Rashmi Guptey
1st February 2022
Harish Talreja
25th January 2022
Sid Talwar
31st December 2021
Ankit Moorjani
30th June 2021
20th January 2024
Sandeep Murthy
17th March 2022
1st January 2020
20th November 2017
7th June 2022
15th May 2022
17th February 2022
28th November 2023
Prashant Mehta
2nd February 2022
22nd September 2021
30th August 2021
15th March 2022
21st January 2022
14th January 2022
5th November 2024
Monish Pathare
28th October 2024
4th October 2024
5th August 2024
20th October 2021
25th April 2021
Akshat Jain
12th February 2021
31st May 2020
Tanya Rohatgi
19th August 2024
20th June 2024
Siddhant Ahuja
25th April 2022
14th February 2022
2nd June 2018
5th June 2024
15th February 2024
9th February 2024
26th May 2022
1st February 2024
20th November 2020
Shivani Daiya
20th February 2020
17th August 2014
17th October 2024
18th July 2019
17th September 2021
15th September 2021
Maansi Vohra
28th January 2021
Atharva Purandare
10th January 2021
Tanvi Ghate
23rd January 2024
Ahan Rajgor
12th May 2022
8th March 2022
22nd February 2022
22nd August 2024
29th July 2024
5th June 2022
5th May 2022
16th April 2021
15th November 2014
25th October 2021
8th March 2020
7th August 2018
27th December 2016
17th February 2021
29th September 2020
24th September 2020
26th July 2020
20th January 2020
15th October 2018
26th June 2018
13th June 2017
21st May 2024
13th February 2024
15th July 2024
10th April 2024
20th February 2024
15th November 2024
Handling a downturn has little to do with what you do when the downturn starts, but more to do with how you built during the boom. At the start of a downturn, if you’re asking “What do I do now?” it’s probably too late.
Handling a downturn has very little to do with what you do when the downturn starts, but a lot more to do with how you built during the boom. At the start of a downturn, if you’re asking “What do I do now?” It’s probably too late.
We are optimists. As venture capitalists it’s in our nature to focus more on the “what if” over the “why not”. This enables us to take risks and dream about the world in a unique way. It helps us relate to entrepreneurs and have the right temperament to start new businesses. Despite our optimism and risk-taking nature, once we invest in a business, we become the pessimists at the table. Having lived through cycles, we have learnt that we have to balance the euphoria of the new with a sense of caution about the realities of the world.
Indian entrepreneurs have had the good fortune of living through a boom cycle for the past 18 months. During this time the average Series B and C financings have gone up by 60% and the average Series D financing has increased 80%. The time between rounds has dropped from 24 months to 15 months and in some cases has been as little as two months! By all standards India has seen unprecedented investment in the enablement of dreamers to build exciting businesses. While this has been a boon to entrepreneurs (and consumers who are living with amazing discounts and deals), the tide is bound to turn. (Indian startups raised $3.5B funding in the first half of 2015)
Before we can understand what to do when the tide shifts, it is important to understand where some of the challenges come from. When a company starts, the majority of its costs are fixed – product, technology, operations, and overhead. Once the product is built, the business starts to sell and generate revenues and gross margin. However, at this early phase educating and acquiring new customers is expensive. The cost of customer acquisition (CAC) is high and the therefore the business has to live with a negative contribution margin (CM) and a rapidly growing marketing expense (Figure 1). Entrepreneurs and investors are willing to endure this high CAC/negative contribution margin as they believe that if they keep scaling, building awareness and repeat purchases, the blended CAC across new and returning customers will come down and eventually generate a positive contribution margin. This positive contribution margin will grow with more sales and eventually recover fixed costs and generate a profit (Figure 2).
This approach of endure a high burn as you get to scale and then optimise once you get there has worked in many instances, so the leash that investors are willing to give entrepreneurs to explore this model (and the cash burn they are willing to fund) has gotten longer and longer. During up-markets, companies are encouraged to focus on scale with the promise that the capital required to fund this high CAC/lifetime value approach would be forthcoming.
This works … until it doesn’t. When the market corrects, investors change their tone and worry that as capital dries up chasing scale may no longer be viable. This is not to say that investors were wrong with their scale strategy or fickle in their approach, but it is recognition of a new market reality where risk capital to fund burn for scale may no longer be available. Businesses need to adjust. Unit economics come to the forefront and conversations focus on profitability and sustainability as opposed to scale.
Building an organisation that can handle the conflicting demands of scale and unit economics starts with thinking about what costs are absolutely essential. Ensuring that the majority of fixed cost spends goes towards product and engineering, as they are the true value drivers. The bare minimum should be allocated towards overheads. This seems like a simple thing to do, but when a company is scaling rapidly, management often loses track of overheads and “special projects” take on a life of their own. The best time to put in place operational discipline is during an upturn. By being aware of these risks companies can use the good times to not just scale, but also build an organisation that is “fit and healthy” instead of “fat and slow”.
This was a painful lesson that we learned at Cleartrip in 2008. We spent the first few years of the company’s existence raising money and chasing scale. When the market turned, we realised we hadn’t focused enough on overheads and other operational costs. The downturn forced us to radically optimise the business and increase operational efficiency. We squeezed our way through the downturn, came out showing fantastic unit economics and today we are a better company for it. We have instilled a discipline of running a tight organisation giving us the ability to flex our marketing spend to drive scale when times are good and pull back this spend and allow product innovation to drive growth during tough times.
At Lightbox, we avoid businesses whose main differentiator is the amount of capital they can raise. That being said, we think a lot about the role of capital in a business and the advantage that can be created if you can raise capital and hoard it. Just because someone is willing to give you a lot of money to realise your dreams, doesn’t mean you need to spend it all right away. We work with our portfolio during the upturn to raise as much money as we can and not spend it. Productivity software firm Slack raised $160MM in April of this year bringing the total capital raised to nearly $300MM. CEO Stuart Butterfield, commented,“We have decades and decades of runway.” That’s an amazing position to be in.
Downturns are inevitable. Companies need to have a defensible product-led business. They need to use the good times to build a business that can weather the downturn. With these two principles in place, when the times get tough they can hire aggressively, acquire customers cost-effectively and out-innovate competition thereby using the downturn to truly accelerate and secure a leadership position.
Read More
Those that make it through are not unscathed – they have battle wounds. The challenges of the first year take their toll… emotionally, organizationally, culturally. While the first year has likely felt like a sprint, it is important to remember that this is a marathon and it is impossible to continue to run a marathon at a sprint pace.
We are at the cusp of creating great technology businesses in India. It can’t happen without the right support from a great board. And a great board needs independent directors.
Hitendra and I discovered this opportunity through an iterative set of conversations that took place prior to funding the business. It was this deep engagement and exchange of ideas, even before there was an economic incentive that allowed for a strong relationship with an open exchange of ideas to develop.
It’s really hard, but so powerful. The "hack" culture of Facebook or the "do no evil" approach of Google or the "respect everyone" culture of the Mahindras. It is amazing to see what great things can be accomplished when a founder drives core values effectively through an organization.
Tech companies are nothing without growth. The real value creation will take place in companies that are able to demonstrate differentiated growth by taking advantage of the imminent technology boom (a result of the explosion in data & apps).
The nature of the game and the implied rules of determining value for disruptive companies are very different than the game being played by traditional companies.
Entrepreneurs and investors are jointly trying to imagine and create a new world. There is no straight line to this process… it is a series of assumptions and iterations – a process of Experiment, Fail, Learn, Repeat.
You will receive the next newsletter in your inbox.
The monthly Gazette is your source of happenings within Lightbox - updates, blogs, deep dives, opinion pieces and all things consumer tech
Join the thousands who hear from us