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

When Money is bad for Business...

All of us know money is a great friend in need when it comes to business. The whole investor business stems from the insight that money is no longer the scarce resource it used to be, and the infusion of external money into a business can accelerate a business many times more than the organic reinvestment of profits can. Imagine a unit-profitable business growing as a straight line from year to year - spending more money than the business has earned can bring the EBIT line down below zero for a period, but then it reemerges a few years later much higher than the straight line did. So far so good, so what's the twist in the tale?

There’s another angle to money, which is not so nice. There’s a reason many parents aren’t giving their children easy money (Bill Gates too, you’d know). Money can make one lazy (e.g. I'll get to work but let me recharge my batteries first), but more seriously, could cause delusions (e.g. I’m popular because I’m charming and not because I’m rich). Similarly in business, having more money than you need can destroy you. Let me illustrate how.

Let’s say you’re running an eCommerce business today in India. Let’s assume the low prices on your portal are partly due to the efficiencies of your model (good sourcing, no inventory, bulk-breaking, private-labels etc) and partly due to discounts on top funded by the business (marketing discounts, signup benefits, app-download incentives, site-wide discounts, co-funded cashbacks and so on). There are no points for guessing which of the two is more difficult to achieve. Now what happens in a cash-rich company is that the first approach is simply considered a waste of precious time that could instead be spent on multiplying the GMV numbers through, to put it crudely, bribing customers to buy.

In other words, the availability of money will drown the intelligence and effort your employees and partners invest, which bad news. The other issue, which is also non-trivial, is that businesses that live through hard times gain a lot of resilience, efficiency and humility. Hard times are as necessary for these learnings as sunlight is for the production of vitamin-D. Just because the investor market has been good yesterday and today doesn't mean you don't create a shock-proof business.

The last bit is about rich businesses who say they run themselves as if they are poor - it's a really difficult thing to do - it's like dieting with a fridge-full of goodies. If you have smart employees, they know how much is in the bank, so towing a hard line will just lead to lack of trust.

What is easier, and much better, is to go the old-fashioned way. Postpone the flood of money. You know your industry dynamics, so do what you have to, but whenever possible, ensure money is raised and used as late as possible (which will also reduce dilution of ownership to a minimum). Try raising and using money for investments (like building a better product, or fulfillment-infrastructure) rather than expenditure (like spending on discounts), and try valuing the "build-for-tomorrow" people in your organizations, the "don't-spend-everything-today" people in your organization who are getting less heard each day.

Initially published in ET Retail on April 29, 2015