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When a giant goes on a eating spree

There are a few crown makers in the current start-up world who have honed the art of finding startups with an industry-defining idea at their seed stage and nurturing it to realise a product market fit. But needless to mention, even in their shining armours, there are a few clicks to spot. This only explains why business is an art and not a science. While gaps in the market, consumer behaviour, technology adoption or, for that matter, a blueprint of the strategy today can be readily developed, the challenge is to get the process on the field. I would refrain from taking names, but even the biggest VC and PE out there have had their share of mistakes and have been highly humble in accepting them. What is of greater concern, however, is that most of the analysis of a bad investment can only be made post-ante. This implies that the investors carried out the same processes yet landed at two contrasting star-ups. Oversight, one of the most cited criteria for the failure of venture capital in recognizing bad start-ups, is more common than it is made out to be. In fact, since most VCs don't run the start-ups themselves, oversight is instead a design rather than a fault.

Many books have critically analysed why startups fail and succeed, giving an outline of dos and don't for prospective founders. So, let's understand what a start-up is in the industry ecosystem, what it borrows from the industry and its peers (another start-up) in its genetic material, and finally when a start-up dies. All businesses try to expand, whether in products on the back of innovation or markets on the back of awareness, but there comes a time when a firm closes the door on the type of products or customers it can serve. We will assume it has already taken care of its internal and external operations by that age. At this point, the growth is small, and one has to face the wrath of investors for not creating enough opportunities with the money that the firm has. It's like a young wildebeest in the forest who has commanded a pasture. It is lured by the pastures nearby but fears that there might be a lion lurking there. Also, leaving this pasture unattended might allow other animals to graze it. So what does it do? 

It allows a small guinea pig clan to take over the new territory. For the wildebeest, the genie is a great way to discover the lurking dangers of the new pastures while they can command the existing pastures. If it's found to be promising, the wildebeest can easily kick the guineas out and take over. But the guineas have grown smarter over the years; they have learnt to breed rapidly and keep exploring further (using population as a hedge against the request predation risk). To come out of metaphors now, start-ups face two risks; first, from the adventure that they are taking, this might not be a developed market or a not a product-market fit, which would nullify the value that it could create from the market. The other is from exiting players from the market who can, on their bargaining powers, easily replicate or recreate the value these startups bring. A similar story unfolded in the organic foods market; for years, start-ups ruled the market until most had to leave the shelves due to accumulated losses (mostly from advertising spending) or operational hindrances. This vacuum was readily gobbled by the giants in FMCG, as start-ups had already explored the market to find the ideal product market fit.

Much like the wildebeest, the startup journey is a delicate balancing act. It's about calculated risks, rapid adaptation, and relentless innovation. The challenge lies in striking the right balance between exploration and exploitation. Too much exploration can lead to resource depletion and eventual decline. Too much exploitation can stifle growth and innovation. In the end, the most successful startups are those who can navigate these challenges with agility and foresight. They understand the risks, embrace the uncertainties, and emerge stronger. By learning from their mistakes, adapting to changing market dynamics, and leveraging the power of innovation, startups can survive and thrive in an increasingly competitive landscape.

Further Reads:

1. https://hbr.org/2021/05/why-start-ups-fail
2. https://explodingtopics.com/blog/startup-failure-stats

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