a startup because they are providing a variant of an existing product; that variant is no doubt a game changer as it will change and push the Petroleum economy. But the car itself is not a game changer.
I read a news item today which said that Delhivery a startup has become a Unicorn company. Unicorn is a mythical animal depicted from thousands of years and appears unique; maybe that is the reason this name Unicorn, a unique company. Unicorn company is defined as a company whose valuation as per markets is One billion (One thousand million) US $, i.e. Rs Seven thousand crores. As a semi-retired person nearing 70, I feel out of depth to read such figures. But for records, all my life I have run a business (a dirty secret- a software business) and had consulting assignments. In both my activities, I have dealt with companies from a couple of billion dollars to nearly 40 billion dollars. So, these numbers don’t scare me, but personally these days I go to an ATM to withdraw money for myself, I am a small man.
Many of these Unicorn companies have been based on the internet, and IT technologies but some of them are doing the work of brick and mortar things as mere mortals do. Here is a table that I got on the net and made me start thinking.
|US $ Million||Revenue 2018||Funding||Valuation||R/F||R/V||F/V|
I will briefly mention what they do.
- BYJU is in online training– revenue from students
- Swiggy and Zomato are restaurant food delivery companies- revenue from the restaurants whose food they pick up and deliver. Tie up with restaurants and menu details is unique
- PayTM is a wallet plus allied things company
- Oyo- helps book hotel rooms and takes money from hotels– this is unique
- Policy Bazar- helps you buy many policies online- commission on the sale
- Udaan is like Flipkart and sales products online
- Freshworks– offers sales and support solutions
- Delhivery– Physically delivers goods from place A to place B and has warehousing facilities.
To me except Oyo, Swiggy and Zomato others do not fit the strictest of the definition. Are other companies providing products and services that did not exist before? No, still they are called startups! By this definition then, like other companies, my company was also a startup and faced the same problems as these companies are facing today. The only difference is that some experts in the world thinks that they are doing something extraordinary!
As usual, my mind started whirring, and I have questions! What is so unique in becoming a company which some “experts” feel is doing fantastic work; they have invested large sums of money in them. For an old–timer like me what matters is how much I am selling and what is the profit that I make out of the business! Is the business sustainable over a period of time?
I will introduce two more terms now for better understanding.
Venture capital firms are investment companies that operate only to handle investments in business ventures that may be considered high risk.
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
Now that we are through with definitions, tables, please help me solve my queries. When the companies are creating variants of existing available services and products, how do they become startups? These companies are supposedly creating products and services which are not existing. So how do investors and angels analyse them, study them and invest considerable sums in them? Uber concept never existed, Airbnb is a new concept; so in these two cases, the investors seemed to do more right than wrong.
I have read that more than 90% of startups fail. What could be the reason? The reasons for failures are the same as the reasons for any failed businesses. These are
- Lack of focus
- Lack of motivation
- Too much pride and ego; that you were a smart techie does not mean that you can create and run business
- Taking advice from wrong people (including advisors brought in by investors)
- Lack of general and specific domain knowledge in life finance, operations and marketing
- Raising too much money too soon.
- Lacking good mentorship
From what I understand about the world of business, you need experience, maturity. How will young guns have this? Recently I read some story about a 15-year-old who has done something great in creating a platform for short story writers. He has two thousand hits to his short stories! Come on, it‘s not two million hits. I also happen to be a blogger, and I know what hits are and how difficult it is to get them.
Similarly, how can 25 years old be know all? He may be brilliant both in his techie side and convincing the investors about his ideas about which others don’t know much, anyway. How do dollars get converted into a sustainable running company?
The table above shows all the figures in million US dollars. It shows revenue, money pumped in and valuation! The revenue is tiny when compared to the money invested. Who does the valuation? What is the significance of the appraisal? I will tell you something about valuation. How can an unproven company, with unproven management, product or services with 4/15/14 million dollars have 1.5 billion dollars valuation? Do investors not understand these things? But since private money is involved, who cares? Is this gambling, horse racing equivalent?
Apple was the first company whose valuation reached one trillion (I can’t count zeroes) US dollars. But once the US-China trade war started, it appeared that Apple may have problems. Immediately its valuation has come down, now Microsoft is numero uno! Apple valuation with tons of money and great products and with proven track records can come down. The companies listed in the table above are both brick and mortar companies and IT companies with nothing proven. Their valuation is going up and up and up! Any logic?
Friends I will introduce you to more things. What people called in olden days as an investment, is now called burn rate. These companies burn money, it’s not yours anyway. Then there are serial entrepreneurs a la serial killers! They create startups, burn money (a % goes to own pockets), take the company to a level and start looking for larger companies for merger and acquisition! Someone decides and declares them more valuable. So promoters, investors, angels all make money as a new set of people replaces the old team. The show goes on. Nobody keeps track of what happens to such companies. Since bank funds and financial institution money is not involved nobody cares. No Nirav Modis and Mallyas are created. Start next company and go through the same cycle, make a million or two. The cycle goes on.
The end result of all this is that “Startup Culture” starts in your country. The startup language is a new language which most don’t understand and I am sure you have still a lot of questions on the subject discussed, even after you have read this piece!