Nikesh Arora warns startups of burning money to scale business

People in India haven't seen what happens if the environment gets sour, the Softbank vice-chairman said.

Worried over the way a few Indian start-ups are scaling their business by throwing money, Nikesh Arora, vice-chairman of SoftBank, has warned a business slowdown could be disastrous for the survival of these firms.

Instead, Arora said, these firms should focus on building a good product and business over a period of time and not look at short-term returns.

“I am a little worried about the way some of the companies in India are scaling. If you look at the West, some of the successes, companies, which turned billions of dollars, whether it's a Facebook, a Twitter or a YouTube, which Google bought, or Google itself, they spent many years perfecting their product and the product grew by word of mouth and thereafter grew by other people knowing other people and network effect,” said Arora at a fireside chat at the Nasscom product conclave.

“There are very few companies in the West that have become very big companies who invested hundreds of millions of dollars on marketing in the early stages of their lives. You can’t take a bad product and spend a lot of money marketing it because you won’t survive.”

Arora, a former Google executive, is among the world's top most paid executives and has backed Indian unicorns such as Snapdeal and Ola.

So far, SoftBank  has invested over $one billion in five firms in India and is looking at building its portfolio in the country. 

Global private equity and venture capital firms are expected to invest $ 6 billion this year in start-ups in India, the world's third largest hub.

It is three times more than $ 2.2 billion around 179 firms raised in 2014. This year around 400 start-ups raised money, said Nasscom.

But Arora also cautioned that the party might not last forever and Indian firms should gear up for a meltdown that could disrupt businesses and bring down the massive valutions.

Instead they should focus on maintain their balance sheets and building great products that will attract long term customers.

"I think in terms of learning, the silicon valley has been through multiple cycles so people know what to do when shit hits the fan. In this market, nobody has seen that," he said.

"Five years ago it was impossible to raise one round of $30 million or $50 million but now there's a lot of companies in India that have raised that kind of money. But people in this market haven't seen what happens if the environment gets sour."