Startup or Scamup?

I know the title of this article is dogmatic and I don’t mean to imply that all startups are trying to run scams, but there is certainly a fair share of those who are only chasing the overhyped, glamorous and unabashed route of external funding without much revenues or even a proper business model. The sole objective seems to somehow raise a bulky sum of money on the basis of fudged numbers and unreal projections without any focus on the actual business or sales figures. The overnight success through a huge round of VC/PE funding has become a benchmark of success for startup founders.

Why I think the above is like running a scam?

Well, I’m writing from personal experience and hence none of my statements are based on speculation. I come from a conservative middle-class family of entrepreneurs, and thus am ingrained with the fundamentals of running a business. Any business that falls in the Primary or Secondary Sectors as per Economics, requires a decent amount of fixed capital and has to have a solid revenue source from the start. Such businesses can only remain operational if they are able to sell the products or goods that they deal in. A huge amount of external funding post the seed funding cannot be the goal of such a business that is unable to generate revenues while fully operational. Now when such a business forgets the business fundamentals, hires experts (read PR agencies) to create a false buzz about the company, shamelessly fudges the sales numbers and doesn’t give a damn about the customers, it does seem like a scam in the making.

What happens when one becomes a part of such a scam unknowingly or without consent?

As an employee of an early-stage startup with only handful employees, one is bound to get involved with all the business functions, i.e., sales, marketing, operations, finance and communications. Hence at some level one might realize that he or she is getting dragged into the unethical practices going on internally. At this point, one of the following two situations occur:

a) One is oblivious to what’s going on simply because one considers oneself as an employee only and doesn’t have the audacity to speak one’s mind.

b) One takes one’s stance and confronts the founder and refuses to take part in the unscrupulous activities.

In the first scenario, the employee doesn’t realize the consequences that he will have to face when the bubble bursts. In the second, he has to face immediate consequences of the founder’s wrath (in most cases, unless the founder is really prudent and stops the act when confronted).

What’s next for the bold and correct employee who decided to speak up?

Only one thing is bound to happen. The founder, in a very well planned and strategic manner takes control of that employee’s responsibilities and does his best to throw him out of the system, without, of course, being too vocal about it. At this point, such an employee finds oneself in the middle of a hanging bridge, not sure whether to go back or to take a leap of faith and move forward. The employee, who probably gave up a secure job at a reputed corporate because he was certain that a startup job will bring with it the freedom and control that a corporate job can never really give, is suddenly jobless without a termination notice, experience letter and the salary which he was expecting on the last day of the month. Now this is a really bad situation if you’re in your mid-twenties, don’t have rich parentage, have no savings and you are only able to make your ends meet with your monthly pay. And for obvious reasons, it’s also very difficult to find your next job when thrown into a situation like this.

What can an employee in such a situation do to find justice?

I’m still trying to figure out.

What’s next for such a startup founder?

We need to wait and see.

Who else is to blame for a situation like this?

The most unsuspicious culprit is the one who shamelessly covers stories of many such startups and publishes them publicly. Yes, I’m talking about the media houses (big and small) that regularly publish stories that create such a rosy picture in the minds of the readers who are often prospective founders or employees of upcoming startups. The most disturbing part is that almost all of these media houses don’t bother verifying any of the information (sales volume, number of customers, number of employees and so on) that they receive directly from the startup founders. As long as a journalist thinks that the article will attract readership, he or she is happy to write anything they hear.

What’s the conclusion?

We are living in dangerous times and the road ahead is far from just being bumpy. The startup bubble (often referred to as the tech bubble) is not going to remain afloat for long. The investors will be hurt but not as much as the founders and stakeholders. The employees, who once thought that they would get a chance to voice their opinions and also be heard while working for a startup, will be dumbfounded.

About the author: Arpit Choudhury was heading Technology and Business Development at a Food startup in Gurgaon, India until last month. He is a product-centric guy who believes that a great product or service doesn’t require a great deal of funding to become successful. Arpit is currently working as a freelancer and despite a bitter experience, he is looking to work with startup founders.