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View: Should we worry about 'startup-conglomerates'?

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Once the hype & hoopla settle down, and the hard economic reality of businesses having to deliver value for all stakeholders kicks in, many Indian businesses will flourish and scale. Eventually, we will learn to celebrate good entrepreneurship, in which failures also will be celebrated equally and openly and seek wisdom from the lessons learned from those journeys.

View: Should we worry about 'startup-conglomerates'?
It has been a fantastic decade of Indian startups, much of it using the power of the Internet. Call it bold entrepreneurship with guts and confidence, deep disruption, convergence, market opportunity, or a combination of all.
It is well-deserved to have a “moment in the sun” for all the hard work and risk-taking. It is also fair to bask in the adulation for all the bold initiatives and of keeping consumers as the mainstay element of the concept!
With over 50 unicorns in the technology space, the Indian startup community has every reason to cheer; for many of these firms are actually solving Indian consumers’ day-to-day issues. Most of these enterprises have transformed the way consumers imagined transacting; it is social engineering at play and economic transformation in progress!
And as a large democracy and stratified consumption market with a sense of purchase experimentation, in the short term, we might be disloyal to brands in general as we flirt with choices. And we need each and every successful startup story, to drive that sense of pride about entrepreneurship, as well as create opportunities of employment or gig economy or value-chain-entrepreneurship in the country. That most of these new-age companies had dared to dream and to challenge the staid status-quo of old-school rent-seeking entities is an understatement!
These new-age-economy-India businesses have interesting backgrounds: almost all of them were started only in the 21st century and most of the founder-CEO is millennial or even younger. Many of them had not faced the licence-era business arena and have been fortunate to have the ability to dream big in a liberalised economy, filled with access to satellite TV, global media, internet-led technology boom and 4th IR.
Most of the unicorns have broken the shackles of the old-boys network called premier-colleges or family business networks. And in the process have also created the new-boys network, in which they have included the influencers and (their) investors alike! (Gender indication here is only as a phrase usage, and does not exclude any gender).
Yet many successful startups (from point of view of scale &/ ability to raise capital from private investors) have also ventured into other lines of new businesses (including unrelated diversification). This diverts leadership and management bandwidth and putting core business at risk.
It is also a fact that for all the hard work and years of struggle to scale, most of the founders get diluted to single-digit stake that unless they negotiate arduously, they may not get most of their shareholder rights in the revised (public markets) entity!
This does not slow them down in getting into multiple businesses with others’ capital. Smart professionals in their team will put together presentations that would stitch those unrelated business areas with the “Indian consumption story” and “Share of wallet” pitch. #TheGreatIndianConsumptionStory.
Since almost all of them are in the private unlisted space, they are answerable only to very few of their (private) investors about business scale, revenues and profitability. As long as those Boards (primarily of the investors' nominees) approve of those investments and plans, it’s regulatorily kosher. Some of those investors anyways won’t hold the stake for long and might exit at the next fundraising round (at a higher valuation). And they may not want to “upset” the Founder(s) with awkward questions, as the exit window might be just a short time away.
While it is indeed a fact that some businesses will need capital to back it for years before they make profits, it is never openly told so. Hopefully, some of these long-tail businesses don’t give long-tale to the investing (retail & domestic ) public, when passing the parcel during ‘investing musical chair’ moves to public-markets phase.
Why conglomerate structure is worrisome for startups?
Capital is not the Founders’. It’s that of those private investors. Who have in turn raised monies from diversified investor pool across the globe; hence how these portfolio companies behave is important from the global investor perspective, as they form an opinion about the Indian ecosystem with these behavioural data points.
Conveniently, (thanks to regulations), some founders get de-promoterised and consequently not accountable for the corporate structure they had created in the first place and benefited from its valuations! And those enterprise risks are being transferred to the public markets during an IPO! The supporters of the “public markets know best” theory would propound that investing public (especially retail investors) are supposed to understand the risk and be ready for any consequence of their investments. Expecting the cap table investors to question the founder(s) on undue diversification and spreading the capital thin seems to be a mere wish list in many instances.
Key questions to ask :
What’s the core business?
Where is it headed?
When will it be profitable?
After all, the core idea of any business is to generate sufficient profits to share with the equity holders! But in the unlisted space, it helps that the investor can book profits and exit by selling to another incoming investor.
For those startups in regulated businesses like financial services, how do the regulators apply “fit & proper” criteria? After all, the regulators look for long-term patient capital with a neck-to-hold-as-accountable (promoters). In a startup scenario, how do they apply the yardstick?
How does the capital requirement for the next few years get calculated, especially if the licence seeker runs a startup conglomerate, whose revenues are trickling in and who is dependent on raising further rounds of equity capital for the cash burn?
And in a diversified financial startup-conglomerate, how do the different BFSI regulators track capital adequacy and enterprise risks?
Where is the Founder’s attention, efforts driven at and management bandwidth? For any founder, despite their high-energy, self-motivated style, even “40 hours-day” won’t be sufficient. Time & other resources are always finite. The worry about hasty diversification are multi-fold: Growth capital, compliance, attention to details, responsible scaling up, governance aspects.
Trying to do too many things when the sun is shining is dangerous, during a rainy day!
An investor might try investing into multiple ideas/companies, with the ideology that many could fail but few could be Multi-baggers.
Can an entrepreneur founder try the same strategy?
In today’s connected market, issues in any of the one company will start impacting consumer confidence in the others. And the investors are betting on the Founder and her/his focus in building the vision into reality!
Many of the new-age founders are no less different from the much-misinterpreted Indian “Lalas” (family businesses), in their patriarchal behaviour. In many of the modern-day ventures, the founders’ families still rule & nepotism exists. Many of the founders have “Family & Friends” in their teams. Many of them have even nudged out their co-founders, to do deals with investors in the cap table. And yet the major investors may not have asked any probing questions yet, lest the “key-man risk” of the founder walking away lurks.
Make no mistake about this. The credit for understanding and marrying the power of public policy and media relations has to be given to Startup conglomerates! Their ability to invest huge capital in getting the senior-most talent in the industry (& including from bureaucracy and regulatory system) and to splurge on media (spends on advertising and in headline management) is immense. For a content-starved media sector, this is air-dropped luxury! If one thought only large fuddy-daddy old school conglomerates worked on the then-called “Government affairs”, it’s now called “public policy”.
Forgotten foundational learnings
  • Culture still rules: Stand-alone stable leadership & management teams would be needed across each business as the conglomerate widens and increases its presence. It’s bad press to have hearsay & anecdotes of the public firing of top management, perceived toxic work culture etc. The stability of holding onto the relevant top-100 people is key. The Founder and the Board should invest time and resources in culture building. One of the big worries about private unlisted firms is this: the Boards are largely nominees of the private investors and the concept of free debate may not exist except for regulatory compliance and the ability to exit at the next higher valuation!
  • Having a Playbook: During this phase, it’s good to develop a crisis-management-Playbook (in period of massive scaling, people one hires are very different from those who can manage crisis or slump times).
  • Loyalty card won’t last without competency: With the fast pace of growth across the startup venture, talent who delivered the previous year may not be able to cope up when the company scales. Not every person who is an old-timer at the startup will be capable of being a CXO of the scaled organisation. So doling out titles doesn’t help as the firm scales! It’s (strategically) cheaper to give away additional bonus cash amounts! And not everyone is good at multi-tasking and wearing multiple roles. If many such candidates currently handling multiple-roles crack, then it impairs the organisation.
  • Successful founders future-proof
    While almost every firm with money-to-spend can and do recruit many “execution” experts and get businesses off-the-ground, and can hire management consultants to put a blueprint together, very few of the Founders actually think of their own “Founders Journey 2.1”. Which in essence is a governance-enabler, that can carve out time & management bandwidth for them for :
    • Investment-review (regular business review)
    • Ideation, Innovation & incubation
    • Interactions with external stakeholders — investors / board members / regulators / governments / media.
    • Governance
    • Sadly, many of the founders get carried away with name-shopping for their boards and hiring big bulge advisors, rather than actually listening to any of them! And many of those celebrity individuals can’t say much in public about lack of space or independence! As a wise old man pointed out, these individuals also need to stay relevant, as the economy moves from the conventional to the disruptive new-age economy. The true test of “independence” will be during a slowdown scenario!
      Once the hype & hoopla settle down, and the hard economic reality of businesses having to deliver value for all stakeholders kicks in, many Indian businesses will flourish and scale. Eventually, we will learn to celebrate good entrepreneurship, in which failures also will be celebrated equally and openly and seek wisdom from the lessons learned from those journeys. After all, everyone wants to be associated with the successful company of the moment! Let’s stop chasing valuations, but start serving consumers and solve actual problems. Goodwill & Valuations will follow.
      “Song & dance about Valuations” — Inspiration from ‘The Actor —Michael Learns to Rock (MLTR)’
      To this popular song, if creative liberties are used to reword the lyrics in the context of the frenzied valuations called Startups, this is my take :
      “He takes you out and he takes valuations up
      'Cause he can show you so much pitch
      I go to bed and tomorrow again
      There's a lot of work (to find the next investor) to be done.
      He gives you gold and he will promise you
      The whole wallet will be yours
      I just can't tell you I love the opportunity so
      Even though my odds of success are low.
      I'm not an entrepreneur, I'm not a big bulge investor
      And I don't even have my own conglomerate
      But I'm hoping so much market optimism will stay
      That markets will love startups yet another day….”
      —Srinath Sridharan is an independent markets commentator, startup mentor and CEO coach. Views expressed are personal.
      Disclaimer: The author is active in the startup space as an angel investor & Founder-Coach. Counts many founders/change-makers as friends, who have & will continue to create positive socio-economic impact. Even if they are not Unicorns.
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