The Startup Bubble: Fairytale story with an impending disaster.

“Food tastes better when we are the chef’s ”. This sums up the startup culture brewing since the start of 21st century.

“What is a Startup?”

A start up is blossoming of a great idea into a high yielding business model. It’s giving business shape to your thought that creates continuous revenue, creates immense job potential, let’s you lead than being led.

Charles Darwin said evolution is survival of the fittest, but in the current scenario it’s survival of the smartest.

Anyone who has an idea has a start-up. There was time where establishing a business was an herculean task but with the onset liberalization, setting up companies has become more easier than finding a new job. Adding up to that is the mindset of younger generation who find it difficult to take orders from anyone.

For example Sean Parker, started Napster and made music available to everyone. The company soon went into spiral due to many controversies and poor management. The only problem with Mr.Parker was that he could not be that person who wears an suit and a tie and attends meetings. This ideology is prevelant in most of the Gen X.

Let’s rewind a little bit and go back to the 80’s, information technology was at full swing and there was rapid shift towards automation. Companies like Microsoft and Apple were started and everyone wanted to own a computer. Many new Companies started which provided IT solutions and technologically advanced. Companies like IBM and HP were facing tough competition from these newly formed entities. Many of these newly formed companies couldn’t withstand the competition and failed.

This cycle repeated again. During 1997–2001 everyone was owing a website. Any business which had a .Com attached to it was a million dollar valuation. It became so easy that opening a company with dot com was more easier that opening jar of pickle. Then came the year 2000 when the dot com bubble burst and making most of the companies cheaper than a piece of paper. Companies like webvan and pets.Com which were highly valued for their unique business model become penniless.

This chart shows the NASDAQ composite index that showed stunning peak during the dot com era. As we can see during 2000–2001 when the bubble burst the index lost more than what it had gained during the last decade.Only those business which were fundamentally strong like Amazon, eBay, google stood up.

That bubble showed some of the basic concepts of economics were still holding good. But as the old saying goes what goes must come around, the bubble started forming again in a different sector. This time it is even more bigger.

The Startup Bubble, where we have new companies coming up and providing the same service in a different style and yet another one pops up stating that they have something better to offer.

Let’s take an example, in India for groceries we more than 10 startups, the bigger ones like Grofers, Big Basket have expanded to the whole region by offering discounts and spending huge amounts on marketing. We have established players like Big Bazar who have taken the advantage of e-commerce. International brands like Amazon have started selling products specifically designed for the Indian mindset. And yet we have new ones like Naturally yours and Nature’s basket.

This has led many startups to fail like Pepper tap which was shut down due low demand. Paytm which is India’s largest payments services, reported a loss Rs 1534 crores last year. The reasons being huge discounts offered by the company to its customers and heavy competition from companies like FreeCharge and mobiwiki.

Now the basic question is do we really need another company selling the same thing. Some might say that this is competition, but the question is if everyone starts opening a new venture than who is going to work for them.

The next question is where will the money come from. Paytm is backed by Ant Financial an affiliate of Alibaba. Flipkart is backed by tiger global management and Naspers capital. Many of the startups are backed by heavy investments from Venture capitalists but due to this funding, these companies are taking more riskier ways to attract consumers. Many venture capitalists have now backed out to fund new ideas as growth is declining even though it’s a great idea.

The basic problem with the startups is, these companies with their huge fund backings, offer discounts which eat away most of their profits. If someone if offering a branded watch which is marked at around 5000, at 500 then how will he make a profit. This is mainly to counter the competition that has been growing, that these companies have been selling branded goods at heavy discounts just to attract consumers. It will take forever red companies to just break even.

Another major problems for the Startups is that when a venture capitalists invests he gains control over the company, which sometime clash with ideology of the owner. This is what happened with most of the Startups.

When a service or a product reaches its zenith the company fails, as there is nothing much to do in this product. It has to either innovate and develop a new one or shut its doors.

Even the competition has grown such a way that companies are going places to market themselves. Endorsements by celebraties, sponsoring events etc. This makes most of the cost and they have little less to spend on r&d.

When a start-up fails, it’s not just the owners that are hit, everyone who had a stake, right from employees to venture capitalists are affected. Customers loose faith in these businesses, which in turn effects all the running businesses. Tinyowl, Dazo, Ask me, Fashionara, purple squirrel etc.. the list goes on and on. It’s not just in India but startups around the world like Dealstruck,Shoes.com, pets.com, lily robotics etc.. have closed their businesses either due to lack of funding or bad demand.

In conclusion, even though startups are hubs for innovation, basic concepts have been ignored which is leading to their fail. We need to go back to the basics and build companies which are fundamentally strong and resilient.

Mv Pranav