Other People’s Money: Why OPM is the new opium for funded startups
Build your business on solid foundations, and don’t always rely on other people’s money
The startup space in India has witnessed an all-time-high in recent times with an influx of funds from all quarters to support its growth. Being one of the most prolific startup nations in the world, nobody wanted to miss out on a piece of this pie and eagerly hopped onto the bandwagon, hoping to give wings to the next big unicorn.
As a result, startups attracted sky high valuations from VCs, received huge amounts of OPM (other people’s money) and showed almost unbelievable growth in a short period in quite a few sectors.
High on this new opium of OPM, startups scaled at an amazing pace, went all out on hiring, fancy offices, launched mega advertising campaigns and offered unbelievable discounts. At the same time, the very opium (OPM) that once fuelled their growth, has caused quite a few startups to crash or burn out after the excess spends to achieve high GMV and hyper scale to the next level.
As per data analytics firm Tracxn, in 2016, over 200 startups shut down — a steep 50 per cent increase over the previous year. Biggest casualties were Peppertap, AskMe, Fashionara, FranklyMe, TinyOwl, BuildZar, Zippon, Amber Wellness, Tooler, Dazo, Zupermeal and GrocShop. In most cases, startups shut up shop after their failure to raise further funding. With growing impatience of investors towards ROI, the trend is likely to continue in 2017, as well.
Also Read: Outlier rounds aside, SEA startups saw US$2.2 billion funding dip in 2016: e27 data
Start-ups also have gotten smarter and acquainted with the harsh realities of the market and are leaning towards planning their exit strategies, well in advance. This sentiment is substantiated by InnoVen Capital’s Report of 2017, whereby 70 per cent of respondents were open to an exit, with 60 per cent rating an IPO as the most preferred exit route.
Last year, the amount of investment sourced by startups was around US$4 billion (Source: YourStory Research). There is still a mixed opinion in the market about whether influx of risk investments would rise or dip in 2017.
Sreedhar Prasad, Partner – Business Consulting at KPMG, pinpoints the problem aptly when he points out that these are “classic cases” of companies with “weak business models that are dependent only on funds,” i.e., OPM, to scale and sustain. As a result, devaluations, mergers and acquisitions, layoffs and funding crunches have been common practices this year.
The fault lies not in the lack of funds but on the opium-like addiction of startups to OPM, leading to a total lack of focus on laying a solid foundation for the business. Instead of focussing on developing a service, product or technology with a lasting impact and working on a sustainable business model, most startups are busy chasing valuation targets. In the process, they forget to create any real value that can help them sustain in the long run.
According to Anirudh Motwani, CoFounder of IndiaCollegeSearch, a startup funded by Indian Angel Network (IAN):
“From a startup’s perspective, over-capitalisation is often as dangerous as being under-capitalised. Investors are correct in expecting you to put their money to use in order to achieve exponential growth in the next 12-18 months, instead of keeping it in fixed deposits while you take a conservative growth plan. It is the founders’ responsibility to figure out the best areas to ‘invest’ the funds they have raised. Some startups, who find it hard to suddenly triple or quadruple their spend, end up burning this ‘OPM’ rather than investing it.”
Startups need to evaluate very carefully where they want to go before accepting VC money. VC money comes with a lot of riders like large equity share and giving them more controlling stakes, which may be detrimental to the long term goals of the startup. VCs are usually looking at profitable quick exits or an IPO, which are rare in India.
They invest in more than one company at a time and look to scale up at a rapid pace to attract a good exit. Quite a few startups have gone on record to say that they were pushed to scale up rapidly at any cost by their VCs. There was undue stress on growth, GMV, and market share over and above profitability, unit economics, and a sound business model.
Also Read: What I learned from the Avengers of Southeast Asia’s venture capital scene
Unfortunately, the founders failed to look beyond the temptation of OPM because of their growing dependence on it. They felt helpless at the thought of being devoid of the funds they had already got used to splurging on luxuries that should otherwise have come into the picture only after the business had started generating enough revenues or profits. “All forgot about the bottom line as the focus was on the top line,” said Kris Laxmikanth, founder of The Head Hunters India.
Founders need to look away from OPM and look inwards at their own resources or even angel investors to help fund their startup. It is best to bootstrap and learn to grow your business organically, even if it means adopting a frugal approach. You should seek external funds only when you plan to scale up and take the business to new heights, and not to meet the regular day-to-day operating expenses of the startup.
It makes no sense for a startup founder to build up a business with all that grit and hard work and then hand over the reins to someone else owing to the temptation of OPM. Doing so eventually leaves you with little control to do things your way to realise your vision.
Conclusion
If at all you need OPM which is not from your relatives or friends, take a longer and more cautious route towards it rather than being shortsighted and getting tempted by the ‘big bucks’, because eventually OPM, if not used properly, can do your startup more harm than good. Take a page out of Mark Zuckerberg’s way to raise VC, wherein he took a relatively small amount and negotiated extremely good terms and conditions for himself without relinquishing control. All it needs is a little bit of smart thinking and patience. Remember to focus on building a sustainable business rather than hoping for OPM to drive it all the way.
After all, businesses are build to make money, not raise Other People’s Money.
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