The biggest challenge facing start-ups is the confusion when investors are playing a wait-and-watch game, says Ravi Narayan, director, Microsoft Ventures.
In an interview with Ranju Sarkar, he explains why the narrative has suddenly shifted from chasing growth to unit economics. Excerpts:
Fund-raising is slowing. How severe will the crunch be?
I think this is a very natural phenomenon; there will be ups and downs in any market.
We have seen it happen several times in the US and are beginning to see this in India.
There is always a little over-excitement in investors and then they make some decisions that are probably not the way they would have wanted.
After a while, there are start-ups that find it difficult to raise money because investors start pulling back.
You will find some evidence of that nowadays.
For instance, investments in the e-commerce space, where it was all about owning the category and getting the biggest market share, whether the unit economics makes sense or not.
Even if the entire scaling and profitability of the company was in question, people were happy to be speculative.
That speculation has now changed from the kind of metrics investors would have used earlier, to what we are seeing now.
Do you see valuations coming down? Will we see down rounds?
Yes, now we will see valuations inching back to something that will hold up to certain logical analyses.
So, you will see some of that. Whether it is a down round or not remains to be seen.
There will definitely be a correction of sorts.
Why has the narrative changed so quickly? Six months earlier, investors were seeking growth, gross merchandise volume; today, they are talking about unit economics.
This is just rationalisation.
As quickly as the Indian marked developed, it is slowing equally quickly. While people were getting a pleasantly surprised, the few unpleasant surprises that have happened tell us things are not going the way they should be.
The trajectory should not have gone that way anyway.
This would have happened inevitably because of the market psychology but now there is a correction that naturally is going to happen.
I am happy that it is happening sooner than later else things could have gotten out of hand and created a certain quality of start-ups that couldn’t stand the scrutiny of business economics.
What are the biggest challenges start-ups face today?
The biggest is the huge confusion that is beginning to arise in the investment climate.
Then, there is the start-up's ability to get the right set of mentors to work with them, because a supply/demand imbalance has come.
Other than that, there are oft-spoken regulatory challenges.
In the past six months, people have not been able to grow fast enough or come across the right opportunities.
And, people who have raised money from venture capitals are under tremendous pressure to grow and are looking for resources to do that -- and those resources have spread out across several different start-ups.
Microsoft Ventures has been around for three years. How has the landscape changed?
The quality and quantity of start-ups in India have completely changed.
I have never seen these many tech start-ups come out of in India. Entrepreneurs are a lot more confident of building companies.
They are not diffident, defensive or apologetic about the fact that they can lose. There are some bold attempts being made. There are a lot of acqui-hires being made in India.
People are getting chance to build a company which is larger, more interesting and more global than the next.
People are a lot more confident, having seen their own classmates build something. So the psychological water levels are rising and all these are very positive phenomena.
With me-too ideas and many jumping on to the bandwagon, has the quality of entrepreneurs come down? Do you see that difference in your new batch?
With the IIT’s and Ivy Leagues, there is always a natural set of connections, a community they already had.
They may have been the first movers because of the resources they already in place. But it does not mean other people cannot be as good or create better companies than them.
If there is opportunity to get more and more people involved, I think it’s a good thing.
I don’t think it’s the quality of entrepreneurs, maybe just entrepreneurs from a different set of backgrounds than what we had originally seen.
Maybe there are me-too ideas, but in time -- that will correct. I don’t think the quality will go down because of a large number of start-ups. But it will give entrepreneurs the experience that they need to build the next set of start-ups.
The venture capitalists are mostly excited by the credibility, the background and the credentials of the entrepreneur -- not the ability to build great start-ups.
This is because most of these guys are first-time entrepreneurs anyway.
What really is the issue/confusion with investors?
The investors are not very clear about infusing new money.
There is confusion when investors play the wait-and-watch game.
On the other side, we have people who have already raised money and are under tremendous pressure to grow.
At this stage, doubts in the minds of investors diminishes the ability for these start-ups to get the resources and that creates uncertainty in the market.
There are several accelerators. How do you differentiate?
We don’t consider ourselves as an accelerator at all.
We have a whole full family of programmes; accelerator is one of them. We run our own accelerator programme; we help other partners run accelerator programmes.
We do go-to-market, which is unique that nobody else in the ecosystem does in such a powerful way.
So we do all these things and all of them are under the umbrella of Microsoft Ventures.
You have created multiple brands, programmes within Microsoft Ventures. How do you communicate them to start-ups? Isn’t it a challenge?
It’s taken the ecosystem a while to understand what we are doing.
It is like going to a university where there is a Bachelors' programme, a Masters’ programme or a PhD programme.
There could be chemical engineering or mechanical engineering programme.
One could be doing any of these courses but the university is the same.
You identify the need you have and appropriately apply for that programme because the accelerator happens to be the chemistry department for Bachelors'.
But now we have a Masters' and a PhD programme among other things.
On your plans to connect start-ups with companies. . .
As much as a start-up has to pay its dues to actually establish the credibility for customers to come to you, it is even more difficult for large enterprises to think that start-ups will ever be able to solve some of their business issues.
At Microsoft Ventures we are beginning to bridge that gap and say that this is possible and we will actually help you create those kinds of innovation programmes to which you can actually do that.
