‘The Indian Startup Ecosystem Is Like The Caste System’

Posted by Youth Ki Awaaz in Books, Entrepreneurship
October 23, 2017

The Indian startup ecosystem is like the caste system. The typical profile of an Indian technology entrepreneur is of a young person from a premier technology or management institute in India or abroad and with work experience in an MNC or overseas.

I did not tick any of these boxes. I was almost 50 years old. I went to a government college in Tirunelveli, a small town in interior Tamil Nadu, and I had never worked for an MNC or in USA. The investors were probably shocked at (a) how I could, with such a poor background and unimpressive profile, co-pioneer an industry and (b) how I still managed to be around for so long without raising billions of dollars.

Asking me to get out of my company was the best way of resuming normal service.

Most investors cannot evaluate a startup with perfect insight at the initial stage; so they resort to the easier option of pedigree investing. If a startup founder matches their typical entrepreneur profile, investors decide to put money in them. Further, most funds also employ associates, senior associates, vice presidents and managing directors with similar pedigree and, hence, today you have this nice closed loop where investors and entrepreneurs are all from the same batch of the same institute and before they can recall who won their hostel basketball finals, there’s a term sheet on the table.

Pedigree-based investing is not as clever as it sounds. Over 80% of venture capital funds are garnered by startups with a pedigree background. Over 90% of all startups in India will fail. Therefore, over 72% of all pedigreed startups will go down.

In reality, 72% failure rate is terrible. If you were averaging 28% in school, you would still be in school.

Pedigree investing has another drawback. It wrongly assumes that the country’s smartest young people are restricted to students of select engineering and management institutes. I have no doubt that we can find bright young potential entrepreneurs in arts and commerce institutes as well. I have the same complaint against the government’s ambitious Startup India programme – all their state centres are only in top engineering colleges. When India is trying to encourage entrepreneurship, we must spread the net much wider.

Betting on horses at the race course

When IUVP invested in Indiaplaza, they had already invested into Snapdeal, who, according to stories and interviews in the media, were now ‘pioneering’ the online marketplace in India, years after we had been running it. This was a potential case of conflict but since it was a fait accompli, I accepted the uncomfortable situation.

“Failing To Succeed” by K. Vaitheeswaran

But I believe investors should not be allowed to make competing investments because it gives them unbridled power
to mix and merge companies in their portfolio, even if it does not make sense for the startups. Many a time the entrepreneurs feel uncomfortable with the situation. I certainly did.

A VC once went to the races and bet some money on all the horses slated to run. After the race ended, he ran into the enclosure, took a selfie with the winning horse and in minutes, it was all over his Twitter and Facebook accounts. As the congratulations poured in globally, his long-time schoolmate and local struggling entrepreneur who had accompanied him asked curiously, “What’s the big deal here? If you bet on all horses, one will anyway win. Should you not be doing some analysis to figure out which horse is likely to win the race and then bet on that horse? That sounds more insightful to me.”

The VC, busy posting his picture with the winning horse on Instagram replied, “You think we have insights? What was your first clue?”

This betting on several horses allows investors to rig the races. An investor with stakes in several e-commerce startups has the option of deciding to back one instead of the others and in a sense decide the winner before the race is run.

Look at the statistics. VCs claim that one out of 10 investments will be a huge success, two will be modest successes and the rest will be below average in their performance or just shut down. In other words, a bunch of extremely smart people with pedigreed backgrounds work hard to deliver a success ratio of below 30%. If you were scoring below 30% in high school, you guessed right. You would still be in high school.

Hiring a CEO to replace me

Normally after a round of funding, entrepreneurs enjoy a honeymoon period with investors but mine never took off because I was busy appointing a CEO to replace me. I engaged with top executive search firms, met candidates referred by the investors and the final shortlist had no surprises at all: without exception they were all from premier technology and management institutes with significant work experience overseas or in MNCs, although none of them had any experience of working in Indian startups or e-commerce.

I was now stuck between a rock and a hard place. One set of investors preferred to hire a COO first who could take over as the CEO if he or she showed promise and results. The other group of investors wanted a new CEO on priority. By the time we shortlisted the final three CEO candidates, dark clouds were looming on the horizon. Positions and egos had hardened among the investors so much that no one was willing to see reason, and I was not just sandwiched but toasted too.

That’s when the penny dropped again.


The extract from “Failing To Succeed” by K. Vaitheeswaran has been published with permission from Rupa Publications.


_

Featured image used for representative purposes only.

Featured image source: Hemant Mishra/Mint via Getty Images

Youth Ki Awaaz is an open platform where anybody can publish. This post does not necessarily represent the platform's views and opinions.