As India accelerates in entrepreneurship today, there are plenty of startups rising in the country including a number of promising and innovative ones.
In fact, India is the fastest growing and the third largest startup eco-system in the world. This includes the elite billion dollar unicorns like Flipkart, InMobi, Snapdeal, Paytm, Zomato, ShopClues, Quikr, Ola to name a few. Though innovations have triggered a new wave in brick-and-mortar business, the burgeoning startup eco-system in India is unequivocally tech-driven.
This explains the emergence of successful and innovative companies from India like Mu Sigma (big data and analytics solutions), InMobi (mobile advertising), Druva (data protection), Zomato (online and mobile restaurant discovery service) and Freshdesk (cloud-based customer support software) among others.
Brick-and-mortar enterprises also find place though they are few- For example, Mydentist (chain of dental clinics), Magicrete (innovative building material) and Global Consumer Products (food and beverages).
Visit a café today. One gets to see a different scene. There are more than a couple of heads brainstorming ideas over endless cups of coffee. Welcome to the entrepreneurs world in India. Most of them are probably discussing about how to make the business successful in India.
The unpredictable volatility in the existing global economic environment raises a very pertinent question for Indian startups. Should startups focus on growth or cash flow?
Yes, this is a tricky question. There is really no simple answer. There are various intricacies that go into deriving the right answer.
Cash Flow – Profit First
Cash flow is the primary goal of any business model. It becomes easier to focus on profits when speed is not the issue for a startup. The larger the market, the more room there is for multiple companies to thrive, and hence speed becomes less an issue.
Additionally, the more complex your business is , the less speed becomes an issue. Companies which are bootstrapped tend to focus on cash flow and profits. The softer the economy, the more you would protect your cash reserves to weather the storm. MuSigma and Zoho are classic examples that come to mind when looking for profit driven companies in the Indian eco-system. “Profit first” is the cardinal rule of these enterprises.
MuSigma is the Indian unicorn which has been profitable right from its inception. It is a decision sciences and analytics firm that helps companies institutionalise data driven decision making and harness big data. It specialises in the areas of marketing, supply chain and risk analytics.
The company employs more than 3500 ‘data science professionals’ and caters to more than 140 Fortune 500 clients.
The growth of Mu Sigma has been spectacular since 2005 when Microsoft became its first customer. Not only does Mu Sigma show that a startup can be profitable but it can also dominate the industry across the globe. With revenue and profits skyrocketing with every passing year, Mu Sigma continues to be an inspiration for Indian entrepreneurs.
Zoho, the leading Indian business application software company is the unique success story of being private and profitable.They have no outside investors in the company, but they are not small – with nearly 3500 employees. Zoho has the resources to invest in R&D and customer support.
In fact, their R&D investment rivals most of the major players in the industry. Their product suite has grown with the company itself which is spread across 6 locations world-wide.
Growth – Scalability First
Brand new markets or business concepts are typically dominated by the first mover, so the natural strategy is to move quickly at the expense of profits. It is always best to be the first mover, and accelerate your lead when you can (or catch up if you are not first).
Typically, B2C businesses need to think “faster” than B2B businesses, given the differences between consumer and corporate behaviour. Venture backed businesses additionally have the challenge to move quickly to ensure growth and liquidity value for their investors. No wonder that eCommerce startups in India like Flipkart, Zomato and Snapdeal lean towards aggressive marketing strategies like heavy discounting and sales.
The logic is that the company can tinker with revenue models and long term profitability, once a large consumer base has been established. The idea is to focus on growth till the point when you are comfortable to “lift off the accelerator” without sacrificing your long term market leadership position. As the financing climate gets better in India with access to investors, startups are inclined to accelerating growth.
The ideology is, ‘growth first, profits a little later’. This is no longer a brow-raising trend and is accepted as the norm of new-age business, which is primarily internet-based or tech dependent. Most of these ventures do not show profits. What they have is an idea, which gains investor blessings and customer acceptance.
Dilemma or Catch 22 Situation
Cash flow is a preferred model as profits serve as a proof that a disruptor has a viable business model. Companies that have iterated towards what looks like a successful model should absolutely ensure that the model actually works.
However, there is a catch here. Sometimes, a company can follow the strategy to earn quick profits that actually lowers its long-term potential. Disruptive businesses often require distinct business models. A push for early profits could lead a startup to default to a known model that provides short-term results but stunts innovation that would have led to more long-term value creation.
The Indian Startup Strategy
The favourable strategy adopted by tech startups in India has been to clone business models from the west. While this may be a safe and proven route, the real challenge lies in addressing the unique Indian economics and mindsets.
Gravity exists and the startups need to deal with the complexity in India while operating in frugality without succumbing to an ever growing cost base. It is about the cost of doing business and how to build your business. The math is visible. The complexity is not hidden.
India – The Second Largest Internet Market
It is encouraging to find examples of Indian startups that are building world-class products, and competing with the best in the world.
Businesses like Urban Ladder and CaratLane are aimed at organising fragmented markets to create “online” brands with positive unit economics. Shuttl, has found the perfect niche between poor experience with public transport and expensive cabs.
OYO Rooms too is actually filling a gap in the hospitality space. And finally, there are startups that have been around for a while now, and that continue to innovate and maintain their market share and economics. BookMyShow is an example that can charge consumers by being convenient.
The way forward for Indian startups is to focus towards a sustainable and scalable business model. Sure, this is not a new phenomenon. Analyzing the Indian environment is the quintessential strategy for any startup in India. Each business has its own unique considerations.
How fast should a startup grow in India at the expense of near term profits, provided the funding resources allow it to do so?
The challenge lies in being value driven without losing on valuation. Prudence is especially required by startups that are just jumping into a me-too game and running after the wrong metrics to get funded by investors.
Needless to say , over a period of time, funds invested in ‘value-driven’ startups will produce much better returns than funds invested in ‘valuation-driven’ startups. Because value works!
The new ones that come up for funding will be asked tough questions. Startups will be forced to think harder and come up with solutions that fit the Indian market. And then Indian startups will be ready to complete the jigzaw puzzle!
A win-win for both startups and investors!