The Flipkart saga: VC in driver’s seat part-2

In the last blog, I touched upon what it means for Flipkart when its founders are not at driver’s seat. It would be interesting to see how this change of leadership at Flipkart may shake-up other start-ups & the larger start-up ecosystem in India.

Impact on other start-up companies: 

The CEO level changes are not happening only at Flipkart but many other young companies are witnessing the same. The impact can come in following ways;

I. Wake-up call for founders: The message loud & clear for the founders of the VC-backed start-ups in India is to show the results than promises. Founders may increasingly face pressure from investors to rework on their break-even estimation, to generate better revenues, reducing the cost, put more stress on cost cutting & control, rework on scale-up or expansion strategies etc. VCs may become more vigilant about their investment in Indian start-ups and may take a look at current valuation figure for their start-ups. If founders don’t want to see the Flipkart story getting repeated at their own start-up, then they may have to bring more professionalism, more focused approach towards achieving profitability & maintaining it with decent rate of revenue growth.

II. More professional hiring at top level:  Since founders may lack required experience to handle some of the business operations and rising pressure from VCs after Flipkart incident, it may lead to more hiring of professionals for top management positions to convince investors that founders are ready to give up on some control for betterment of the firm.

III. No easy availability of new capital: This may put a break on easy rounds of fund raising, which was frenzy earlier. In the light of changes at Flipkart and sudden heightened vigilance from VCs, many start-ups may find reluctant investors to invest further equity and even if Investors are ready to invest in next round it might be at marked down (lower) valuation. Due to this adverse scenario playing out where suddenly investors are skeptical about further investment in the start-ups unless the good results are shown, many small start-ups (which has similar business model) who are surviving on the investors’ money may get suffocated & eventually chocked to death.

Impact on the start-up ecosystem in India: 

Indian start-up ecosystem may feel some shake-ups and jolts after changes at the market leader in e-commerce business. The impact may be visible in following ways;

I. loosing sheen in the Job markets: Push for cost cutting may lead for lower recruitment requirement from start-ups. Subsequently, the job market in India which has witnessed huge demand from start-ups for last couple of years may dim significantly. Contribution from start-ups towards new job creations may get hit due to pressure on cost reduction. Also many start-ups are already slashing existing jobs which may add some trouble to the job market.

II. Prolonged wait for start-ups to enter Indian IPO market: IPO market in USA is going hysterical on announcement of Snap Inc.’s (maker of Snap chat App) IPO which is start-up. Initial figures are showing it is valued between $19 Bil to $22 Bil. Indian IPO market & investors can just be envy of this. Indian IPO market may not see in near future entry of any big Indian start-ups heading for IPO route.  Many stake holders in Indian IPO market like merchant bankers, I-bankers, Legal advisors, distributors, Brokerage houses, Retail & institutional investors etc. who are expecting their business to zoom up due to start-ups entering into IPO market, may have to pray for better financial health of Indian start-ups to reach a stage where they can go for IPO. For many big Indian start-ups which are daydreaming for IPO, the increased vigilance & tough demands from investors (VCs) due to invisibility on sustainable profitability coupled with scalable venture, the dream looks distant.  

III. Some rejig of Indian start-up ecosystem:

1.Shying away from VCs & other tough investors: Having seen how Flipkart & other stories are playing out at this juncture, founders of many new start-ups may shy away from going to VCs for raising capital. But I believe this phenomenon is temporary in nature, eventually if start-ups are lacking capital to fund their expansion needs and if it has capabilities to convince VCs then it might go ahead and take VC or other investors’ funding as we know in true sense there are not much of venues (though theoretically there are many venues) where star-ups can go and actually raise the capital.

2.Focus may shift towards being differentiators rather than being ‘me too’ start-ups: For upcoming entrepreneurs who are smart & observant will take a note of what is going around with Indian start-ups. After witnessing the struggles of many existing start-ups to cross break even after years, psychological shift may come to start a start-up which is focused on differentiators (through innovation or by doing things differently) which may have higher chances of break even than focusing on yet another similar product/service –oriented start-up. Also pragmatic founders may focus more on working out sustainable & profitable business model instead of focusing on singular pieces of their business.

Apart from these aspects, many more interesting and important aspects are there in the context with Indian start-ups & ecosystem which are not covered here.

Note: VC/PE taking the control of the firm is not necessary bad signal always. If it can create win-win scenario for all important stakeholders of the firm then sometimes it might be desirable!