Growth, Exits or Just a Mirage: VC Musings

While lucky are those who have mastered the art of "Riding a Tiger without Being Eaten", we believe that Startups with Business Models where Customers (not Investors) Pay for the Product or Service will only survive in the long run, whether or not they are part of $100M or Unicorn Clubs

More than $6B has been invested in India Startups in 2015 per VCCEdge. 764 Startups have been funded this year compared to 263 in 2014 according to Tracxn. Per Nasscom, India ranks third among global startup ecosystems with more than 4,200 Companies. While 8 Indian Companies have entered the ‘unicorn’ club with valuations topping $1 billion or more, 40+ Startups that belong to $100M Club are waiting for their passports to the Unicorn Land.

Recent Global Trends

IPOs have remained weak, with technology companies going public at the slowest rate since 2009, and most of those that hit the market failed to reward late-stage investors. Even Private Secondary markets have dried up and employees are struggling to find ESOP buyers

Endiya’s Musings on the current situation: Important aspects that Entrepreneurs must pay attention to

1) Private IPO Sandbox is a lot more comfortable than unforgiving Public Markets

While Box was valued $2.4B in a Private Round, its current Market Cap is approx. $1.75B on NYSE
Square raised its last round at $6B but its current Market Cap is approx $4B as a Publicly listed Co
MakeMyTrip more than doubled its revenue past few years while current Market Cap is 3/4th of its IPO in 2010

2) Exits become tough after achieving High Valuations (especially after joining Unicorn Club)

Instagram should thank its stars for its acquisition at $1B by Facebook (FB). Facebook acquisition of WhatsApp is more an exception rather than the norm. Large Corporations think much harder at any time when they have to shell out more than $300M to buy promising Startups that aren’t real businesses yet. Joining Unicorn Club while it sounds cool and romantic, is a double-edged sword in lieu of the following

Structured Deals where Investors Participate in the Upside while protecting their downside risk (my colleague will soon be writing a comprehensive blog on deal structures of Unicorn Cos)
IPO Investors’ unforgiving mindset
Cash Rich Companies deciding to build organically than buying when Ask is more than a Certain price

3) Startups ramping up Growth via Acquisitions end up nowhere

Witnessing a new trend of how Early Stage Companies who barely know how to walk themselves trying to grow in size through acquisitions. Using Brand (built by spending Millions of Investors Dollars recklessly) and Equity Capital, to acquire and scale do not work unlike leveraging existing customer base and distribution capabilities. Case in point - one of the Adtech Companies that raised more than $75M to acquire failed startups all over the world, haven’t created much value for either the Investors or the Team.

Fledgling Entrepreneurs and Companies do not have the knowledge/process/people necessary to buy and integrate companies (unlike Cisco/Google). Even Tech giants are having garage sales like never before. What was once viewed as ‘strategic’ acquisitions by companies like Symantec, Nokia, Intel, eBay, Microsoft are being spun out

4) Raising Large Amount of Capital without Product/Market Fit is like chasing a mirage

Seed/Series A/Series B in 180days - Doesn’t augur well for Startups. While it’s true that most of the fast-growing companies are Tech-Enabled businesses, to iron out all the kinks in the business models it does take time. Pushing on Marketing/Brand Building Pedal without understanding “Who is the Customer” and achieving “Product/Service – Market Fit” isn’t going to help Company build Valuable Business in the long run

Conclusion

Though the scenario looks frothy, disciplined founders will build valuable companies given the entrepreneurial momentum and ecosystem evolution.

Some of the changes we see in the current Entrepreneurial Landscape compared to yesteryears include

2 to 3 Founders with complementary skills in the initial founding team
Product Marketing and Management abilities to build world-class products
Aggression and Fearlessness to compete with Global Players
Critical Mass of Internet and Mobile Users with the ability to spend (150Mil to 200Mil)
Connectivity to Global Growth Capital Pool