Lessons on Venture Building in India
From Zero to One, a Not To Do List
Hello! Thanks for joining me on this journey of lessons on venture building in India.
As I write this, I look back at the last two years, where I spent a considerable amount of time working closely with the leadership of two seed-stage EdTech startups in India. Additionally, I am drawing on the wealth of literature that now exists in the form of tweets, reports, opinion pieces, and data on the Indian startup experience. Finally, I also explore my own stint with entrepreneurship wherein I looked towards the possibility of building a platform that would connect underserved talent based in India 2 with startup founders based in India 1 who were in need of bright minds to build their ventures.
For context, my roles in these two startups have been multi-faceted. I would like to call myself a generalist who worked on all things conceivable but for the most part, I concentrated on providing high-quality user and market research that drove product and venture level decisions. Thanks to my exposure to some, if not the entirety of the leadership in these firms, my constant reading around the Indian startup ecosystem, and my own side project(s), I have made a set of observations on what is important in the “0 to 1” and “1 to N” journey. Happy reading!
Money, Money, Money 🎶
To take any idea off the ground, you require a certain amount of startup capital. Whether it comes from family and friends, venture capital firms, angel investors or — in the best case scenario — your customers, the choice is yours. As a vast majority of startups are venture funded and not bootstrapped, it is natural that this borrowed capital be allocated in ways that benefit the business and in-turn, its investors. However, when abnormal amounts of capital are pumped into businesses, things go awry. An example of this is the 2021 funding boom which led to several trends of capital misallocation in the Indian startup ecosystem.
From my experience and reading, here are some key pain-points:
Building “Credibility”: At the outset, startups spend a significant portion of their funding on office spaces. For example, in 2021 alone, startups leased 2.2 million sq. ft. of office space in Delhi-NCR, Bangalore, and Mumbai. This trend continued into the first half of 2022 and is expected to persist into 2024 with startups in the top six cities (Delhi NCR, Bangalore, Mumbai, Pune, Hyderabad, and Chennai) leasing an estimated 78.3 million sq. ft. of office area.
What led to this? Well, during the funding boom, many companies pitched promising visions to multiple investors, which led to high expectations. Consequently, they hired a record number of employees across various functions, therefore spending a good portion of investor funding. To accommodate these new hires, startups had to lease more office space, spending another chunk of capital. Interestingly, some startups went the other way and preemptively leased large office spaces to signal stability and thereby attract future talent. This raises a funny chicken and egg question: which came first, the employees or the office space? 🐣
In tandem with this, another large expense that some startups have undertaken is the hiring of overvalued management-level professionals. Dubbed “unhireables”, and typically found in growth-stage startups, these individuals often command exorbitant salaries and make up about 15-20% of the entire workforce. A simple description of such professionals can be found below from the Ken.
Are you a thirty-something in a mid- or senior-level position?
Do you work in a product and tech role in a series-B or above company?
Saw a salary hike of 30% or more for each of the past three years?
Do you earn more than Rs. 50 lakh (~$61,000) per annum?
If you’ve answered ‘yes’ to most of the questions, you may have a problem on your hands. You could find yourself among a cohort of professionals whose salaries are out of sync with the dramatically different startup environment. Put simply, as an asset you might be overvalued in the same way your startup once was.Reasoning for why startups engage in such hiring is fairly simple. As startups wish to establish credibility through different means in their respective markets, they hire professionals with a perceived reputation (typically someone from a reputed engineering or management school with a few years of work experience in the domain), thus giving off a positive signal to jobseekers. However, with excess capital and a tight labour market, the salaries of these professionals balloon, pushing them into the “unhireable” zone while consequently draining capital but adding little value. Funnily enough, this phenomenon has a trickle down effect.
Becoming Dev Shops: In the last few years, many startups have allocated a sizeable amount of their capital to over-hiring software developers in order to reach their target market faster. For example, in FY22, the average spend on employee benefit expenses at a top EdTech firm was $23 million — a 146% jump from the previous year. Similarly, in the same financial year, India’s top 27 commerce startups spent a total of $1 billion on their employees. Given this kind of spend, this has not only hurt the runways of the companies, but also those that were hired. Inc. 42’s Indian startup layoff tracker records 37,000+ employees laid off from startups since 2022. In the last year alone, 22,000 employees were laid off from 70+ startups.
Based on what you have read so far, what do you think is happening?Multiple off-shore MNCs are setting up offices in India hiring from the same talent pool
Large rounds of funding is being raised through venture capital funds
Borderless hiring is the new norm
Work from home (WFH) privileges are a key bargaining chip for candidates
If you guessed “All of the above”, well done! Large amounts of capital coupled with competing employment opportunities domestic and abroad raised the salary bar in the tech space. Thus, startups were incurring not only a high cost to acquire these individuals (through real estate leasing, and marketing efforts), they were also paying out large sums of money as compensation.
From the picture presented till now, it is clear that this ugly trend of overvalued salaries existed not only at the management level, but also at the employee level. What if I were to tell you, that it didn’t stop there?Founder Salaries: Over the last few years, as startups have accelerated in their growth and size as have the salaries of the founders themselves. For instance, in FY23, founders were on average paid roughly Rs. 5Cr. (~$600k) a year, a 68% jump from FY22. In fact, one startup founder took home Rs. 200Cr. (~$24m)! Sadly, in the same financial year close to 70% of these startups, posted an average loss of 467Cr. (~$60m).
Data for the above chart comes from Inc. 42’s Founder’s Salaries Tracker FY23 But why do founders do this? Here are a few things I have observed:
Founders aren’t necessarily aligned with the incentives of long-term growth and sustainability of the business itself
A strong western influence of startup founders leading lavish lifestyles post heavy funding rounds (Series B+) leads to Indian founders spending money on luxury cars and large homes in metropolitan cities
The “even if it doesn’t sell, at-least we got rich” attitude is prevalent where founders only care about getting rich fast and nothing else
If you thought of any founders while watching this video from techroastshow on Instagram, comment below!
Seeing the above trends of capital spend can be worrisome. Questions around PMF, growth, and most importantly, monetisation and profitability are expected and have been asked countless times. So, what can be done?
Lesson 1: Do Not Take When You Do Not Need
As seen through the data, Indian startups have raised outrageous amounts of capital in the last few years. Although investors played a pivotal role in this, it is imperative that entrepreneurs understand that raising more and more money does not by any means guarantee that the business is going to succeed nor that the founders are excellent businessmen/women. In all likelihood, startups that raise excess capital very quickly are more likely to fail due to poor financial knowledge leading to gross misallocation and opportunistic behaviour. And boy, have venture capital firms noticed.
Takeaway: Do not raise more capital than is needed to reach a stage of growth that ensures either revenue generation or profitability as doing so only leads to an overvaluation of the company, the employees within it, and yourself.
Lesson 2: Lean, Mean, Startup Team
The most common stories you hear from Silicon Valley are of small teams doing big things. Here are some visual examples:
DoorDash:
Uber:
Google:
Takeaway: Everything in the world can be built by a few brilliant people. You do not need an army until there is a war to fight. The more people you have, the more mouths you have to feed, and what did we just learn about using capital?
Lesson 3: WFH Was Cool Before COVID
The world’s largest tech companies today began from small spaces. Mixpanel (a relatively newer tech startup) began out of a small room, very similar to some of the early days of firms such as Meta, Amazon, Google, Apple, and more.
Takeaway: Stay at home and build as much as possible. Get a monitor inside the toilet if you have to. There’s no need to line someone else’s pockets with the money you have worked hard to raise, and there’s certainly no need for that pretentious corner office.
Final Thoughts
As much as I admire Indian founders and their sacrifice in making their vision come to life, it is painful to read cases of fudged accounting books, siphoning of funds, gross losses, and poor treatment of employees. If the Indian startup ecosystem must thrive and grow, and rival our friends in the West, there must be an overhaul. Investors must be far more cautious and prudent when trusting their money with people, entrepreneurs should breathe impact, profitability, and empathy, and the general public should be far more trusting and mission-driven. Regardless, the Indian startup experience is one to witness first hand, and I would encourage all my readers to give it a shot at some point. Whether you are an early employee, founder, or investor, it will transform your life.
If you have reached this far, thank you very much for reading this week’s issue from Consortium. I have loved every bit of research, writing, reading, scrapping, and re-writing. I hope you have enjoyed this as much as I have.
See you next week!
MVP
Extremely informative and well-written! 👏