The Lessons WeWork And Uber Hold For Indian Entrepreneurs

The withdrawal of what was speculated as the second-biggest initial public offering in the U.S. by a startup that leases spaces in office buildings offers lessons for India.

When SoftBank Group Corp.-backed We Co. backed out of its IPO last month, leading to the exit of its Co-Founder Adam Neumann, questions were raised over the co-working startup’s fundraising plans. Losses have soared at the startup, which has also witnessed an exodus of executives and job cuts over the past week.

WeWork isn’t the only U.S. startup in troubles. Shares of Uber Technologies Inc., another startup backed by Masayoshi Son’s investment firm, dropped over a third after it went public in May. The takeaway from these incidents for Indian startups and founders, according to analysts, is to not blindly chase valuations.

Harish Chawla, partner at private equity firm True North, agreed. “We’re seeing the disaster of combining capital-fueled-growth with valuation-fueled-arrogance,” he told BloombergQuint in a WhatsApp text message. “To rephrase Mike Tyson—everything was hunky dory till the public markets punched a hole in the fantasy.”

The board of WeWork had a fiduciary duty to advise founders and keep them on the right track, Jitendra Gupta, co-founder of payment solutions provider Citrus Pay and former managing director of PayU, said. “But the ecosystem is such where everyone is only focused on an up-round,” Gupta said, adding startup founders need to balance capital efficiency with growth.

WeWork, which had raised $12.8 billion from private investors over 10 years, was last valued at $47 billion. While its revenue grew at breakneck speed, so did losses. A similar case holds true for SoftBank’s investments in India. Losses at Paytm, its largest bet in the country, have widened nearly fourfold to Rs 4,217 crore in three years, while its valuation jumped from $5 billion to over $15 billion. Its other Indian bets, including Oyo, Paytm Mall, Hike Messenger, Grofers and Ola command high valuations but aren’t profitable either.

Shailendra Singh, managing director and head of India and Southeast Asia at Sequoia Capital, said the WeWork incident is an important reminder that companies of scale should be built with a view to be sustainable and have great governance around them. “It’s a reminder we need to embrace innovation by keeping those (governance) principles at core,” he said in response to a question by BloombergQuint during the World Economic Forum last week.

“The WeWork example is an eye-opener for entrepreneurs,” Vani Kola, managing director of Kalaari Capital, told BloombergQuint in an interview, adding entrepreneurs shouldn’t take pride from movements in momentary valuation. “Capital should be taken in a way that it creates sustainable return on investment, and does sustainable value creation, and build a service that is profitably run.”

Companies that are planning to list should prepare for greater scrutiny from shareholders and analysts, according to K Ganesh, founder of venture building platform Growth Story and promoter of BigBasket, a unicorn. Companies in high burn and growth mode should also plan funding well in advance, he said. “Any last-minute change could hurt the company and that’s what happened with WeWork.”

Valuations of startups, according to him, are getting amplified since companies are choosing to stay private for longer time, which would come under question when they go public. “We will see lot more realism in late stage pre-IPO private valuation.”

That reflects in the number of startups that have hit the markets over the years. While India has a large number of operating startups, only a handful—InfoEdge, JustDial, Matrimony and IndiaMart, among others—have managed to successfully list over the years.

Karthik Reddy, co-founder of early stage venture backer, Blume Ventures said listing is a certain path to a long-term sustainable venture capital market. “Without this, we can’t ever claim to have built a robust start-up ecosystem.”