The times are changing. The situation is clearly explained by a line attributed to Vladimir Lenin: “There are months where nothing happens; and there are months where there are years.”
Everything was fine till a few months ago. Fresh money was being raised. Initial Public Offerings (IPOs) were taking place or were being talked about. Billion dollar valuations, building new unicorns, were happening every other week. The media was full of startup entrepreneurs. And politicians were using them to tell us that India’s economic story is going very well.
Suddenly everything seems to have changed. The easy money that was flowing into the region has slowed, thanks to the rich world’s central banks making money out of thin air. Unicorn numbers are falling. Today, there is no chance of a highly rated IPO. The media is questioning.
There are some lessons we can learn. Technology entrepreneurs drew attention to the marketing lessons offered by the success of some international firms. As Al Reese and Laura Lies write in The Fall of Advertising and the Rise of PR: “All recent marketing successes have been PR successes … to name a few: Starbucks, The Body Shop, Amazon.com, Yahoo !, eBay, Palm, Google, Linus, PlayStation, Harry Potter, Botox, Red Bull, Microsoft, Intel and Blackberry.” Indian technology startup entrepreneurs drew from this insight and sold their alleged ‘success’ stories to the news media and social media.
The news media, always on the hunt for heroes, bought their stories and took them to the mass market. As Phil Rosenzweig puts it in The Halo Effect: “Our most compelling stories often put people at the center of events. When times are good, we admire and make heroes.”
This has turned many startup entrepreneurs into social heroes. From the condition of the country to investing money, his views on various things are considered important. It ignores the basic aspect of life that human expertise is in very narrow fields.
These entrepreneurs have caught the attention of common Indians. A big reason for this is that their stories are presented to the world with great simplicity, almost saying that if they can do it, so can you. As Rosenzweig writes: “The test of a good story is not its responsibility to the facts, so much as its ability to provide a satisfactory explanation of events.”
In that sense, the stories of these new age heroes didn’t take into account being in the right place at the right time, or the fact that there was so much easy money floating around and waiting to be invested. We are told that the ‘success’ of these entrepreneurs is due to their individual ability and hard work.
Furthermore, the expectation that these businesses will someday make some money has been passed off as a business model and rarely questioned. One analyst even went to the extent of forecasting earnings by 2041 to justify Zomato’s exorbitant IPO price.
But that was all yesterday. In his book What Goes Up, Eric J. Weiner quoted fund manager Jerry Tsai as saying: “The trouble with getting a little bit of good publicity is that when something goes wrong they like to hit you along the way. The media likes to make things up so they tear them down. can.” Or as Rosenzweig puts it: “When things go bad, we blame and create villains.”
While the sabotage hasn’t started yet, media startups are reporting layoffs and also questioning the regulatory arbitrariness that some of these firms are involved in. In fact, almost two decades ago, the media did a stellar job of highlighting the excesses. The dotcom bubble burst once. Something similar happened after the sub-prime crisis. The media did a great job of explaining the why, what and how of that financial crisis.
The biggest lesson here is that just because something lasts a while doesn’t necessarily mean it’s doable. Technology startups mostly had a cash-burn model, by which they offered goods and services at massive discounts. Their revenues and losses grew at the same pace; The VCs financed these losses so far. They cannot continue to do so, given that money is no longer that cheap.
To conclude, there are three ways in which startup entrepreneurs can make money. The first is to sell to other entrepreneurs. Many of them managed to do so. The second is to launch an IPO and take a portion of its stake to ultra-bullish retail investors. That happened too. Now the time has come for the third and only sustainable path. Startups must ensure that their revenue exceeds their cost.
From this we learn two lessons. One, the era in which entrepreneurs had lost access to easy money as a potential, is now over. And second, a large valuation doesn’t necessarily mean the business will one day be profitable.
Vivek Kaul is the author of ‘Bad Money’.