As start-up founders get PhDs in ITUS (Iski Topi Uske Sir), which means passing the baggage of losses to the next person, financial sustainability has become a long lost cause. This charade continues until the IPO (Initial Public Offering) until the baggage becomes too big for a single investor and requires the support from the collective ignorance of equity market participants. Although losses are certain when a company blitzscales by materialising the wish of every project manager that accelerated efforts can deliver a baby within the first trimester, the resultant culture is too toxic to ignore.
Start-ups want to achieve scale for various reasons. And the worst possible reason is that the business model being profitable only at scale. In simple words, go big or stay home! Whatever might be the reason, in order to achieve a scale that would otherwise take decades, ideas need to be materialised ASAP, requiring resources left right and center. One has to build a product, go to the market and give discount bribes until the customers show up in numbers sufficient to score a profit. This means that the cost of learning would also be accelerated.
For instance, if a food or grocery delivery start-up launches in multiple cities at one-go then the company has to spend heavily on resources to build service capacity. Although a divisible resource can be scaled or de-scaled to accomodate demand variations, all resources are not divisible. Another challenge is the cost of learning, since most start-ups want to go all-in as the first hand of cards is served. If something is wrong with the launch campaign, the impact will be borne by all locations, since iterations have not been conducted.
Despite having deep pockets, companies built during the last century, when debt was scarce and venture capitalists were rare, still consider the concern of financial sustainability. The companies that ushered the wave of technology companies in India such as Wipro, HCL, TCS (Tata Consultancy Services) and Infosys value financial sustainability. And even the next wave of companies such as Mindtree and others were frugal with investor money, helping them sail through though times including the 9/11 aftermath and 2008 financial crisis.
Few years ago, an Indian Grocery delivery start-up launched in 16 cities immediately after a funding round but shut-down in most cities within weeks of the launch. On the other hand, companies with deep pockets such as Tata-Starbucks and McDonalds adopted a phased approach and took few years to introduce Starbucks in tier two cities, not only allowing the economies to mature till the required point but also allowing the management to incorporate learnings.
Fake it till you make it, but what if you don’t make it!
WeWork did not quite work out and will perhaps be considered the biggest bad bet in the VC community. In addition to the dubious charade of being a technology company, what surprised me was the fact that while WeWork was being valued at over a billion dollars with a few hundred loss making locations, the Swedish co-working space operator Regus, which operates over three thousand office spaces and most of them are profitable, was struggling to fetch millions!
And WeWork would have still worked out as long as they found the next baggage carrier to pay for the heavy baggage. In simple words, no scheme is a Ponzi scheme as long as the dealer does not go bust and manages to pay-out using the next round of buy-ins. And in order to do so, they need to fake it and build the hype.
Although the Venture Capitalists hire auditors to check the books and see through the hype and gimmicks, they fail to evaluate the culture that can lead to debacles. Perhaps Uncle Sam relied on the papers to evaluate on-ground deployment while forgetting the gimmicks, finally letting desert tribesmen overpower an entire government! And then we also have Theranos and Nikola, which are perhaps better suited examples for the God Syndrome of start-up founders.
Long enough does not imply forever!
Although you can get away with losses, it will certainly not result in a legacy. We know many tech companies that seem to have achieved the scale of too big to fail but let me remind you about Yahoo and their dot-com bubble siblings. Whereas, companies such as Nokia, Kodak, and BlackBerry (formerly RIM – Research In Motion) have managed to navigate the shifting sands of time. More iconic examples include IBM, Intel, HP (Hewlett Packard), AMD Processors and Sony.
Many founders equate IPO or sell-out to a grand finale, but that is not always true. An IPO is just another round of buy-ins but the last one and then onwards you will have to pay for your own drinks. While for those who sell-out, they carry an even greater risk. Although financial success ascertains their methods, these methods have such thin odds of success that one in a million would be quite optimistic!
And finally, for the spectators and aspirants, every iconic success has a few dozen known failures and thousands of unknown failures that could not even whimper. Although go-big-or-go-home works well to pump adrenaline, pegging survival with going big is quite an irrational gamble as success is combination of too many rights, whereas failure requires only one wrong hit.
And concluding it with a simple analogy; just as attempts to defy the laws of physics can break a few bones, attempts to elude the rules of finance can ruin livelihoods and careers. As entrepreneurs, we are not only responsible for shareholders but also for stakeholders.
Savvy Munshi 