The entire startup ecosystem went gung-ho earlier this month when India got its 100th unicorn startup. While the glamour around being a unicorn seemed unmatched, no one really raised the fundamental business question about profitability and unit economics of companies.
There is no denying that access to this kind of capital is amazing for an early-stage young company, and also drives serious motivation about entrepreneurship and starting up. However, we also need to introspect on the message that goes out to millions of first-generation entrepreneurs who are still just starting out - Is raising funds everything?
New-age
startups in India seem to be playing a single-minded game of becoming ‘role models’ and getting featured as a ‘unicorn’. No matter how mythical the creature maybe (just like the correlation between being a unicorn and being successful), it has surpassed the importance of being a valuable profitable company.
Amid the pressure of raising rounds after rounds of funding, the founders often tend to engage in heavy marketing campaigns (running into millions of dollars) with celebrity influencers and invest all their mind space and efforts towards fundraising.
The traditional big-gun VCs and investors of India have also thrown money into companies creating mythical valuations (just like the animal ‘unicorn’ itself) based on no logical formulae or any base of algorithms. All we get to hear now is that funding is for the ‘future’ or for ‘data’ that the company is going to own, which eventually is going to convert into money in a utopian world. Another more popular conception behind over-valuations is that the industry size is huge and the startup will capture its x percent ‘very soon’.
The valuation basically has become merely a number that a group of investors decide in a closed room and believe that the company is worth by all means. With this fluffy bubble of the ecosystem, one always wonders what are the remaining exit options for these companies, as achieving profitability seems to be a distant dream (or not even a goal) for most.
We have already seen what some of their IPOs lead to. We have also seen acquisitions at horrendous valuations as compared to what their investors had thought. And we have also seen massive down rounds waking the founders up from a sound sleep.
There are other downsides of this culture (read: BharatPe) with so many recent cases of founders found guilty of financial misrepresentation, internal fraud and toxic cultures within companies.
However, without sounding like a pessimist, the idea is only of a wake-up call! To set out expectations right and to tell the new generation of entrepreneurs coming out of college that fundamental rules of business remain the same through ages - and one of the golden rules from that book is profitability.
Selling and scaling are best suited when they go hand in hand, without a biased imbalance in the direction of only ‘scaling’. There are companies to look up to. There are bootstrapped startups creating real value. Technology companies are changing the world with a larger goal and business at their core. For-profit social enterprises that are solving real-world problems. And real businesses are being created even without the buzzword ‘technology’.
It's time to choose the right heroes and celebrate entrepreneurs and startups with real business models and innovations, without being biased towards overtly funded, mythically valued ‘unicorns’.
—Pawas Jain is Head of Product at CNBC-TV18. Views expressed are personal
