Over 95 per cent of startups are expected to fail. In fact, we are doing considerably better in India at least as far as valuations go, for the time being
Hi folks,
Over the last few months, there has been consistent bad press around a few startups in India concerning lay-offs, (ref. TinyOwl, Zomato, Housing.com, Vizury), bad decisions, hostage situations (ref. TinyOwl) and more. The general air has been negative and I had to pen down my thoughts, as someone who belongs to this community. I am disheartened by the negativity and I want to provide some perspective.
I was motivated to write this post after witnessing a general level of negativity over the last few weeks with comments like “This is what you get when you join a startup” and “The whole country is crashing.” etc. doing the rounds.
Here are my opinions, perspectives, advice and candid two cents in no particular order for entrepreneurs, employees and VCs:
There is no such thing as Failure
One of the most important reasons why Silicon Valley has been so successful in creating some of the greatest tech companies in the world is that culturally Silicon Valley recognizes failure as a stepping stone to success. You will find literally hundreds of entrepreneurs who have had failure after failure and continue to pursue the next idea and continue to receive funding interest.
Silicon Valley VCs know that someone who has failed on various occasions actually carries with them valuable lessons reducing the risk of failing at a subsequent venture.
I love how Silicon Valley in fact has re-defined failure. They don’t even call it that. They call it a “PIVOT”. Now isn’t that a mighty word? No one ever fails. You simply pivot 🙂 The perfect case in point is the Pinterest story which was founded during the recession, survived early failures and developed as a company for the long-run.
Recommended reading – ‘Becoming Steve Jobs’ -. People see Steve Jobs through the lens of the iPhone, iPad, iPod and the Apple of today. It is easy to forget that he was ousted from Apple and floundered for almost 10 years with Pixar and Next, losing most of his money before he made a comeback.
Recommended reading – ‘Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future’
Let’s get some perspective on the failure rate
Over 95 per cent of startups are expected to fail. In fact I think we are doing considerably better in India at least as far as valuations go for the time being.
Here are some stats about Y-Combinator — one of the most successful startup accelerators. Their acceptance rate is about 3-5 per cent. Within the ones that do get accepted the odds of success are 10 per cent. (Read more here)
General industry thumb rules point to the fact that one or two in 10 startups eventually succeed. Most fail or remain mediocre.
And here’s some perspective on past market crashes
To the folks who are comparing current times to the 2000 dot com crash and the 2008 financial meltdown, let me point out a few facts.
The 2000-2002 dot com collapse resulted in a loss of US$5 trillion in market value, and a loss of 1.735 million jobs in 2001, and an additional 508,000 during 2002.
In 2008, the IMF estimated that the financial crisis would produce US$3.4 trillion in losses by 2010. Two-plus million jobs were lost in a mere four months with several million jobs being lost in the years to follow.
Yes folks. Those are the numbers. That’s the kind of upheaval the Valley and world went through before producing today’s global giants. Any monies lost in India or the downsizing taking place here pales in comparison. It is too early to get pessimistic. Don’t get me wrong. I don’t say this out of lack of empathy. However, in any new market a ton of money and time has to be spent in gaining experience before one can see a growth phase. India is still a fledgling story.
And some perspective on timing and challenges
India is JUST starting out, folks. Our smartphone penetration and internet penetration are in low double digits (<20 per cent… I believe actuals are even lesser than 15 per cent).
In a market this nascent, a lot of money will have to be spent in educating the masses and getting basic technology adoption before we truly see monumental successes.
Remember that China had to get to over 40 per cent Internet and smartphone penetration before they began seeing explosive growth.
India is a VERY different market in comparison with the United States or China. People seem to draw comparisons when replicating business models. However, there are several nuances and one very important difference. India while politically one country is more like 29 different countries for a startup — each state has a different language, culture, practices and needs.
Never Give up
Fellow entrepreneurs, keep at it. I often get asked about things that were instrumental in our success. And if there was one thing I can point to in my journey is that I NEVER GAVE UP. Two posts I had written a long time ago are relevant here –
Pursue Mastery and not Success
In the words of Michael Jordan – “I can accept failure, everyone fails at something. But I can’t accept not trying” – Michael Jordan
Spend wisely
Capital has been boundless over the last few years. However, my advice is spend EACH dollar like you would spend your own. At Directi, we have had an interesting journey. We have never taken on any external debt or investment. As a result, every time we spend money we are spending OUR money.
While arguably that has its own constraints, on the other hand we have become VERY good at figuring out how to spend money wisely. We have an unbeatable track record of getting to profitability in the shortest time possible across all our startups. So the next time you get US$50 million in funding and want to spend US$15 million on an IPL campaign – just ask yourself what would you do if that was your hard earned US$50 million.
Don’t pay your users to use your product
I have been witnessing what I believe is the most unhealthy trend in the industry over the last few years – Paying people to use your product. I just don’t get it. I can understand providing incentives for acquisition. But incentives for engagement never made sense to me. Here is my perspective on this trend –
If you have to PAY users to keep using your product you have a serious problem. It means that your product is by itself not good enough or intuitive enough to keep users engaged. You cannot fix that by giving discounts and cashbacks. If your users are not engaged, take all that money and spend it on identifying why users are not engaged and fixing your product.
Giving money to users to use your product creates an unhealthy incentive linkage. Users will now expect it by default to continue using your product. Read Daniel Pink’s book – Drive. While he talks about this from the perspective of employees, the same principles apply to users. Do you want your users to be motivated by money or by the value your product provides?
Paying people to use your product is the quickest way to burn all your cash. The most successful companies in our industry NEVER had to pay people to use their products. Imagine if Google started off by saying ‘I will pay each user to use my search engine’. Or Facebook paying for each post. Or Twitter, LinkedIn, Microsoft. Even the handful that did dole out cash incentives (Paypal) did it ONLY for user acquisition and did not continue doling money out for continual usage.
At Directi we have developed over 50 different small and big products across our 11 businesses and we have NEVER, I repeat, NEVER paid users to use our product.
The biggest clue for me is what people talk about when they use your product. Without naming names, most users I have met — whether using an e-commerce app, taxi hailing app or food ordering app — are talking about cashbacks and discounts and not convenience or experience. Now that’s a huge warning bulb for me. When everyone in the country is saying ‘use this product buddy and you will get INR 700 cash back’, instead of saying ‘use this product and it will give you an amazing experience’.
My priority order of spending money
I have always followed a strict order on where I like to spend most of the money for each of our businesses. I call it the three P’s of spending –
People — I will spend as much and more money and MOST of my time on hiring, retaining and training the best of the talent in the country.
Product – The simple formula for a successful business is to create a product that provides more value to a user than the amount of money you expect to earn from that user. Spend money on product.
PR – The first order of marketing is PR and not advertising. And yet most entrepreneurs in the country spend millions of dollars on advertising campaigns while completely neglecting the importance of good PR. Recommended reading – The Fall of Advertising and the Rise of PR by Al Ries -. In fact while you are at it read all his other books too. They are all amazing!
Advertising – If by chance, there is any money left over after spending as much as I can on all of the above (and I sincerely hope there isn’t) then I may spend it on advertising. Advertising is the biggest sinkhole for cash. Again read Al Ries’s book above for more context.
Some pointers for investors
While businesses I have founded at Directi have never needed capital infusion, I have met several amazing VCs and investors across the industry in the last 18 years. Many I have tremendous respect for. Time and again I believe the following success principles matter when investing –
Leave adequate skin in the game for the founders in the initial stage (Series A/B) – If founders get diluted to low single or double digit percentages within the first two-three rounds, you are creating a misalignment of incentives.
Chase retention and engagement as opposed to a paid install base. I would rather have 10,000 users who are using my product because they love it and there is nothing out there that’s better, than have 1 million users who I have to keep giving money and discounts and cashbacks to for them to continue using my product.
Mentorship is more important than money. After all, many of these investments are being made on bright 21 year olds. I remember when I was 21 years old. Heck if I could talk to my 21 year old self right now I would have a ton of advices to offer. Don’t just leave these entrepreneurs on their own with oodles of money. Hold their hands and take them through the journey.
Some pointers for employees
There have been a large number of layoffs announced over the last few months and I can empathize with the general feeling amongst various employees. Let me offer some advice here:
Do not get disillusioned by a few failures. As I stated above, India is just about starting out at this stage. Startups have their risks, but the rewards of working in the space far outweigh the risks.
In a fast moving startup environment, your learning and knowledge growth will typically be 4x of that in any conventional stable company. A startup provides most of its employees the opportunities to wear multiple hats and get diverse exposure.
Most startups will provide early batches of employees an opportunity to participate in wealth creation that is beyond what conventional jobs will offer.
Do you want to look back at your life and say ‘I took a safe choice and led a normal life’? Or do you want to be able to say ‘Heck I was part of an exciting journey with its ups and downs, but I created something, I took a chance’.
Take a page from culture in Silicon Valley, where entrepreneurs and employees alike move from one startup to another without skipping a beat, without getting dejected or pessimistic.
None of the above comes from a lack of empathy. I actually partly blame our education system. I strongly believe our education system needs to better prepare us to deal with uncertainty. A true entrepreneurship culture can only flourish when people can not only handle uncertainty, but relish it 🙂
My intention is to arrest any general pessimism in the industry as a result of a few events. Let’s learn to celebrate failures folks. For, without failures there can be no success.
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