The inability to quickly pivot, or have a Plan B, is a clear start-up killer. Sreedhar Prasad, Partner, e-commerce, at consulting firm KPMG India, says that entrepreneurs often have the "my kid is cutest" problem - they can't look beyond their business idea.
It was a problem of plenty. Of too much, too soon.
In December 2014, a dozen 25-year-olds raised $90 million from SoftBank. "Within 10 minutes," Advitiya Sharma, a co-founder of Housing.com, recollects. In those heady days of India's consumer Internet boom, venture firms competed with each other to write fat cheques very fast, lest they lose out on the next billion-dollar companies.However, Housing.com, a start-up that had started with the "idealism to fix the real estate market in India", didn't know how to handle all this cash. They threw money at everything, expanded into ancillary businesses such as luxury, commercials, movers and packers, acquired companies without any due diligence. Around `160 crore went up in smoke after a marketing blitz, in just two months.
The money also pumped up egos. In jest, Rahul Yadav, the former CEO of Housing.com and a co-founder, and Sharma would address each other as Sachin and Binny Bansal. "With money in our bank accounts, we got this erroneous notion that by throwing money we can solve any problem. We had stopped brainstorming," says Sharma.
Soon, the company started running out of capital and was forced into consolidating its businesses. Non-core categories were shut down and about 600 employees fired. Yadav himself was sacked in July last year by Housing.com's board as his behaviour was "not befitting of a CEO and is detrimental to the company".
A new CEO, Jason Kothari, was hired. Sharma quit the company in March this year to start his second venture - an education start-up called Genius.
Rahul Yadav declined to comment but his, and Housing.com's saga underscore several lessons both entrepreneurs and venture capitalists could learn: the importance of mature co-founders, being frugal, hiring right, keeping egos in check, the ability to quickly pivot to a Plan B, and, of course, dealing with employees as well as failure.
Indeed, the problems that lead to the failure of start-ups appear like a repeat telecast of Housing.com's drama. And at the core, it is about poor planning.
Plan, Plan, Plan
The food-tech world is now littered with stories of start-ups that grew too fast, blew up too much money, and then closed operations.
Restaurant aggregator TinyOwl quickly expanded to six cities: Mumbai, Bangalore, Delhi NCR, Chennai, Hyderabad, and Pune. It raised $16.25 million in February 2015 and another $ 7.75 million in October - the start-up burnt $16 million in seven months, and had to scale back operations in nearly every city soon after.
SpoonJoy, which was acqui-hired (read distress sale!) by on-demand grocery delivery company Grofers, says it had too little money. The idea was to make homely, healthy meals accessible to the urban working population at reasonable prices.
"A large part of the cost was around delivery, but it would have come down once a critical mass of orders was reached in a location. But till then, you need external capital to sustain the business," says founder Manish Jethani. SpoonJoy raised angel and a $1-million Series A in May 2015 from SAIF Partners. "We wanted it to be a big company where we can add value, but we were not able to raise more capital," says Jethani.
The issue with both TinyOwl and SpoonJoy were poor unit economics. Restaurant aggregators, particularly, operate at a very low margin. Restaurants typically don't agree to commissions of more than 8-10 per cent. So on an order of `300, for instance, an aggregator like TinyOwl could have earned just `30. Then, companies usually discount to attract customers. The unit economics per order were difficult to justify. In many cases, VCs wanted their portfolio companies to scale up fast and grab market share even though it never made sense in terms of unit economics. Scale and market share, at any cost, did pump up the valuation of start-ups. This, in turn, enabled early investors to exit by selling off their stakes to another fund. While it did work for sometime, the "greater fools" disappeared starting the second half of 2015. Poorly run companies were stuck with little cash, operations in multiple cities, a huge employee base, and investors who suddenly started demanding a path to profitability.
All this boils down to unsound, perhaps hurried planning. The choice of investors, too. The big lesson for start-ups is to plan well for everything, from the VCs one approaches to raise capital, to using the proceeds of a funding to spending it frugally. Some start-ups such as used vehicle marketplace Droom use analytics to measure everything. Indeed, most companies that are currently thriving have demonstrated restrained usage of cash. In the food-tech world, Bangalore-based Swiggy has emerged stronger by not discounting as much as others did. The company also never launched operations in multiple cities at the same time.
"I don't think capital is ever the reason for a start-up shutting down. If the entrepreneur can't raise initial investment, they should be prepared to bootstrap. And if the company is dependent heavily on external capital, then one should raise money first. So, that is a planning issue," Alok Mittal, former MD at Canaan Partners and currently an entrepreneur at Indifi Technologies, says.
The Other Idea
Raghav Verma, founder of tea chain Chaayos, had earlier founded PrepSquare - a start-up that helped students prepare for IIT and MBA entrance tests online. The company partnered with teachers and created video modules. However, Verma realised that even though students are their end-consumers, the decision-makers, when it comes to education, are the parents who preferred offline coaching centres.
"We realised it was a space where you need to create a brand first. That was possible only by offline coaching centres and that would take a lot of time and money. And we didn't want to get into it," he says.
Verma looked at other spaces, thought of pivoting, but couldn't come up with another idea. He shut down PrepSquare in 2012.
Similarly, Viraj Gadhoke had to shut down his deal delivery start-up Binjj. The company helped restaurants offer deals and discounts at specific hours or days and upload them in real time. However, Gadhoke soon realised a problem. Restaurants are managed not by owners but by managers, who often didn't have the authority or the motivation to create deals. He gave up the idea and is now working on his solar energy start-up, VA Solar.
The inability to quickly pivot, or have a Plan B, is a clear start-up killer. Sreedhar Prasad, Partner, e-commerce, at consulting firm KPMG India, says that entrepreneurs often have the "my kid is cutest" problem - they can't look beyond their business idea. However, products that solve a pain point or have a ready market do have a better chance of success.
Once bitten, Raghav Verma now advises flexibility. "You have to set yourself a timeline and see if you can achieve it. If not, then quit or pivot. People get stuck in procrastinating on taking the tough call," he says. For Chaayos, Verma gave himself six months to test if he could reach break-even with the first store.This time, he did.
Peace. No Fights
Shabnam Aggarwal started an education start-up along with a co-founder in 2009. The company wanted to help kids learn English through fun games on low-cost mobile phones. But all wasn't well.
The co-founder wanted to make the product available to low income kids even if it meant incurring a huge loss. But Aggarwal insisted on building a sustainable business first. "Focusing on the bottom-of-the pyramid alone and burning capital without any revenue didn't make sense to me," she says.
The conflict about the path the company should take stressed her - so much so that she started overlooking operations and human capital. Once, an employee who had epilepsy worked late and forgot to take his medicine."When he reached back home, he had an attack in the washroom and passed away. I was so stressed in overcoming the antagonism with my co-founder that I missed taking care of my team," she says, adding, "This is not the kind of leader I wanted to be."
Within a week, she left the company.
Rajeev Banduni of growth advice platform GrowthEnabler says that 85 per cent of the start-ups shut down in its first 18 months. Of this, 65 per cent close due to co-founder conflicts.
IT industry veteran Saurabh Srivastava says that founders fall apart due to personal reasons - business issues are hardly ever the case. "In my first software start-up IIS Infotech, I would get all the coverage from media by virtue of being the CEO and also the co-founder of NASSCOM," he says. "My partner Mohit Goyal was working equally hard. At times, I would worry about it since I was sure that this would have bothered him on several occasions. However, it never became an issue between us as he understood and handled it maturely and we remained great friends," he adds.
In retrospect, founders who have experienced such conflicts say that it is important for all to agree on the business model and growth plans.Though plans can change, fundamentals need to align. Shabnam Aggarwal suggests an unequal equity distribution among founders so that decision-making is clearly left to one person. "Before starting a company, co-founders should try and tackle a difficult situation together so they know how each one would react. Starting a company is a lot like marriage - you should experience hardship and happiness before taking a huge leap together," she says. Aggarwal is now working on her venture KleverKid that helps parents find after-school tutors, activities, and camps for their kids.
Nevertheless, Sreedhar Prasad of KPMG India bats for start-ups that have several co-founders. His reason: heterogeneous brains brainstorming an idea is always better. It also ensures each idea is challenged and refined, rather than accepted as it is. "This is especially important in the formation days of the start-up when the business model or the product may change several times," he says.
Failed. So What?
What happens when founders are at the receiving end from employees?
In November 2015, TinyOwl's co-founder Gaurav Choudhary got a sour taste of employee agitation. When he went to his Pune office to announce a scale down, around 30 employees held him hostage for 48 hours demanding settlements. Choudhary reportedly had to undergo counselling for stress and anxiety after being freed.
When logistics start-up Townrush ran into a capital crisis, it weighed heavy on employees unsure of their future. Nishant K.S., who was Townrush's first employee and a part of the management team, says the toughest part was answering their questions. "The anxiety drained energy out of everyone and there were questions around how they see themselves with the company in the future. We tried to keep everybody motivated but that doesn't help much," he says. The company initially scaled back operations but finally sold to Grofers in October 2015.
The lesson here is to both hire right and communicate better. Some segments of the Indian e-commerce ecosystem resemble the manufacturing sector - they hire bottom-of the-pyramid people for jobs such as delivery akin to manufacturing hiring labourers. Some experts have pointed out that the skills required to handle such a workforce are largely absent in start-ups. They could borrow best practices from manufacturing companies that have established industrial relations procedures.
Founders, employees, and the society they live in, also need to learn to deal with failures better. In April this year, 33-year-old Lucky Gupta Agarwal, a techie-turned-founder, committed suicide by inhaling nitrogen gas over the failure of his social networking start-up, KQingdom. The incident is a wake-up call.
"As a society we don't know how to deal with failure. It is seen as an aberration, when it is not. Everyone just comes after you - why didn't you do this or do that," says Arpit Agarwal, Principal at Blume Ventures. He adds: the biggest problem is that all failure is personal in India, when it is not. "There should be dissociation of failure of the profession from that of the person. If we do that, we will deal with it in a much better way."
Agarwal himself went through a low phase after he closed his start-up Academic Ventures in April 2012. The company wanted to commercialise lab-ready technology from educational institutes, but did not take off since commercialisation wasn't a priority for Indian institutes. "I would hear that I wasted my two years," he says.
An online counselling and psychological support platform, YourDOST, provides around 700 one-on-one sessions daily for emotional support. It says that one-third of its customers is people who have either worked for a start-up or have one of their own. India requires more such support organisations.
But till such time that happens, founders and their employees are mostly left to their own to deal with failures.
Advitiya Sharma of Housing.com turned to Vipassana, a form of meditation. He wouldn't take calls before 11 in the morning, because he is visiting temples. Perhaps, meditation and all the lessons he learnt from Housing.com's mistakes would help him do better at his new company, Genius.