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Startup funding: Valuation alone should not define a unicorn

Ravi Narayan

Ravi Narayan

In terms of investments, food-tech and travel-tech firms seem to be gradually moving away from the radar. Deeply focused tech companies that are not necessarily consumer facing could be the next hot favourites. Several entrepreneurs are looking at building companies based on machine-learning and Internet of Things (IoT), and industry experts are welcoming this trend.

Prediction for 2016

India’s startup ecosystem is still vibrant and healthy. In 2016, we will see some more correction. A slowdown allows investors to take stock and ensure their investment thesis is aligned with emerging possibilities. Ups and downs are bound to be there. I expect more companies to emerge in the analytics and IoT space. These technologies will be deployed across the board in sectors such as healthcare, education and retail. Also, many startups will look at building directly on the mobile platform.

Unicorns

The concept of unicorns cannot be solely based on the valuation. There are several successful startups that do not command a billion-dollar valuation as they never needed to raise that kind of money. Some of the world’s best startups have achieved tremendous success without raising any money. Signeasy and Zoho are classic examples of bootstrapped, profitable and global ventures. Many entrepreneurs are unsure of the value they are creating as they do not know their target audience. Several firms know that eventually they will be acquired for their intellectual property and customers. Yet, they are unclear about what global tech firms value in an acquisition. Startups should raise funds when they need to. They should go in for an amount that suits their need.

Sophisticated investors

When startups falter, they need to make corrections and get the right business model in place. Early-stage funding is easy to secure from colleagues and family members who may not be sophisticated investors. Until you get to the sophisticated investors, you don’t know if you are on the right path or not. There is no dearth of money. If startups solve structural issues in their business models, funding will not be a problem.

US entrepreneurial culture vs Indian ecosystem

Companies in India are moving beyond the obvious skills. They are looking at product managers and architecture skills. The evolution of the ecosystem is a reflection of the sophisticated talent pool that’s being created here. Entrepreneurs in Silicon Valley invariably have a clear exit strategy – whether through acquisition or an IPO. In India, entrepreneurs don’t seem to have a perspective on this front. Things are changing– smart entrepreneurs have potential suitors in mind when they approach investors, but there is still a long way to go.

High cash burn

Cash burn is necessary for many startups to survive. Consumer-focused businesses incur steep costs due to inventory, supply chain and high ad spends. In the pursuit of establishing themselves, firms have to deal with little or no margins. For enterprise-focused businesses (SaaS-led and software products companies), people and marketing are the traditional cost centres. Therefore, enterprise tech startups require a significantly lower investment while investors tend to get higher return on investment from these companies.

Startup bubble?

Two-thirds of startups that get funded these days are companies in the consumer tech space. There is an interesting bubble on that front. Any ecosystem has its highs and lows. Every market corrects itself from time to time. Those who have a robust business model and traction are able to sustain themselves irrespective of what’s happening in the market.

(Ravi Narayan is the director of Microsoft Ventures, a global initiative that mentors startups. Microsoft Ventures recently announced the formation of Innovation for Corporate Initiative in order to support companies that wish to engage with startups.)

As told to correspondent Disha Sharma

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