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[Published in Mint on May 30, 2013. Here is the link to an abbreviated version of the article on LiveMint.]
[Credit: Laurynas Mereckas]
Building a startup into a successful high-impact company is not easy – it is hard no matter where in the world the founding team may be located or which geography is targeted.
It is even harder in India, despite the macro outlook almost always looking rosy – 1+ billion people, strong economic growth, emerging market/BRIC, technical expertise, many underserved needs etc.
Many of India’s successful startups have navigated a maze of challenges, creating leading brands and sustaining for long periods of time. Correspondingly, it is much harder in India, relative to the US/Europe, for competition to unseat leading brands. Erstwhile startups that have created a successful brand include Cafe Coffee Day, Dr Lal’s Pathlabs, Flipkart, Indian Energy Exchange (B2B), Indigo Airlines, Infosys (B2B), InMobi (B2B), Justdial, Makemytrip, Naukri (B2B), one97 and Snapdeal.
Here are some of these environmental challenges that I see many startups facing here. These are almost never explicitly discussed. Perhaps this is because it’s like the air – it is just self-evident and it is hard to solve for these.
Many of the successful companies we talk about today in India took 10+ years to get to escape velocity and impact. Why? India-focused startups have to change buyer behavior and/or create infrastructure (eg Flipkart’s several thousand people in logistics, Meru Cabs’ owned & operated taxi fleet, One97′s PayTM mobile payments infrastructure), as opposed to purely focusing on better/faster/cheaper solutions. As a result, I generally see linear organic growth in companies targeting the Indian market. There are some companies that have overcome this by creating low-friction offline models e.g. Dr. Lal Pathlabs with low-capex collection centers, and micro-finance businesses with repetitive hassle-free loans to the bottom of the pyramid.
Some other sources of friction include:
- the need for offline presence (even for mainly digital companies).
- difficulties in payment collection from consumers and businesses.
- gatekeepers that have optimized for self-preservation/cashflow.
- government-driven paperwork for compliance & set-up and regulatory uncertainty.
A series of small markets
Startups need large markets (Rs 2500cr+ or $500 million+) to get large and succeed. This is hard to find in India, perhaps due to early consumer demand, unorganized markets, regional differences or foreign substitutes. For example, digital advertising is a roughly $400 million annual business here, with mobile at 10% of that. To access and maintain growth, almost every new startup here needs to increase their focus on creating and evangelizing their category versus just focusing on their own startup’s growth.
Some examples of overcoming this challenge include:
- spending large amounts of capital to create a category (eg ecommerce, OTA, wireless telecom).
- expanding into adjacent markets (eg Info Edge, which expanded from jobs into matrimonials, real-estate, education etc.).
- building or piloting in India and transplanting to the US (eg Zoho)
- aggregating several emerging markets outside India, perhaps before proceeding to Western Europe and the US (eg InMobi, iFlex, Subex).
- attacking a large spend base (eg Micromax for hardware, Cafe Coffee Day for coffee/tea/snacks, BillDesk for bill payment).
While many startups choose to access existing categories abroad (eg smartphone apps), many Indian startups have successfully created India-specific categories, including inbound marketing (Justdial, Zipdial), B2B marketplace (Indiamart, Indian Energy Exchange), assisted services (OneAssist, Onward Mobility, Suvidhaa), MVAS (OnMobile, IMIMobile), entertainment services (Dhingana) and transport aggregation (Redbus, Ola Cabs).
Lack of trust
Lack of trust is endemic in India, whether you are driving through the streets (and perhaps Delhi is an extreme example of lack of trust!) or negotiating with corporate partners. Examples include:
- (some) people misrepresent themselves materially without any consequences (eg overselling).
- (some) founders focus on control at the expense of value creation.
- potential buyers have a hard time parting with payment details or paying for off-the-shelf software.
- (some) people negotiate all the corner cases in extreme detail, to the point where the law of diminishing returns kicks in pretty strongly.
- trust gap between regulators, law enforcement and business.
- trust gap between promoters (aka founders) and investors and potential misalignment on timelines and strategy.
- (some) government and companies focus on protecting themselves from the 1% of customers who are gaming the system at the expense of the 99% remaining customers.
Relationships, not contracts, govern deals. Many brands in India are created from execution reliability at scale rather than product differentiation. Brands in India are disproportionately more valuable as they represent a trusted provider of products or services – think about the enduring value of the Tata brand in multiple unrelated categories. As one consequence, I believe more startups should think about brand-building here in India relative to if they were in the US.
Hard to find strategic talent
Almost every entrepreneur and investor I speak with has this issue. This is not easily solvable – the only potential solution is to focus on A+ people right from the founding team onwards and never compromise on that front, even if it means slower roll-outs. Zoho and InMobi are often cited for building great teams.
Strategic talent is hard to find, including executives, product managers, product marketeers and design experts. We find ourselves scouring large established companies in India for executives and many times find these executives short on ability to take career risk and lower startup-level compensation in exchange for equity. We look abroad sometimes to import talent. One other friction point tends to be lack of middle management willing (or empowered) to take their own initiative and a cultural bias for say:do ratio > 1 (interesting quote by an anonymous founder) which generally means that execution requires a lot of hand-holding.
The smaller pool of founder/co-founder and risk-taking startup employees results in lots of churn and inordinately long hiring cycles, although this is changing fast at a cultural level in India. It is also quite stunning how many times people who have signed employment contracts do not show up on their first day of work.
Not enough experienced mentors
India has an early (but fast-growing) eco-system for new venture creation. I see successful founders giving back to the founder community in a big way through investments, mentorship and driving industry hygiene.
However, there aren’t enough successful founders yet to cater to the much larger group of new founders who need help. Without the perspective provided by aligned mentors, many founders are finding it tough to pivot or accelerate.
I am optimistic on this front, as many experienced and competent mentors have stepped forward over the last two years. In my opinion, this is one of the reasons driving the creation of many of the incubators and accelerators in India which are centered around these hard-to-find mentors.
Constricted access to capital
This has been an issue in India for a long time and is probably why there is a higher focus here on companies to get to cash-flow breakeven fast or to trade-off growth for cash-flow. It is not surprising that the early successes in Indian ventures have mostly come from services-oriented business (e.g. outsourcing, BPO) or offline consumer businesses that grew organically for a while.
Many would point to investors being over-cautious and risk-averse. I think that the environmental factors mentioned above are the causal factor for investor cautiousness and not vice versa. I would argue that the $1.1B in 2011 and $762M in 2012 (source: Venture Intelligence) that went into venture in India was perhaps more than the market could absorb efficiently. Capital is abundant in the growth stage, once product-market fit and/or profitability has been achieved, and hard to come by in the development stage (ie pre-revenue and/or pre-traction stage).
Indian startups have developed a unique set of growth strategies to overcome the challenges mentioned above. I will write about these different growth strategies (and perhaps deep-dive into some of the challenges) in subsequent posts. I am hopeful and excited about companies in India that are overcoming these challenges.
Thanks to the brain trust, who provided feedback and contributed ideas, including Bhawna Agarwal, Kunal Bahl, Raj Chinai, Ashwin Damera, Pranay Gupta, Ravi Gururaj, Ravindra Krishnappa, Sasha Mirchandani, Kavin Mittal, Suchi Mukherjee, Pallav Nadhani, Hitesh Oberoi, Janhavi Parikh, Avinash Raghava, Amit Ranjan, Rajesh Sawhney, Vijay Shekhar Sharma, Amit Somani and my colleagues here at Lightspeed Ventures Maninder Gulati, Apoorva Pandhi, Anshoo Sharma and Bejul Somaia.
Please note that three companies mentioned in this article – Dhingana, OneAssist and Indian Energy Exchange – are Lightspeed portfolio companies.
Lightspeed India MD Bejul Somaia was interviewed by Paramita Chatterjee of the Economic Times newspaper about Lightspeed India’s experience with incubating both OneAssist and LimeRoad. Here’s the link to the article.
We are actively looking to incubate companies in these spaces, as well as back established companies and startups in these areas.
Our experience has been very positive:
“We were involved in incubating two companies in the last 12 months – OneAssist and LimeRoad – and have been very pleased with the results so far. Being able to work closely with teams during the incubation period really helps set the right foundation and strategy for the business. The incubation approach is very time-intensive, with no certainty of a successful outcome. But we will build on our positive experience by catalysing new companies in an organised manner.”
What sectors are Lightspeed looking to invest in?
“Education technology, financial technology, healthcare services, internet, mobile, software and software-as-a-service.”
[Also published on Yourstory.in]
Earlier this week, I was invited to mentor the GSF Accelerator’s startups on Pitching & Investors Decks. I thought I’d summarize what I said there.
I certainly don’t claim any special knowledge on what makes for a good first investor presentation. There have been many books and blogs written about this. However, I’ve seen hundreds of investors pitches over the past several years of coaching CEOs on IPO roadshows, raising capital as a founder and listening to pitches as an investor. Heck, I’ve even been involved with investing in the leading presentation sharing company - Slideshare - which has helped accelerate a trend toward storytelling in presentations.
The first meeting is not about getting investors to agree to invest (although perhaps it is when you are looking at angel/micro-VC funding). The key is to start to develop the relationship and get them excited enough and intrigued enough to want to dive in deeper in a subsequent meeting.
You can greatly improve the odds of having a productive first meeting by telling a compelling story in a concise and hard-hitting manner. Make it personal. Hit the main high points first to generate and assess interest. Then provide backup to your claims to cement the story.
Click here to see the 4 key slides (on Slideshare) that you need to nail.
After these four slides, stop and assess your audience by asking them what they think, their key concerns etc. You should then be adept enough to address these concerns as you continue with the familiar series of slides on traction, product overview/roadmap/differentation, market sizing, business model, go-to-market, financial projections and funding requirement & milestones. Finish by showing the Investment Highlights slide again and summarizing the key points. Leave this slide up while you go through any final Q&A with the investors.
Some other guidelines and pet peeves:
- The point of the slide should be the title of the slide e.g. don’t say “Team” as the title of the slide. Instead, say “Extensive Team Experience in Adtech” if you are doing an Adtech startup.
- The meeting is not about reading out the presentation, it’s about your conversation and engagement with the investors, with the presentation as support material.
- No more than 2 minutes per slide. I’ve seen 30 minutes spent just on the first slide where the whole pitch is given with that one slide.
- You should be able to run through the presentation by yourself in less than 30 minutes.
- Place yourself between the investors and the projected or laptop-based deck. Otherwise you’ll have the tennis match effect of spectators swiveling back and forth between the presentation deck and you.
- Don’t leave the meeting without asking investors: “What do you think?”, “What are your main concerns?”, “What did you like specifically?”
- Know what your investors have invested in or said about your space before you meet them. The Web is your friend.
- Please don’t take the slide deck I’ve embedded above as an example of the colors, fonts or layout that you should use.
Yesterday, we formally announced that Lightspeed and Sequoia invested in OneAssist, a company that creates and markets assistance and protection-oriented membership plans for consumers. OneAssist was incubated and founded in the Lightspeed offices during 2011 by Gagan Maini and Subrat Pani. We’ve known Gagan for almost five years and frequently traded views on business ideas and opportunities in the payments, loyalty and concierge space. Gagan and Subrat have known each other since the late-90s, when they worked together at the SBI-GE cards joint venture. They have each built new businesses from scratch inside larger companies – Gagan most recently started the Indian operations for CPP and Subrat built the credit cards business at Kotak – and we’re excited to back them in building a new company in this white space.
The thesis behind OneAssist is that consumers increasingly value peace of mind, convenience and assistance with respect to certain events that can disrupt or interrupt our everyday lives (such as the loss of a phone or wallet, health emergencies etc.). This is driven by: (i) increasing time scarcity – especially in double income households, (ii) a cultural preference for ‘assistance’ (witness services such as Naukri’s ‘assisted’ online job postings, where sales reps hand-hold employers through the job posting process, JustDial’s assisted directory service, IRCTC’s agent channel for booking online tickets etc), and (iii) an emerging orientation towards protecting oneself from unforeseen future events (health insurance didn’t meaningfully exist 10 years ago and is a 13,000 Cr industry now). And perhaps more anecdotally, a growing sense of taking responsibility for oneself and one’s family.
We believe there is a large opportunity to create a branded, consumer-oriented assistance and protection platform across multiple segments. The initial use cases OneAssist will support are the loss (or theft) of a wallet (including cards, driving license, PAN card etc) and the loss (or theft) of a mobile phone. In each case, the company takes on the chore of cancelling credit/debit cards (or remotely wiping and locking a phone), protecting against misuse of cards and/or data, providing emergency assistance (such as providing a replacement handset with data fully backed-up), and replacing essential identity documents such as a driving license or PAN card. Each product also offers certain group insurance benefits to protect against financial loss. Plans are priced at Rs 1,000 to 2000 per annum depending on the chosen package plan, which equates to just about Rupees 3-5 a day.
In addition to marketing directly to consumers, the company would also market their products through affinity partners (such as banks, telcos, retail, etc) and corporates who have large customer or employee bases and can offer such products as very relevant value added service or benefits for a fee.
This business model is notoriously difficult to execute against given the importance of delivering against the promise in ‘moments of truth’, the myriad of supply-chain partnerships and capabilities that must be developed and coordinated, the direct and partner-driven sales and marketing capabilities that must be built to achieve scale and the customer engagement strategies that must be deployed to ensure high customer satisfaction and loyalty. We believe that Gagan and Subrat are the best entrepreneurs to take on this challenge and wish them and their team the very best as they embark upon this adventure.
[Published in Medianama]
Ecommerce in India has gone through a cold spell, but there is hope for warmer days ahead. There appears to now be a clear focus on contribution margin and sustainability versus the previous race to buy topline. As Bejul explained in his post, customer lifetime value is a metric that Lightspeed believes is critical to measure and optimize.
The ecosystem is a key enabler of sustainability for an industry. For example, it is unviable for all ecommerce players to build end-to-end logistics and payments/wallet capabilities internally. Certain ecosystem trends are emerging which may help ecommerce businesses become more viable over time:
Capabilities of logistics service providers aren’t static
Logistics is where rubber meets the road, and ecommerce glamour meets the offline reality filled with dust, sweat and lost/wrong/delayed shipments. Some ecommerce specialist players now provide:
- End-to-end ecommerce solutions, including inward, racking, picking, packing, shipping and collection.
- Transparency into logistics company’s processes through APIs, which can reduce returns (and costs) and bring predictability.
- Variable warehousing bills (per order shipped) that help manage costs at lower scale, and a projection for reduction in per unit cost with increasing scale of the ecommerce business.
There are several new and old companies worth calling out:
- Dedicated ecommerce divisions within traditional players like Bluedart, Aramex, etc
- New ecommerce logistics specialists such as Delhivery, Holisol and Chhotu. These companies and teams tend to be more hungry, innovative and nimble than their traditional counterparts but are still building their capabilities. Also interesting is Mudita for bulk inter city shipments.
Payment gateways/aggregators are trying to address pain points
Payment gateway failure horror stories are common, with failure rates as high as 35%. This continues to be a lost opportunity, and a very expensive one, as it costs up to Rs 1,000 to get the customer to that point. Here are a few improvements/innovations that are coming up:
- Wrapper technologies that work with multiple banks to minimize probability of transaction failure.
- Deep analytics and visibility into customer’s intent to buy: For example, ecommerce companies can track a list of failed transactions (with customer and cart details) so that their teams can follow-up and close offline.
- PCI/DSS compliant widgets which simplify the payment experience for consumers.
- Capability to handle payments originated over mobile web.
There are traditional names like Billdesk, CC Avenues, EBS, who are incrementally adding value but the new teams that are coming up quickly are Citrus and PayU, in addition to GharPay which collects cash from consumers’ doorsteps when no physical delivery of goods is involved (e.g. tickets, collection in advance of shipping).
The industry is maturing
Some of the more recent trends I see are:
No-poach agreements: After the initial land grab in the OTA space, Yatra, Makemytrip, Cleartrip got into such arrangements. Leading ecommerce players are now discussing these. It is good from a talent pool perspective too, as people apply themselves to fix hard problems versus moving to the next job.
CoD Blacklist: CoD is a key part of Indian ecommerce. However, high CoD return rates (upto 25% in some categories) cause operational challenges and working capital burden. Some players are discussing creating an industry wide CoD customer blacklist – this can drive significant efficiency for ecommerce / logistics companies and a better experience for genuine customers.
Trust from OEMs/Brands: Brands/OEMs are putting more trust into ecommerce now. Eighteen months back ecommerce was not strategically important to brands/OEMs, but brands are now launching their own ecommerce platforms, and/or have a clear strategy for ecommerce as a channel. Senior executives with years of core category experience are now excited about ecommerce and are considering opportunities in this retail format.
These trends are still in their infancy but if they continue the situation will be very different a few years from now. The key question is to what extent and in what time frame will these developments move the needle in making ecommerce sustainable.
Some thoughts for ecommerce entrepreneurs
My thoughts for entrepreneurs building ecommerce companies are to:
- Assess if you can derive value out of any of these services / trends: For example, compare if your current logistics / payment provider (in-house or outsourced) is competitive with the changing environment or revisit if you can bring in top talent from the domain into your team.
- Step forward to support the ones you find relevant: For example, you would take risk when you test a new partner in your order flow (logistics or payment), or when you commit to not hiring from competition, but these partnerships can pay off very meaningfully in the long run.
- If you are a new startup, identify and focus on your core competence: Logistics and payments contribute significantly to direct costs but they are only necessary and not sufficient for success. So unless you plan to differentiate on these, leverage the ecosystem.
This list is by no means exhaustive, so please feel free to add more names / trends / thoughts in the comments section.
[Published on Yourstory.in]
So, how long will it take to get a term sheet?
This is a question that most entrepreneurs appropriately want to know. While there is no one size fits all answer to this question, the focus of this post is to ask what I think is an equally important question for all entrepreneurs – what does a term sheet really mean?
The reason this is important is because all term sheets are not equal. Some firms issue term sheets early in their investment and diligence process (Firm A), while others issue them at the end of their process (Firm B). While Firm A will be able to issue a term sheet more quickly than Firm B, there is likely to be a higher risk that the deal does not close as most of the detailed diligence is yet to be done. Conversely, while Firm B might take longer to issue the term sheet, if/when when they do so, they will likely have a very high likelihood of completing the investment, thus providing the entrepreneur with a higher certainty of close.
Since most term sheets contain exclusivity clauses that restrict the entrepreneur’s ability to speak to other firms and evaluate other financing options, wouldn’t you rather accept a term sheet that has a higher probability of close, even if this takes a little longer? So next time you ask an investor how long it takes to get a term sheet, be sure to also ask what level of commitment their term sheet represents.
Here’s the presentation I gave at the IAMAI Digital Commerce event this morning:
I find myself simultaneously excited by the future prospects of India’s mobile value-added services (MVAS) industry and depressed by the current friction in the eco-system. Overall though, I am cautiously optimistic – there is some hope on the horizon in the form of upcoming offdeck rev-share changes, smartphone growth, and the (rumored) Reliance 4G launch.
So, what is the problem?
Mobile operator ARPU in India has collapsed from roughly $10 in 2005 to $3 currently, compared to a steady $11 in China and $70 in the US. There is over-competition in the market – good news for consumers in terms of voice prices but bad news for consumers in terms of slower rollout of broadband and high wireless data prices.
Wireless data in India is relatively early – it accounts for ~$4.8 billion in revenue (according to IAMAI and Analysys Mason) or 16% of overall wireless revenue of ~$30 billion. MVAS (excluding data plans and p2p SMS) accounts for approximately half of wireless data revenue in India. Contrast this to US data revenue of ~$70 billion in 2011 (approximately 35-40% of overall wireless revenue of $200 billion) and China data revenue of $32 billion (approximately 27% of overall wireless revenue of $120 billion). There are approximately 50 million mobile Internet users in India out of ~800 million mobile users.
MVAS companies in India are not growing fast (or at all). Since they have traditionally focused on building businesses inside the operator walled garden, they have been governed by the 25-30% cap on the rev-share that they get. Recent TRAI regulation changes have not helped the vendors (although I think consumers have benefited from the elimination of spam and seamy billing practices). Due to their whitelabel nature and lack of consumer branding, most MVAS companies are being increasingly commoditized. They also have a high cost base given the rev-share constraint, content licensing costs and the fixed cost of managing operator relationships.
The leading MVAS companies like OnMobile, IMIMobile, Comviva and One97 have now refocused their attention outside India. Beyond that, there is a long-tail of MVAS companies, none of which seem to have truly punched through $5-10M per year in revenue and many of which have now optimized for cash-flow at the expense of growth.
No alternative payments platform in place. Operator billing is the most pervasive payment mechanism in the world, and in India (apart from cash and checks). Some sort of alternative mechanism needs to come along, whether cash load networks or mobile wallets with integration to net banking/ETF/credit cards/cash load networks or operator billing aggregators. 18 million credit cards is a miniscule number relative to 800 million+ mobile users.
But I think there is some hope on the horizon. Here’s what to look out for in the next 12-24 months:
1) offdeck rev-shares could be poised to increase dramatically from 30% to developers going up to 70% in the next 12 months, with Vodafone leading the charge (more on this in the next post).
2) over the next 2-3 years, as true smartphones (Android/iOS) grow to ~100 million installed base, from the current 10-15 million, consumers will have access to a global applications database and regular payment options.
3) Reliance 4G may disrupt on pricing and rev-shares to break open the market. This might drive a data plan price war.
(republished from Nextwala blog)