Oxygen Toxicity and Delusions in the Startup World

As a startup consultant, I meet talented individuals all the time who aren't worried about their competition being better than them, but only about them being "better funded'' than them. I see the focus on mad scale (politically-correctly called 'traction'), losing money to get bad customers ('the acquisition cost vs. lifetime value' illogic), confusing expense with investment (the month-on-month myopia) and battling everyday problems caused by the easy-availability of money. We've all heard of too much of a good thing, and that too much oxygen kills. Of late, we have seen a spurt in articles bemoaning the damage investors are doing to the startup industry and yes, this is another one of them. I had written an earlier article that urged entrepreneurs to postpone external infusions till needed, but I realize the problem is now bigger - if you don't take that money, someone else will.

Let's look at various aspects of what's going wrong today.

1. Entrepreneurs, employees, vendors, agencies, sellers and customers are getting spoilt:

• Entrepreneurs are trying to be hares that sell-off the future winnings of their race before the tortoises catch up. They also feel flying business class to attend conferences in the Silicon Valley is the most important action point.

• Employees think the company pays them to make glorified mistakes and learn (to glorify them better next time). They feel justified telling others they quit because the company didn't invest enough / wasn't aggressive enough.

• Agencies pitch ideas that make for great insightful investor-relations' decks, and have a flimsy chance at best of ever being executed.

• Sellers think the (funded) business has to compensate them for their own faults.

• Customers feel they deserve a 110% discount, plus 90% cashback and no-questions-asked returns with a coupon for their next purchase. The threat to post on facebook gets them an additional birthright coupon. 

• And everyone's in on the party. Stones and mangoes are getting delivered, parts are being replaced, fake notes are being paid with, and so on - you get the point.

2. Everyone's trying to run faster than the tiger:

• No one's asked for a one-hour delivery, but companies want to build that. Now they want to build one-hour returns too. All being equal, faster is better - but if this costs 10X normal delivery, we customers prefer the cash discount.    

• Well yes, we used to like bubble-wrap, but now we have enough. Don't keep sending us 5-inch scratch-guards in a 5-liter boxes full of air.

• Businesses are really discounting more than needed. If the rate for in-city logistics is INR 50 / Km, 'aggressive' businesses are now starting their pitch with INR 25 / Km. Yes, they manage to discourage others - but only to accelerate their own eventual troubles.

3. Expenses are winning over Investments:

• Companies talk of customer acquisition costs as if customers can be acquired; as if they'll stay on when the huge discounts go away. We all know what happened when email providers tried charging for services. The same, no surprise, will happen to the latest Unicorns too when they charge real money.

• We are customers. We know we won't stick around when the fair's over. Investors should also know this. Market share today isn't equal to, or even related to, market share tomorrow.

But you know, the most dangerous of all implications, the one that may be most destructive for us once the funding boom-times are over, is that

    

4. Untrue truths are being taught

• Money is never the bottleneck

• Ideas are commodity, what is important is to scale fast 

• It is okay to fail - you learn more when you fail, plan to fail fast and pivot 

• You are in the business of creating value - not buying and selling

• Build GMV, profits will follow

• Customers acquired through freebies will repeat organically 

• Real-estate on the mobile is expensive and has to be paid for

...and so on. One could go on in such Unicorny Lingo forever.  

The fear is that when the party's over, and it's time to wake up and smell the coffee, some of today's whizkids may wake up with a permanently distorted view of reality. 

Originally published in ET Retail on November 9th, 2015