There is this peculiar phenomenon in the startup ecosystem that continues to bring about failures again and again. The time that is meant to be a success, raising a huge amount of money, more often than not, marks the beginning of the end. Numerous companies have expanded fast, only to fail due to their own bad decisions. It is such a common problem that it requires more light, particularly as history continues to repeat itself, with every new generation of entrepreneurs believing that they will not repeat the same mistakes as the previous ones.
For example, when that much-awaited fund transfer of ₹10 crore comes, the founder will likely shift their attitude. That grit and ingenuity that they possessed during times of austerity can be an illusory sense of accomplishment that is a gamble. This premature celebration happens in familiar ways uniformly from the very first dot-com bubble to the current startup culture. The behaviours are remarkably uniform wherever and whenever—whether Silicon Valley in the late 1990s, Berlin in the early 2010s or Bangalore today.
Consider the notorious Boo.com case, which burned through $135 million in just 18 months in the early dot-com boom. Their magnificient London headquarters, lased with expensive furniture and extravagant launch parties, are the mirror of unwanted pre-revenue success.
Fast-forward to today, and we have the cautionary tale of WeWork, which was more concerned with the speed of growth and look and feel than financial viability. The firm leased up prime real estate in cities all over the globe, spent lavishly on the offices’ design, and found itself with its valuation drop from $47 billion to under $5 billion when reality finally caught up with its financial projections.
The road to failure has been trodden so often that it’s second nature. The initial misstep is most often spending too much on office space. A startup that has been operating out of a bare-bones coworking space or even the founder’s apartment suddenly feels the urge to lease fancy office space in the most pricey neighbourhood.
The justification typically concerns “impressing clients” or “attracting talent,” but these are just covers for the underlying necessity of establishing the founder’s new status.
What these startup founders fail to appreciate is that all extra office space means rupees that could have been spent on product development, customer acquisition, or—horror of horrors—giving the company more time to turn a profit.
This geographic advantage is usually accompanied by an equally erroneous talent acquisition process. Instead of retaining the thin, hungry teams that raised the capital, entrepreneurs hastily bring aboard industry “veterans” at salaries that would make established companies blush.
These experienced individuals usually come from corporate settings which have not prepared them to work with the very particular issues facing early-stage businesses. As Peter Thiel, in his book “Zero to One,” said so astutely, “A startup messed up at its foundation cannot be fixed.” Bringing in overpaid, misaligned talent is precisely such a foundational flaw.
The best example of such a mistake not being made and the company reaching a zenith can be Zerodha. Zerodha co-founder Nithin Kamath once said that Zerodha didn’t have enough money to hire IIT-IIM graduates when they started. He beautifully and respectfully asserts, “Thing is not like we don’t hire them. It’s just that there are no IIT, IIMs [alums] in this company. And the reason is when we started, the first many years, there was not enough money on the table. So, we couldn’t afford any IIMs. Because people come with the price tag.”
The record of failed startups has numerous examples of startups expanding their staff too rapidly. Quibi raised a staggering $1.75 billion before it even launched but recruited costly executives from legacy entertainment firms who were not familiar with digital content. The startup collapsed just six months after it launched, having spent hundreds of millions of dollars for nothing.
Likewise, the Indian food delivery startup TinyOwl expanded to multiple cities and recruited hundreds of staff shortly after receiving a lot of investment, only to fire massive numbers of employees a few months later when they discovered their costs were too high to survive in the startup ecosystem!
One problematic factor of this ‘lavish spending attitude’ is the way that founders blur the distinction between spending and actual progress. Marketing budgets rise incredibly quickly with no real shift in strategy or execution. Funds are invested in issues that require thoughtful solutions rather than indiscriminately throwing money at them. Campaigns are made on numerous platforms simultaneously without adequate testing or measurement in place. The Pets.com failures, which invested $17 million in marketing, including a Super Bowl ad, before their collapse, remind us of the same errors today.
This trend is particularly troubling because it persists despite numerous warnings and caution against such action. As Warren Buffett once stated, “Only when the tide goes out do you discover who’s been swimming naked.” The flood of funding provides a temporary high that conceals deep issues in business models and the quality of how things operate. But markets are always correct, investor sentiment shifts, and raising more money becomes more difficult. When this happens, the startups that have been counting on continuous money flow are left exposed and vulnerable.
The greatest startups, however, practice the same frugality after raising capital that characterized their bootstrapping days. The early Amazon offices were famously adorned with repurposed doors repurposed as desks. Even after going public, Jeff Bezos continued to prioritize operational efficiency over appearances of success. The same was the case with the early days of Facebook, where there was resistance to spending on anything that wasn’t directly contributing to growth and product improvement. Mark Zuckerberg spurned many opportunities to upgrade to fancier offices or expand the team too quickly, instead investing in improving the user experience.
Take another example of a company that just became a teen on April Fools Day- Bewakoof. Their first “office” was in a slum in Mumbai, ₹6,000/month rent for a small space on the top floor with a tin shed. With plastic chairs to sit on (and no, they were not even Nilkamal) and makeshift tables, they started with full zeal. Between the Mumbai sun and the heat from their machines, it was unbearable without an AC. But their will to build was Unshakable.
Equity funding in 2011 was a rare dream. And then graduates with zero work experience? Forget it. They started with just a few thousand rupees, which was what they could get from home. That was it. They worked out of that space for two years and then grew.
The next stop was an industrial estate in Ghatkopar. This time, they had real chairs—the ones with wheels—and an AC. Resilience and rebellion to prove something helped them survive. Then came growth. So that’s how one should grow.
The funda is not cheap; it’s a deep appreciation of the math of startup success. Every rupee spent must eventually be justified by the value it creates. A straightforward but useful model considers that a typical business needs to create five times the return on every expense to pay for the cost of capital and the inefficiencies of any business venture. So, an investment of ₹10 lakh in property needs to create ₹50 lakh in new revenue just to break even on that expense. Likewise, a ₹30 lakh ad campaign with uncertain return on investment needs ₹1.5 crore in new revenue to cover the cost.
The numbers are even darker when we consider people resources. Hiring five additional team members when it’s not necessary can quickly drive up the cost of running a startup without creating much short-term value. In India, where the price of talent has risen astronomically over the last several years, hiring too soon can be terribly damaging. Each new hire represents not only their salary but also other expenses such as benefits, office space, equipment, and management time—all of which have a high price tag.
The saying goes, “Revenue is vanity, profit is sanity, but cash is king.” The saying has been verified countless times throughout business history. Yet with each successive generation of supported entrepreneurs, it still takes each group the hard way to learn the lesson. The companies that succeed in producing long-term value are always those that respect investor funds. They see it not as payment for what they’ve done before but as an obligation to treat it with utmost caution.
This is not to suggest that venture-capital-backed companies should be doing things out of fear or unjustified conservatism. Creativity does entail appropriate investment, and some cost is justified even when their payoffs are not immediately quantifiable. Nevertheless, there is a vast difference between strategically investing and doing things for appearances’ sake. The former is characterized by cautious scrutiny and clear linkage to long-term business objectives, the latter by human beings’ desire to be validated from the outside and fêted too early.
Recently funded entrepreneurs must understand that their investors put money into them, not so they could just feel wealthy. Money was invested with the intention of generating a lot of profit, and that only happens by generating real value. That was the case when the railroad boom occurred in the 19th century, and it still applies to the modern digital economy. The way to generate value may have shifted, but the rules remain the same. Short answer: the path from money to failure is well-worn but one to be avoided at all costs.
The most successful entrepreneurs are still hungry and disciplined regardless of the amount of money sitting in their bank accounts. They regard money as simply a tool—something that will enable them to chase their dreams and not the goal in and of itself. They understand that the true indicator of success is not the size of their offices or how well-regarded their employees are but the amount of value that they can create for customers and, thereby, their investors. Legendary investor Paul Graham has in the past described the most vital characteristic in a startup entrepreneur not as intelligence or drive but as frugality.
This has proven true in a host of rises and falls of the economy over time and will serve to mark the distinction between the successful startups and failures serving as cautionary examples to upcoming entrepreneurs. Present-day founders of means have but a simple, albeit profound, question to pose themselves: Will you learn from history, or are you poised to make the same errors?
