Startups should take this advice from RBI’s Raghuram Rajan very seriously

As startups are struggling with funding and the cash burn rate is also spiralling up in the e-commerce sector, RBI Governor Raghuram Rajan has some advice for the greenhorns.

As per Rajan, startups should understand deep discounting models will not benefit the e-commerce sector and it is not a viable model for business.

"If the only reason you are getting revenues, not profit, is because you are selling based on 50 per cent discount, it can’t be viable in the long run. All these businesses are trying to establish viability, some are still being financed in a big way. It is natural for some of them not to work which will lead to shutting down the business," said Rajan while delivering the YB Chavan memorial lecture in Mumbai.

The investors are also not opening up their purse strings and amid this, many of the startups are depending on the capital injections from venture capital funds and some have also closed down.

"I think this (shut down) is a natural process and we should not stand in the way and lament too much," Rajan said, making a strong case for policies which will make it easier for startups to exit so that resources can be used productively. Given the competitive nature of things, it is also essential to have safety covers including health insurance, unemployment insurance and pensions, he said, adding that such nets can ensure "social peace".

Also, Rajan said the conditions for starting up are improving by the day on the back of interventions by the government and regulators which have upped the infrastructure and logistics support.

However, there is a lot which needs to be done, he said, flagging skilled talent as a key prerequisite for the country.

There are many other soon to be introduced aspects which will help the startup ecosystem, Rajan said, pointing out to Bankruptcy Code which he expects to be introduced in the current session of the Parliament, and also the introduction of the Small Finance Banks.

He also said that the bankers while dealing with stressed loans with small businesses should also understand that the smaller firms do not have the same mettle to take every case to a court as a big business does.

"I said easy exit (for startups) but it should not be unfair exit. With respect to small firms, creditors often have draconian powers which large firms can limit in courts. Something like Sarfaesi. A large firm has a better way of dealing with it in the court than a small firm has. "The banker may have much more power over the small firm with Sarfaesi than it has over large firms. Because we want to get the money back from the large firms, we continue to make the power harder. So, we have to be a little careful. Balance it out. The small firm should not be put out of business too fast while large firms stay in business too long simply because the large firm has easier access to good lawyers.