Senseless cash burn will kill your startup, 'growth at all costs' mentality should be avoided

17 Jul, 2015

In India, capital is flowing freely into the startup ecosystem as seen by the soaring valuations of fledgling technology firms. However, the alarming rate at which startups are burning money should raise eyebrows. This prevalent mentality of 'growth at all costs' is worrisome. Startups needs to introspect on various aspects of financial management keeping in mind the long-term goal of running a sustainable business.

Team and scalability

As an investor, the quality of the team and the scalability of the business are very important factors that decide whether to put money in a startup or not. I think even the best teams can find it difficult to transform a not-so-scalable idea into something that will create value for investors. However, a bad team with a great idea will not go very far either. Therefore, it is important to couple these two factors together so that you have a great idea backed by an excellent team.

The Rahul Yadav saga and what it means for maverick founders

The Rahul Yadav episode provides a lot of lessons for entrepreneurs. It is always a challenge for them to manage conflicting interests of different stakeholders. However, I don't think that the saga would restrict the flow of hot money into startups. Investors will continue to look for interesting people who are unconventional, maverick and different from the lot.

Capital Management

I think startups in India have a tough time understanding the ideal cash requirements for their business. Its turning out to be a very common problem. Entrepreneurs are often very optimistic about their idea but they fail to foresee challenges involved in doing business in a country like ours. They also fail to draw a logical timeline for execution or estimate as to when their business would start generating revenues.

Is high cash-burn rate advisable?

The mobile revolution is changing the dynamics of human behavior at a very fundamental level globally. Companies are burning cash to make people adopt to this new paradigm so that they can build scale in the businesses. Most such businesses may fail in the long run as their cash burns out. Only a few will survive. The prevalent mentality of 'growth at all costs' is destructive.

Bootstrapping is not bad

I think we are presently living an extra-ordinary time in terms of the opportunities available. Many startups wish to have good capital backing upfront so that they can reach a critical mass. This is especially true of businesses that do not have strong entry barriers. However, if the business has a strong IP or higher entry barriers that deter competition , then bootstrapping would serve the larger interest of the entrepreneur. Bootstrapping gives the opportunity of building a business not dependent on external capital.

Work-life balance

It is true that entrepreneurs need to focus 24/7 into their business. However, over-focusing could impact their ability to see things differently. That's neither ideal for the business nor the entrepreneur's personal well being. An entrepreneur can feel very lonely at times. Its important to take time off work and meet other entrepreneurs. Discussing common problems can make the journey less lonely. Such interactions may even give an entrepreneur new insights on effective work-life management.

(Sushanto Mitra is the founder and CEO of Lead Angels, an alumni focused angel network. Lead Angels has made early stage investments in CarveNiche Technologies, MyCuteOffice, GreyMeter, MyLabYogi, and Sensus Technologies. Mitra has been active in country's early stage investment ecosystem for the last 15 years. He was most recently director of Hyderabad Angels. Before this, Mitra served as chief executive officer, Society for Innovation & Entrepreneurship, IIT Bombay and director of Techcap India a boutique investment bank focused on early stage companies.)

As told to our Principal Correspondent Binu Paul.