Lessons For MBAs From Start-ups Downturn

What ails Start-ups in India? Despite adopting successful business models from abroad and pumping in fabulous amounts of money and offering top salaries to the best talent from Management Institutes and IITs, many of them are finding themselves in dire straits and quite a few have shut down. The situation does hold certain lessons for management students.

Kuriakose Abhishek, Founder CEO of Explorate, an online portal that aggregates products from e-fashion websites, tends to blame ‘cloning’ of a business model without assessing its suitability for a country like India, poor investment decisions and spendthrift ways of running the company.

He says while the unique nature of the Indian market provides an opportunity to innovate and thrive, recent graduates from top notch schools in India believe they can clone businesses from other countries that would be profitable.

Venture capitalists “blinded by the founders’ alma mater have been following a hackneyed strategy to provide funding” to such entrepreneurs. In early stage funding, he says, 1–2 founders from IIT/IIM fitting the criteria would receive 1–2 million dollars and 3–5 founders would get 3–5 million dollars. For 7 plus founders it would be a virtual lottery.

In 2015, investors pumped $9 billion into Indian start-ups, about 50% of the total amount invested between 2010 and 2015. Most of the investment were made in Mobile or eCommerce Start-ups that have cloned the startups of the US or some other country.

Investors overlooked the fact that Chinese entrepreneurs could afford to clone because of a closed economy with practically no competition. European entrepreneurs too could afford to clone, because the European pattern of consumption is similar to that of US.

Thus, funds are being squandered on unviable businesses in India. Abhishek says following his interactions with entrepreneurs, investors and employees of start-ups, he found three fundamental issues contributing to the downturn.

The first one is high customer acquisition costs with some of the start-ups spending no less than Rs 5000 to lure potential customers instead of traditional door to door marketing strategy. Apart from spending such huge amounts to attract customers to the website, further discounts are offered to show higher Gross Merchandise Value (GMV) adding to the cost.

Secondly, most of the start-up founders seek constant media attention instead of being involved in the daily nitty gritty of running the company.

Thirdly, when funds start flowing in, the founders become lax and the slacking soon permeates to the employees. Fabulous salary hikes and expensive hiring practices add to the problem. Huge amounts are spent on food, travel and entertainment of employees forgetting the fact that the company is still at the start-up state. Any business needs four to seven years to establish themselves and even then cannot afford to squander money.

And to cap it all, most of these companies have been founded by IIM or IIT graduates. “With no practical application of what you learn, the university tag doesn’t really matter. What matters are the soft skills, the ability to put pieces together and the hunger to learn,” says Abhishek.

He also refers to the new entrepreneurs hoping to achieve instant success without having to work hard. Some of them accept invitations for talks and inform the audience about difficult times they encountered while raising funds. “If I was an investor, I would never invest in a founder who calls this a difficult time. It is an adventure, a story you are carving and this has to be enjoyed to the fullest. Entrepreneurship is not for the weak minded,” he says.

Abhishek concludes that maybe the time has come to look beyond the IITs and IIMs to find real entrepreneurs who can sense the pulse of the Indian market. (Originally written for Medium, Abhishek’s article was reproduced by Dazeinfo.) (Image Courtesy : pixabay.com)