The truth about the Indian start-up bubble: is it happening?
Never in the history of the planet has so much wealth been legally created, said John Doerr, a venture capitalist.
The old economic theories of wealth creation that claim that wealth is a consequence of saving or investing or appropriate government spending have failed to explain the phenomenon.
No, this was not classical economics. This was described more like a well-stocked kitchen waiting for someone to come along and mine their masterful ingredients to create a delicacy.
This was the internet. The largest distribution channel in the world. Initially only a few saw the potential. People like John Clark, the PayPal mafia.
Others soon realized what was happening and flocked to it. Rejoice world, for the Promised Land is here.
People started riding the wave. New companies sprung up weekly with prefixes like ‘I’ or ‘E’ before their names.
They created a different category of business entirely. They were dotcom companies. Their business model was completely based on the Internet. Venture capitals were struggling to invest in them.
They all seemed to be doing what everyone thought. Look at that loser who just got a million dollar investment. Let me also start a company and add ‘e’ before the name.
Investors deemed this too good to miss.
A combination of rapidly rising stock prices, market confidence that companies would earn future profits, individual stock speculation, and widely available venture capital created an environment in which many investors were willing to overlook the traditional metrics in favor of basing trust on technological advances.
A bubble began to take shape.
In simple terms, a bubble occurs when speculators notice the rapid rise in value and decide to buy in anticipation of further increases rather than because stocks are undervalued. A bubble cannot be sustained for long because sooner or later the self-regulation mechanisms of the market are activated.
March 2000. The dot-com bubble burst. In just one month, the Nasdaq index fell by several thousand units. It was an absolute market crash.
Fifteen years later, housing bubble adjoining and here we wonder if we did better this time.
The debate over whether we are experiencing a similar type of bubble today is on again.
Some say that 2014 was the best since 2000 in terms of IPOs, while 2015 marked just a fraction of that number. A similar scenario happened in 1999 compared to 2000.
Some argue that we’re in another bubble because technology IPOs and VC funding combined for 2014 amounted to $105 billion in equity funding, more than companies funded in 1999, but less than the total. funded in 2000 (CBInsights), suggesting that if this trend continues, 2015 could end like 2000.
A close observer will probably see that fast-connected and emerging markets like India seem to echo the Silicon Valley bubble.
Housing.com has laid off 600 employees. Compare the present to earlier days when Housing billboards used to be placed in almost every mall in every metropolitan city in India.
Zomato is laying off 10% of its staff of 3,000 employees worldwide, mainly in the United States.
The recent Foodpanda and Tiny Owl scandals filled the news. Tiny Owl’s own founder was held hostage by his employees. The news would chill you to the bone as this resembles the meltdown days 15 years ago.
However, those fears are not rationalized by keeping a one-sided look. There have been positive signs, pointing out that headline makers pointing to the existence of the Indian start-up bubble are not to be taken seriously. The startup ecosystem in India is still at a very emerging stage and those most exposed to these high-priced private investment rounds are foreign funds with deep pockets and a high appetite for risk.
Recent cases of consolidation also show that the market is already self-correcting.
Grofers, a hyper-local grocery app that lets customers order goods from neighborhood stores online, last month made two acquisitions in one week, taking over its shuttered competitor Town Rush and meal delivery service Spoon Joy.
Car Trade, a Mumbai-based used car sales portal, has acquired rival CarWale for an undisclosed sum.
Why is it important to reflect on the existence or not of a tech startup bubble in India?
Entrepreneurs are entrepreneurs and will always run after the idea with the highest potential.
On the other hand, venture capitalists have a much greater responsibility. They are the drivers of effective capital allocation and are responsible for fostering innovation in verticals, which have traditionally been dominated by laggards.
Good ideas and unique solutions in unexplored areas will always generate market and demand, which is an investor’s main concern, even if it doesn’t exist at the moment.
An accidental mouse on your plate can happen to a restaurant because it is growing and scaling so fast, however, when you find a mouse on your plate every day, that opens up an opportunity.
Opportunity for the second generation Indian entrepreneurs rising from the ashes of the fallen, even bolder and much more stern and disciplined.
Just Buy Live, an e-retailer that connects brands with local retailers, has raised $20 million in a Series A while maintaining strict unit economic discipline. Here also comes Shabda Nagari, a Hindi social media portal, which just got $1.7 million in angel investment.
The first round ended, many stumbled, and yet some took some rich coffins home with them. But the second round is about to start and some steam is already rising on the horizon. Take a seat ladies and gentlemen.