In the highly competitive market today, it seems like a trick question on whether a startup should focus on scalability, which seemed to be a trend until last year, or sustainability. Though one might toss for scalability at the very outset, facts speak otherwise.
This year, a lot has been written on the high “cash burn rates” of the star online startups and predictions of doom in the areas of growth or funding. This is in stark contrast to last year which was dominated by high valuations, wide ranging expansions, hyper sales and big hiring packages. These high cash burn rates were partly due to investor pressure to scale up, gain market share from the rivals and clock high GMV’s (Is it the right metric anyway?). There was a furious race to achieve this among the top funded companies and a lot of “me too” startups hoping to cash in on the investor gold rush.
However, now this unbridled growth has reached a plateau due to coffers running dry and wavering customer loyalties. So, this frenzy for rapid scalability seems to have come at a cost. The way these companies have been spending cash has raised a big question mark over their long term sustainability. So the moot question is whether it is wise to scale up so fast if it puts your very survival at risk?
A leading Indian brokerage firm made a study of the 22 top Indian e-commerce startups during the financial year 2015 – 16. The prognosis by them was quite grim. In that period, the combined losses grew by 293% to Rs. 7,884 crores on a combined earning of Rs. 16,199 crores. Only one start up, Practo, in the healthcare tech sector, was making more revenues than expenses.
Inspite of the hectic pace of growth, the losses were brought about by ‘below cost’ discount sales to attract customers, big advertising spends across all media, and rapid expansion into smaller cities to achieve scalability. Also, there was a dearth of original ideas or products. Most of them were copycats of each other with similar product offerings. One can’t but be reminded of the egg selling scheme of Milo Minderbinder in Catch 22 of buying high and selling low!
In fact, the first five months of 2016 have witnessed over 18 startups wrapping up operations. Atleast 15 of these startups were funded and just one startup went beyond Series A stage. Not surprisingly, 4 startups were from the food tech space, 4 in the hyper local category and 2 in fashion. They were all crowded landscapes already. Going by a Goldman Sachs report, private equity investments in startups has declined by a whopping 25% as compared to last year. So obviously, focusing on scalability over sustainability may have been a flawed strategy.
High cash burn for scalability and a dependence on investors is not the right survival strategy anymore for Indian startups. Investors too have shifted their focus to startups that have the potential to sustain in the long run rather than those with just high valuations and no ‘real’ returns.
In a way, this year will be the best learning for startups as they are slowly realising the pitfalls of only focusing on scalability. Pepper Tap, the grocery delivery app, had to shut shop in six cities, including the major metros, and still couldn’t survive as it had scaled too fast and were not really prepared with the correct logistics framework to service its customers. It did not spend enough time to gain a stronghold in an already existing market and diversified too fast. Even Grofers, Housing.com, Food Panda and Zomato have scaled down their operations significantly and have shut down or scaled back operations in non- performing cities.
There are quite a few startups like Urban Ladder and Carat Lane that are building world class products and are competing with the top brands in the world. They have managed to organise fragmented markets to create “online” brands with positive unit economics. Oyo rooms and BookMyShow, are examples of such startups which can effectively fill a need in the market and have managed to innovate and grow their market share.
Since 2005, MU Sigma a leading Indian business application software company has been making waves in its respective domain too. It has quietly made a mark in the world without any high valuations or spending sprees because their business has value.
Many lessons have been learnt from startups that have gone bust in the past. Clearly, it is high time that startups start focusing on sustainability first because once a sustainable business model is in place, scalability will automatically follow.
Going forward, only sustainable businesses which are value-driven, with a respect for the bottom line, will draw the attention of the now cautious investors and yield better returns on their investments in the long run as compared to valuation-driven startups. Moreover, only the sustainable business models will be able to scale successfully and prove their real mettle rather than becoming just ‘one-time wonders’. In fact, brick and mortar or e-commerce, the fundamentals don’t change!
An article by Mahesh Nair
Founder at Picsdream