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The hype is gone, and now startups have grown wiser to not burn massive dollars to acquire customers through unnecessary discounts

First things first: 2016 has been a year that Indian entrepreneurs may want to forget. The year saw many high-profile ventures — funded and bootstrapped — vanish into thin air. The list contains massively-funded startups like PepperTap and iProf, and moderately-funded ventures like Zoomo, Fashionara, and Parcelled. Remember, these are just a few of the over 200 companies that did not survive to see 2017.

Even VCs’ darlings like Housing, Foodpanda and Zomato had a disappointing year. They had to either scale down operations or hand pink slips to hundreds of employees in order to cut costs. Some wound up operations in several cities.

The key reason for this tough ride, as we know, was primarily due to lack of venture capital. Startups that burnt dollars with the hope of eventually getting some customers and in the long term some good revenue, felt the pinch. Essentially, their bet on burning massive dollars to get some dollars in return went in vain.

Also Read:  5 high-profile Indian startups that kicked the bucket in 2016

VCs who followed the herd mentality had no option but to put a full stop on mindless funding exercise. They stopped funding even their portfolio companies, as their expectations of getting a good ROI wore thin.

That said, this criss turned out to be a blessing in disguise for the ecosystem as a whole. The industry learnt a couple of lessons from the crisis, and wiped out some fake startups and entrepreneurs.

Let’s see how the investment crunch affected the ecosystem positively.

Hype is gone

“I am quite happy about the turn of events in the last year and half. This is one of the best things that happened to the Indian ecosystem,” Manish Singhal, Partner at Pi Ventures, a new VC kid on the block, told e27. “Always remaining in hype is not good. Success doesn’t teach you as much as failure does.”

What has happened in this scale is that lot of excess money got wiped out of the system. Lots of fake business model companies which did not have a unit economics but marketshare sort of thesis, they are in trouble.

Also Read: The class of 2016: 27 things that made us go “whoa!”

“And that has taken out of a lot entrepreneurs who have done startups just for the sake of doing a startup. Therefore the money now remains available for real companies, who have real product and real business model, and those are solving a real problem,” he added.

Survival of the fittest

In reality, there is no dearth of funds in India. There are umpteen angel investors, seed funds, early-stage investors, and growth-stage funds in the country. Many of them have raised lots of money. There was a deployment pressure on all of them from their LPs and that’s why they invested without doing much due diligence. In essence, they had FOMO — the fear of missing out.

“If you talk to any VCs in India, they have enough money to invest in startups, but the question is ‘are they finding good enough companies to invest?’ If you keep investing, you have to come out of that cycle we got into — because a lot of early-stage funding have infused money into such companies who had not done any product innovation. Now, with this funding crunch, early-stage funding comes into product innovation and now they can write bigger cheques,” Singhal said.

A check on unnecessary spending

It is well-known fact that Indian startups, especially those in the consumer Internet space, burn a lot of money to acquire customers. They burn dollars by offering huge discounts and bleeding their unit economics. If you take foodtech, for instance, startups operating in this space spent massive amount on customer acquisition and retention. No wonder, foodtech startups were the worst hit because of the crisis.

“It is time to focus on unit economics and acquiring real customers, rather than attracting them through deep discounts which has resulted in cash burn,” said Rajat Tandon, Vice President at Indian software companies’ body Nasscom.

“The market has started becoming more sane and more realistic. People started focussing on core metrics than vanity metrics. Instead of GMV, net revenue, monetisation metrics, profitability and path to profitability, sustainable growth – all came under focus and became the new mantra,” said K Ganesh, an active investor K Ganesh, a serial entrepreneur and Partner of Growthstory.in.

Conclusion

The year 2016 has been a course-correction year. With the weaker startups are gone, the stronger ones can now focus on their core metrics and product innovation, without worrying much on competition. It may take another two-three quarters to come out of the blue, but eventually the ecosystem will benefit in the long term.

And it will take India a step close to Silicon Valley.

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Image Credit: mongstock / 123RF Stock Photo

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