Transcript: Insidious Loops in Indian Startup Ecosystem (TSP Insights)
In this episode of The Startup Project, Nataraj Sindam and guest Debarghya 'Deedy' Das dissect the Indian startup ecosystem. They explore the lack of media criticism, unsustainable business models, and the 'insidious loops' of hype-driven funding and founder secondary sales. This is a must-listen for anyone interested in the realities of venture capital and entrepreneurship in India.
2023-03-21
Host: one of the topics I wanted to talk to you about, uh, was regarding Indian startups. I think you wrote, uh, a bunch of content around, you know, which companies are succeeding and which companies are not. Uh, so just give me an overview of what you think is happening right now in the unicorn class, uh, especially on Indian startups.
Guest: Yeah, so let me let me start by saying that, you know, when, when I moved to Bangalore, I was working at Google at the time, and one of the big reasons, there were many reasons, but one of the big reasons I moved back was to learn more about the tech ecosystem in India.
Host: And you moved from US to Bangalore.
Guest: Correct. I was in New York prior to that, and I moved from New York to Bangalore. Um, I knew it was going to be a temporary thing.
It was just testing the waters, but I did want to get a better feel for how tech works and and what's available in India now. Because I always hear so much hype about it. From the internet, you hear new startups are getting funded.
There's over 100 unicorns in India. There's so many stories of big acquisitions. Uh, Shark Tank is now, you know, a household name in in India.
So, you know, to some extent startups and venture and entrepreneurship has really become mainstream and I wanted to see what the hype was all about.
And when I was there, I learned a few interesting things and and maybe this comes back to my Twitter opinion is, I like to have a nuance take on things. I don't want to have be for or against something, but I want to understand what it's all about.
And when I looked into the startup ecosystem in India, one thing I didn't find was there was no critique. You know, everyone always writes positive news about Indian startups, pretty much across the board.
Uh, maybe a little bit of that has changed now. Uh, but that really irked me, and that was kind of a negative signal. Everything can't be good with any ecosystem.
There's some good, some bad, and the more I dug into it, the more of the bad I would find. I mean, most of the people writing these things are are VCs and they have their incentivized to write good things. They're invested in these companies.
Um, or people working at the startups who are also invested in this ecosystem. So, the more I looked into it, I realized, look, there's a lot of good stuff happening in India. Like, look, it's a growing market.
There is growing disposable income, technology, it's a technology first market. People are growing up with mobile phones in, you know, volumes that we, when I grew up in India was unprecedented when we were there. And that's great.
And I think there's a lot of potential there. However, a lot of the companies that I saw in India were just not real businesses. I think that's the first thing that struck me. You know, you are building amazing products.
A lot of the products work really well. They have many, many users. They solve a big problem need quickly. One of the great examples is Dunzo.
Dunzo is a company, for those of who, those who don't know, Dunzo is a company where you can order anything from anywhere immediately, including a free text box of custom instructions of what you want this person to do, and it costs you 30 rupees on top of, you know, what you would normally pay, which is incredible.
But it's very evident that learning from some of these examples in America, some of these business models, I never saw them scaling.
So, then the more I dug into it, you see, there are some insidious loops where these CEOs of these startups would raise, generate a bunch of hype, build a great product, raise a bunch of money, hire a bunch of people, and my goal, my question was, okay, what's your exit plan here?
Like, these companies aren't going to make money. Uh, they're never going to be profitable. You're, you're talking about 80, 90% loss margins. It's very hard to turn those kinds of businesses around in many of those cases.
And I realized that what was happening is either they were too attracted to valuation and just didn't understand what building a good business meant, because they were blown away by all the hype, or they understood that at some point or they knew that going in, and they decided to sell secondaries.
So, they were getting rich and building their own personal brand, and if the company didn't work, it was like, oh, the market's not ready, but I tried my best. Um, even though, you know, that's questionable.
So, that's sort of a high level overview of what the good and the bad is.
And I think not every company is bad, but my opinion is a lot of, I would say aside from less than 10 companies, most consumer oriented startups in India, I struggle to see a path to profitability for them, from, from an outsider looking in.
And one last point I'll add there is more of a subtle uh, thing is the reason you can critique the Indian ecosystem, and this is great, um, in comparison to the US is the MCA, the Ministry of Corporate Affairs in India, uh, ask startups and even private companies to file financials every year.
So, you can actually see how much money they're making, how much money they're losing, all of these details which you can't really get visibility in America.
Host: Yeah, I think I've invested both in US and Indian companies.
So, one of the things that's, I mean, there are bad things in India as well, but in terms of like regulation and filing paperwork, which is a lot more, which includes this particular, uh, feature, most of things are bugs, but there's some features in it, which is what you mentioned, uh, where you can get every year you give the valuation.
For example, if you invest in a US startup, you don't know what valuation it is running as an investor, uh, unless you're like a lead investor who's on the board and, you know, you get the insider information, but rest of them don't know which valuation at this point their internal valuation is.
Uh, for Indian startups every year you get an updated valuation. So, you know very quickly what the feedback is from the company. Um, but you the point about incentives, right? Um, a lot of startup media are startups. So, your story is a startup.
Like, even though you can say TechCrunch in the US criticizes some of the companies, uh, but mostly they're, you know, they talk about funding news and, uh, there some, you know, occasionally they come up with a critique of company or like they coverage, they do cover a critique made by a different publication.
Uh, but in India, your story or Inc42 and some other, you know, upcoming publications, they are pretty much startups themselves. They are like promising investors to attract attention. Um, so it's like that incentive is not there for them.
But there are other publications like I think there's one Morning Context or something which is a purely subscription based. Uh, they did some investigative or some criticism about startup models.
Um, they're purely subscription based, I think so, they don't often get, uh, you know, referred by your story or, you know, Inc42, um, and that whole ecosystem, which I get.
And I think you're also right about, um, the secondary, uh, share sales aspect of it, which happened, I think in US also, right? For example, there was this company which was Hopin.
Um, at peak of, you know, pandemic, it was valued 7. something billion. Uh, the founder exited for $150 million. It is now valued again at, I think $1.2 billion or something.
So, I mean, in, in a sense the founder did the right thing, like if you know the company is overvalued, like is it wrong that I am selling my stock? Right, right? Uh, that that sort of applies if, uh, you know, in your public markets also, right?
If I am holding a stock and I know that it's overvalued, what do I do? I hold it or I sell it? Right? So, there is some interesting incentives. Uh, and also a lot of early employees, like look at all these things as the same.
I think where the education really lacks is, uh, especially in Indian markets is, uh, a lot of people don't understand what is the incentive structure going in as an early employee or joining in as an engineer.
Like, how, uh, simple or how easily the whole system can break down in six months. Like, that aspect, I think is still pretty much unknown.
Even though like the top level, the founder sector, people who are creating companies understand this incentive structure very well and, you know, that's what happened. They raised at pretty high valuations, you know, in last two years.
Even a starting pre-seed company with no team, no product was raising at $10 million.
Uh, and that might be a little bit norm normalized in the US from 7 to 10, but in India it's it's extremely high, especially if you see things like what's happening on Shark Tank India or something, right?
Um, like that's extremely high valuation for a pre-seed company with no product, uh, just an idea.
But those things happened and, you know, we, we now see that there's no path into actually finding a product, uh, or product market fit or even surviving for next 18, 24 months. Um, and to your customer, I think consumer products, right?
I think there are very few categories large enough where consumer side of companies can actually work. And I think India is in a phase where the primary needs or like the absolute primary needs are winning. Like, you take Swiggy for example, right?
Swiggy is crushing it. Um, and that's like basic need. It serves a very basic need. Dunzo also in a lot of ways serves a very basic need. Uh, and then there's like gaming and gambling which is working really well.
Um, and then I think there's whole edtech gamut with Vedantu and Byju's and which which I think have lost the plot in terms of like what is the right scale and valuation.
I think there is a use case, there's a right product market fit, but again, they overvalue themselves, they over scale themselves. Because we've seen this in, um, public markets as well in the US, right?
Not all the SAS companies that are overvalued are bad companies or bad products. It's just that you can't value something that is making $1 billion in at $100 billion valuation. $1 billion is still a good business.
Why can't you have a company which is, you know, a $1 billion revenue and valued at, you know, $4, 5 billion. That's a good business with 300 employees, right?
But when you change that to, you know, value at $100 billion, then your expectations of revenue are increasing and then, you know, you basically revert back to mean and that's what we are seeing.