How Startups Are Burning Cash Faster Than Ever

Startup culture is predominant now a days in India and throughout the world. In India, startups especially in the Internet eCommerce domain have taken all the attention. However, the rates at which they are burning cash raises a concern. All of them points to a bubble (startup bubble).

For those who are aware of the dot com bubble burst back in 2000, the economy crashed. A lot investors lost their money overnight. The most hardly hit were venture capitalists and hedge fund companies. The companies that these people invested in were the most hardly hit. The dot com era between late 1990s and the early 2000s had startups that had incredible success and also spectacular failures.

Why The Cash Burn Rate Is Speeding Up

Ten years ago, startups were not burning cash as they are now. One reason is it’s now expensive to run a startup for various reasons – competition being at the top. For example, in the Internet eCommerce domain, Flipkart, Snapdeal and Amazon are locked in a battle of who can deliver the most. It may as well go on for years until the cash dries up.

Startups

Just to give an idea on how much cash an Indian startup burns, here are a few examples.

  • Ola which raised $210 million (1300 crore) in October, 2014, spends 125 crore a month on operations. It’s in talks to raise a further $400 million for growth and expansion. Ola also report losses of 34 crore on revenue of 51 crore for the financial year 2013-2014.
  • Housing.com, one of the hottest real estate startups in the country raised $90 million in November, 2014. The company spends 12 crore per month. It also reported a loss of 48.8 crore on revenue of 1.9 crore.
  • Flipkart the most valued company in the India (valued at $12.5 billion as of March 31, 2015), spends 3700 crore a year. For the financial year, 2013-14 it reported a loss of 700 crore on revenue of 3000 crore.
  • Snapdeal, one of Flipkart’s rival in the online retail space, is targeting a funding of $1 billion from Alibaba, which itself has a market cap of $210 billion. It is estimated that Snapdeal’s losses may hit 1500 crore this fiscal, a five fold increase from the previous fiscal year.

What Happens When The Bubble Bursts

Bill Gurley, one of the most well known VC in the Silicon Valley has predicted that some companies which are overvalued will fail in 2015. One of the concerns for Bill Gurley is liquidation preferences. When privately owned company valuations shoot up, liquidation preferences are inserted into venture funding deals to ensure VCs get paid first in case the company is sold.

If the company is sold at a higher price than the valuations, everybody becomes rich. If the opposite happens, a lot of people who invested in the company are left in the dark especially employees who were given stock options.

billgurley

Bill Gurley

What Bill pointed out is, that only a few of these startups are actually profitable. Most of them have to cover huge amount of losses with venture funding. For example, Flipkart may be the most dominant online retailer in India, but it still reported a loss of 700 crore in the 2013-14 fiscal year.

When the cash dries up, it will sink a lot of people and can have a catastrophic effect on the industry. This is what happened in 2000 when dot com bubble burst. In about a month in 2000, stocks worth of $1 trillion evaporated. A lot of people lost their money and lot of companies folded.

Why You Should Not Be Discouraged From Creating Your Own Startup

Building a startup from your college dorm sounds incredible. The credit for such an inspiration among many college students goes to Mark Zuckerberg. Startup requires innnovation. India still hasn’t seen a world dominating company. All startups go through the same process at the beginning – raising venture funds and hiring experience people who can take the company.

Because of the dot com bubble, a lot of Internet companies went down, however there were some companies who survived it and look at where they are now – the likes of AOL, Yahoo and most importantly Google.

In India, startup culture has taken on a new level especially in the IITs. A startup doesn’t need to be in the technology field. It can be anything simple and useful.

For example, a duo from SRM University, founded a startup for creating an automatic dosa machine. They created it as a college project. However, it got attention in one of the Business Plan Competitions at NIT Trichy. The Indian Angel Network liked the plan and helped in making a reality.

Another trio from SRM University, founded a Chennai based startup, Kobster.com, which supplies office accessories, furniture and housekeeping products. They recently raised an undisclosed amount from venture capital firm Splice Investors.

Author: Lahaul Seth

A programmer and a web developer, he is the founder of Lion Blogger. His main hobbies are web design & development and providing writing services to clients.

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