The presentation was part of the StartupGrind session taken by Mr Yogesh Pathak. he can be reached at yogesh@kartriventures.com StartupGrind Pune sessions are https://www.startupgrind.com/pune/

1. How Startups should handle
a downturn
Yogesh Pathak

2. Startup Times of india

3. Yahoo

4. Cisco

5. Rediff

6. SIFY (Satyam Infoway)

7. On the other hand…Amazon P/E : 290

8. Bubbles
• If several companies, public or private, can practically never realize
the high valuations they once had, and trade at 10% to 40% of their
peak valuations, we were certainly in a bubble
• By definition, we realize this post facto

9. “Only when the tide goes out do you
discover who's been
swimming naked”
- Warren Buffett

10. Why bubble happen
• Overhype of a given sunrise sector, technology,
change in consumer habits, etc
• Throwing more capital on ideas and companies
than they deserve / absorb
• Public markets throwing their usual evaluation
benchmarks in the wind
• Herd mentality
• Grow big fast
• Investor and entrepreneur hubris
• Expectations of exponential growth
• Overhype of disruptive ability

11. How to spot a bubble
• Surge in entrepreneurial activity
• Surge in funding activity
• Ludicrous-sounding business
models (Try the “Grandpa Test”)
• Benchmarks other than P&L are
invented and deemed-super
important
• Growth is priority #1, not
profitability; High burn rates
• Valuations increase at a rapid rate
• Funding increases at a rapid rate
• Negative unit economics
• Subsectors of interest keep coming
up, and all are seen as rosy
• Employees sucked by start-ups and
investors from other sectors
• High salaries
• Crazy employee perks
• Unheard-of deals, at unheard-of
valuations in unheard-of
geographies
• Investors, media and start-ups drink
their own kool-aid
• Commoners take risky investment
bets (e.g. taxi drivers buying stocks,
IT managers becoming angels)

12. Unicorns!

13. Bubble Capital = Excesses
• Box Inc (listed)
• Revenue: $ 300 m
• Valuation: $ 1.5 b
• P/S of 5
• Dropbox (private)
• Revenue: $ 400 m
• Valuation: $ 10 b
• Funds raised: $ 1.1 b
• P/S of 25
• Perks: $25,000 per employee
Chrome Panda
$100,000

14. Irrational Valuations, 1999
eToys
• Valuation: $ 4.9 B
• Revenue: $ 100 M
• Op. Loss: $ 123 M
• P/S = 49
And many more…
Toys R Us
• Valuation $ 3.9 B
• Revenue $ 11 B
• Op. Profit $ 400 M
• P/S < 1
• 1500 stores in 38 countries

15. Irrational Valuations, 2015
Airbnb
• Valuation: $24 B
• 2015 Revenue: $900 M - $ 1 B
• 2015 Op. Loss: $ 150 M
• P/S = 24
Marriott
• 4000 hotels
• Revenue $14.5 B, Op. Profit 9%
• Valuation $ 17 B
• P/S < 1
Expedia
• Revenue $ 6.6 B, Op. Profit 13%
• Valuation $ 16.5 B
• P/S = 2.5

16. Downturn
• Performance in underlying valuations is not reached
• Capital raising difficult even when capital is available
• Sense prevails and irrational deals peter out
• Valuations revised downwards
• Downrounds start happening, often at harsh investment terms
• Prominent companies shut down with all investor capital lost
• Public and private market meltdown together or in phases
• Extremely difficult for new startups to raise funds
• Customers cut spend on IT
• VCs funds go into a shell and some shut shop

17. Questions to ask in a downturn
• Is my business idea/model, based on a bubble-era assumption of customer
uptake or market growth?
• If so, revisit the whole thing!
• Business idea/model is sound but growth expectations unrealistic?
• Can I raise capital in a downturn?
• Can I run without raising capital? How long is our runway?
• Can there be a plan A (with capital) and plan B (without capital)
• What is our business and are we going to have fun building it?
• How can we become more resilient?
• What is our secret sauce for customer loyalty, moat, and competitive
advantage?

18. Things to remember in a downturn
• Keep the dream alive
• Stick to the basics: Customer Value, Revenues, Profits
• Do not overextend on expenses
• Have a 9-12 month runway with current cash and burn
• When capital is available, TAKE IT. Avoid haggling on valuation.
• If need to shut down, do it gracefully. Honour all commitments. Pay all liabilities.
• Explore M&A as an alternative to shut-down. Keep the dream alive.
• Help fellow entrepreneurs
• Watch the market. Prepare for the next upturn.
• Watch the competition.
• Spend more time with customers and fine-tune your offering.