Dot com moment for Indian Start-up ecosystem?

In past few years, the Indian start-up ecosystem has seen an extraordinary rise in valuations and fund raising. And start-ups from various sectors including edtech, fintech, medtech (remember tech will eat everything in future), all of them have received millions of dollars in funding. In just 2021 alone the Indian start-up ecosystem raised 41.4 billion USD in funding and gave rise to 42 new unicorns. But as soon as 2022 started, suddenly there is bad news coming from all directions, the losses of these company have been piling up, mass layoff have started with over 9 thousand employees laid off from reputed companies like Vedantu, Cars24, Ola and others, funding has slowed down and even highly valued startups are going out of business. So the question is: is the gold rush of Indian startups about to end? How will this crazy start-up crash affect the business ecosystem of India?

The answer to this lies in the statement – “if you want to understand the future, go back and study the past”. History always repeats itself. But we don’t pay attention to it.

So, what is going to happen in India? To find out, we must study similar events that happened in the past. And immediately you will be able to predict future trends. To study the start-up bubble of India, we need to understand the dot com bubble of the late 90s.

Dot com bubble :

The story of the dot com bubble dates back to the 90s. Computer penetration in US had reached levels which were extraordinary, the market was literally growing by 100% every two years. And just like everyone in India suddenly got access to the internet in 2016, back then millions in the US started getting access to the internet. To draw another parallel, just like we are seeing start-ups being founded in every corner of India, back then in the US internet companies were flooding the US markets with new products and services, and since most of these start-ups were website-based companies, they had a dot come suffix attached to their name (like and and and etc.)

And just like investors funding every other start-up in India, back then investors in the US were so bullish on dot com companies that even if the start-up didn’t have a business plan or a minimum viable product, they would invest in the company. If you only had a website you could get a million dollars funding right away, and among these companies were also companies like Amazon , e-bay and even Google.

Why did so much money start pouring into the market? Well, 2 things happened:

  • Every other start-up was commanding a billon dollar valuation.
  • Many of these companies went to IPO and saw record breaking opening, so investor sentiment in the US became even more optimistic.

And this led to a market bubble. Hardly any of these companies were profitable, and if you see the US stock market during that time, the volatility was both tempting and horrific. This bubble kept ballooning for 10 years, from 1991 till 2000.  And suddenly in 2001, just like any another bubble, investors started pulling out from the start-ups one by one and the market crashed.

Within a few years US stock market lost 10% of its value, one of the darkest times in US market history. All million-dollar funding sources started to dry up, thousands of employees were fired to cut costs and hundreds of start-ups, which were once said to be a million or billion dollars’ worth, went bust. Investors lost 5 trillion US dollars wealth from 2000 to 2002. This was the result of the dot com bubble. 

The dot com bubble that killed many start-ups also gave rise to many companies like Amazon and Google and eBay. All these companies didn’t just survive, they excelled into multi-bagger stocks and, more importantly, turned into giant monopolists and changed the world altogether.

So, what killed many companies in this bubble and not these giants?

One type of companies that went bankrupt were ones that didn’t have a product and market fit in the first place. A good example is This company basically offered all pet products from dog food to dog towels etc., but the problem was that unlike Amazon which sold 2.5 million books across various genres (most bookstores could neither stock this many books on their shelves nor offer as much variety in genres), barely sold anything that mortar-and-brick stores didn’t have. So, went out of business in spite of raising tons of money. While Amazon had an x-factor that no other store could offer, didn’t have a unique selling point to bank on.

In India currently, the quick commerce boom, looks like a moment. In India, there are Kirana stores everywhere you stay. If you want something quickly just give a call to a Kirana store and you will obtain the order, so it hard to identify the USP of quick commerce tech companies in India. This model worked well in the US where the grocery stores are typically located far away residential areas unlike in India.

Another type of US companies that went bust during the dot com bubble were the ones that fell prey to regulations. Take for instance You could buy CDs and DVDs from stores to listen to music. With Napster you could directly download mp3 files from the internet and listen to thousands of songs easily for free. It fell prey to piracy regulations. To draw a parallel, Napster in US was similar to the hundreds of websites in India that offer free songs online.

Napster were slapped with lawsuits and were eventually shut down. Although the product was good since it operated in a completely new market which had no regulations at the time, when these regulations were rolled out in the market Napster fell prey and went out of business. But after these regulations were implemented, Spotify entered in the same space doing the exact same thing, but Spotify is a billion-dollar company today because it adheres to the regulations. This is a prime example how regulations bring down a company, when the company creates new product for which there are no regulations. Something similar can happen with the “buy now and pay latter” (BNPL) companies in the fin-tech domain. RBI Is regulating their pre-paid instruments to stop them from lending monies in their wallets to customers, as the companies will disrupt credit cards which are issued by credible banks.

Some companies in the US during the dot com bubble were way ahead of their time. For example, It was like the YouTube of 90s, but the internet speeds were not that great, plus the browsers back then were not that advanced to stream online videos. YouTube came later and offered the same and benefited from the advancement in technology.

A parallel to this are the blockchain based apps like decentralised finance (defi) and some other products which are way ahead of their time. Some companies offering these defi services might struggle in the near future.

So, as an investor how do you pick the winners?

The genius investor Kunal Shah (founder of Freecharge and CRED and also a famous visionary) has his own theory of investing in start-ups. He calls it the delta four framework. He says, humans are constantly seeking more efficiency in goods and services and so whenever a new product enters the market to solve a particular problem, it changes the old behaviour to new behaviour.

For instance, Uber came and changed the way cabs worked all over the world. If you give Uber 8/10 and old cab systems 4/10 rating, the delta here becomes 4 (8 minus 4). According to Kunal Shah, every time the delta becomes more than 4, it basically creates wealth for the start-up.

When this happens, it basically creates three things.

  • Creates an irreversible behaviour. Any delta 4 service will not let you go back to old behaviour.
  • High tolerance. Just because Uber maps are not working, or WhatsApp chats are “not secured” (as it was talked about few years ago)  people will not stop using Uber and WhatsApp.
  • Unique brag worthy proposition (UBP) > Unique Selling point (USP). Every time humans discover something that is delta four, they can’t stop bragging about it. For example: true caller app – every one used that app by hearing it from someone else who bragged about this app to someone else, they got social currency by sharing that, it was cool, no ads were there. Likewise for zerodha.

These companies require the  least amount of fuel to spread.

Also take for instance, buying shirts offline and buying shirts online.  The delta of efficiency in both processes is more or less than 4, the reason is that even though it is digital it’s not more efficient. One bad experience in buying shirts online and we are never going back online. No tolerance and no UBP.

These are companies that require tons of marketing money to increase their delta but end up destroying wealth.

Thus, the theory of delta four comes from core principle of biology where every time a species has a breakout, and one version of species becomes more effective or efficient than previous species they wipe out the previous species. This is true for companies and services too.

Wealth moves in the spectrum of efficiency. Companies that create more efficiency (i.e. delta four or more) create wealth. Others destroy wealth.

Written By: Ankur Kushwaha, Sr. Consultant, Invest Punjab | Govt. of Punjab.

DISCLAIMER: Views expressed are personal.​

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