And now, the rubber hits the road

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Over the last three years, I’ve had opportunities to meet several young startup entrepreneurs – on professional lines as well as friendly.  Most of them were young and ambitious.  They bootstrapped their way to start their businesses mostly around internet and mobile applications.  The common thread I had noticed in all their businesses was low entry barriers, least requirement of startup capital.  A few college friends or past colleagues could pool in their savings and get going in a hurry.

But now they are facing some real tests. Rising inflation, slowing demand, liquidity crisis and business cycles are roughing them up.  Even getting to office has become expensive owing to surging oil prices.  Suddenly they need more working capital as suppliers no longer give them credit as they used to; and customers take time to pay up.  Double whammy!

I suspect they have little fat to cut and are operationally geared up to the max.  Stretch any further and they will break.  They need more gas to run and capital is fast drying up.  Debt is ruled out since they have no collateral to offer and interest rates are no longer benign on personal loans. There is no certainty in advance to say who has the constitution to survive the drawn-out agony of a serious slump. It takes both resilience and cash to withstand two or three years of grim business. Maintaining morale while carrying out redundancies and wholesale restructuring can defeat even the finest manager.

So now they seek external funding by way of capital support shedding their obsession with controlling stakes.  But VCs are strapped for liquidity as well since their previous investments haven’t yet matured. Likely that it will take longer to exit those since there is little or no appetite for public investors for IPO – the primary exit route preferred by VCs.  Secondary exit routes like M&A, buyouts happen during low interest regimes but inflation at 12% (in India) makes sure that interest rates keep inching their way up.

They have to stick around and survive.  I think this is one of their hardest test. Soon they will also witness political hurdles as well if the UPA govt fails the trust vote and reforms take longer to descend that will suck every last wind, not just of liquidity, out of the system.  In surviving those hardships and sticking out till the very end, they will earn their spurs and rites of passage.

But of course things could always be worse and exactly where their rubber hits the road. The only way for them to get around is to get all the more innovative, try even the most weird way to get everything past the gate. It’s your money in customer’s pocket and there are far more claimants to that ever shrinking pie.  Go grab it, fast !

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