Start-ups must create real value

A prolonged funding winter has knocked the wind out of many start-ups and put an end to yet another era of irrational exuberance and frothy valuations. Many start-ups are currently facing backlash on a range of issues such as dodgy governance, financial impropriety, unethical selling, and workforce exploitation.

Suddenly, the tables have turned. Cool start-ups that have so far played an investor-sponsored valuation game look fragile and vulnerable. Boring companies that have stood the test of time look stable, even appealing!

This comes after a decade of growth with India emerging as the third largest start-up ecosystem globally with nearly 1,00,000 registered start-ups and over 100 unicorns across diverse sectors. It is noteworthy that only 15 per cent of these start-ups are profitable while the rest are making losses and burning cash in an attempt to grow or stay alive.

While free-flowing venture capital has been a boon for India’s start-up ecosystem, the excessive dependence of even the most established start-ups on non-stop capital infusions is disconcerting. As the funding winter has revealed, this is becoming a dangerous way for start-ups to live. In Warren Buffet’s inimitable words: Only when the tide goes out do you learn who has been swimming naked.

What should start-ups aspire to be when they grow up? One view is that start-ups should try to be useful institutions that solve important problems. A high valuation can be a happy side effect of such institution building, but it cannot be the start-up’s reason to exist. Jim Collins wrote admiringly of Level 5 leaders who combine personal humility with professional excellence; and yet so many contemporary start-up leaders are using personal branding as a way to metamorphose into celebrities.

Peter Drucker said that the purpose of every business is to attract and retain good customers, and beyond that to make a difference in the world; and yet so many modern entrepreneurs stand ready to devise any method to attract investors at high valuations, however negative the impact on their customers, employees, or the ecosystem.

Customer delight should be a cardinal truth for any start-up with long-term aspirations.

We know that delighted customers generate positive word-of-mouth, which leads to high referral rates, which in turn leads to sustainable and profitable growth. The Net Promoter Score metric was introduced by Fred Reichheld to quantify this virtuous cycle.

So what are we to make of our start-ups that abuse their customers? In edtech, there have been reports of vulnerable parents being browbeaten into taking undisclosed loans to buy courses they cannot afford. Paid trolls have attacked the same parents on social media for posting negative feedback on companies.

In fintech, regulators have stepped in to curb predatory lending practices that were pushing gullible borrowers into a debt trap. It is unlikely that high valuation start-ups that are playing a win-lose game against their customers will ever grow up to be respected institutions.

Employees first

In his book Employees First, Customers Second, Vineet Nayar illustrates how business leaders must build trust with their employees and treat them as first class citizens within organisations. However, many companies that live off the hard work of gig workers are doing the opposite. Quick commerce and food tech start-ups are in the news for subjecting their delivery staff to a toxic brew of long hours, poor pay, and traffic hazards.

Recent mass layoffs across the start-up ecosystem have shone an ugly spotlight on the inhumane treatment of affected workers. Stacking the odds heavily against those who serve the company, in order to benefit only those who own the company, seems incompatible with the idea of institution building.

Even beyond customers and employees, founders have a responsibility to protect the start-up ecosystem. Earlier this year, a major start-up backed by blue-chip investors admitted to grave errors in financial reporting; their defense was they got carried away by passion.

In another instance, a celebrity founder was accused of embezzlement by his own board and forced to exit. Such cases of malfeasance taint entrepreneurs, investors, and auditors alike. Worse, they erode public faith in the integrity of the start-up ecosystem. In the last decade, entrepreneurs were encouraged to move fast and break things and fake it till you make it. They were exhorted to embrace new age mantras like growth hacking and jugaad innovation. All this fostered a culture of chasing reckless growth, whatever be the cost. The bill of damages has come due.

The silver lining is that our youth no longer lack the courage to start something new. The profusion of unicorns, decacorns, and IPOs around us are testament to that. India is getting ready to offer its own world-class tech companies; UPIs arrival on the global stage is a harbinger of things to come.

However, recent start-up implosions and post-IPO price meltdowns suggest that when courage is overtaken by greed, it is not a pretty sight.

Founders should raise capital and grow at a fast clip, but they must also pay proper attention to their revenues and expenses, respect their customers, nurture their employees, and protect the start-up ecosystem they inhabit. If businesses follow this time-tested script, macroeconomic fluctuations and rising regulations may affect valuations temporarily, but their true long-term value would remain intact.

High valuations can glitter, but when all is said and done, enduring institutions are gold.

Paul is MD and CEO of TalentSprint; and Sambamurthy is former chairman of NPCI. Views expressed are personal.

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