Avoid Going from Riches to Rags: 6 Lessons for Startups With financial backing, entrepreneurs are equipped with the resources they need to innovate, scale, and disrupt industries. But despite these advantages, nearly 75 per cent of startups funded by VC end up failing

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In the high-stakes world of startups, Venture Capitalists (VC) is often seen as the golden ticket to success. With financial backing, entrepreneurs are equipped with the resources they need to innovate, scale, and disrupt industries. But despite these advantages, nearly 75% of startups funded by VC end up failing. The failure rate is alarming, as it prompts a very pertinent question: What went so drastically wrong?

To understand this, we examined several unicorns and startups to identify mistakes which reduced their valuations, and in worst cases were either acquired or closed. We present below the six mistakes that they did, which you must avoid in order to run your business sustainably.

1. Don't Spread Yourself Too Thin Too Fast:

A startup manages to attract investment due to the sharpness of their offering. This capital is intended to enhance and deepen the essence of their value proposition. However, often startups start pursuing lofty endeavours without a solid execution plan, spreading themselves too thin too fast. Startups shouldn't undertake numerous initiatives simultaneously without seeing them through. Instead of a superficial growth through marketing or acquisitions like BYJUS, startups should concentrate on strengthening their internal infrastructure and enhancing their current products and services to establish a solid foundation that can support them when they decide to grow and take greater risks.

Once perceived as a rival to X, Koo is closing due to their too thin and too fast growth approach that proved to be unsustainable. Koo focused on scaling up using investors fund instead of focusing on establishing a robust revenue model that can sustain itself. Koo stretched itself too thin by eyeing international market without a robust support in the Indian market. With failed acquisition talks, this four-year-old startup decided to shut down. However, the startup could have focused first on creating a strong reliable core proposition that would have ensured people use the platform genuinely, and second, ensuring that their users continue to use them in a long term. This strategy could have saved Koo from shutting down.

In contrast, Rebel Foods, an Indian cloud kitchen, were able to spread themselves in over ten countries over a period of a decade, focusing on resilience first with a long-term design thinking.

2. Don't Over-Estimate Product-Market Fit:

Entrepreneurs often have a grand vision and launch their startups with high hopes. However, not every vision aligns with market realities. Before seeking funding, it is crucial for entrepreneurs to assess product-market fit, i.e., whether their product or service meets actual customer needs. If the market demand is not evident, they must consider whether they can create that demand effectively to ensure sustainable and profitable operations. These considerations are vital to avoid overestimating product-market fit and ending up in financial debt.

PharmEasy is in a financial debt because of this very reason. PharmEasy is competing with local medical stores—both are offering medicines, at a discounted price, with free delivery. To strengthen their market presence and gain higher margin, PharmEasy went ahead with vertical integration. The startup went on an acquisition spree, in particular, Thyrocare which landed PharmEasy a huge debt. PharmEasy's valuation dropped 90% from $5.6 billion in 2021 to around $710 million in 2024.

In contrast, Lenskart was able to dominate more than 40% of the organised market share in Indian eyewear industry due to right product-market fit.

3. Don't Under-Estimate Your Most Valuable Stakeholders:

Employees and Customers are two most valuable stakeholders for any business—the people you pay and the people who pay you. Employees should be a valued asset for any business. This will ensure employees continue to be associated with their workplace. Similarly, customer needs should be met and satisfied. Customers acknowledges and rewards businesses who add value to their life through brand loyalty. However, startups glorifying exploitative work environment in the pretext of hustle does not sit well with customers. Customers today want to be associated with companies with ethical and fair practices.

Both PharmEasy and BYJUS have been in the news for giving their employees huge targets that often require them to push customers to buy their products leading to both employee and customer dissatisfaction. On one hand, employees face excessive work pressure to meet unrealistic targets, straining not only their well-being but also jeopardize the relationship between the employee and the employer. On the other, customers feel misguided and loose their trust in the company.

In contrast, EaseMyTrip is well regarded by their employees and was able to grow because of their customer centric approach.

4. Don't Chase the Money:

Investors come with expertise and can provide invaluable support apart from financial backing to the startup founders. They have a lot to offer, that startups can leverage and gain guidance from. However, this demands that founders not just seek money, but also guidance while partnering with an investor. Instead of perceiving their investors merely as a source of money, founders should acknowledge investors as mentors and benefit from their strategic guidance. This necessitates founders to be honest with their investors—maintaining transparent communication by involving them in significant business model changes and keeping them updated on their financial situation. This, in turn, will invite investors to share their expertise and vision, fostering stronger partnership, resulting in securing more investments.

GoMechanic exemplifies the consequences of neglecting the critical relationship between the founders and the investors. The startup was on the brink of becoming a unicorn, with a series D round of funding from SoftBank. However, during the process of due diligence, it was revealed that the startup is in a financial mess with several accounting violations, over-inflated numbers, and fake financial reporting. This financial mismanagement was a direct result of the founders' reluctance to maintain honest communication with their investors. From the outset, the founders had been providing misleading information, hiding the true state of the company's finances. When the truth surfaced, the existing investors realized that their funds were lost and filed a FIR against the founders.

In contrast, DealShare kept in loop their stakeholders amidst their changing growth strategies and business models. This has ensured a strong relationship of trust and shared vision between the investors and the founders.

5. Don't Take Funding for Granted:

Startups with VC investment has the resources to expand rapidly and elevate their business. However, according to data, less than a quarter of unicorns are profitable. This is because most startups are mindlessly growing business in all directions without a strong financial foundation. They rely heavily on investors fund to grow their business, instead of building a sustainable revenue generating model. Founders should realise that funding is limited and will not always be available, and hence should strive towards diversifying their funding sources for financial security and sustainable growth.

Dunzo continued its operations despite high operational costs, thinning profit margins, and logistical challenges, under the assumption that their investors would come to the rescue, pouring in more money to sustain and grow their business. Their faith in the continuous flow of investment capital led to bolster confidence. They neglected to tighten their belts or pivot their strategy to adapt to the changing market dynamics.

In contrast, Zerodha became a unicorn based on the profit generated and not through external funding.

6. Don't Become The "Entrepreneurial Hero":

Startup founders often romanticize the entrepreneurial journey, which can lead to a false sense of invincibility. The allure of being an entrepreneur lies in the idea of innovation and a sense of purpose. However, this mindset may prevent them from acknowledging the risks and challenges involved with being an entrepreneur. The idealized image of entrepreneurship clashes with the reality that on an average 90 percent of startups fail. The reasons may vary but by accepting this truth, founders can take a more practical approach to business. They should focus on resilience, adaptability, and learning from failures—all to ensure profitability, rather than seeking validation as heroes. Moreover, recognizing the likelihood of failure can help founders maintain a healthy perspective on success. Rather than fixating solely on achieving unicorn status or attaining overnight success, founders can define success on their own terms, whether it's building a sustainable business, making a positive impact on their community, or simply finding fulfilment in the entrepreneurial journey itself.

BYJUS founder Raveendran, once applauded for his ability to secure funding from big names, faced several legal suits for oppression and mismanagement by the investors. The once-glorified image of being an entrepreneurial hero clashed with him losing the trust of his investors.

The mistakes made by startups are mostly a result of hasty generalizations. Founders should perceive their startups like saplings, that requires not only water of investment but also time and patience to grow. Their growth should be organic and ever evolving, nurtured by the founders' vision and market needs. Founders should remember that just as a sapling cannot thrive in any soil, a startup cannot succeed without the right product-market fit. Similar to saplings that need warmth and care, startups need their customers and employees to foster a healthy ecosystem. Akin to saplings expanding their roots to draw sustenance from the ground rather than relying solely on external watering, startups must establish a strong financial base, drawing on the expertise of their investors. Like a well-tended sapling that eventually becomes a robust tree, a transparently managed startup can prove to be resilient despite funding winter.

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