Why venture funding tech start-ups founded exclusively by inexperienced young IITans is a recipe for disaster

Aish Sinha
Jul 21, 2017 · 9 min read

Very often when one hears the words “tech start-up”, brash, young college drop-outs or IITans come to mind who have just chanced upon the next big idea and are all set to raise their Series A funding while playing carrom and eating pizza- all at the same time. Headlines of newspapers also hype the IIT factor. For example, The Times of India on Jan 28, 2017 carried an article with the following headline: “IITs fourth largest producer of unicorn start-ups in the world.” It went on to further state that “If you aspire to create a billion-dollar business in India, one of the IITs is your best bet.” Two years back, YourStory had the following headline: “60 per cent of Series A companies in India have founders from IIT/IIM and all of them are males.”

So I set about to research this for myself and was startled with my own findings. I researched the backgrounds of founding teams of 28 tech start-ups (admittedly a small sample size but perhaps enough for my argument as you will see). Firstly, just to set the record straight yes it is true that most of the well-funded (that have gone on to raise Series C or later rounds) start-ups do have at least one founder who is from an IIT (including the newer IITS — Varanasi and Roorkee) / Delhi College of Engineering / BITs Pilani. I will continue to use the term “IIT” in a loose way to refer to some of these top engineering colleges in India. But I did not stop here. I wanted to understand if there is any difference among tech start-ups that have been successful versus those that have not.

Now to avoid further confusion, I will define exactly what I mean by successful versus not. By successful start-up, I mean a start-up that meets the following criteria: a) has raised multiple rounds of funding and b) has not been sold for a significantly lower value that it once was, or announced that it will be sold soon, or is running out of money or has or is in the process of shutting down. So by default the unsuccessful start-ups are the ones that have massively downsized / scaled down / shut down or have been / are in the process of being sold under duress i.e. fire-sale. My definition is rather simplistic and I do broadly agree with Indian e-commerce’s pioneer K Vaitheeswaran that there is no such thing as an unsuccessful start-up. All start-ups have been superb learning experiences for their respective founding teams and perhaps also the angels and VCs associated with them. Having said that my evaluation of success is only from within the confines of corporate finance i.e. did the investors make a return above the cost of capital?

The digital / tech start-ups, I categorized as successful (as of today) based on my narrow definition are: BigBasket, BookMyShow, Byju’s, CarTrade, Delhivery, Flipkart, Freshdesk, InMobi, Mswipe, Ola, Oyo, PayTM, Pepperfry, Quikr, ShopClues and Zomato. While the start-ups I defined as unsuccessful are: DoorMint (shut down), FabFurnish (acquired by Future Group for ~ $4 Mn), Faishonara (shut down), Grofers (shut operations across cities and layoffs), Housing (sold to PropTiger in all stock deal), Jabong (sold to Myntra for $70 Mn), LocalBanya (shut down), Parcelled (shut down), Snapdeal (former unicorn, in desperate discussions with Flipkart for sale at sub $1 bn value), Stayzilla (shut down), TinyOwl (acquired by Roadrunnr for a pittance), Zo Rooms (acquired by Oyo in an all stock deal), GoZoomo (shut down). I do agree that a couple of the start-ups above are in a grey area and they might be very soon on the unsuccessful list. Case in point is ShopClues which seems to be struggling with declining traffic and very recently had an ugly spat among the co-founders. However I am yet to write off ShopClues as it has proven itself to be resilient in the past–it raised capital (from Tiger / GIC) even though it is smaller in GMV than the other four large e-commerce players in India (Amazon, Flipkart, Snapdeal, PayTM).

Across both sets of companies — successful and unsuccessful, most have at least one IITan co-founder. Although 77% of the unsuccessful ones have at least one co-founder from IITs while only 60% of the successful ones do. But we can ignore this difference as it might not be statistically significant given my small sample size and unscientific technique. Moreover, both sets have roughly the same number of co-founders on average: two (the range is wide — one to seven co-founders). As a side note, when taking averages I use medians to ensure outliers don’t skew the results.

Now here is the surprising part. Even though both set of companies have IITan co-founders, there is a massive difference in the number of years of experience — at successful start-ups the median years of experience is 6 years while at unsuccessful ones it is half of that.

In fact, successful start-ups have at least one mature co-founder / mentor like figure who can guide from past experience. Most have someone on team who has had 10 years or more of experience. This can best be explained by looking at the number of years of experience of the most experienced of the co-founders. So among the successful companies, Delhivery, InMobi, ShopClues, FreshDesk, Quikr, Pepperfry, Mswipe, BigBasket and CarTrade all had founders / at least one co-founder who had over 10 years of experience. In fact CarTrade was founded by Vinay Sanghi, a seasoned executive who practically grew up with cars around him. He belongs to the promoter family of Sah & Sanghi motors, the dealership chain in Mumbai. He partnered with Mahindras and founded First Choice and ran it for years before diving into the online auto-classifieds space. Mswipe’s Manish Patel is a medical doctor by education and ran his premium liquor and alcohol retailing business for over 20 years before starting Mswipe. He was a SME merchant before he founded a company catering to SME merchants. Similarly, Pepperfry’s Ambareesh Murthy became EBay’s country manager for India, Philippines and Malaysia before he started Pepperfry. He sure did know a thing or two about e-commerce. Pranay Chulet of Quikr had 10 years of experience before starting his business. Pankaj Chaddah of Zomato, Mohit Tandon of Delhivery and Naveen Tewari of InMobi and Pranay Chulet of Quikr had all worked in a tier 1 strategy consulting firm prior to starting their respective ventures.

This brings me to my next point. Successful start-ups are more likely to have founding teams with two or more education/experience dimensions. Unsuccessful ones have only one: IIT. Therefore, it is not IIT — Q.E.D. It is rather IIT and ____________. The blank in successful start-ups have been typically filled by one of four varieties of people 1) those with MBA degrees from one of the IIMs, 2) those with MBA degrees from an ivy league, or equivalent Tier 1 business school in US or Europe, 3) those who have worked at a Tier 1 consulting firm or 4) those who have worked at a global technology company (eBay keeps popping up more often than others, but also Amazon, Microsoft and Google). The unsuccessful digital startups exclusively have inexperienced IITans, for example Housing (multiple co-founders including some drop-outs but all from IIT Bombay) or TinyOwl (one founder from IIT Bombay) or GoZoomo (two co-founders but both from IIT Kharagpur).

Of course there are some that have been unsuccessful even though they had founders with multiple education/experience dimensions. For example Jabong had four co-founders and included IITans, IIM, INSEAD and Harvard Business School alums as well as former McKinsey consultants. But it still performed sub-optimally, could not keep up with competition and got sold to Myntra for ~$80 Mn, well below its earlier heyday valuation. One key element it seemed to be missing is someone with an experience in a global technology company. With respect to the founding team background profile and lack of global technology co-founder, ditto with FabFurnish. This could be sheer coincidence but worth thinking further about. Successful start-ups overwhelmingly have at least one founder who has worked in a global technology company. The unsuccessful digital start-ups rarely have anyone who has worked at a global company let alone a global technology company.

But so far, we have only explored the reality of what it is without questioning whether it is right or not. First off, is it right that VCs have a bias towards funding IITan led start-ups? The answer to this question is really two folds. Most VCs I have known, do not consciously carry this bias but might be unconsciously falling in the trap. Firstly a lot of them are themselves IITans. This could lead to in-group bias. Additionally, IITs given their grueling entrance examinations, do have a high bar for admission. This as a result only permits the best and the brightest to get in. As an aside, what happens inside the IITs is a function of both students’ willingness to learn and the resources available. Sometimes both are lacking. However the sheer genius of IITans does not go away and most VCs find them to be intelligent, smart and ambitions: good ingredients for success in Adam Smith’s world. Just because a lot of IITans one meets are smart does not mean there are no other forms of life that would be as smart or smarter. However this perception could become limiting when sourcing and evaluating deals. As an analogy to explain this better, most Western countries are rich and most Asian countries are poor. But it does not mean that a particular Asian country could not be richer than a particular European country. So if you were out to look for rich countries and only went to Europe you might miss out on Japan, South Korea and Singapore. But in case there is any unconscious confirmation bias building up in the VC community, all I have to do is to point out to them the success of BookMyShow, Byju’s, Freshdesk, Mswipe, CarTrade and Oyo — all founded by non-IITans [I am not even counting the ones founded by DCE or BITS Pilani alums]. And I am sure there are many more examples.

Experienced founding teams also have an easier time attracting management talent which might be much harder to do for a very young founding team. This is especially true in India given the cultural context. What might also explain the success of seasoned founding teams in India is that it is a market with various pitfalls that can sometimes not be solved with just brilliant technology. A technologist might be able to come up with a very good app and in the valley, it could possibly go viral on social media, be picked up across media channels, downloaded by users, experienced, used and monetized. However the same app in India might require heavy feet on street to sell. The sales team to go out and sell would again not be just a straightforward hire, incentivize and request. It would be more a mix of hire, train, lose, train again, command, monitor, control, audit, trace, fire, hire again! Similarly a large call centre to answer queries and walk customers step by step through installation would need to be put in place. Once the call centre is setup, someone has to deal with the high attrition. Deliveries would get delayed due to unforeseen infrastructure problems. Payments won’t happen. Servers will go down. A lot of these problem that sometimes remain behind curtains for a technology focused founding team in the valley, come to the forefront in India. Many of these problems require soft skills and not just raw intelligence. As a result, pure technologist right out of college might not be well equipped to handle such a wide mix of issues that crop up. The same technologists after a few years of experience might be though.

So the bottom line is that when funding digital companies, VCs and angels could out-perform the market by watching out for founding teams that are diverse, mature, have a mix of young enthusiasm and some caution that only comes with experience. Perhaps MBAs and former consultants are needed in small doses while global technology experience is a must have. The writing is on the wall, when your founder posts solutions to problems relating to changing consumer behaviour as linear equations on Facebook. EQ might be required instead.

How to raise funds for your early stage startup?

The author is a former investment banker and currently works as a strategy professional in the telecom industry. The views and ideas expressed are personal.

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Aish Sinha

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#culture #politics #history #innovation #digital

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