India’s epic and unprecented startup funding boom has birthed unicorns, minted millionaires and taken companies public at record valuations. In the process though, founders are getting burnt out, employees are veering towards fraud and insecurity is driving people to the dark side. Moneycontrol takes a look.
Chaitanya Ramalingegowda feels nothing. His company, Sequoia-backed mattress startup Wakefit just had its best month- Rs 100 crore of revenue in October alone, in addition to closing previously unplanned $30 million funding round at a 40% higher valuation than a year ago.
He has got here after painstaking effort for years, shutting down two companies and nearly going broke. You would think he would be thrilled at the success.
Yet Chaitanya feels nothing. Not happy, not sad, not excited. Just, nothing. “It was just a number in an excel sheet and a (number in a) press release.” What did it all really mean?
Because Chaitanya is burnt out. He is hardly the only one. As India undergoes supposed technological disruption with more users shopping, paying, gaming and living online, the people behind said disruption- internet entrepreneurs and investors are feeling the heat. On the surface it looks like a fantastic time for both sets of people- startups have seen their valuations jump to record highs, new internet companies are valued many times more than their older, larger, profitable peers and venture capitalists have seen their holdings swell massively in a short period.
Behind The Scenes
Behind the scenes, some entrepreneurs are on the brink of burning out, spend days obsessing over their competition rather than chalking out their own plans and investors are running helter-skelter trying their hardest to squeeze into the next hot deal, sometimes without being fully convinced about the company, sometimes without even seeing the company’s numbers properly.
“You feel burnt out because you are constantly running around. We live in an echo chamber populated by other founders, startup media and venture capital/private equity investors. And then you wonder whether all this work is the right use of my energy and mental bandwidth,” Chaitanya said.
At play is the compressed timeline for significant business milestones. Business-to-business ecommerce firm Infra.market was valued at $200 million at the start of 2021. With two funding rounds in six months its valuation zoomed to $1 billion in March and $2.5 billion in March and August respectively. Now it is in talks to raise money valuing it at $4.5 billion, Moneycontrol reported. Similarly, social commerce firm Meesho’s valuation has gone from $2 billion at the start of the year to $5.7 billion a few months ago. All in less than a year.
Three founders Moneycontrol spoke to confessed to feeling burnt out due to the current heady startup environment. “By most metrics, I know everyone envies my life. But there is this sense of despair, inevitability and emptiness that I feel these days. Of course I feel all this in the few moments away from the company-building madness,” a unicorn founder said, requesting anonymity.
“Life currently feels like running at full speed in the darkness, running in something resembling Daedalus’ labyrinth,” he said, referencing the Greek architect who in the ancient myths built a confounding maze which ran underground and held a mythical monster- the Minotaur.
Fast and furious: Fraud edition
As their valuations rise and businesses scale rapidly, these companies also go on a hiring frenzy, hiring hundreds in weeks. One founder recently regretted such speed, when he uncovered fraud from a newly (and quickly) hired city head. The city head rented an office and willfully exaggerated the rental the company paid, pocketing the difference for himself. The startup, hungry for growth and with money to burn, hardly noticed the expensive but tiny office on its books of accounts for a few months. The founder himself found out recently by accident, not because he had an inkling of fraud.
At a transportation startup, an executive in charge of inventory (ensuring enough vehicles are available in a particular area) took a fixed fee from each driver/owner on the side for letting the vehicles park there. These instances are a result of the rapid expansion drives undertaken by internet startups who work with a ‘growth at all costs’ mindset- encouraged by founders and investors in India and Silicon Valley for many years.
The pressure of growth—sometimes self-imposed, sometimes driven by external factors— is taking a toll on companies, where board meetings are dominated by funding discussions above all else. Any internet business with a founder seen as credible and a business seen as viable in the simplest sense, is inundated with investment offers, investors say.
Founders say they are forced to be direct (read rude) when an investor sends multiple emails pitching to join a company’s not-yet-planned funding round, mail term sheets and ask for confidential information without the founder showing any sign of interest. If the deal works out, the investor’s ‘hustle’ may be appreciated but often founders either ignore these mails as long as they can, or at their wits end, send a curt “We are not raising. Not interested. Thanks” email, as per a conversation Moneycontrol has seen.
Indian startups raised over $25 billion in barely 9 months of 2021, double all of 2019’s then-record of $13 billion. “Fundraising sucks all the energy out of you. A typical big fundraise takes four months and you can’t focus on anything else major,” the founder of a VC-backed startup said.
“I’m not burnt out yet but if this continues it will happen for sure. I have to actively guard against it. This sort of pace is not sustainable. It is scary,” he added.
In multiple sectors, from commerce to fintech to software, companies are raising successive rounds at double and triple and triple their previous valuations only because a competitor did the same, and they don’t want to be seen as lagging.
“You have to set the right goal with the founder. After raising $1 million the goal can’t be to raise $10 million. Sometimes founders see competitors or others raise money and benchmark themselves to that. We have to tell them otherwise and to focus on the product, business, and customers,” says Kushal Bhagia, partner at First Cheque, a pre-seed investor.
Well-funded entrepreneurs who have no plans or need to raise money still feel the pressure to raise, driven by the splashy media coverage and hundreds of congratulatory social media posts that accompany a fund raise. They sometimes benchmark their success to their public visibility.
“With so much funding news, there’s an automatic urge for us to raise money as well, even if we don’t need it,” says Jerin Venad, co-founder and CEO of bus commute startup Cityflo
“But I see it as the urge to eat unhealthy food when you’re not hungry or to borrow money on my credit card just because it’s available. It’s tempting, but you know it’s not right for you in the long run,” he added
With money in the bank and large addressable markets, a talent crunch is becoming startups’ biggest cause for worry. Some are giving 100-150% salary hikes and still unable to retain talent while others offer prospective candidates double their expected salary and still can’t close the deal because a third party whisks away the candidate with a better offer at the last moment.
Some startups are growing fast, raising large rounds and can thus justify the fat salaries and oversized hiring budgets for now.
Their smaller rivals or distant competitors are being forced to give all employees an outsized pay hike, not to reward past performance, but to keep them from leaving- denting their cost structures and in the case of unprofitable companies, making them reliant on venture capital for longer than previously planned.
In an effort to stay grounded during this funding boom, Venad frequently revisits lectures and advice from age-old billionaires and investors Warren Buffett and Charlie Munger. He makes it a point to see two videos a day to remind himself of their oft-repeated advice, passed down from economist JM Keynes- the markets can stay irrational longer than you can stay solvent.
“This can’t be life”
Entrepreneurs are now making concerted efforts to disconnect from the hoopla, realising that the funding boom can lead to a personal crash. Chaitanya for example, abandons screen usage (phones, laptops, tablets,) after 10:30 pm, only reading books in that period and checking his phone only if someone calls.
It is harder for internet entrepreneurs to disconnect because well, the internet is their source of sustenance. Founders increasingly rely on social media to hire candidates, get instant feedback, build their brand and even attract investors. Chaitanya for instance is active on Twitter but avoids posts from other founders and investors to avoid getting sucked into the vortex, and checks only his notifications for customer feedback or complaints which need to be addressed.
Ashwin Damera has been practicing yoga and meditation for over a decade now. The co-founder and CEO of online learning firm Eruditus, valued at $3.2 billion recently, has become more spiritual as his company has grown. During the pandemic, he doubled yoga’s duration to 45 minutes each twice a day.
“The startup life has so many ups and downs. This can’t be life. It can’t be so momentary. There has to be more to it,” Damera says, adding that yoga helps him be balanced and gives some a sense of detachment.
What has really changed?
Investors are similarly facing a challenging time, with even top multinational funds struggling to get into the hottest deals. Investors and founders suspect that the current frenzy is driven only partly by more internet users/shoppers- the factor blared in most reports and investment theses.
“Consumer behavior has changed somewhat, but it has not changed in the same proportion that availability of capital and risk appetite have,” said a partner at a venture fund, requesting anonymity
“US interest rates have been at record lows, the Federal Reserve has pumped in trillions and after economies have recovered from the pandemic, there’s all this risk-seeking capital which is flying into India after China cracked down on tech companies,” this investor added.
Just as the funding boom has been unprecedented, if all the capital companies have raised does not result in the staggeringly-large outcomes founders and investors are betting on, the scale of fallout could be unprecedented too.
To be sure though, while some founders face burnout, many are willingly postponing vacations and happily pushing themselves harder because they see a new era of business where they stand a higher-than-ever chance of outsized success. Investors too are doubling down seeing the prospect of unexpected returns and anticipate a technological revolution.
Established companies are going public on stock markets to record investor demand, while newer companies which may have earlier struggled to find an investor who can take a moonshot bet without expecting immediate results, are now flooded with investment offers
“Burning out trying to raise money happens more often than from raising too much money. For many founders who have spent years chasing that elusive next round, this boom is a god-send,” an entrepreneur said, requesting anonymity.
“Many founders are seeing this boom as a once-in-a-lifetime opportunity to make money. It is a great time to be an internet entrepreneur,” she added.
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