As startups focus on valuations, unit economics often becomes a neglected metric. Indian entrepreneurs need to identify what business models work and what don't, and adapt accordingly. We need to fail fast and move fast.

Are we in a bubble?

More and more people are taking up entrepreneurship as a career. When I started early-stage investment 10 years ago, the average age of an entrepreneur was 40-plus. Now, the average age is 26. Even third-year students at IITs have started their own ventures. Hence, the quantum of failure has also increased. It is said that 50 per cent of ventures die at the early stage.

Yes, these ventures are getting high valuations. But I won’t say that there is a bubble, as corrections will follow soon. Already, there are fewer announcements happening and less money is being invested.

Unit economics

At the end of the day, unit economics is important. You can't keep on spending money just to please the customer. You need to limit discounting and start making money at one point, especially in the services business. That is the problem with most businesses, where without unit economics people have expanded to such an extent that working capital requirements are not being met.

When TinyOwl started expanding, they raised Rs 100 crore. But if you look at unit economics, per order they were spending increasing amounts on promotion and marketing, on discounting, and on execution of order (such as employee costs, delivery costs). And they must have burned a large amount of the money they had raised in the first seven-eight months. So for course correction, they stopped concentrating on that part of the business which was consuming a lot of cash but not generating enough revenue. So people were removed as they changed their business model.

However, these businesses also create a lot of jobs. E-commerce businesses have led to the mushrooming of so many other businesses. For example, logistics startups have come up in a big way. They also generated employment in warehousing, last-mile delivery and tech solutions. All of this goes for Ola or Flipkart.

You can't keep on spending money just to please the customer.

Sectors gaining currency

An on-going trend is mobile-based solutions. Hence, businesses which leverage the mobile platform are the flavour of the season. Analytics and cloud will also offer favourable opportunities.

Herd mentality

Seeing the success of e-commerce, a lot of venture capital funds were attracted to the sector. When good companies get funded, and people see that it's easy to copy their business model, copycats come in. However, not all of them are able to sustain.

For investors, a good business model and a good team will be the first attraction. If three to four companies in a particular sector have received investment, chances of other companies in the same sector receiving funding are remote. Only those companies which bring disruptive solutions stand a chance of getting funded. They will get traction, the rest will be forced to shut down.

Indian startup ecosystem vs that of the US

One great difference is that Indian entrepreneurs are a bit too attached to their companies or solutions, whereas in Silicon Valley people believe in results. So they would quickly move to other solutions if their initial solutions weren't working. They would quickly shut down their businesses and move to another one. In India, we need to fail fast and move fast.

Second, we have still a long way to go when it comes to having the ability to take investment risks. Though people are talking of a bubble, if we look deeply, the money has gone to only a handful of companies. So in India there is still scope for a lot of other companies to get funded.

Third, innovation has to be brought into the picture. Most solutions we see today were present in some other market and we have just adapted them to India. But a positive change is that more and more people are willing to leave traditional jobs to disrupt existing business models.

Right time to raise funds

Any time is the right time. Businesses should raise money only when they need it and only what is required. We have seen businesses getting funded even during an economic downturn because investors were willing to invest in high-quality businesses. Also, one needs to be careful of raising money as a part of equity, because today's dilution will be of much larger value when the company is actually valuable.

Anil Joshi is the co-founder of Unicorn India Ventures. He has been associated with the Indian startup ecosystem for nearly a decade and is a former president of Mumbai Angels. 

As told to Disha Sharma.

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