A common discourse these days in the print and social media is the persistent rant by “old school” economists and businessmen about how easy access to venture capital and private equity for startups have spoilt the ecosystem. And any failure is attributed to this easy access, any news in fact. In this post, I throw open three challenges for the startup ecosystem.
First things first, definition of pelf. The word has disappeared from a lot of English-speaking countries, but still survives in India, at least in my mind. It refers to money and wealth, which is ill-gotten, or through a dishonorable way. For the more lexicologically inclined, here is a link with more details.
As the startup economy generates any news, like Jabong being on sale; or ANI Technologies (the firm that runs OLA Cabs) reports losses, I scroll down to read the comments. And a large majority of them are rants about how these young twenty-something entrepreneurs have so much access to easy capital, that they do not care about business failures. I would imagine it is very fashionable to say – yes, failure is good and you should encourage failures, but fail with your own money (bootstrapping is okay; VC money is not). On the other hand, entrepreneurs would argue for the need for sufficient capital to invest in developing the ecosystem (low internet penetration, poor logistics and last-mile connectivity, inadequate payment infrastructure, and heightened competition from MNC subsidiaries like Amazon.in). Platform-businesses need capital to kick-in network effects, including subsidizing users (like Uber); so do a lot of infrastructure-dependent businesses that need patient capital before all pieces of the ecosystem fit with each other (PayTM).
The first challenge I pose to the entrepreneurs is to communicate the nature of your business model to your stakeholders very well. What is the source of your network effects? In just the last week, I heard at least four entrepreneurs pitching to investors, using the platform word in their first slides of the presentation, without ever talking about when and wherefrom network effects would kick-in. If you need capital to kick-in network effects, elucidate. Over the last few years, enough has been written about platform business models and network effects, a simple Internet search would educate you enough. Please put up at least a pictorial representation on your website (most of the websites have pages titled, how it works, which are craving for such content). For an example, please visit the homepage of Tarnea Technology Solutions (disclaimer: I advise them).
The second challenge is about pivoting. Entrepreneurs (ab)use this term a lot, that quite a lot of times, I am left wondering if the business had any specific plan in mind at all. When one thing does not work, it is natural to seek another business. When a large plan does not yield great results, it is important to seek business results from whatever succeeds in the overall scheme. But to use the word pivoting with a sense of pride is unnerving. I would urge entrepreneurs to take pride in whatever you do, fail, bounce back. But to pivot with pride, I am not sure. You may have used entrepreneurial bricolage (making do with whatever is at hand) to build your business, nothing wrong. The classic (okay, my favorite) academic paper on entrepreneurial bricolage is here. Bricolage explains how entrepreneurs recombine their limited resources at hand and create unique products/ provide unique services that challenge institutional norms. For examples of digital bricolage and what it entails for new age entrepreneurs, read this latest article at HBR.org.
The third challenge (may be a request) I pose to entrepreneurs is to provide credible estimates of performance. The old age firms, especially the ones listed in the stock market need to provide the (Wall or Dalal) street and analysts with performance expectations. Yes, forward looking statements. The stock market penalizes firms who do not provide reasonable estimates of performance, or fail to perform in line with estimates. Entrepreneurs, even though you do not have the retail investors and analysts chasing you with quarter-on-quarter performance expectations, it makes for good governance to keep stakeholders informed. Please provide us with credible forward looking statements. It is actually good time-pass these days to initiate conversations with OLA and Uber drivers about when and if at all these firms will ever become profitable. Neither the drivers, nor the riders have a clue to the way forward, and it is good fun listening to various viewpoints. I am very impressed with Snapdeal founder Kunal Behl’s collaboration with Ashvin Vellody of KPMG to publish this report on the Impact of e-commerce on SMEs in India. Not so much the report (it is definitely well written and contains insightful analysis), but the act of writing itself is commendable for me.
To summarize, entrepreneurs in the startup world, if you want to change the perception that all your startup capital was easily obtained, is pelf, and therefore not justified, I challenge you to
- Explicitly communicate the source of your network effects
- Don’t pivot; use entrepreneurial bricolage
- Provide credible estimates of performance