Pitfalls remain in India's start-up ecosystem

There has never been a better time to be an entrepreneur in India. But when there is too much optimism and positivity around, it can lead to the building up of a bubble-like situation. These sentiments were echoed by participants in a brainstorming session titled "India's Entrepreneurial Ecosystem: What Next?" at the MindRush event.

The panellists included serial entrepreneur Vishal Gondal, Founder of GOQii.com; Radhika Aggarwal, Co-founder and Chief Marketing Officer, Shopclues.com; and Laveesh Bhandari, Chief Economist at Nielsen India.

The discussion opened with entrepreneurs speaking about their past start-up experiences. Many challenges, especially related to funding, have been ironed out for entrepreneurs now, they pointed out. Aggarwal spoke about her previous unsuccessful entrepreneurial stints before founding Shopclues, an e-commerce company. "I have been third-time lucky with Shopclues," she said. Gondal spoke about the challenges during the launch of his previous start-up, Indiagames. He founded Indiagames in the late 1990s and sold it to Disney in 2012. He is an active angel investor now and has also launched a wearable gadgets company GOQii.com.

Why are more and more people taking on the risk of entrepreneurship? "The cost of entry into the entrepreneurial ecosystem has gone down dramatically. The only thing that is stopping people is high salaries," said Bhandari. He founded Delhi-based economic research firm Indicus Analytics back in December 2000, which was acquired by Nielsen India in 2014.

Entrepreneurs have much better access to resources than before. "Earlier, if you had to start a business, there was so much that you had to look at completely from scratch, including what technology to use and how. Now it is much faster because so many things are already available," said Aggarwal.

Gondal pointed out that the risk-taking appetite among entrepreneurs has now gone up. "Today, there are people who have left everything and they ask me what to do next. This means entrepreneurship is being celebrated," he said.

This certainly appears to be a great time to be an entrepreneur and scores of start-ups are raising huge amounts of funding, said the speakers. "When I started my first company in 2008, I did not know what venture capital meant," said Gondal, who started his first venture when he was only 16. "Then I got to understand it as something as good as a loan that need not be paid back," he added in a lighter vein.

However, amidst the euphoria of start-ups raising millions of dollars in funding, a bubble-like situation seems imminent. "There will always be a number one and number two in any industry and they will command high valuations, whether it is e-commerce, travel or gaming. But what happens to others, especially vertical commerce companies selling everything from spectacle frames to lingerie?" asked Gondal.

The valuation of start-ups needs to be rational. The process of valuing companies on the basis of GMV (Gross Merchandise Value or gross revenue) is not justified, said Gondal. "It is like valuing banks on the basis of crores of money that they have in deposits, while their revenue is only a percentage of that which they charge as fee." Gondal has survived multiple bubble scenarios, including the dotcom bust in early 2000. He has been through a phase when investors backing Indiagames were pushing the company to invest in advertising. But when the crash happened, investors deserted the venture. The only way to survive was to have a real business that made money. That meant laying off people and giving up expensive office spaces. "Until entrepreneurs are getting investment they are not worried about cash because someone else is funding the losses," he said.

"The cost of entry into the entrepreneurial ecosystem has gone down dramatically"

LAVEESH BHANDARI

Chief Economist, Nielsen India

The panellists also agreed that the entrepreneurial ecosystem is unlikely to go through upheavals similar to that of the dotcom crash in early 2000. This is largely because of the fast adoption of Internet and smartphones that is leading to people buying and consuming online. Also, mergers and acquisitions are helping start-ups acquire scale rapidly. "Exits like redBus and Facebook buying an Indian company also show that the whole mergers and acquisitions space is heating up," said Gondal. "I believe there could be about 25 start-ups with a billion-dollar valuation in the next 12 to 18 months."

Entrepreneurs today appear smarter and better equipped to face tough times. "As compared to the late '90s, entrepreneurs are much better prepared to handle a bubble situation," summed up Bhandari.