Startups are nailing their own coffins with VC hammers. Here’s a way to escape that fate

“If somebody is not paying you to build the product, you are betting that your product is something people might buy. Then, you are in the gambling business,” Professor Saras Sarasvathy says. Photo credit: Prabhu Stavarmath.

The supersmart, know-it-all entrepreneur. I run into a handful of them every day. They say they know what the market wants. They know what the market is. They know who is the customer, what she wants, and how much she will pay for it. All this, when they haven’t yet got one paying customer for their product. And many a time, the product is nonexistent.

They think the products they are building are worth an X amount of money and there is a market of millions or even billions of dollars out there. They make these projections – or predictions, to be more honest – based on many hypotheses. Most of it is just fantasy.

In predicting the future, these bright, young entrepreneurs are nailing the first, fat nail into their startups’ coffins. Professor Saras Sarasvathy is sitting on enough data to tell me this.

“In Bangalore, they are doing more of it because they think predicting the future is the way to get venture capital funding. They are not even predicting the future to get the customer; they are predicting the future to get VC money!” Prof. Saras says.

“They have spent no time talking to the customer or actually building a product that a real customer wants. That’s my worry,” she tells me.

The professor has been studying expert entrepreneurs for over two decades and is clear about where the cracks begin.

If somebody is not paying you to build the product, you are betting that your product is something people might buy. Then, you are in the gambling business.

She is one of the top scholars in the world on the cognitive basis for high-performance entrepreneurship. Her thesis on expert entrepreneurs was supervised by Herbert Simon, 1978 Nobel Laureate in Economics. She is a professor at the University of Virginia’s Darden School of Business, and also teaches doctoral programs in entrepreneurship and business strategy across Europe, Asia, Latin America, and Africa.

We’re sitting in a dining hall inside the Management Development Centre (MDC) of Bangalore’s prestigious Indian Institute of Management (IIM). There are entrepreneurs, educators, wannabe entrepreneurs, startup enthusiasts, and management aspirants flowing in and out of the hall as we talk. A perfect setting to discuss what’s going wrong in India’s startup landscape. Before we proceed, let me admit it. I am guilty as well.

The professor begins our chat by throwing a few irrefutable numbers at me.

The flimsy probability that they cling on to

In India last year, between 285 and 416 startups – depending on your source of information – raised venture capital funding. Let’s say two-thirds of them raised first rounds of funding. The success rate for VC-funded startups is less than 10 percent. If nine of 10 fail, there will be around 30 startups left standing.

“Those are the only ones that will actually do anything wonderful with VC money – in the entire country,” she says. I squirm.

The nonsensical hype that we propagate

The effectuation movement

And it arrived in India

The measure of success