3/1/22, 7:40 PM Indian Start-up bubble

Every morning when you check your social media, there is a good possibility that you come across the
term "unicorn". Some unheard start-up has raised an absurd amount of capital to inflate their valuation
above the one billion dollar mark. While it is a daily routine for Indian Gen z and millennials, it raises a
serious question. What the future holds for them? Especially for those who want to explore the flashy
world of entrepreneurship. While the tale-tell stories of rags to riches, idols, and heroes are fascinating,
the Indian start-up ecosystem has a disappointing and dystopian reality. Every year thousands of start-
ups get incubated across the country, but they are just replicas of businesses that have worked in other
markets. Such companies are called mee-too companies that lack innovation and uniqueness. However,
this phenomenon is common in every developing economy due to emphasis on growth rather than
research. Indian founders do not aim for global monopoly or revolutionary innovations. They focus on a
healthy exit through an acquisition by the world leader in their sector. Thus instead of creating a product
of their own, they duplicate it from the dominant player in their market. They make the whole company a
product for the world leader in their sector by building a loyal and reoccurring customer base with
specific modifications that suit the Indian market. Thus their aim shifts from making an outstanding
product to inflating their valuation.

While the television show Shark Tank has created an awareness among the masses about the world of
start-ups and funding, it is a far cry from the hundreds of millions of dollars raised in the Indian VC
market every week. While a unicorn is born every week in India, its viability and chances of long-term
survival are low. After starting up by raising the seed capital from friends or relatives, when a start-up
looks for its first outside investment in India, it is comparatively easy to woo investors by showing them
the massive market. Foreign investors pour cash into an Indian start-up with their knowledge about what
will work or won't because of their earlier experience with similar business models elsewhere. Indian
start-ups, like everywhere else, use the capital for rapid growth while profitability is thrown back to the
backseat. Once the money is exhausted, Indian start-ups go through another round of funding. This
cycle of raising capital in exchange for some stake in the business and spending it all expanding goes on
for few times. Each series of funding is named after an English alphabet serially. Every round of funding
raises more cash than the previous round for more growth. It results in more revenue. Which in return
increases the share price of the company. The once small start-up now is a multi-billion dollar business
making the founders and early investors billions of dollars on paper. However, after all the hard work the
real struggle starts. A business should not be losing money under ideal circumstances. It would be hard
to raise more money now as there is no room for expansion nor any customer left to acquire. To add salt
to the injury, the founders have far less stake left in their own business after several rounds of dilution.
So now it's the time to focus on profitability or figure out an exit.

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However, there is a dilemma. The start-up grew from a small local business to a national giant by
acquiring more customers than anyone else ever has traditionally in its sector. To gain new customers it
had to provide its services at a significantly discounted price. During the growth phase, the losses were
managed by the subsequent funding rounds. Now there is no scope left for raising more capital. The
company has to make money or go down to bankruptcy due to a lack of capital. To be profitable the
business starts raising the prices of its services or products assuming that they have a monopoly in its
sector. Unfortunately, at this time, a small company pops off in another corner of the country that offers
the same service with a slight edge due to the advancement of technology around the world. The large
business cannot afford to lose money now while the small business has enough capital to take a loss and
grow. The consumers of the larger company now slowly leave and go to the smaller company to enjoy
the discounts. Eventually the large company losses customers, then revenue, then equity value. At this
point, the founders, if fortunate, should exit. The company unable to provide discounts will have its
customers cannibalized by other smaller start-ups with Venture Capital backing. It will eventually run out
of cash and go bankrupt. Even if the company is acquired by a larger company, it will inflict financial
damage to its parent organization. As a result, it will tank the share price of the parent company.

If it becomes a trend, in the long run, it will be difficult for Indian Startups to get acquired or go public.
Any investor won't invest in Indian start-ups if they will go burst eventually. The gravy train will stop. In
the end, the founder who wants to innovate, has a viable business model, and wants to contribute to the
world positively will be left out without any support.

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