Indian startups need a wake-up call: Naren Gupta

Lack of focus on long-term benefits among founders and funders is hampering the growth of a healthy ecosystem

By Naren Gupta
Published: Jul 7, 2016
The writer is co-founder, Nexus Venture Partners
Image: Sameer Pawar
The writer is co-founder, Nexus Venture Partners

The last 10 years have seen the birth of remarkable new-age startups in India. What are the common themes among these startups? They are technology-based and innovation-driven, and are often launched by motivated, educated, high-energy founders. These startups are changing a variety of industries, such as retail, health care, logistics, transportation, education, and entertainment. They enable a broad swathe of people to access high-quality products and services at affordable prices. Most importantly, these startups can scale rapidly and create millions of well-paying jobs, something India sorely needs.

Founders with grit and vision, fuelled by risk capital, have driven this vibrant startup scene. Recent changes in government regulations and tax policies are recognising the importance of startups among broader economic policy initiatives. Done right, these startups have the potential to form the foundation of long-term economic growth and bring millions of people out of poverty.

But the experiment that anchors India’s future is beginning to stumble. At least it seems far from realising even its modest potential. Let me explain why, and share some thoughts on what can be done before it is too late.

Based on my decades of experience in the Silicon Valley and, more recently, in India, I can say that Indian founders are, in general, world class. Venture funders and the media also have their hearts in the right places. The Indian ecosystem, however, lacks maturity. Unlike in the Silicon Valley, only a handful of investors in India have experienced multiple economic and venture cycles. All of us have a lot to learn.  

While building great companies takes years, if not decades, many Indian investors have a short-term mindset. We often invest in areas that are ‘hot’, and shun larger, longer-term opportunities. The result is an over-funding of hot areas, with a concomitant funding dry-up a short time later. Indian investors also tend to value companies based on short-term metrics rather than an understanding of underlying technologies, business models and defensibility.
Post-funding, the investors’ focus seems to be on preparing for the next round of funding in preference to building sound, market-leading companies.
 
Exceptional founders need to be backed by a stable source of thoughtful capital from people who have gone through entire funding and company-building cycles.   
The Indian media tends to over-promote ‘hot’ business opportunities and founders, setting them up for disappointments and eventual failure. When the lofty, unrealistic projections are not met, the media is equally expeditious in trashing the companies and their founders. It is either boom or it is bust. Over the last five years, the media coverage of microfinance, mobile VAS, media, ecommerce, food delivery, and other business opportunities, together with their founders, shows the immaturity of the Indian startup ecosystem. In my personal dialogues, I have generally found India business reporters to be informed, caring and thoughtful. I hope that the media will provide a more balanced coverage in good times and bad. The press should take a leadership role in helping potential customers discover innovative products and services from early-stage companies; something these companies do not have the resources to do themselves.

Most of a startup’s early success can be attributed to the founders and the leadership team. For this, they rightly deserve fame and fortune. Recently, I have observed rampant short-term orientation in Indian founders. Do irresponsible investors and the media drive this behaviour? I don’t know. In any case, exceptional founders should have the courage to go against the grain and do the right things. Startup leaders who cannot say ‘no’ to their board and venture investors when they are being misdirected are not good leaders.  

In the early years of the Silicon Valley, in 1980, I started Integrated Systems, a company focussed on software products for real-time design and implementation. Our team wanted a company that would outlast any of us. We made numerous mistakes. One time, at the suggestion of one of our large customers, we got diverted into building a hardware product that could implement real-time logic for laboratory testing. It brought us revenue, but the decision almost killed the company since we were not set up to support hardware products in the field. Our biggest mistakes were, however, mistakes of omission—things we should have done, or the initiatives we should have killed, but did not, despite our instincts. Why? In every case, the decision would have caused short-term pain, but the long-term benefits would have been substantial.  

We made many mistakes, large and small, but fortunately none turned out to be fatal. We learnt from every mistake. I ran the company for almost 15 years as president/CEO, with a maniacal focus: I took no outside board seats, or made any startup investments. It was the best time of my life. We took the company public in 1990, and merged it with Wind River in 2000. Integrated Systems remained a leader in the real-time space till Intel acquired the merged company for almost a billion dollars in 2009.

New-age startups have the potential to scale rapidly and create millions of jobs
Image: Getty Images
New-age startups have the potential to scale rapidly and create millions of jobs

In 1995, after I stepped down from the CEO’s position at Integrated Systems, I met a young professor from Harvard University for lunch. Dr Yagyensh (Buno) Pati, in his post-doctoral research, had discovered a technology that would enable many more components to be placed on a semiconductor chip. I agreed to fund his company under only one condition: He would work on the company full time. Giving up an academic position at one of the most esteemed institutions in the world was a very difficult decision. In addition, bringing a new technology to market involved much iteration, some causing significant drops in short-term revenue. Buno had the courage to make the right calls. Five years later, the company went public and had a valuation of more than a billion dollars. As Buno says, “When you are standing on a pier with one foot in the boat, the boat is unlikely to go anywhere and you are likely to end up at the bottom of the sea.”

Over the last few years, I have failed to see this focus or commitment in many of the new-age company founders or management teams in India. They seem overly focussed on their image in the media, maximising valuations in the next funding rounds, and other short-term bragging rights. Where is the focus on exceptional products and customer satisfaction?  

My belief is that today’s even moderately successful Indian entrepreneurs are so distracted that they cannot maniacally focus on building great companies. The baubles that distract them range from angel funding to building fancy bungalows. During my recent visit to Bengaluru, I cringed when I was told that many executives of rapidly growing companies were spending time with architects and builders, while their companies were losing millions of dollars every month and are in survival battles against strong competitors.

Some people say that the tendency to take short cuts is in our blood; the so-called ‘jugaad’ mentality. I disagree. It has nothing to do with Indian family values, culture or markets. Narayana Murthy and Sunil Mittal built large, durable companies in a less hospitable environment in the not-too-distant past. Indians around the world are doing exceptionally well as founders and leaders of market-leading innovators.  

Two other major factors are affecting the ability of Indian founders to build large and sustainable market leaders.

One: Indian founders lack a culture of mutual support and brotherhood (and sisterhood) with other founders. In the Silicon Valley, founders frequently celebrate other founders’ successes. They try and buy products from other startups. The early-stage companies that we have funded in India tell us that moderately successful startups are their worst customers. For example, they would often defer payments to these early-stage companies while making timely payments to more established players. Startups that are further along also fail to leverage other startups’ innovative products and solutions. Rather than building a strong ecosystem around their companies, these founders set up competing teams within their own organisations. These teams are often incapable of competing with agile startups and distract the company from its main mission.  

Founders, it seems, are doing everything possible to see other founders fail, even if they are in complementary businesses, at the expense of significant distractions, wastage of resources and less-than-optimal outcome. Founders and management teams need the courage to change conventional, dogmatic notions of ‘How India works’.

Two: Startup leaders need to embrace the notions of sharing and sacrifice, which are the key foundations of Indian culture. Authority, responsibility, credit for success and financial rewards should be shared broadly and deeply. When I ran Integrated Systems, one thing that made me proud was that most employees referred to Integrated Systems as “my company” in talks with their family, friends and the media.

The ‘me first’ way of thinking makes it difficult to build strong, committed teams with a wide range of expertise. As a startup scales, the capabilities of each team member and how well the team works together determines long-term success. The larger pie even allows more participants to benefit from the success. Silicon Valley has excelled on this philosophy of broad sharing. Given our culture, Indian startups can do even better.

Ten years ago, I decided to take a detour to help build the Indian startup ecosystem with a dream; a dream that the next mega success will originate in India. While the last couple of years have taken us sideways, the dream is alive and well.

We—founders, venture investors and the media—are all privileged to experience the once-in-a-lifetime opportunity first hand. But this privilege comes with responsibilities.  Let us learn from the best in India, the United States, and elsewhere. Let us work together to leverage entrepreneurship for the benefit of billions of men and women in India and around the world.

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(This article is excerpted from the latest Forbes India 08 July, 2016 issue which is now available at news stands and book stores. You can buy our tablet version from Magzter.com)

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  • Dhimant Bhayani

    Accidentally came across this article and having lived in Silicon Valley for 32 years as an entrepreneur and VC and now for the past three years in India (brought my Startup product to India), I can share the following: (1) There is only ONE PRECIOUS COMMIDITY - Time! Everything here takes longer than expected. While waiting, capital burns and resources under utilized (2) Historically, VCs came from technology background ... their ability (intuition) to see trends and application of the same exceeded a single entrepreneurs focus (exceptions always are there). (3) Lesser tech understanding in investor / angel community is causing lot of pain in the ecosystem. Pain is endured by entrepreneur and investors alike! Again - I would like to refer to point 1 above , it is all about time to do something (build or generate revenue) and I believe that this may be the reason that it is easier to get Seed Funding (short term goal at lower burn) and Groth Capital (low risk to investment and less sensitivity to tech, market and revenue scale). India investor ecosystem has shortage of True Series A and B investors who stay with the company or help it pivot, if needed. (4) The most painful thing I found is that many customers (including Govt. agencies who buy things via tender) are not competent in evaluating technology and true cost to build the same - this makes it hard for tech company to promote their solution with differentiation. Focus is on lowest price without buyer having any clue as to cost of the product. An example would be Aakash tablet or recenctly someone asking me supply a product at half of what it costs to build! This potential customer truly believed it can be built so cheap (I am talking about hardware here). This makes it extremely difficult for young companies to do business with larger companies. (5) Last but not least, it is totally unfair to criticize / attack someone at an individual level if he is in lavish office or traveling business class, he has earned it or his employer can afford it. There is immense immaturity here when it comes to maintaning professionalism. I think that India will have a vibrant ecosystem of startups, investors and exits next decade! ( Vision 20/20 ;) ).

    on Aug 21, 2016
  • Vipin Gahlaut

    VCs should not blame media for due diligence, it is the responsibility of VC to do deep analysis before investing. Media always runs for sensational stories as media gets money from sensational stories whereas VC gets return when invest in startup with sound fundamentals. I am also an ex Wind River employee, left in 2013 to start my own venture. We are leading an IOT space under brand name Smarteefi in India. We launched the first IOT product that no one has done before and it is well received by our users but we only got coverage on NDTV gadget360, because generalists that runs behind sensational stories does not understand the technology that we have built in last two years. Infect OEMs has shown more interest in Smarteefi than media to white label our product which we refused to. Next month we are planning to launch yet another innovative product that no one in India has done before and we are quite sure that again media may not cover us, VC may not show interest but we know that our fundamentals are right and our target market is huge. So its better to be in bootstrap mode unless we get investor who understand technology and its potential.

    on Jul 26, 2016
  • Dheeraj Rajeev

    I liked your point about the culture of \'mutual support\', but I would like to add a rider. Mutual support means that entrepreneur A uses entrepreneur B\'s products , B uses C\'s products and so on. This means that most of these entrepreneurs build / also build products for other businesses. Now, since the inception of the software startup world in India, we have not seen awesome B2B products. Now, many startups are getting there and building world class B2B / developer experiences (Postman is a good example). Thus, for quite sometime, as an entrepreneur, I was not able to trust my fellow countryman\'s product. Building B2B / enterprise products requires a different kind of discipline and has a difficult selling cycle - something that investors were loath to invest in earlier (in India). Now that too is changing. So - Naren\'s article should be seen with some comprehension of the context. What I also liked about his article is a nice admission on the last couple of years having taken them sideways. Very human and very encouraging to read as well. As entrepreneurs, we often tend to miss the fact that VCs too are in the business of making money for investors who help them create their fund.

    on Jul 25, 2016
  • Shampa Ganguly

    I agree with this article a lot. I am struggling to convince prospective investor the long term vision since they are in great hurry to exit and make money.

    on Jul 13, 2016
  • Krishan Mittal

    Nice article. Trying to understand who has to wake up? Investors or Entrepreneurs? The article has sighted issues with both. While investors are looking for \'hot\' areas, entrepreneurs lack the spirit of collaboration. I believe innovation culture will be successful only if it is supported well financially. India for long suffered a brain drain due to lack of funds. It will be really bad for the country if we are not able to leverage the current economic environment to encourage innovation and entrepreneurship.

    on Jul 13, 2016
  • Vishwas

    some valid points but why is this not being implemented in nexus companies ? \" SOU CHUHE KHAKE HAJ KO CHALI BILLI \" - after killing and eating 100 Mice, the cat decided to go to Haj pilgrimage to atone for the sins \"

    on Jul 11, 2016
  • Sai Samvrita

    Nice article

    on Jul 11, 2016
  • Kiran Nadkarni

    Excellent article, Naren. I totally agree with your observations. I wonder how many of the individuals in the investing community have built companies in their past or how many of them have seen the highs and lows of the VC cycle. How many of them know what it takes to build successful and durable enterprises? Like you said, they invest in 'hot' spaces which get crowded very soon, instead of creating companies or businesses of tomorrow. Also, they invest in scale and not scaleability of business model. Hence the rush among them to throw a lot of money in toddler companies to gain topline at any cost. They invest in several companies to get the portfolio effect (law of averages) to make a return on their fund instead of investing in a few and working with them to earn superior returns. Clearly their portfolio sizes do not permit them to spend quality time with their companies. I have known of investee companies where the VCs do not have a clue how and where the money is being spent. One way to address this situation is to reduce the size of funds the VCs raise (particularly the early stage investors) and fix their management fee based on their expenses rather than a flat 2% or 2.5%. This way, they will have to work hard to earn their profits through carried interest. I blame the investing community for bringing short-term mindset to the start-up industry. For the sake of entrepreneurship in India, I hope sanity will be restored soon.

    on Jul 11, 2016
  • Gaurav Sharma

    While I have lot of respect for Nexus venture Partners and Naren , especially in his stint as entrepreneur, this post is full of hypocrisy. It is strange that he is talking about frugality and spend by entreprenurs while his posh offices , fancy life style and expenses are unwarranted and unnecessary for a VC firm. No need to be in prime AB road for a VC. Why blame founders ?- VC also don\'t collaborate , outbid each other , speak ill of one another etc. Should not sharing and sacrifice come from him and VC ? Can we see a lower management fee and carry - why do they need to make so much money on fees - cant it be given to startups ? can they travel economy , have a simple car and rent office is non prime , high street location before advising and pontificating ? Where was he and other Nexus partners when Rahul Yadav and Housing founders ran it to ground ? Could he not advise his pwn portfolio company of these pearls of wisdom and intervene before it became too late. Advise is easy , to follow it is difficult. Those who stay in glass houses.....

    on Jul 11, 2016
  • Gaurang Chandarana

    This is one of the most sensible articles and views I have come across as a founder of 2 startups. We are not getting funding and risk running aground for a business which is first of its kind in the World and worth 1.50 lac crores per annum in India alone. We have to go short term to raise money to sustain and then unfold our vision with the revenues we get. In the meantime, we will have to go with the flow or risk going bankrupt.

    on Jul 11, 2016
  • Vijay Krishna

    Excellent article. Thanks Naren for sharing and you are right on target even if it is utopian. The media needs a hero or a villian so don\'t expect any changes from them. The VC needs to report to their LPs the IRR (rate of return) and that can only happen if their portfolio companies do next rounds/exits, thus don\'t expect VCs to change either. Now the entrepreneurs themselves may not have enough experience to realise what you are saying because most of them are doing their first venture and probably in awe of the VCs on their board. Standing up to VCs who own majority of the company (with their preferential rights running into hundreds of pages) is pretty tough. BTW, how thick are Nexus\'s own investor docs?

    on Jul 10, 2016
  • Vinay Rao

    Edtech isn\'t about education, Healthcare is about doctor directories and communication, and Transport isn\'t transport, but ride-hailing. These are legitimate business opportunities, but they aren\'t a massive scale and margin opportunity that the dumb money chasing them presumes it is. They are \'just another business\' that needs to watch its back for lower cost alternatives emerging on the cheap.

    on Jul 10, 2016
  • Ca Shashi Mohan

    Sir, thanks a lot for touching the real nerve of startups/entrepreneurial scene of India. Entrepreneurs need to focus more on their customer base than attending numerous startup meets. Have a long term prospective and keep learning the best...

    on Jul 10, 2016
  • S Bhattacharyya

    This is an excellent article by Mr Naren Gupta. He has articulated the mindsets of Indian founders, Investors and Media very well. My experience with most venture capital funds in India for funding a startup company that is based on world-class innovation and technology platform in the healthcare sector has not been positive. I faced exactly the same issues highlighted by Mr Gupta. No VC was able to understand the future potential of our technology platform that brings healthcare facilities at dead cheap cost to people in the rural and Tier-3 and Tier-4 cities that constitute 65% of India's population. The test is simple to conduct with a drop of blood and results will be known within 15 mins. It's a Lab-in-a-Box kind of thing that is portable and operates on battery. Most investors missed out the scale of the business, the social benefits, early detection of life threatening diseases so that eventually millions of lives would be saved. Either they did not understand the technology platform, or they thought its going to take another 5 years to get their expected returns. Surprisingly, many told us that first you go operational and then we will come in to fund you for your growth. So I realized most of these VCs are too risk averse and prefer to operate like PE funds. I find hufe amount of capital being invested in e-commerce companies and we all know they all are in trouble after starting up with a bang!

    on Jul 10, 2016
  • Srivibhavan Balaram

    Naren, I completely agree with your comments. Every entrepreneur needs to introspect on what you have said here.

    on Jul 10, 2016
  • Avik Kedia

    Dear Naren, Appreciate your views. Rightly pointed out that not just startup founders, but investors too need to wake up and smell the coffee. Startups are alrady under a lot of social, financial and mental pressure to succeed. And with the lack of dedicated Indian investor groups, startups face huge difficulties in raising capital. There are very if any Indian firms like Matrix or Kaalari. We need more Indian HNIs and rich industrialists to launch funds. At FinanceBazaar.com, we are facing the challenge of having large, well funded competitors which is dissuading investors to take a position against them. What is the fear? The Indian market size is too large and the demand and growth story is here to stay. With the right kind of support, mentoring and investment, India can churn out multi billion dollar startups in the near future. But for that to happen, we need to have faith in each. Best, Avik Kedia CEO FinanceBazaar.com New Delhi

    on Jul 10, 2016
  • Goutam Ghosh

    A very well presented and analytical in thought and crisp and precise and to the point article. In fact I felt to learn business practices and presentation and proposition from this professional.

    on Jul 10, 2016
  • Vinay Gupta

    I completely endorse your point.. too much noise too little focus and too little progress.. it's totally lost why they exist

    on Jul 10, 2016
  • Ramesh Loganathan

    Interesting view. While I do agree that there is a paucity of good advisors and short term attitude of founders , wouldn\'t fully agree that the problem is more here. In valley and elsewhere there is quite s of a jingoistic attitude among young investors (where luck was as important as idea/team/execution) that they know it all. That said I also believe that startups here do very much help others. Very well networked. And in recent years even further amplified by larger number f accelerators and incubators in place.

    on Jul 10, 2016
  • Kapil Dev Singh

    very true. only a sustainable idea must be worth valuing... thank you sharing the personal experience

    on Jul 10, 2016
  • Akshay Shah

    This is the new age mentality driven by VCs, especially outside VCs otherwise we Indians are kinda married to our companies and startups be it big or small and in any space, our DNA is of bonding not of changing! We never change partners, survive bad marriages and even bad businesses and bad relatves, the current thing is not the Indian DNA, its the VC infused DNA for some short term smart gains, its for their benefit and I do not think the founders have much of a say here as its like riding a tiger!

    on Jul 10, 2016
  • Akshay Shah

    This is the new age mentality driven by VCs, especially outside VCs otherwise we Indians are kinda married to our companies and startups be it big or small and in any space, our DNA is of bonding not of changing! We never change partners, survive bad marriages and even bad businesses and bad relatves, the current thing is not the Indian DNA, its the VC infused DNA for some short term smart gains, its for their benefit and I do not think the founders have much of a say here as its like riding a tiger!

    on Jul 10, 2016
  • Vijay Kumar Ds

    Mr. Naren, Yes u hv rightly pointed out most of Indian Startup environment currently Media, Investers, Founders, Financial Institutions are going for HOT and Bubbles for short and Quick money and want to push risks and no long term thinking but many wants to just replicate silican valley echo system and other serious problems skill gap, no minimum commitment from current youth and many wants to step into MNC or Government jobs for work not really into Startup. Government and Banks stuck with their own procedures, politics and without risk they want to create millions of jobs wo real work on the ground but India has great potential for new enterprise if tapped w risk w patience and less greedy than hype but truth.

    on Jul 9, 2016
  • Vijay Kumar Ds

    Mr. Naren, Yes u hv rightly pointed out most of Indian Startup environment currently Media, Investers, Founders, Financial Institutions are going for HOT and Bubbles for short and Quick money and want to push risks and no long term thinking but many wants to just replicate silican valley echo system and other serious problems skill gap, no minimum commitment from current youth and many wants to step into MNC or Government jobs for work not really into Startup. Government and Banks stuck with their own procedures, politics and without risk they want to create millions of jobs wo real work on the ground but India has great potential for new enterprise if tapped w risk w patience and less greedy than hype but truth.

    on Jul 9, 2016
  • Krishna Chandran

    Excellent article and spot on. From a industry veteran to the you g entrepreneurs.

    on Jul 9, 2016
  • Shaju Nair

    Great post Naren. I second the opinion that there is a need for greater levels of mutual support and brother/sisterhood among startups. Instead of pitching one against the other, the funders and the ecosystem should also push for greater collaboration. In a different post, Anurag Batra (@anuragbatrayo) from BW had mentioned that his philosophy was one of \"Prosperous is the one who prospers all around him, and not just himself\". Clearly in line with your point about sharing and sacrifice. Thanks for sharing your thoughts. Nice read.

    on Jul 9, 2016
  • Ranjeesh

    A powerful message conveyed through this article. India's got talents. But the blend between Venture capitalists, media, promoters, policy makers are not synced to have a long term successful yield.

    on Jul 9, 2016
  • Nishant

    There is nothing special or wrong with Indian founders/startups. Take out the \'Indian\' in the above article and EVERYTHING will be true of many valley startups also. There are all kinds of startups in the valley and similarly in India. Some will do well, most won\'t - exactly like in the valley. Some founders will do the PR blitz and flame out spectacularly and some will double down to build enduring businesses - exactly like in the valley. Some will screw over everyone to garner the maximum profits and some will make wealth for a larger set - again, exactly like in the valley. What the author needs to do really, is stop trying to find faults with \'Indian\' startups. India has a very unique market and its own problems with its own opportunities. Unlike the US, If you want to play the game, everyone is welcome.

    on Jul 9, 2016
  • Rajesh Sawhney

    Well said Niren. I remember your comments last time we met that founders need to create something thats 15 times better, not 15% better. This present situation is my view was caused by VCs and hedge funds who willy nilly encouraged and funded companies (with hundreds of millions of dollars) chasing vanity metrics like downloads and GMV.

    on Jul 9, 2016
  • Kanwal

    Very well written

    on Jul 9, 2016
  • Suresh Chawla

    Naren , what you have said is absolutely true . one can hear lot of passionate discussions from entrepreneurs and most of them with some rare exceptions talk not about their products or technology , how it can change the world, But with a focus that how this can bring them a great funding and how their company will be next unicorn. The heroes are those who have been able to raise huge funds and not those who have done pioneering research work or developed a new technology. As Indians we love to eulogize the success rather too well. If we will start giving attention to real people then only things will change. Entrepreneurs have become more self centered . They need a wake up call.. well said ..

    on Jul 9, 2016
  • Satya Srinivas

    Dear Naren, Great article. Also, for Indian startups to be successful, we need to consume locally, that seems to be a challenge. I am not sure if Flipkart would be as successful if there were no "discounts" given. Beat the economics of business. Our ease of doing business needs to get best, else we shall be wasting our time and energy. Great article.

    on Jul 8, 2016
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