India: VC firms urge startups to get ‘boring’, focus more on ‘processes’

We favour the sensational and extremely visible. This affects the way we judge heroes. There is little room in our consciousness for heroes who do not deliver visible results or those heroes who focus on process rather than results, writes Nassim Nicholas Taleb in his book—The Black Swan: The Impact of the Highly Improbable.

Such human behaviour bias to favour and celebrate “visible results” over everything can perhaps best explain the last decade of the startup landscape—where young tech companies were fuelled by a wave of venture capital-funded excess, which encouraged fast growth above all else. The “sensational” bit explains why we are overawed with the likes of Elon Musk and theatrics involving fast fingers on Twitter, or a 25-year-old founder’s overcommitment to his loss-making startup by over-leveraging himself, or a larger-than-life vision of seeing flying cars.

But some of the recent disasters of the startups especially at the public markets are having VCs to question such biases or upend their playbook—to go for “boring” instead of “sensational” and increasingly focus more on the “process” than “extremely visible” results.

There are concerns being raised largely on three factors:

1. Making a strong case for gross margins: Public market investors value visible margins. A look at the numbers and picture will be clearer. Consider three tech unicorns with widely varying gross margins: Zoom, Uber and WeWork. Zoom, which can boast of exciting gross margin of 81%, is trading at over 15% premium. Uber, in comparison, with suboptimal gross margin of 46%, is trading at a 27.52% discount and WeWork with an abysmal 20% gross margin was expected to get listed at 68% to 78.7% discount, before its initial public offering (IPO) plan was shelved. These statistics are not aberrations but represent a close correlation between margins and valuations.

Price discovery in public markets is a lot more rational, and even though there could be temporary speculations, in the long run valuations in public markets boils down to time tested metrics of ‘margins,’ than an obsessive focus on ‘growth’. This essentially goes back to boring entrepreneurship 101 which says that without some consistent growth and improvement, your business will probably die and decline. And without profits, you have more of a lottery ticket than a true business.

3. Cult of personality culture: VCs are faced with a dilemma—rein in the charismatic founder to avoid any mistakes or allow him full rope to innovate, experiment, fail and succeed. In the past, VCs have tilted towards the latter, because charismatic unbound founders, such as Elon Musk, Mark Zuckerberg and Steve Jobs, have delivered results.

Feld tries to differentiate between personality cult and thought leadership. Quite often former may masquerade as the latter, making it difficult for outsiders to differentiate. While, thought leadership is about experimentation, feedback, curiosity and analysis contributing to perfection in leadership, cult personality is about reinforcing one’s ego by proving his vision and ideas are always correct, and it contributes to god complex.

At times it is hard to differentiate between the two, but the high profile exits of Adam Neumann and Travis Kalanick tells us that it is a skill that one has to nurture.

Shrija Agrawal is Mint’s associate editor. Due Diligence will cover issues in India’s venture capital, private equity, deals and startups space.

This article was first published on livemint.com.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.