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Rajan warns against deep discount model in startups

business Updated: Apr 26, 2016 15:28 IST
Raghuram Rajan

Raghuram Rajan on Monday made it clear that getting revenues through deep discounts is not a viable business model for startups.(REUTERS)

With concerns being raised about cash-burn in the burgeoning e-commerce sector, Reserve Bank of India (RBI) governor Raghuram Rajan on Monday made it clear that getting revenues through deep discounts is not a viable business model for startups.

“If the only reason you are getting revenues, not profit, is because you are selling based on 50% discount, it can’t be viable in the long run,” Rajan said after delivering the YB Chavan memorial lecture at the state secretariat .

“All these businesses are trying to establish viability, some are still being financed in a big way,” he said, adding, it is natural for some of them not to work, which will lead to shutting down of the business.

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

Given the competitive nature in the startup space, it is also essential to have safety covers, including health insurance, unemployment insurance and pensions, he added.

Stating that it is “reputable” to be an entrepreneur, Rajan made a plea for being resilient, saying, “the enterprise started by an entrepreneur can fail, the people should not fail”.

Calling job creation the most important issue facing the country, the RBI governor said startups, which grow into bigger firms, can offer maximum employment opportunities.

(with agency inputs)