Most of you must have seen this image (or a version of it) in the last few years. I remember a lot of people sharing it or referring to it with almost a sense of pride and relief. It was almost as if the world had found a way to get the rewards without the work. I also remember using it about 2 years ago during my design thinking workshops. My objective was more about slowing down any wild imagination among participants, about creating business models without firm, underlying foundations.
Oddly, this would be the only section or slide that would find a small amount of resistance and counter-views. Apart from the losses Uber was amassing, there wasn’t much else to disprove it. Its valuation certainly fuzzied plain reasoning for many business folk.
And while the jury’s still out on the success or failure of Uber, I’ve been trying to see if there are any indicators in their drivers’ views.
On a recent Uber ride, the driver was telling me about their reducing margins. How Uber initially started with a very lucrative 15% (share of revenues Uber retained, leaving the rest for the driver partner). And how, with time, that share has increased to 20, 25, and now 28%. I also inquired about why I was often getting surge prices in the afternoons.
The driver explained that they prefer the mornings and evenings because of surge pricing. And since their revenue sharing is lower now, a lot of them go home to rest in the afternoons. A few afternoons ago, the app showed nearly half a dozen cars around me. Yet it took an hour of trying to get a confirmed booking. And the few drivers who cancelled, suspiciously called to ask where I was going, before cancelling. And recently, a few drivers have also asked how much I was being charged for the ride. Something never discussed before.
In an earlier post, I shared a story of another company before Uber, that perhaps did not have a good pulse on its different stakeholders. And how it eventually disappeared from this space in the face of Uber. By these recent signs, seems that if Uber doesn’t disrupt itself, someone soon enough might.
If you own, manage or work at a company, and are grappling with a complex challenge or are in need of innovation for growth, get in touch. More here.
And you might find my book, ‘Design the Future’ interesting. It demystifies the mindset of Design Thinking. Ebook’s on Amazon, and paperbacks at leading online bookstores including Amazon & Flipkart.
Is there a bubble forming in the Indian startup scene?
The Hubble Space Telescope
Is the Indian startup space fast becoming a bubble? Let’s take a closer look and find out.
At the Goldman Sachs technology conference earlier this year, leading venture capitalist of Benchmark, Bill Gurley expressed concerns to attendees, of a possible bubble, caused by some over-valued startups in the US. His concerns were directed at the young companies that had almost magically reached over a billion dollars in valuation, which according to him, was largely fueled by investor fear of missing out (or FOMO, as the VC community knows it). He said that investors were making investments of sizes previously reserved for listed companies. Aptly, he said “a founder pursuing a $40 million IPO offering takes the process more seriously today than a founder raising $400 million in private capital.”
Another reason for his concern, was the presence of public market investors like hedge funds, etc., investing in the space earlier catered to only by venture capitalists. Bill isn’t wrong in saying that hedge funds, mutual funds, etc., have traditionally had a different investment appetite and strategy. FOMO, clubbed with this new blend of different investor classes and styles of investing, is perhaps what is fueling his growing anxiety of a possible bubble. Benchmark has funded numerous industry-altering young companies since 1995, including Twitter, Instagram, Snapchat, and Uber, and around 250 other startups.
The Wall Street Journal’s Billion Dollar Startup Club saw at least 73 young private companies valued over USD $1 billion this year, compared to only 41 last year. Nearly half the investors in some of the most invested startups too, were institutional and strategic investors, with Tiger Global (TG is an international firm that manages hedge and private equity funds) leading the pack with 12 investments in private billion-dollar companies. TG also raised the most money last year, $4 billion to be more specific, amounting to nearly 12% of all venture capital raised in 2014. (source)
Coming back to India, should this over-investing and over-valuing in US startups be of any concern to our booming Indian startup scene that is currently fueled by online travel, e-commerce retail and logistics, classifieds, online food ordering, radio taxis, etc.? Let’s find out.
Firstly, one of those aggressive investors that Bill Gurley mentioned, Tiger Global to be specific, is also the most aggressive investor in Indian startups. In 2015 alone, TG disclosed investments in over 17 companies, investing in rounds totaling to about $1 billion. Some of its investments include a $150 million round (series H round!) with other investors in Quikr, India’s largest online and mobile classifieds portal. Then there was a series D round of $ 100 million in Shopclues, an e-commerce portal. We could argue that the exact investment exposure by Tiger Global is not known, and could be somewhat small. Or that perhaps these startups are actually worth the millions or billions they are said to be worth.
Tiger Global, among others, may have helped inflate a startup bubble in the US. But that is a significantly different market than India, with a more mature and aggressive investor community. Therefore, a race to get a piece of what is hopefully the next Google or Uber in the US might have led investors to try and outbid each other with sweeter deals to promising startups. But is TG’s strategy or tendency to overvalue being carried to India too?
In February, a reasonably well funded ‘mom and baby’ products portal, BabyOye, also a Tiger Global funded company, was acquired by Mahindra Retail for an undisclosed sum; in the hope of boosting their own brands Mom & Me, and Beanstalk, that have not been too strong online. BabyOye raised $12 million in 2013 from investors, partly used to acquire another company (Hoopos.com). After an earlier round of funding in 2011, BabyOye spent extravagantly on TV advertising using a former movie star in the ads.
Mahindra’s acquisition to gain online strength seemed concerning, given that such a large group felt the need to acquire a small company with only 1500 followers on Twitter (now up at 2003 followers), to bring in the capability of selling online, even if the acquisition didn’t cost them much. And at a time when a lot, if not most of those products were already available on Amazon and Flipkart. Did that make good business sense, or is e-commerce happening so fast that even the heavyweights of Indian industry are feeling the pressure to jump on this bullet train?
US’s popular classifieds service, Craigslist, only had one known investor ever; eBay. And that too not for too long. And was Craigslist popular enough? More than it perhaps ever expected. In comparison, a similar service in India, Quikr, has raised upwards of $350 million so far, and we can only wonder why. To buy and sell other companies, maybe?
And just then, in comes news of a possible acquisition of the nearing-a-billion-in-valuation Housing.com, by none other than Quikr. If the acquisition does happen, it might be a progressive step for Quikr. But it also leaves me wondering about the vision of these startup promoters. With growth strategies and business direction that seems to be going all over the place. In many ways, this startup mania is turning out to be more of an exit ground for investors, rather than an effort to give the world the next great company that’s made in India.
Looking at the magnitude of investments themselves, a layman could argue that ‘the more the funding, the better’; after all, is there anything like too much money? Or for that matter, even a sky- higher valuation. Imagine the pride and respect in your social circles when they read in bold, the value of your young company. But venture capital and investing isn’t as simple. If one funding round happens at a significantly high valuation, the next round becomes that much tougher to raise, as does getting a suitable exit for your existing investors. Of the $51 billion worth of private equity deals in India from 2000 to 2008, there have been only around 30% exits, according to a McKinsey and Co. report.
Over-investing in companies brings with it, the tendency to spend it, whether it makes perfect business sense or not. As the world, and more importantly India, is getting increasingly interconnected online and socially, it is worrying to see the amount of money young online businesses are investing into expensive traditional media, with the likes of Amazon’s catchy ad, or Flipkart’s loud and confusing one, everyone’s on TV and on billboards, trying to push their way into the heads of prospective customers.
About 5-8 years ago, it was comparatively tougher for companies to scale. Building capacities, adding servers, fleet, manufacturing capacity, manpower, etc., took a lot more time and more money.
So, while salaries are much higher today, many services and business functions can also be outsourced efficiently. This allows companies to focus on core activities and scale faster. There is the evolution of analytics, contractual manpower, hired CXO’s and everything in-between available. Basically, the seemingly impossible tasks that earlier needed a small army, can now be pulled off with a small team.
All this brings us back to “how do we make sense of the heavy investments into these, still nascent startups?” And more importantly, will such heavy spends only on marketing guarantee a successful future for these young ventures? And, is any funding being spent on better listening and understanding of customer needs? Or on empathizing with problems customers are currently facing?
The notorious, multi-billion dollar Uber for instance, has an extremely light operating model, asset-light, limited overheads, and is highly scalable. But has it done anything to address woman passenger safety in countries where it operates? Not so far. Even Indian taxi aggregator Meru (2 years older than Uber) had a panic button on the app long before Uber decided to put one there. Uber waited till after unfortunate incidents occurred, before putting a feature that was so logical and obvious. All that funding seemed to be spent on technology and marketing. Then why do customers still shower so much love on services that don’t feel the same way about them?
Between aggressive promoters and aggressive investors, focus has gradually shifted from the customers’ best interest. It now seems to be more about startup and investor’s best interest. Online food ordering businesses too, for example, have built strong websites and apps. And they have been advertising like there’s no tomorrow. But their internal processes remain shockingly primitive. Back in 2008, I had toyed with the idea of starting an online food ordering service, and had listed some concern areas that needed figuring out, in an effort to shape the idea better. While I eventually didn’t pursue it, online food ordering startups today, surprisingly still live with those same problems, despite the advancements that have happened in the interim.
The possible risks of overvalued and over-invested startups are many. From VC firms going bust, to startups not being able to raise the next round of funding. Or for that matter, those being made redundant by other startups. And with every startup that shuts shop, it also affects a large number of other individuals and businesses. Everyone from logistics businesses to small suppliers to even home businesses and employees. Anyone who has come to serve these super-valued startups.
And finally, in an effort to boost entrepreneurship, India has considerably relaxed rules for listing startups in the recent past. But this bold step will take its time to see benefits, especially since there is poor liquidity in this space. And the experience in valuing new age businesses isn’t anywhere near accurate.
The sky-high valuations of startups would make for interesting conversations with friends and a few rounds of beer. However, lack of clarity in funding and growth strategy in these heavyweight startups could be a matter of concern. For young stars of a new and emerging India. And India’s big startup contributions to the world would hopefully be those that are highly profitable and scalable. And most importantly, solely focused on delighting its customers.
Originally posted here: http://yourstory.com/2015/07/startup-bubble/
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