“A startup based only on cool technology will fail”

Nandu Nandkishore, Professor, Indian School of Business, shares that startups will have to be much sharper on factors like the logic for their business, kind of opportunity, competitive advantage, business model, milestones and scenario planning post-COVID.

TPCI: How is the COVID-19 crisis expected to impact investor confidence towards Indian startups? What will its effect be on the choice of targets (sectors, nature of startups, etc) and quantum of investments?

Prof Nandu Nandkishore: There is an acceleration of the trends that already were in place before COVID-19 along with some new sectoral shifts. A lot more of products, services and content are now being consumed at home – whether it is media, entertainment, education, F&B, healthcare, etc. The sectors that are more affected are those that are out of home. This typically includes restaurants, hotels, travel, gyms, etc.

This acceleration has created both threats and an opportunities for business, depending on which sector they are in.

Further, there will be some underlying and lasting changes in the ways of working. Companies like TCS, for example, have announced that they would significantly reduce their office size and a lot of employees will work from home on an ongoing basis, and come to the office one or two days a week.. Internationally also, companies like Twitter have said that they would encourage working from home on an ongoing basis. Therefore, the need for physical office space (and related real estate) will reduce while residential spaces will need re-designing to enable ‘work from home’. Similar is the case for travel, restaurants, etc.

Similarly, there are opportunities being created. You have more and more stories of service providers, fitness trainers, yoga instructors, education providers, etc who cannot meet people physically, but have gone online. In the process, they have discovered that they are not restricted by their geography. But they are able to access clients from all over the world.

Venture capitalists will be looking at the following key aspects:

1. Are you in a sector that is already now in the growth phase? Or is your sector in a stressed phase right now? A couple of years ago, for instance, WeWork was seen as a very good startup, till people realised that it was in fact not a tech startup. The sector in which it was involved was office realty, which was already stressed. So people will take a closer look to see which sector you are playing in.

2. Have you identified an opportunity, where you had a distinct and lasting competitive advantage to offer? If I paraphrase some of the writings by people like Peter Thiel, if a startup is solely based on cool technology, chances are that it will fail. However, if the startup is based on a real societal or business problem, where there is some gap in the market; where the startup can use technology to offer a service that is 10X compared to a legacy service, then there is a very good chance that it will succeed.

3. Then it is a question of which stage the startup is in. Is it in the ideation stage? Is it in the MVP (minimum viable product) stage? Has it gone past the MVP and has a proven business model and is looking for cash to scale up. And there are different kinds of venture capitalists who focus on different stages of the startup ecosystem. There will still be a significant interest in startups, but people will be far more discerning about which sector, which phase the startup is in, whether they truly have a competitive advantage (ideally 10x), and whether this competitive advantage is in some ways proprietary and protectable. They would also want to see at what speed this particular opportunity needs to be scaled up and exploited. 

TPCI: Aggregators like Zomato and Swiggy were already facing pressure on their unit economics. What should they be doing to stay profitable in the present time when the supply chains are so disrupted?

Prof Nandu Nandkishore: I am involved with a few startups around the world. My advice to startups is that in the short term, you have to proceed on the assumption that this COVID-19 related disruption is going to last for a long time and some habits may change forever.

Secondly, the implication of this is that you have to control your cash spend very tightly. This includes cutting all discretionary or ‘nice-to-have’ expenditures. And in a last resort, if required, they may even have to look at headcounts or salary. But they should do that with a lot of heart. A case in point is the way in which Uber and Airbnb have gone about the process of retrenching their workers. They feel the pain and they do it with a human face – as genuinely and generously as they can. Nobody wants to do that unless it becomes inevitable, in order to ensure that the enterprise survives the short-term cash flow crunch.

I have also advised startups to look at what they can renegotiate from office space, fixed charges etc. They can even look at employees if some payments can be delayed to an year or two in the future. Can some cash payments be converted into stock-related payments? So you have to look at all options to make sure that you can stretch the cash available to you for an extended runway. This applies to all startups; the SME sector, and the large company sector as well. Witness Hertz, which has filed for bankruptcy in the US.

TPCI: What should be the change in approach for new startups trying to make pitches to investors in the post-COVID world? 

Prof Nandu Nandkishore: I am still getting pitches from startups. I see them identifying opportunities and looking at how they can target these better than legacy players. The criteria for evaluating these investments has not changed. What has probably changed is the sentiment because the stock market is in a phase of volatility and uncertainty.

It is an open  question whether it is currently a bull market or a bull trap that will lead to a bear market. So investors are also probably not going to be as bullish about evaluations for startups, as they would have been 2-3 years ago. Your business case has to be much sharper – the funding you ask, why do you ask, what you intend to do with it, and what are the milestones by which you can demonstrate that you have progressed. Scenario planning is very much a part of it. You have to be able to present various scenarios and how your business will be able to deal with the various kinds of stresses that could come as a result of COVID-19.

TPCI: There was an overwhelming preference towards rapid growth and higher valuations in startups over the past few years, which also came at the cost of profitability. How will this change post-COVID in your opinion?

Prof Nandu Nandkishore: There was some change in this approach happening already earlier, across the globe and even in India. Partly the push towards valuation was the kind of short term strategy where the startup promoters were looking more towards an exit strategy from day 1. That really does not inspire confidence in me as a VC. So there were a lot of question marks about some of the valuations. Already before the COVID-19 crisis, people were starting to ask questions about the cash flow, bottom line, unit economics, scalability, etc. These were the right kind of questions to be asked. These questions will continue going forward and be an important part of the evaluation criteria.

TPCI: How well positioned are Indian startups in comparison to their counterparts in other parts of the world to drive the next phase of growth, positive disruption and innovation post-COVID-19? What initiatives (across stakeholders) will help them achieve this potential?

Prof Nandu Nandkishore: If you look at successful startup ecosystems, whether on the West Coast of the US or China, they have at least five different elements that have to come together.

1. It needs to have venture capitalists willing to fund different stages of the lifecycle.

2. It needs to have talent.

3. Thirdly, it needs to have an existing base of startups where you can connect with existing experienced entrepreneurs and startups, learn and get inspired by them. Perhaps supply to them or buy from them, or work collaboratively with them.

4. It needs to have universities that are plugged into industries and can exchange ideas or views in a constructive way with startups. This includes the concept of university professors in countries like US and China, who actually take up equity in startups.

5. It also needs a government that looks at the sector supportively.

A successful startup ecosystem needs all of these elements to work together .

What has happened in India historically is that each of these elements have operated sub-optimally and without coordination to some extent. The result is that a lot of Indian entrepreneurs basically try to do it quick, and copy existing models in the US or China.  There are a lot of good success stories in that model.

To be fair, there are also innovators like OYO, who have managed to create a new segment.

One of the reasons why the Indian entrepreneurs were doing more copies was because they lack this solid interface with existing startups, universities, and government. There are a very few notable exceptions where universities are engaged well with business, but by and large our universities tend to be a little isolated. They see themselves as preparing students, taking examinations, but not really partnering with industry. That bridge, which is really well established in US, Japan and China, does not work really well in India.

On the government side, there has been a welcome recognition of the role of startups in economic transformation in the more recent past. Initiatives like Startup India will certainly encourage more entrepreneurial minds to explore their true potential. At the same time, I also feel that the government can be more mindful of the stresses of a startup and support their cause to the extent possible. For instance, when the government says you have to pay salaries for 6-8 weeks of lockdown, this could mean bankruptcy for most startups. In US and UK, governments have said that they will give 75% of the salary bill,  and that kind of assistance can be invaluable in this tough period.

So this startup ecosystem in India still has to mature. People need to understand the need to work more collaboratively in this ecosystem. It is starting to happen, but it needs to accelerate and happen a lot faster.  

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Nandu Nandkishore, Professor, Indian School of Business, has almost 40 years with commercial  organizations including 26 years with Nestlé and leading businesses all over the world as a CEO.  Nurturing innovation as an Intrapreneur as well as a Venture Capitalist, he has helped people and businesses grow and realise their potential.

A noted keynote speaker, and an author of several articles in HBR, he is now a Professor at the Indian School of Business. His client list as a consultant includes Essilor, The Coca-Cola Company, JW Marriot, Banco Commercial Romania, Standard Chartered Bank, and several other global companies. He continue to mentor startups like Livinguard AG, Vyn, the Mom’s Co Ltd, Global Gene Corp Ltd, MPharma and others. All views are the personal opinion of the writer and do not represent any official point of view.