We are regularly updating our knowledge on various aspects of our business,
its facts, and figures. Since we are professionals and working in business
environments so there we have to be equipped with the current affairs of our
ecosystem.
💥I am working in a Kirana startupecosystem and also heading a startup in B2B grocery retail so there my daily
routine is to keep myself updated with the latest developments and maintain the
information flows. Like me, there are many professionals who are closely
following the stream. Things are related to startups, investors, and the
ecosystem. No doubt things were moving in the retail ecosystems since 2014
onwards in the right direction and a big buzz is there in terms of investment
and turning startups into unicorns. Startup definition in layman's language,
Startups are those who do execution with speed, and how fast they were able to
achieve the status of a unicorn or smart valuation was the basis of
success. Huge money was pumped by the VC funds, angel investors, family
offices, and HNIs which helped more than 75 startups turn unicorns in the last
three years time. I am fully convinced of the things that were brought in
by the innovators. But, We are bound to certain fundamentals and basic Laws,
so the same is applied to businesses where things are very much driven by few
fundamentals. The fundamental law of business is to earn profit from business
activities through whatsoever practices. Let's jump to the preamble of this
article " Ignorance of Fundamentals by the Startups and how they sidelined
it"
👉Startups and investors both started working on some easy
conversion approach which led towards meanless directions somewhere. I am
going to let you understand the fundamental approach in layman's style. This
will surely match with the ongoing practice of the ecosystem stakeholders. A
few things remain constant which we called by fundamentals so the same
is applicable to Startups and investors both.
Inside of Investors and how they forget to apply
fundamentals of investment:
Investing is simply the process of acquiring assets that you hope will
grow in value. Investments can include owning a home, owning a business, owning
real estate, or having money in savings accounts and CDs at a bank or credit
union. Investors in the startup ecosystem have some different theses.
Investors do have many theses to work on but again they are concluding their
decision that out of 10 investments they will succeed to get a handsome exit in
2 or 3. This means 7 or 8 investments will go in vain and will be a failed
decision. Here somehow they are breaching the fundamentals of investing and
driving them in the direction of such thoughts. Here my question is why
out of 10 investments, 2 are getting successful and some many cases even this
is also not. And if such things are there then what is the use of evaluating
the startup, asking for an Investment Deck, and carrying strict Due diligence? 💥and
If the startup
business model is so convincing, disruptive, and scalable then how things go
negative in near future?
This shows that the fundamentals were not analyzed before
shortlisting the startup and evaluating them or what about the business model of the
startup they believe it will run and will do best in near future. Why am I
stressing about this? Every business has certain set rules which have to be
followed religiously, these rules are the basic principles of that business
stream. I am not talking about completely IT-driven business models or ideas
that can operate certain businesses on the cloud with nothing physically
running on it.
But, again if there is the physical movement of goods and services in the
business model like it is in grocery eB2B retail then one cannot ignore the
fact. An investor needs to differentiate those things while finalizing startups
for further-stage investment proposals. If any real business is growing on the
ground then it will take time to reach a level i.e. to reach a scale or
become profitable. There are no shortcuts to making them successful overnight
or say in two, three, or five years. awesome? How can a VC expect 100X returns
or 20X, or 10X? Just think about the cost of that money investing in a startup
for a given period of time and calculate the return. The shortcuts are
good if they help to save time and money but business fundamental works on
certain laws.
The calculation of interest over market risk and its return is the soul of
investment. A 5x return is logical if the primary work is done thoroughly by
the investors before investing in a startup. If you being an investor don't
believe in the idea or you are thinking that 80% of the investment will be
completely devastated and you will make your money from the rest of the
investment in Multi X returns then don't invest.
Investment is not
gambling and investors should not be gamblers
My above thoughts would give a contrary impression of the present scenario.
But, let us not forget that the current landscape of investment in the startup
ecosystem is mount formation. Currently, the law of 👀FOMO is
operating in the ecosystem and no one wants to be left out of the race. This
show of changing caps is in the stream. Early-stage investors want to hand over
the hat to the big one and this goes on till the startup either succeeds or
fails. One needs to think deeply. The same is going with
startups.
Fundamental of business that startups
are not following.
Startups too have some shortcomings or failures on the ground of applying
basic fundamentals in their business model. There are startups that are really
working on some problems at large and through their innovative ideas, something
good has been built. We can talk about #Zarodha #Groww #cardekho
#Shopify #Swiggy #Zomato. They definitely brought
disruption in their area of exploration. In a true sense bringing disruption in
the segment is a kind of outcome by the Startups. If we analyze deeply the
inside story of successful startups, we will find that they are totally
IT-driven businesses and without their stack or involvement business processes
can't take place. I would categorize them as Startups working on the cloud. However,
in the case of Swiggy, Zomato, Dunzo, etc and other delivery startups will have
profitability challenges but they are creating adoption and consumers take them
as granted. Again fundamental of these businesses has to be taken care
of.
Business fundamentals
are logical and have the compulsion to fit them in the business stream before
ideation, implementation, and execution.
If your startup is involved in the physical movement of goods whether it
belongs to grocery retail or other retail formats, you have to inbuild them on
your own to tune with some set of market conditions that are prevailing in the
market and no one can bypass them. The cost of changing existing
conditions is very high. Let's understand this equation through a real-time example.
Startup ABC is working in grocery retail. They got the idea of building an
online marketplace for grocery retail, Built a high-stack IT solution for the
stack holder. It is a seller marketplace model. The model is called eB2B
online marketplace, onboarded thousands of Kirana Retailers on their IT
platform, and started reaching them through Mobile App. This is a kind of
Direct to Retail Model. Why they thought of bringing this kind of change
into the ecosystem as a new idea and how it helped them to raise money? Definitely,
Startup ABC found some gaps in the market, Problem was large so they started
working on a solution. Filling up the gap and finding solutions. In their
pitch, the startup is working to empower Retailers by way of providing them
with one umbrella solution as a Supply Chain Aggregator. DTR model removed the
middle distribution channel resulting increase in margin. This is how a new
idea takes place and the same is with other eB2B startups or even B2C or D2C or
Agri startups. In these kinds of startups, there is the physical movement of
goods involved at each stage.
Now, what happened wrong to this business model? I don't want to mention
the name of startups working in this segment. You know them, but the
question, again and again, is why they are not making profit despite raising
huge money, even burning the entire amount, and also scaling to other
territories like crazy. They tried to convince investors that their business
model is scalable and profitable.
Here is the answer, they failed to incorporate the fundamental of such
businesses that they tried to disrupt through the innovative business model and
intervention of costly IT tools. What are those fundamentals:
- Lack of
Business Mindset - Half of
knowledge is dangerous - Trying to
change the traditional miniature practices of market - Managers
are driving the low-margin business in high profile style - Burning
money on adoption. - IT-driven
business is for unfriendly IT users like Retailers seldom use. - Founders
are highly paid without bringing profit to the organization
A lack of a Business mindset is the first fundamental
requirement for a business. The founders should have a business-mindedness or
else they will become puppets in the hands of the investors or their KMPs. Mere
finding a problem in a certain area and working on it through KMPs will lead to
a possible failure. A business mindset founder protects the business by
predicting near-future trends based on his inherent capabilities. This helps them
to align their business strategies on time. In the current startup ecosystem,
founders are not of that mindset or I would say most of the founders are
technocrats. They firmly believe that an IT-driven business model will scale
and will be the valuation driver. The business cannot be projected the way IT
can run it. It has to go through the market conditions and accordingly needs to
be coordinated with the business owners.
Half knowledge is dangerous: Skill-driven founders are willing to
disrupt retail based on some logical business verticals, but for physical
business, they must have a deep understanding of market conditions and business
terms in the first place. The skill set is more likely to be the first choice
of professional investors as they have the ability to grow a loss-making
business and increase valuation and even turn it into a unicorn. Half the
knowledge of market practices by the founders is dangerous and ultimately the
ground-level work does not synch with the projected one, resulting failed
venture.
Trying to change traditional business
practices: Let's talk
about grocery business or FMCG business in India. Both streams are being
carried by a series of middlemen. The margin spread is there to feed all of
them in their stage of execution but that is too much narrow. In the FMCG
business- Brands distribute their products to retailers through CFA, SS,
distributors, and then retailers. Retailers further sell to final
consumers. In the staples stream, this is done through local mandis, traders,
and wholesalers/ Semi Wholesalers.
What is the harm in it if one is trying to bring solutions for the
retailers and provide them with one umbrella solution? This question will come
to the readers. But, a major point here is that the basic principles of
traditional practices were violated. Generating margins is a big deal in
grocery retail but an existing traditional channel of distribution is making
money from this low-margin spread by keeping its shows on a low profile.
“Remember – the cost of running a business through managers is always a costly
affair but running it through existing owners is always cost savvy and
effective”. Distributors, SS & retailers are owners of their businesses.
They are working in a very low profile and master of earning profit from its
thin margin basket.
Another main reason for not making a profit is: Squeezed
margin - Brands are
not giving preference to such startups as they do not want to disturb their
existing channels, however on the same way, they do not want to lose the
opportunities that these startups are bringing, however here they are not
sacrificing on the margin side. In some cases, they did so but again had to
roll back their decisions amid strong opposition from existing channel partners
as channel conflicts broke out.
I am giving stress on this point because this is one of the major
aspects and practices where startups are hammering. As an eB2B startup,
you have asset-heavy operations in terms of heavy opex, cost of setting up
systems, and processes. based on analyzing the financials of existing eB2B
players. How they will earn from a thin layer of margin is again subjective but
if someone is there who is bringing operation excellence and capabilities will
definitely earn profit and make their startup a real business.
Managers are driving the low-margin business in a
high-profile style: The managers are managing the show of the low-margin
business of various startups as they are not working with the existing middle
distribution channel where the owners are working. Getting work done through
managers is always expensive, whether the traditional distributors are working
at a low cost and earning profit and matching ROI. Setting up systems and
processes always attracts a good number of cost components. Metro Cash &
Carry, Walmart, and other heavy Capex and Opex run models are examples.
Burning money on adoption. India is not a country where we think
of bringing change in all spheres as we are living in different walks of life
where there are different demographic changes in our religious thoughts, food
habits, tastes, customs, and even in society. The business model of a startup
is based on certain principles of optimization. It refers to the process of
changing the product in which it is made, to meet the needs of customers in a
market other than that in which it is made. This means changing products to
bring about customization in the long run and that brand has to spend heavily
for free sampling or up to a level where demand can start spontaneously. But,
India is a country of diversity, and spending to bring about adoption is a
costly affair. No one can change the behavior of Indian consumers. A startup
always failed to meet the hyperlocal requirements or they are not able to align
with the diverse requirements.
IT-driven business is for unfriendly IT users like
Retailers seldom use. Startups
are getting funded based on their IT stack as VCs are investing in startups
where IT is the product and the main driver of the business. But, one-third of
India's population is still struggling to meet their daily needs. As per the
current data, only 43.5% of mobile users are using smartphones. 40% of grocery
retailers are using basic phones or they are using basic features of
smartphones. This means that people are still unfriendly towards smartphones.
Startups are trying to bring use cases where their end consumers can start
using their smartphones to order goods. This adoption happens when we talk
about B2C marketplace but it is not the case in B2B. What if you are working on
a solution that the end user is not using. According to a market survey, only
30 out of 100 retailers are using B2B startup App to order merchandise, with
the rest relying on the foot-on-street manpower of those startups.
Founders are highly paid without bringing profit to the
organization: The fundamental crunch is once again seen in this, & and the founding
team and KMPs take home a large amount in terms of salaries. The basic rule of
business is that promoters should take cash from the business for their
personal use only when the business is making a profit or can take a minimum
amount to run their family's daily bread and butter but in most cases, startup
founders are using to build their personal wealth. Most of them are enjoying a
hefty amount of salary, accommodation etc. This is a layman's argument about
how a loss-making startup is letting its money go out of its cash flow.
Startups are struggling to get funds but founders are investing in other
startups as angel investors. Startups like Paytm, where investors' money
evaporated within a year of their IPO launch, but individual founders are
running their own personal wealth funds and investing in startups.
There are many other points to elaborate but a question always will be
raised by professionals why is the ecosystem not following the basic
fundamentals of business? Investors and startups need to think about the basic
rules and fundamentals. Disruption is not what comes with success rather it
disturbs the existing ecosystem at large if certain basic principles of
business are not followed. And the cost of disorganizing the existing system is
huge which eventually leaves ashes of burning money behind with a tag of
failure.
Ignorance of fundamentals is tantamount to ignorance of the law which will
not bail you out on the basis of ignorance of the law. The same logic applies
in the business where the ultimate objective is to make a profit. And making a
profit from the business is always an art and some fundamental principles have
to be followed.
We are operating in the Food & FMCG grocery retail ecosystem in India.
As an emerging organization, we carry the business fundamentals and startup
mindset of innovation in our business model. Our focus is on building a
technology-enabled platform for brands, distributors, wholesalers, and
retailers. Taking the grocery retail ecosystem with us at every step for their
empowerment so that we can contribute to building a $ 5 trillion ecosystem in
the coming years.
A Layman write-up is written by Balwant Singh Rana, the Kirana Retail
professional
written on: 18.11.2022, Jaipur, Rajasthan (India)
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