When reality bites - Patience in building a company

Some of the hottest companies in the stock market are Nvidia and Microsoft. All these companies are riding the AI boom, and their stock has seen a spectacular resurgence. The fun fact is that these are hardly new-age companies. Microsoft was founded in 1975, Apple in 1976, and Nvidia in 1993. All these companies have been around for three to four decades.

This longevity is a reminder of how long-standing companies can often build trust and credibility in a way that newer companies absolutely cannot. Mammoths can reinvent themselves faster than unicorns. The best example is Microsoft, which has become a blockbuster stock after decades of being lacklustre. To those youngsters who think that creating a unicorn and cashing out is the goal of their lives, they could not be mistaken. Building and scaling a company has only become harder for youngsters rather than easier in the last couple of years.

Starting a company is easy. Anyone can do it. It is a joke in Silicon Valley that if any employee wants to take a sabbatical or a paternity break, they quit their jobs and claim to be working on a stealth startup. I always smile when I see "stealth startup" listed on Linkedin. The issue is that the barriers to entry, especially in software, have decreased dramatically. Instead of expensive servers, one can use cloud hosting and keep their operational costs well under control. The other fad damaging the startup ecosystem is the rush to get Angel or VC funding.

Startup founders think investors typically look for a 3-5 X return in about ten years. However, that is untrue. Every investor is shooting for the stars. They want you to return 50-100X for Seed and Series A. The number drops to 10 X for Series C. The reason is that most investments in the portfolio will fail anyway. If the company makes 50 investments, only 1 or 2 will make it big, and the investor wants your company to be the big hitter. This mismatched expectation means that your performance has to cover for the non-performance of all the portfolio companies and return a hefty profit to the investor. Hence, the early-stage investor expects every company to be a blockbuster, which seems delusional considering that most investments fail. Thus, the most sensible startup has to wear the albatross of every other portfolio company on their shoulders.

Even after getting to series A, B, or C, getting to IPO takes a lot of work. Only 10% of Series D companies get to IPO. Raising public money is no joke; many statutory, legal and government regulations exist. If anyone is on the startup bandwagon, it is an easy 12-15 years of your life going from seed funding to IPO, and every stage has the deck stacked against you. Failure is written all over. It is no wonder that bigger companies have it much easier since they have already been through this process earlier. The CEO of Nvidia is now seeing his dreams of great wealth, name, and fame play out 25 years after going public. In India, the Reliance group leads the transformation of telecom, media and retail. Their flagship company went IPO in 1977. It is a similar situation with Samsung in South Korea.

Big companies have earned the customers' trust and shown that they can deliver on expectations quarter after quarter, year after year. Under the influence of ambitious leaders, they are in an excellent position to disrupt and transform the market in ways no startup can. Of course, the media will always play up stories of Google, Facebook, etc. However, these "young" companies have been around for a long time.

If you are thinking of starting a company, here are some tips:

1) You will make no money for the first few years unless you want to fool around with the VC community and sink their money. Two years back, an angel investor told me that any IIT graduate could quickly get 3-5 million dollars as seed investment in India. That era of free money and low interest has wholly disappeared, never to come back again. Now startups are back to being a grind.

2) Aim to be profitable first and have customers clamouring for your product before seeking VC funding. You want to avoid being in a situation where you have to double your customer base year after year and cannot do it organically. Nobody wants to end up like the startup Javice, which tried to scam JP Morgan out of 175 million dollars by creating fake customers. Seek VC funding only when you need the money to grow your customer base. Most startups have cash sitting in the bank without doing anything with it. This surplus means the founders allowed greed to get the better out of them.

3) Startups and IPOs involve a very long game. Only do things because you like it and not because it will make you money. You can also have an excellent career by working hard in a traditional company. The only difference is that inside a startup, you can spend all your time on your passions, which a conventional company will not countenance. So, like your work in a startup. If not, then it is high time to get out.

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