If you are looking forward to making some money, investing in the bubble while it is blowing up, is the best way. But, you need to time the exit. There will be a time you will see that everyone around you is investing in the bubble and you will know it is time to exit.
I am listing down a few reasons why I think that there is a startup bubble, all the investors are going to face huge disappointment as the troubles of startups will get amplified and billions of dollars will be flushed from the market again. I will be really happy if, startup bubble does not burst but, I doubt that.
Let’s first analyze why startups got funded in the first place?
There was a dot com bubble that went bust in the year 2008 and post that valuations of a few startup companies were cheap. Most public market investors did not have money to invest any further, but private investors were the ones who had money, and they made smart investments in these small firms which, had the potential to grow.
There was a series of downfall of economies as well, Brazil, China, Greece , Russia. There was no concrete investment avenue that looked lucrative. And, private investments looked lucrative. As, the round one private investors exited with handsome returns on investments that they had made during the crisis. The exit value was so lucrative that it brought of round 2 interested investors. Thus, came the buzz word “ funding” “start-up “ and “angels.”
The reasons why I think startup bubble will go bust:
Wrong on the Basics: Most Indian startups are either e-commerce oriented or tech related. We all know what happened with Foodpanda, donebynone, Lumos etc. Why is nobody ready to buy Flipkart? Or probably why Snapdeal also looks shaky? In case, you don’t know here is why. All these e-commerce sites forgot to work on the basic concept of “Earning Profit” they started concentrating on increasing the user base and customers. For this they spent more on marketing than they earned.
This is a vicious cycle and it is never going to stop, with increase in users there will be money rolling but, there won’t be profits.
Lack of innovation: Most startups we see in India, are a copied version.Despite billions being invested in,most startups are not profitable.
Agreed, India is a consumer driven economy, but how long are the start ups just going to be mere copycats? They have to innovate, and they have to be edgy for the investors to be interested in them. Think, why do we all love Facebook, watsapp, or google, because they were innovative, they addressed the needs when nobody did.
If you are an investor, I would suggest you to find companies like happily unmarried, Coin-base that came up with alternate currency Bitcoins, or Bolt . lt that makes chargers for bikes. These guys have a future. So, the point is “Substance will Sustain”
Over valued startups:
Most startups are overvalued, Why do you think flipkart raised only USD 550 million,
when it was valued at USD 16 billion, Snapdeal, which was valued at USD 5 billion, raised a mere USD 500-million investment. So, analysis of business model is very important before, being confident and trying to raise money in the market. Thus, most companies sugar coat their valuations and present it to the investors to attract fresh investment.
The flaw of patience: I have been in the market for a while now, and, I have realized that there is a flaw that most investors in India lack in is ‘patience.’ Everyone looks for quick money, and if there are some losses the investors will suck the juice out of you and make sure your fall is accelerated. Hence, startups, should be aware and stay away from these investors. These days, in order to diversify investors, invest in varied avenues. However, they do not have much idea about the operating model of that business. Thus, investors are of no value addition, other than their money, which they will withdraw or threaten you to withdraw, when you go through hard times.
If this bubble goes bust, there will be a lot of people who will lose money. But, there is a silver lining for companies with real substance, they will give returns and survive the downfall. So, if you are a startup investor who has invested in a company that is fast growing and making money, but lacks substance, innovativeness, and profitability. “Exit and have your plan B in place. “
Like I said, I would love to be proved wrong, and I would like to hear your counters if you have any!