Has it become an acceptable norm to prioritise valuation over value creation when running a start-up? If yes, why is this trend embraced like the holy grail? With this borderline trend fast becoming the norm, it’s the right time to find out what gives start-ups the confidence to not bother about profitability in their first few years and what makes their path different from that of the listed companies. To answer these burning questions and share insights on the norm, we have for this episode, Vikas Agnihotri, India Operating Partner at Softbank Investment Advisers. And for Insight by Grant Thornton Bharat, we have on board Raja Lahiri, Technology, Media and Telecom Leader and Partner, Growth Advisory.
Narayan: Welcome to Episode 22 of storm the norm the fortnightly podcast where we pick up norms that come in the way of businesses succeeding in a disruptive world. I'm Narayan,
Anisha: and I'm Anisha Motwani,
Narayan: Storm the norm is now brought to you in association with Grant Thornton Bharat, and includes GT insights, a special capsule from a GT expert. Onto today's episode. Now, Anisha, there seem to be many ways to cut the norm we'll tackle today. The debate around value versus valuation, the different rules by which startups and listed companies play with a theme that seems to come up regardless of how you look at it is this. It's almost like there's an absolute disdain that startups, especially the ones that hope to scale with success have for profitability. I mean, it seems like it's almost like a no-no for startups to do anything other than make colossal losses and burn cash, like there's no tomorrow before they can be deemed to be successful.
Anisha:I see this evidence all around us Narayan. So you are absolutely making a relatable point.
Narayan: Yeah, I probably sound militant about it. I mean, I was just reading a few days back about zomato's pre IPO buys, hoping to raise what $1.1 billion or thereabout from the stock market, but also being almost proud about current revenue being only slightly more than their current losses, which is already packed that around 2400 crore Indian rupees.
Anisha: And that just makes you wonder what gives startups the confidence apart from of course, having all that VC money at their disposal, to not bother about profitability at all in their first several years of existence?
Narayan: Yeah, why has it become an acceptable norm to prioritize valuation over value creation? And why have startups and VCs alike embrace this as the holy grail?
Anisha: When you put it like that, it does seem like there's a sense of entitlement that has seeped into the startups and the VCs alike, to make money for themselves before anything else, isn't it?
Narayan: Absolutely, and the funny part Anisha is that a disruptive business idea that probably got this type of founders and the VCs excited in the first place, so slightly, I'm changing the world or at least making it better for customers. And yet, the three IPO part of the journey seems to relentlessly focus on valuation creation, all costs, including making huge losses. Kara Swisher was described by some as Silicon Valley's most powerful tech journalists, describes startups whose VC money is running out, but who haven't yet become profitable, as assisted living for millennials.
Anisha: assisted living for millennials, it seems, you know, that reminds me, there's another New York Times journalist Kevin Roose, who calls VC money for unprofitable unicorns, Millennial's lifestyle subsidy.
Narayan: They're sitting in the outside and laughing but and this might sound like a harsh indictment of what is arguably the most accepted and proven model of creating a robust entrepreneurial ecosystem. But like they say, where there is smoke, there's likely to be a fire, why does the world so easily accepted the norm, that it's okay to be a loss leader in order to become a unicorn.
Anisha: What you described as harsh indictments of the startup world from the likes of Kara Swisher or Kevin Rose are still only words. If a listed company were to chalk up such a colossal loss as unicorns do, not only would they not get away with it, but they would likely get indicted in the court of shareholders as well as in the court of law. So I'm with you in trying to understand why this norm is so prevalent, and how we can stop it.
Narayan: Since we have to be practical Anisha and find ways to storm the norm. Perhaps the corollary we need to explore is this: New startups not need to think about the path to profitability, and if they do is this path so different from that for listed companies? How? Why?
Anisha: great questions Narayan
Narayan: and before I burn my fingers trying to answer them. Let me pass the torch on to someone a lot more capable of. Our guest expert today is Vikas Agnihotri, Operating Partner, Operating Group at SoftBank Investment Advisors, India. Vikas was previously the Interim Head of Google India and before that the Managing Director of Sales for Google India. I dare say he will have a strong opinion about this norm, if not some interesting ways to storm it. Vikas, it is a pleasure to have you here on this episode of Storm the Norm.
Vikas Agnihotri: Thank you, Anisha and Narayan for having me here. Always a pleasure to interact with Anisha, good to get to know you Narayan through this journey. And yes, let's get started, an intro would you?
Anisha: Yes. So the norm that we want to storm with you today is: Most Indian startups have towering valuations, but no sign of profit. In fact, 70% of the so called unicorns in India are loss leaders. What's your view on that Vikas? How do you explain that?
Vikas Agnihotri: Let me start by, you know, in an overall sense, the way we look at it, clearly scale is good, scale at any cost, as you would also know, is a recipe for disaster. And I think, clearly showed that. But a lot of behavior, when you look at it, we should not just blame the startup ecosystem, or the founders, the unicorns, but it's also actually very largely driven by the investor community and the kind of support that the investors are actually ready to give. And, therefore, you know, you got to give credit to both sides as they are scaling, what the path to profitability will look like, because too many, at a point of time, if you want to take a snapshot, it's not that evident. But as long as there is a path to profitability, it starts making sense. So what I would want to share with you, just to give you perspective is the way we add the SoftBank vision fund, when we look at some of the opportunities and what goes behind our thinking when we are backing some of these organizations, we generally do believe we take the unicorn levels, because there is a lot of money involved. And as I said, you know, scale is good, but scale at any cost is a recipe for disaster.
Anisha: I really want to challenge you, because you're saying that's not true. But we have enough evidence, look at last year's balance sheets, colossal losses and stupendous valuations.
Vikas Agnihotri: No, absolutely Anisha. As I said, if you take a snapshot of a moment of time, when the journey is on, it will always look incomplete, right? If you were if you were painting a picture, and you're halfway through it, it's gonna look incomplete, for sure, because the story is not complete. If you were making a jigsaw puzzle, and you were making a complex jigsaw puzzle, let's put it with with about 500 pieces of the puzzle to go in, and you reached about a 100 of them, you will obviously think that is making no sense because obviously, with 100 pieces at 400 to come in you, as people from the outside world are unable to visualize and imagine what the puzzle is going to look like, or what the painter is making the painting that's going to look like, so it's a journey. If you were, to take a snapshot of Amazon or Tesla, or many of the other companies, when they just about being their journey two to three years or four years into their life, you would actually see similar kind of constraints. But as scale comes in, as they grow, there is the path to profitability that comes into taking shape. And that's where I'm getting at because, again, as investors when we look at ourselves also, it is we think we provide them with capital, console, and connections. And you need to understand that all three are very important, specially when you're making you're taking bets on emerging technologies, technologies that are going to solve big problems, and will eventually have a big impact because that is the way it has to happen, right that you pick up a big problem that some of these unicorns are trying to solve, technology and AI is going to actually solve it for you. And when you solve it, it's going to have a big impact. And the question is that when you're trying to do all of this, you're also trying to do it at rapid pace and rapid scale, when rapid pace rapid scale of things that are not, you know, things that are going to change behavior actually takes a lot of money to come in. Right. So, when you start thinking on it from that perspective, right? You also need to understand that in the initial phase, when you're making these, you know, when you're investing behind companies, there are a couple of reasons why there's a lot of capital that goes in. And it takes time to take shape. As I said, one is initial capital that you're providing will always actually in our mind, in our perspective, it actually frees the founders time and mind from just chasing for more capital and raising, you know, time and again, but they're focused on what they know best, which is building world class companies. The other thing is that with capital we are able to attract, because they're solving for big problems, they are able to attract better talent. Better talent, from my years of experience here as well as in my previous company will always come when you're really challenging and trying to solve things that that are like literally like moonshot kinds of solutions that you're working on. And again, I mean, when you put all of that together, at least, at our level, at SoftBank, we have a little phrase that we call that, you know, you're gonna nail it and then scale it. So we work really hard with all our all our investor, all our companies, and all our founders actually, to really work hard to build a model that clearly has a path to profitability. Because once you nail that, it's easy to scale that. And that to us is, I think, is really, really important. Just to give you an example, and you gave examples of several companies, right, where the concern is when, let's take an example of an e commerce company, right? If an e commerce company at scale, is still making a loss at a transaction level, that's a problem, right? But if the companies are contribution positive per order, right, then there, it makes sense, because you need to be contribution positive, because other costs that are going in then are really manageable costs, because there will be marketing costs, etc, etc, that goes beyond that. And as scale comes, your investments, going behind marketing and other aspects, which are more controllable, will obviously start coming down and suddenly, because you had a model that was more contribution positive, it overall starts making sense. And all these companies, you will see will actually move into that direction.
Narayan: So I'm tempted to go off script here a little bit, because there's so much food for thought you've given over here. But let me stay on script for a minute and ask and I think I already know the answer to this one. Is there an ideal time horizon to get a positive for a startup?
Vikas Agnihotri: No, it all depends on, you know, what is? What is the nature of the company, the industry that you're in? And what are you trying to solve? So if you look at SaaS companies versus E-commerce companies, obviously SaaS companies will reach that stage much faster. Because SaaS companies have much higher contribution, they are b2b play, and and you can manage the cost. You can get scale and then manage costs much faster and much earlier. Then when you're looking at a b2c kind of company, where, as I said, you're trying, because it's new technology, you're changing behavior, you're changing the way things are done. And that does take time. That does take time. And I mean, anyone and you know, with your background, and Anisha has been in marketing, you would appreciate that changing consumer behavior, does take time.
Narayan: So a corollary to that seems to be remembered and still under point about time horizon, but I'm less bothered about the time horizon to become editor positive, and you addressed that fairly. The other factor that you've been talking about multiple times, even in the last few minutes, is one of scale. Obviously, a startup must be innovative. But it sounds to me like the definition of success is, is for a startup to obviously be innovative, but also to scale and scale quickly, if possible. But given that the main task is of changing consumer behavior on mass. Which of these is more important, resist the need to be originally innovative? Because as you might notice, a lot of Indian startups at least seem to be borrowing ideas from elsewhere, but adapting and implementing them for India. Or it doesn't matter that it's not an original idea, all it requires is changing consumer behavior adapted to this context or at scale.
Vikas Agnihotri: I think that's a great question. Let me let me start by saying that, again, we are looking at it from a perspective, not exactly from the entire startup community, but startups that gets funding and that are supported by large investors, right? So if you want to do and that's where scale comes in. So I'm trying to address the first question on the issue around scale to begin with, if you want to build a great company, and you want to build a Mickey Mouse sized company to do something, you know, in your local area, or maybe your city or something like that, sure, go right ahead and do it and you know, you don't need external capital, maybe you can manage that yourself and you will still do a great job of building a great company. But when you're ambitious enough to say I do want to address and look at this solving, as I keep saying, solving big problems that will get solved through technology and AI and therefore you're looking for a big impact, you need support on money. And when you're looking into doing that, then you have to bring scale into the picture, right? And I think that's the most important, because that's why you need capital to go in and when large capital goes in, then you need scale for everybody to get returns, returns on that, right. In terms of your other part of the question where you said that are Indian startups innovative enough, and things like that. I've seen a lot of change, and a lot of companies trying to bring change. And I, when I look at that, I like to classify that into three buckets. Really, the first one I call it is in terms of disruptive and innovative from a global perspective. But I think everyone likes to look at those kinds of companies, because that's the shining thing and everybody likes to say that, hey, I mean, it's very visible, that scale that's big. However, India, and when startups are looking at India and solving for issues in India, India, is very complex kind of situation with a great opportunity in any case. So the second bucket I look at is where you are seeing frugal disruptions that are happening. Because sometimes those disruptions done frugally are the need of the hour for a country of our kind, and will scale because there's a large mass of the population, which is requiring those kinds of disruptions to happen for certain things, for their businesses to scale. The third is the classic Indian jugaad or innovation, right? I would only request people not to classify innovations with only one lens. There is room for looking at things that are happening in the country beyond that.
Anisha: Vikas, one final question before we wind up. 90% of Indian startups fail within the first five years of their inception. And as you know, further compounded the troubles of so many of them. And when I mean there's some data that I was reading that says that most of them will not be able to survive beyond the next six to nine months. If there is not enough capital infused into those startups. So are Indian startups serious business, or will they just fade away once the funding from VCs, PEs dry up?
Vikas Agnihotri: I think India ecosystem, the startup ecosystem probably is one of the most vibrant that we can see that's happening in the world. You have, just look at some of the numbers, right. You have over 55,000 owned startups that have taken shape over the last five years, we've had $65 billion of investment that has gone over the last five years, hasn't changed 1000s of companies No, it changed 3,200 startups, right. So you will you may say that, hey, there was 55,000 all of them get funding, no, they didn't get funding. But think about the quantum that we talk about right $65 billion, chasing 3200 startups that are coming out of this country, that's massive. It's actually unbelievable. If I look back five to eight years, for someone to say, can something like this happen, we will hope for it, but the kind of change that's happened is quite magical in fact, We ourselves at SoftBank, I think we've invested over $13 billion between SoftBank and SoftBank vision fund into the country. Over the last six months in the start of the year, we've actually closed six deals and put in beyond $2 billion into the country. So why are we all doing it? Right, because I think there's something about India that is actually attracting everybody, we got to look at the bigger picture to say this country is expected to be the third largest economy, you know, over the next five to 10 years. Give or take plus minus one year. I mean, I'm saying seven people can say 7, 6, 8 so I'm just giving a broader wage. It's a consumption driven economy. You have great talent, you have a young population that's digitally connected. And you have a per capita income that's actually drawing, there's a middle class, that's a big middle class, that's actually you know, adding to the per capita. To look at that, it is enough and more that's truly happening. Now, money or capital, and support will always chase companies that have a good business model. And that takes us to the first question that you've actually earlier asked, if you're building a great company, you will always find capital. In fact, people also ask that will companies find an exit eventually, or investors find an exit. If you're building great companies, you will find capital, whether it's public or private and you will also find exits as we go along. So the idea really, and I think that people must always remember that build great companies, don't try and do, you know, don't try and do shining things just for the fact that, you know, it looks pretty cool, do cool things that matter. And as long as you have a path to profitability, as long as you're trying to solve the big problems that you ask, as long as you are disruptive enough, using technology, AI, data, science, etc, to put things together, you will always, always succeed.
Narayan: That has been absolutely riveting. So, I mean, this, I think the purpose of this conversation has been to provoke more conversation and I think you've done that. Very astutely so thank you for that.
Anisha: Thank you Vikas
Vikas Agnihotri: Thank you, my pleasure.
Anisha: So Narayan, what did you take away from everything that Vikas said?
Narayan: You know it strikes me Anisha, that the best insights on any of the norms that our guest experts have tackled, actually this, goes back to the basics. And that's what stood out for me from what Vikas said too. But perhaps the most important thing he said for me was that startups need to remember, actually need to never forget that their world changing idea will never see success, unless they recognize that what they're setting out to do is create behavior change. Without the recognition, no amount of cash burn can set a startup on the path to profitability. What about you Anisha, how would you storm this norm, what hacks do you have for our audience?
Anisha: Yeah and I also recall, you know, the three very basic questions that Vikas said, are your customers happy with you? Will they buy more from you? Will they run for more?
Anisha: No matter whether it's a brick and mortar business, or a click and buy business, the norms don't change.
Narayan: Exactly, yeah so, how would you storm this norm?
Anisha: I believe the cracks of storming this norm is in getting startups to solve for value creation rather than valuation, as you have said, right in the beginning. The first norm actually is, that for many startups, the pivot from idea to reality ends up with pivoting from clarity to confusion.
Narayan: I'm intrigued,
Anisha: Many entrepreneurs start with a great idea and an even bigger dream ahead the road. The market experience leads the idea to a new direction and the company decides to pivot. The problem that happens is, that in the absence of a clear vision for growth, and optimizing revenues, a majority of India's startup resort to pivot so often, that their path completely diverges from the original purpose, often with no new targets or milestones in sight. And this deflection then quickly spirals out of control, and the company hits a roadblock. So when pivoting is a great idea b ut it's also important to take into account numerous factors that entail a successful pivot and reduce the risk of pivoting. The most important aspect of pivoting is to pick new goals and align it to your vision as soon as you decide to pivot.
Narayan: Also, it's about making sure that the new direction presents a better opportunity for growth that has factored in consumers voices and a better scope for expansion and diversification. Right?
Anisha: Absolutely right Narayan and to add to that is another crucial aspect and that is to make sure you don't scrap everything you've invested in and created that far but modify and build on it. It is a tricky business, I think that needs to be navigated in a manner that it leads from confusion to clarity, and not vice versa,
Narayan: Right said.
Anisha: The second hack is, it's not all rainbows and unicorns, as the saying goes. Raising the unicorns is a fundamentally flawed approach to building your startup. Because if you start with this whole thing of that I want to be a unicorn in X number of years. It gets you into this growth at all costs proposition and that proposition only works in the strongest bull markets and in the most optimal conditions. And at some point, this party ends because burgeons are not perpetual and no one has limitless capital to fund a perpetually money losing business.
Anisha: So you know, the resilient startups are the ones that are actually looking at executing balanced growth and taking a long term outlook. And they weave in diversification into the business model to ensure the rich tapestry of enabling ecosystem of adjacent products and services, all markets, all customer segments, and build a full stack of supporting structures. This means that they have multiple business lines and products or segments and geographies and providing equal system of services from day one. So when, if one thing does not pick up, then you're able to navigate and pick up something else.
Narayan: So much sense over Anisha by focusing on balanced growth, building for the long term as well as deepening and diversifying for resilience these smart startups not only survive market shocks, but they can also grow and thrive in good times, and bad.
Anisha: and bad times. Absolutely. And in short, they turn adversity into advantage.
Narayan: And what's the third hack now?
Anisha: This is a very common one. But I still, it's also very relevant though that do not burn before you earn. And we all know that running out of cash is one of the top most reasons for startups to fail. And our COVID and pandemic has actually, by a survey that was recently done that 70% of startups will run out of cash in six to nine months, if the situation remains the same is evidence of this. Cash flow management and staying on top of your burn rate, is the most basic aspect of startup survival. A large trend that many financial statements of funded startups reveal is that the burn is far greater than the core revenue generated by the business. And when that's the business model, the stability of the firm's future comes into question. And I think VIkas did touch upon it, in his conversation, and the hacks to circumvent this unviable business model is actually quite simple. The first one is right pricing from the start. Price shouldn't be considered a barrier to grow. Instead, it's the feature of the product that reflects its market position and its quality. The second one is cost management, so the lifecycle resiliency is two factors. One is the unit economics of the business for user acquisition. and second is how much do you invest in headcount ahead of the revenue curve to drive that growth. And this is where startups need to take a calibrated and calculated decision.
Narayan: And you know, one other thing that occurs to me, especially when we connected back to that outcome of generating behavior change is that advertising and promotional expenses being greater than the revenue earned year after year. biggest problem as a scale that the company is looking to reach for that investment is not being delivered. And from a layman's angle. In such cases, the firm is paying the customer more than the revenue this customer is generating to the firm and when has that ever been optimum for any business?
Anisha: Yeah, you're buying customers instead of creating any profitable customers. The next hack. The fourth one is actually something which is both a boon and a blessing and a curse, private equity investments. Each startup decision is influenced by a founder's ambition and his or her vision of how big and how fast. That's how big do we want the startup to become? And how fast do we want to get there. And that sometimes leads to the problem of having too much money too soon. Manier times entrepreneurs get swayed by valuation numbers, they forget that valuations are a function of supply and demand. With the demand for Indian startup investment opportunities clearly outstripping the supply of quality companies in the marketplace today, unrealistic valuations are bound.
Narayan: And the problem is further compounded by the fact that the private market lacks any independent benchmarks, or independent benchmark estimates of value.
Anisha: With too much money comes the risk of getting overextended with high expectation and the infusion of capital earlier on might not have been able to accelerate the business fast enough to meet those expectations. And many startups end up over promising and under delivering, choosing the right investors, infusing the capital at the right time. And utilizing the same with prudence and a long term outlook is critical to manage this risk return trade off.
Narayan: I'm nodding in agreement to every point you're making seems so straightforward and it's so easily missed.
Anisha: And the last one is that so many startups actually do not have an exit route or strategy in place. The predicament of Indian startups is made worse by a general lack of an exit route or a clear timeline for exit. Typically, investors rely on public listings as an exit route when putting money into startups. And if you take a closer look at financial because it indicates that even the unicorns in the Indian startup ecosystem are nowhere close to the default IPOs and you did talk about zomato's pre IPO buzzing, the attempt to try and offload the risk onto the public puts the exit route and IPO market in a in a big danger zone. Technically what you're doing is you're offloading your risk onto the public.
Narayan: You know, I'm just marveling at this simplicity and that just depth of wisdom in these hacks. Anisha if I may quickly recap right? Make sure if you're planning to pivot your startup that it goes from confusion to clarity and not the other way. Second, don't chase becoming a unicorn. Aim for balance growth, you become the unicorn on the way. Third seems like you know, an age old axiom but don't burn before you earn. The fourth, choose your investors wisely because they can turn out to be either a curse or a boon. And lastly, make sure you have your strategy in place and you've thought it through. So insightful, practical and matter are urgently needed Anisha so thank you for the hacks. I think that gives us a great place to segue into a GT insights module, where gt expert Raja Lahiri tells us how business can specifically help storm this norm. Raja is TMT leader and partner growth advisory at GT Bharat, so Raja what practical advice do you have for businesses in navigating the storm between value creation and valuation?
Raja Lahiri: Thank you very much. It's a pleasure to be on this podcast.
Anisha: Raja, the question that we have for you is, what's your advice to startups and VCs? Is there an alternative to being lost leaders as you scale up?
Raja Lahiri: Absolutely. Unfortunately, there are no shortcuts. I think the fundamentals needs to be at the core, I guess first, which is the obvious one is really the unit economics, right? When you're selling a service, or a product, right? Is your unit economics profitable or not? If you're starting with a model where your unit economics is, is really is not profitable, and is loss making, and you really do not have a plan for profitability, I think that's the biggest issue. So you need to have a unit economics model, which is profitable, or at least you have a specific path to profitability. What are the things that you could do as you asked? I think first, I guess, look at the product quality. But more importantly, very, very closely look at your pricing, right? pricing of your product, pricing of your service. Customers will always pay for quality products and services, wherever you are, which whichever part of the globe. If you're underplaying on your product, and underpricing your service, or your product, that's your biggest issue. So price your product well, appropriately on the back of quality. Second, I would say look at cost structures. One of the issues which we have seen is really companies and startups really going really after acquiring customers, right? at the cost of profitability. So significant advertisement, significant sales and marketing, acquiring customers. But the question is, right? how can I really optimize the cost structures, whether it is on sales and marketing, whether it's on customer acquisitions, we are living in the digital world, so use digital tech, absolutely for you, as you create your business models. So look at cost structures very well. Third, I would say cash flows. Again, whether you're a startup, early startup, or a big startup, or a late startup, right? The cash flow monitoring is the key. We have seen so many examples of companies really burning cash, right? month after month, month after month, but not really monitoring what's the today's situation, so cash monitoring is the key, fundamental, basic, but that needs to be the heart of the strategy. And I would say an important point in all of this is having the right governance framework, the board, people and teams who challenges you, not just go with the flow, but wihich challenges you. A right governance, a right mindset of team will definitely challenge some of the business decisions, which will create not just the right board, the right financial controls, the right business controls, but also look at having the right set of advisors, auditors, lawyers, internal auditors and all of that. So governance is a fundamentally important aspect of this thing.
Anisha: Thank you, Raja. This has just been so insightful.
Narayan: A norm that is urgently relevant today. A deeply insightful and expert guest perspective, hacks to storm the norm and a business perspective. That's a full plate to wrap up Episode 22 of storm the norm, now powered by Grant Thornton Bharat. As always, there are multiple places you can catch us on Spotify, Apple podcasts on cloud and jiosaavn by just searching for storm the norm and on saregama karwaan 2.0 devices on Channel 453. This is Narayan
Anisha: And I am Anisha.
Narayan: signing off for now. We'll be back with a new episode shortly. Thank you and talk to you soon.
Anisha: Thank you