4 Ways to Ensure Your Start-up Survives the Bubble Bust

Maya Angelou said it best: History, despite its wrenching pain, cannot be unlived, but if faced with courage, need not be lived again.

Not that anyone in the start-up and investor communities seem to be listening.

The pain and trauma of a tech start up bubble will come. For some time now, experts, analysts, and practicing venture capitalists have been warning of a tech start-up bubble bursting.

“Entrepreneurs should use the wave to their advantage and ride it fully but with full knowledge that this wave will end and it is important to be, not just ready, but at a more advantageous position when the wave ends,” says Krishnan Ganesh, a successful serial entrepreneur himself.

Ganesh and his wife, Meena Ganesh, created GrowthStory, a start-up platform that has founded and led four green field start-ups, has seen nine fund raises from institutional VCs, four successful exits and seven M&A transactions. It’s also promoted, along with founders, five companies and raised Series A funding for them. Some of their more famous investments include Big Basket, Portea and FreshMenu.

It isn’t only the sky-high evaluations that’s indicative of a bubble. For many, the shocking amounts spent on advertising and discounting, are what’s worrying.

“I see companies giving 100 percent cashback to get transactions. This will never last,” says Ganesh.

K. Vaitheeswaran, also known as the father of Indian e-commerce, believes that a bubble burst is imminent. In fact, he’s surprised it hasn’t happened already. And the amount of money being burnt on advertising surprises him.

“It’s incredible that they have spent hundreds or thousands of crores on mass media in the last two or three years and yet less and 20-25 million shop online. That’s incredible.” Vaitheeswaran, earned the title “father of Indian e-commerce” because he founded India’s first e-commerce site, Indiaplaza.com.

Entrepreneurs who believe this bubble isn’t going to burst, are living in a bubble. “The biggest mistake is getting carried away and not realising there is a cycle of up and down in the market–funding, valuations and euphoria,” says Ganesh. “Those who have relied purely on the high tide to cover and soar will realise whether they have their pants on or are swimming naked when the tide subsides.”

It’s not all bad news. There are still actions entrepreneurs can take now to course correct and ensure they survive the upcoming bubble.

Here are some ideas:

Spend, but spend carefully. “Spending on real things with a clear objective is very important–not because you have the money. There is nothing wrong in capitalising on the momentum and building your brand–provided your business model has been cracked,” says Ganesh.

He says “outbidding for resources” whether it’s people or advertising space can be detrimental if not done with a clear objective and for specific period of time “and that too after core value proposition has been cracked.”

He says that it’s a good idea to “use cash to experiment, pilot initiatives, crack the code with regards to customer acquisition, customer retention and increasing customers’ ‘life time value’”.

Make money! It sounds obvious, but few e-commerce companies can boast of it. It’s vital to start generating a profit, if an operating profit. The chase for ever higher numbers of customers, using discounts, will get a lot tougher when the money dries up.

“The biggest lesson we should have learnt from the last bubble—that we haven’t—is that, fundamentally, a company must make money. A company can take two, or three, or five years to make money. But it can’t be 15 or 25 years. A business that needs more than 5-7 years to make money, after significant investment, is a business that is fraught with risk. That’s a lesson we should have learnt, but we haven’t,” says Vaitheeswaran.

There’s a simple reason we haven’t learnt this lesson, says Vaitheeswaran. It’s because a portion of investors, not all, suffer from greed or fear, he says.

“There’s a greed to make money; to build a bubble and then exit. And the fear stems of the missing out on an opportunity, and that leads them to keep investing more. They want to be part of the e-commerce action. It’s the same fear and greed that led to the dot.com bust in 2000, and it’s the same fear and greed that will lead to a bubble.”

Build stickiness. Getting customers to come back to you, even when you’ve removed the discounts, is important. “Those who have built a loyal customer base, have cracked the business model and revenue monetisation strategy and are not relying just on discounting to get business on an on-going business will be safer,” says Ganesh.

“In general , vertical e-commerce (sites that specialize in one domain like Urban Ladder does for furniture) has more stickiness especially if they are dealing in their own brands and are not just a reseller of other brands where discounting is the only way to get people to buy from you,” says Ganesh. “Having said that, it’s possible for horizontal e-commerce players to do well if the basics have been cracked and they have used the bull market to raise capital and build a war chest before the bubble bursts.”

Fail fast. Ganesh believes this is important because it’s critical to ensure e-commerce entrepreneurs don’t rely on weak business models on an ongoing basis. He also says that it’s vital to build strong technology and process to ensure a solid foundation. “Get the product market fit and customer value proposition right using all the cash raised at an inflated valuation. This will stand you in good stead even when markets come down and sanity comes into the environment,” he says.