Don't Take Shortcuts
If I slapped a motor on a cycle and called it a bike, you might use it to travel 1 Km; you will certainly not use it to travel 100 Kms.
In the 1990s people assumed getting into an IIT would guarantee success in life. India is the country of jugaad.
Jugaad = Find a shortcut.
Indians started devising ways and means by which they could game the system and get in. The number of tuition centres that promised a way to get selected through the joint entrance exam (JEE) skyrocketed. I am sure the coaching industry built around the JEE has made more money than the IITs themselves!
I am not sure how many students got into IIT ONLY because of the coaching centres. I doubt the number is very high. Also, if coaching was the only thing that helped them get in, I am sure the years thereafter would have been miserable.
Jugaad in any form is still…
In 2005, when the first VCs came to India, they had a tough time trying to find enough startups. There were not too many, to be honest. By the turn of the first decade of the millennium, things had changed considerably.
For some reason raising money became the status symbol.
As has been the tradition, now the efforts are on to game the system to raise money. When it comes to doing this, reaching the figure Rs. 8.33 Lacs/month ($11,000) in revenue became really important. Assuming recurring revenues, at that figure, a startup would be generating Rs. 1 Crore (~$150,000) in revenues per annum. A psychologically significant figure in India.
The trouble is, unlike IIT, business is not as conducive to gaming! You cannot overcome this with a little more practice. Life’s like that.
I have worked with startups that struggle to reach this figure. Just because it would make things easier from the perspective of a fundraise, they chase it. Even if it means building businesses that will be unprofitable - forever.
An entrepreneur I known for a couple of years now had diversified into two different revenue stream to drive the income up. One line was growing slowly but delivering solid margins. The other while growing faster was draining him of cash each week! Being a startup, he had not even segregated the two P&L statements to see how each line was performing. I am sure, his entrepreneurial intuition would have made him realise where the pain from coming from but he did not want to accept it.
Until COVID, that is.
The lockdown forced many activities to be shut down. Fortunately for him, he was left in a position where he could continue to pursue one revenue channel. He generated his first-ever profit during the quarter when the lockdown was active! Till then, each month he had been borrowing from family to keep up with payments to be able to grow his revenue.
As he emerged from the lockdown, he decided to cut off the arm that was rotting - metaphorically. He turned his focus onto the one revenue stream that was working and closed down the other line of business completely. Even if that meant not reaching the magical figure quickly. This focus has delivered sustainability and a clear path for the company forward. While he still tells me that having the additional capital would allow him to grow, he is no longer focused only on raising it. If it takes a couple of years longer, so be it.
Several businesses can be grown ground up in a profitable manner if the focus on fundamentals is clear. Whether you raise money or not, building a business is a marathon, not a sprint. If the investors do not want to look at a venture before it hits a particular revenue target, it’s their problem, not yours.
Most importantly - an investor invests money; if lost, it can be earned again through other sources. As an entrepreneur, you invest time; once spent it is never coming back. When dealing with such an invaluable resource, don't take shortcuts.
Chasing business instead of investments should be the way Indian Startups should be made to think. Tell them.