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A piece of advice for startups from Raghuram Rajan

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CIOL Writers
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CIOL 2016- The Year of Dramatic Exits from top

Amidst rising concerns about cash-burn in flourishing e-commerce sector, RBI’S Governor Raghuram Rajan has a piece of advice for startups in the country. Speaking after delivering the YB Chavan memorial lecture at state secretariat, Rajan minced no words to warn against deep discounts and made it clear that getting revenues through deep discounting is not a viable business model for startups.

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"If the only reason you are getting revenues, not profit, is because you are selling based on 50 percent discount, it can't be viable in the long run," Rajan said. "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.”

The remarks come amid dwindling valuations of some successful Indian startups, which are being partly attributed to the high stress on discounting in the business model.

Making a strong case for policies which will make it easier for startups to exit so that resources can be used productively, Rajan further added, "I think a shutdown is a natural process and we should not stand in the way and lament too much."

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He 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.

RBI’S Governor had some suggestions for bankers as well. He said that bankers while dealing with stressed loans with small businesses, should understand that the smaller firms do not have the same spirit to take every case to a court as a big business does. "I said easy exit (for startups) but it should not be an 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."

Acknowledging that it has become "reputable" for being an entrepreneur, Rajan said, "the enterprise started by an entrepreneur can fail, the people should not fail".

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