By Parag Dhol, Managing Director, Inventus Capital Partners
Inventus Capital Partners is a US-India venture firm managed by popular entrepreneurs and industry operating veterans who have guided and financed nearly 100 entrepreneurs with operations in India and Silicon Valley.
The good folks at Accel Partners gift a book at the beginning of each year. A few years back, it was Nate Silver’s, ‘The Signal and the Noise’. This article is, largely, not about the contents of the book but draws upon the evocative title.
While the (self-explanatory) concept has its origins in electrical engineering, its use here is as an analogy for the startup ecosystem over the years (2014 & 2015, in particular). Almost nothing illustrates it better than data on tech. VC investing in India over the years (values in $Million on the left y-axis).
The term ‘Inflection point’, popular usage of which is attributed to Andy Grove (may he rest in peace), is generally a great thing for underlying business segments. However, it is a yellow/red flag in things financial – a course-correction inevitably comes along and that’s what we got.
While there were sufficient reasons for optimism that beginning in 2014, as someone beautifully said, “Excess in not progress”.
How did we get there?
There were, as is to be expected, multiple reasons but I will focus on a few behavioral ones here:
•Entrepreneurship, seemingly, came too easy:
55 food technology startups raised $373 million in 2014 & 2015, according to data from Tracxn. A year later that sector is pariah to most investors. Much the same can be said about the home services segment.
•Gravity defying revenue models:
There are theorems, and then there are axioms. “Revenue is vanity, profit is sanity and cash-flow is reality” is one such axiom. It is in the nature of twenty-somethings to question conventional wisdom – that, arguably, is the reason for progress. However, question Milton Friedman’s axiom (“There is no such thing as a free lunch”) at your own peril.
•Land grabs masquerading as strategy:
Even today I meet entrepreneurs who prioritize geographical expansion over establishing sustainable unit economics. All this while the Startup Genome Project attributes the No. 1 cause for startup mortality to premature scaling.
In VC circles this behavior manifested itself as large funding rounds for very early-stage companies – idea being to lock-up a particular segment against competition.
We, at Inventus, learnt the hard lessons of city-to-city expansion in India in the early part of this decade. The hyper-local companies, and other aggregators, have learnt/are learning similar lessons today.
•Overemphasizing the newest data point:
Something that Nate Silver points in his book. Translates as inspiration (Anu Malik type) from Western, and more recently, Chinese companies. The entrepreneurs inspired by a Homejoy, a Spoonrocket, a Fab.com, and a Groupon will know what I am talking about.
The challenges faced by various Indian entities of the world’s best known copier-and-paster, could be a lesson in itself.
So, what does the future portend?
We, at Inventus, believe that the basic drivers of the 2014/2015 boom stay intact. Internet usage has hit a critical threshold, smartphone penetration is rapidly increasing and there is a business friendly government in place. Just that most participants in the ecosystem got ahead of themselves in 2014 and 2015.
We believe 2016, or 2017 for that matter, will not be like 2009 – when even the signal disappeared (remember, “RIP Good Times!”). Should, in general, be a good time for patient creators of businesses, as distinct from valuation-obsessed folks.
Also, on the flip side, froth has longer-term benefits. Relatively early in my VC career I was witness to the fire optic building spree. This, subsequently, leads to blossoming of a Google, Amazon and Facebook. Something similar might be brewing in the logistics segment currently. An entrepreneur was telling me about owners in Bangalore’s outskirts converting their land to warehouses without being aware of the requirement of loading bays!
Look forward to a vibrant -hopefully sane, as well- ecosystem in the coming years. Our future, like that of the likely reader, is mortgaged to progress therein.