TinyOwl’s implosion is just the beginning of the end for India’s startup bubble

About to burst.
About to burst.
Image: AP Photo/Luca Bruno
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Food-ordering startup TinyOwl and online restaurant search portal Zomato made headlines this week for all the wrong reasons. While Mumbai-based TinyOwl faced criticism for its decision to lay off over 100 employees, an internal email from Zomato’s founder Deepinder Goyal—reportedly talking about the company’s missed sales projections—was leaked in the press.

In fact, things got so ugly at TinyOwl that Gaurav Choudhary, a co-founder of the startup, spent two days held hostage inside the company’s Pune office by employees who were laid off earlier this week.

These developments are leading many observers to raise doubts about all food technology startups in the country. But I believe that issues that these two startups are facing might not be limited to this vertical alone.

These incidents highlight some bitter realities about the Indian startup ecosystem, which have so far been overshadowed by the multi-billion dollar valuations of a handful of companies, and the multi-million dollar funding rounds they have done.

Reality check

I believe that such ugly incidents are in store for several other companies in India’s fledgling startup ecosystem. In fact, these problems may well emerge in the much-celebrated e-commerce space in the future.

I expect at least one major online marketplace player to shut down or severely rationalise its operations within the next 24 months. That could lead to tens of thousands of employees getting directly impacted.

Here are some reasons why this might happen:

The bubble is real

For over a year now, the media has been questioning if the Indian startup ecosystem is witnessing a valuation bubble or is being overfunded.

In my opinion, that is the case. What happened at TinyOwl and Zomato is just one bubble getting corrected. There are many more bubbles that may burst in the coming months.

The hyperlocal segment—that matches demand with the nearest available supply—is a perfect example of a valuation and funding bubble. A number of startups have emerged in the space over the last one year. But there are very few businesses that have a commercially viable business model.

Hyperlocal startups have also led to scores of localised logistics and delivery startups mushrooming, which are dependent on them and so remain vulnerable.

In fact, highly regulated sectors such as mobile payments and electronic wallets may also see consolidation over the next 24 months.

Untalented crowd

Far too many individuals with no real entrepreneurial ability have entered the tech-enabled startup mela. They lack everything that is required to run a successful company, including business acumen, maturity and experience.

It is a surprise that many of them have succeeded in attracting initial funds from some of the most experienced and respected investors.

However, as expected, the initial euphoria around these entrepreneurs died down very soon. And now, investors want the businesses to start focusing on generating revenue and profits. This is where the real problem lies: many of these media-celebrated startups had no concrete business model since the beginning; so generating real revenue and real profits is completely out of the question.

Misplaced expectations

The reaction of employees at TinyOwl, who held their co-founder hostage, display the immaturity of professionals in this space.

It seems that a lot of people join startups because they are lured by the hype and glamour of such workplaces. Or, perhaps, they believe the stock options would help them create instant wealth.

It is well established that working with a startup has its risks. If employees chose to work in a high-risk environment, they should be prepared to accept the reality gracefully that in their case, the bet hasn’t paid off.

What this means for investors

Despite all the bad news, there is no denying the fact that India has an undisputed e-commerce opportunity.

Considering that, investors might not want to stay away from the market.

However, incidents such as those at TinyOwl might make investors wary, and they might raise their standards of due diligence. Startups that raise funds in the future might have to go through a more rigorous screening process.

And as a result, perhaps only the startups where entrepreneurial exuberance is backed by solid business acumen and some business experience will get funded.

We welcome your comments at ideas.india@qz.com.

Also read: TinyOwl and Zomato are proof that something is rotten in India’s food tech startups