Sramana Mitra: The ecosystem has come together for sure. I’m a big fan of capital-efficient startups and fundamentals-oriented startups. In January, we analyzed 20 Indian unicorns. I didn’t consider two as overvalued. The rest were dramatically overvalued. That means that people are investing in the future and expecting that the valuation is going to get back-filled, which is the way unicorn investing often happens.
India is going through this now. The US market has gone through many of these cycles. This kind of investing hasn’t always worked very well. People tend to make a mess of having too much money. Let’s hope that some numbers of these entrepreneurs are going to be able to keep their heads straight. If they do, there is a tremendous upside because there is an invaluable infrastructure that is going to get built.
I saw one company that is building surgical infrastructure in tier two and tier three cities. I was talking to Rahul Chandra last week about the same topic. This kind of funding doesn’t happen too much. There are only a few players who have the capacity to do this. In each space, there are a lot of entrepreneurs. One or two of them get big funding and the rest don’t. Then they start thinking about how to differentiate and manage the company.
My take on this is there are two ways of building companies. You can build companies in this mode where you flush companies with capital and then backfill valuation. There is also the more fundamentals-oriented way of building companies where you put small amounts of capital, execute, and valuation is commensurate with metrics.
With a $20 million investment, you can build unicorns in India. This point of view, however, is getting lost in the media’s obsession with worshipping unicorns. What are your thoughts about that?
Krishnakumar Natarajan: The media plays a role in it by putting unicorn founders on a pedestal with unit economies not yet established. Today, there is a significant gap between private market valuations and public market valuations even in India. What is happening in the last few weeks is that the public valuations in companies are seeing a correction.
To that extent, there is a bit of FOMO in terms of the unicorn type of valuations. There are large players who only like to write large checks. There are also companies that aren’t in the limelight. They are raising money but have a clear focus on unit economies. Entrepreneurs are torn about taking funding. They are looking at it more in terms of visibility without thinking if they can deliver that value.
Sramana Mitra: The role of the media is to be a lot more responsible about putting the limelight not just on big funding but also on the people who are building serious companies. When we cover companies, we do not ask for funding. We ask if they have reached $5 million in revenue or not. If you want to be on the Entrepreneur Journeys, you have to have $5 million. I don’t care how much funding you raised.
Krishnakumar Natarajan: There are a few examples who have built sustainable businesses. Sridhar at Zoho has done a really great job.
Sramana Mitra: That mode is becoming more accepted these days. Even in the global ecosystem, the more fundamentals-oriented business-building has become more mainstream. This unicorn mania strikes in India with Softbank and the likes. That is like two counter forces pitting against each other.
It was a pleasure speaking with you. Thank you for your time.