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VCs & startups: Heralding a new beginning

With nearly 5,000 tech startups and the sector at #3 globally, veritable ‘young’ entrepreneurial Indians are dotted across the value chain. Admittedly, many have been bloodied in the process (mortality rate, 18 – 22% over 5 years) but at same time the ecosystem now sports a more matured look, and is not unduly swayed by the “gold rush” as seen earlier.

Published: 24, Aug 2017

NASSCOM® is the premier trade body and the chamber of commerce of the IT-BPM industries in India. NASSCOM is also a global trade body with more than 2,400 members, which include both Indian and multinational companies that have a presence in India. NASSCOM's member companies are broadly in the business of technology products and services, BPM solutions, Engineering R&D, Internet, Mobile and E-commerce. NASSCOM’s membership base constitutes over 90% of the industry revenues in India and employs over 3.9 million professionals.

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Photo: Shutterstock

The startup story continues to gather steam. Having successfully completed the first round, marked by frenzied activity, we are now in the second phase.

The Jawbone debacle is a classic case of 'death by overfunding' in Silicon Valley. It resonates with the broader trend across the globe, and closer home, with headline grabbing events in ecommerce and food delivery space. With an impending sense of déjà vu, I can recollect the internet boom of the '90s. A similar obsession had prevailed with funding even then and as the dictum goes, “The more things change, the more they remain the same”.

With nearly 5,000 tech startups and the sector at #3 globally, veritable ‘young’ entrepreneurial Indians are dotted across the value chain. Admittedly, many have been bloodied in the process (mortality rate, 18 – 22% over 5 years) but at same time the ecosystem now sports a more matured look, and is not unduly swayed by the “gold rush” as seen earlier. Simply put, the pursuit of Venture Capitalists is no more only about getting funded but about striking a balance. So let’s see what’s on the other side of the see-saw.

There are tell-tale symptoms of a change in outlook, best exemplified by the remarkable rise in corporate and start-up collaborations, involving VCs. While the finer details of this trend are beyond the scope of this article, the broader trend that is aiding this - apart from the lessons learnt - is the rise of “deep-tech”.

With the maturity and rise of Machine/Deep Learning, Internet of Things and other disruptive technologies, corporates have realised the need to focus and partner in these areas. It makes sense, given the cultural, structural and business realities that prohibit them from innovating fast and effectively. While for the Deep-Tech startups, technology being their forte, they lack in areas of market access, business and domain skills, and funding also being a criteria. Hence the synergetic and complimentary mutual needs have contributed to the rise of accelerators and incubators. Data suggests, the focus has shifted significantly from investing to broader engagement - partnering, accelerating and incubating.

India is saddled with overwhelming challenges in areas such as infrastructure, healthcare, education, financial inclusion, among others. Startups see these challenges as billion dollar opportunities. Given the nation’s size and complexity, it’s a perfect test bed for piloting projects which solve such real world problems, and can scale in global markets subsequently. Such as, Africa, SE East and Middle-East.

To answer the know-it-all cynics: phrases like the “new normal” are often seen by them as an attempt to cushion the harsh impact. Undeniably, there has been a perceptible drop (about 20%) in funding over the last two years, and right now, funders aren’t exactly tripping over themselves to write out fat cheques, but surely that can’t be the only reason why we are experiencing a market rationalisation of sorts.

In the first round, the mortality rate was high and we saw a horde of startups entering but eventually getting swept away by the maelstrom of hyper-competition, a characteristic of red oceans. As they scurried to improve on celebrated parameters like Gross Merchandise Value (GMV), situations became bloated and unwieldly for many startups. In a run-up to acquire customers, the cash burn was exceedingly high with little or no impact on stickiness factor.

The second round - if we can call it that - will be about addressing these challenges through expert advice and sound business practices beyond great product development alone, like talent recruitment, process definitions, go-to-market & customer retention strategies, entering new geographies, among others. Often, the startup founders are brilliant individuals with great products but require hand-holding in articulating a clear business proposition.

B2B business is very different from B2C. At the product development stage itself the time taken to build is longer than B2C. At 45% of the market, the current trends suggest that B2B is increasing at a faster rate to play catch-up. With an expanding horizon coupled with complex new-age technologies & the need for enhanced customer experience, the need for funding cannot be over-emphasized.

But, it’s equally important that funds are put to effective use (like building the right team, investing in technology, robust business model etc.) and not expended in areas where the returns are low or even negative. I do believe, in Round # 2, this new kind of relationship between VCs and startups will pitchfork the nation globally, a notch or two higher.

- By Srinivas Peri, Senior Director at NASSCOM 10,000 Startups

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