Startup Lessons: Learning from 2008 crisis
For the startup ecosystem in India, primarily the aggregator businesses, current COVID-19 situation is particularly challenging. While some of the unicorns were already starting to show signs of trouble because of poor economic performance even before COVID-19 situation started emerging, the pandemic has only acted as a catalyst. The entrepreneurial ecosystem in India needs to do a deep dive to analyse the reasons and factors as to why in spite of billions of dollars of investments, none of the recent unicorns have been able to go public while their western counterparts have made successful exits with far lesser investments.
Though not an exact comparison, the aggregator unicorns should rethink their business models and while doing so they may like to take a look back at the 2008 financial crisis and learn from the mistakes made by the erstwhile titans of the financial world. When the underlying real estate properties started to lose value because of overly optimistic projections not living up to the test of time, the bubble burst. Something similar is happening currently with most of the Indian unicorns.
For almost half a decade most of these firms have been burning cash for customer acquisition through deep discounting, couponing, deals, cashbacks, et al. Not owning any of the businesses themselves and consequently not having a firsthand knowledge of the factors that affect the underlying businesses, the aggregator unicorns (much like their VC masters) have been giving monetary incentives to the customers believing that money is the only factor. Economists of yore, on whose knowledge the entire foundations of modern economies have been created, had mentioned the factors of production as land, labor, capital, and enterprise. In the modern technology-driven era with data, cloud computing, virtualisation, etc. driving business efficiencies, capital is still only one factor of production but NOT the only one!
The global lockdown to fight the pandemic has resulted in significant changes in consumer behaviour and no doubt all businesses are seeing the impact of it in their own ways. The aggregator unicorns are particularly stressed because the businesses they run are like the CDOs (a.k.a. the now infamous Collateralized Debt Obligation) that led to the financial crisis a decade back. The aggregator unicorns have been primarily packaging services of the businesses they showcase holding little to no risk in the success/failure of the businesses themselves. Since risks and rewards go hand-in-hand, there are no surprises that these aggregators have little to show in terms of rewards. Like the purchasers of CDOs who statistically analysed risk through statistical data crunching with complete disregard to the quality of the underlying assets, the venture capital firms have been pouring in money in today’s aggregator start-ups of India primarily focussing on the population as the underlying fundamental that will drive consumption with little or no focus on the motivations of consumers and their behaviour. Just because a business model has worked in one geography/culture, it cannot be blindly plugged into another society and assumed to give the same results without taking the social, cultural, political, psychological, demographic, behavioural and other aspects into account.
Difficult times tend to stress test the strategy and those who have invested time and effort in analysing the boundary conditions in advance tend to survive better as they have some sort of actionable plan already at the back of their mind. Successful firms tend to respond to difficult situations rather than reacting to them. The present crisis like any other crisis will act as the Darwinian test leaving only the fittest to survive!!!
