VCs fiddled while India’s startup scene rotted – now the shit’s hitting the fan

Photo credit: The US Army

Earlier this week, we wrote about an unusual workshop in Mysore, near Bangalore, where entrepreneurs faced searching questions from peers and mentors. In India’s hyped up startup environment, such radical candor is rare: it’s all about funding, valuations, and breakneck expansion at all cost. Inconvenient realities of unit economics, product-market fit, and challenges in execution are glossed over. That’s how it has been for the past couple of years as India saw billions of dollars of venture capital flowing in.

Now the shit’s hitting the fan as investors have started asking for roadmaps to viable businesses. From food delivery to real estate and ecommerce, entrepreneurs are being forced to cut down their cash burn or even cut back operations and lay off staff.

It’s easy to blame all this on immature entrepreneurs who got carried away with easy money. But what about seasoned VCs who should’ve known better than to throw money at half-baked me-too ideas? Where was the due diligence? These are questions that are coming up now.

Last night, Anand Lunia, founder of Mumbai-based seed stage VC firm IndiaQuotient, set off a Twitterstorm with this: “We say churn in startup ecosystem is good. Founders need to improve, buckle up, blah blah.. What about investors??”

Several pertinent points have come up subsequently. Here are a couple of gems:

• Fund managers pick a showcase IIT team, build traction with discounting, dress up performance, raise the next large round – a classic ponzi modus operandi.

• Now dozens of startups are sitting on US$5-50 million, wondering what to pivot to. And the new template is to put US$30 million into a horizontal, and it can always buy a few verticals for ‘growth’.

See: Housejoy buys Orobind. But will consolidation solve the problem of home services in India?

Valuations vs value

The main point is that everyone’s been too busy launching or backing startups to have time for building solid companies, as Gaurav Sharma put it in a comment on the Tech in Asia article about the need to call out the bullshit in the ecosystem. Copycat models and placing valuations above real business value have become the bane in the system.