[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.
Market friction
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).
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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.
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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.
16 comments
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February 19, 2015 at 12:31 pm
Lack of Trust in India, and how startups should deal with it | smritiweb.com
[…] @dkhare of Lightspeed India Venture Partners has an interesting article about the problems with the Indian startup ecosystem that makes it difficult to start and grow a startup in India, title The Silent Killers of Startup Growth. […]
July 17, 2014 at 2:37 pm
Pankaj (@pankaj_sachdeva)
Few additional obstacles in my view for growth of start ups. Divided in 3 categories:
A. Startups which have a turnover of less than 10M $ (INR 60 crores) –
i) Over passionate on development
ii) Ignoring the importance of sales & distribution.
iii) Founders must remember right (& not complete as “complete” will never happen) product is important. If they can develop the complete product in stages its very well acceptable.
iv) Important to start planning distribution is important from Day 1 as customer is the only guy who tells you a real feedback on product. The feedback should then be used to develop the next phases.
v) Cash is KING – preserve as much as you can. Founders forget this.
vi) Biggest – Loss of focus on Plan B & C.
B. Startups whose turnover is between 10 M $ and & 25 M $
i) Right model of scaling like inhouse vs. Outsource, Make or Buy etc…
ii) One common hurdle I have observed in such startups – Corporate overheads. They range between 1 Cr. And 1.50 Cr. as you need to have HR. IT, Finance, Office at a reasonable scale. Invariably the businesses are not able to support these costs. True catch 22 situation – business is unable to support these costs same time business cannot survive without them because of potential scaling up.
iii) Loss of focus on Plan B
iv) Cash is King!! preserve as much as you can. Founders forget this.
C. Startups which exceed 25 M $
i) Right model of scaling
ii) Right mind set of investors who support the growth
iii) Over confidence
April 19, 2014 at 4:25 pm
Shikha Verma
I agree to your valuable information. I find lack of trust is the major issue in solving other issues mentioned here.
April 20, 2014 at 9:45 am
4thAugust1932 (@4thAugust1932)
You need Cash/Caste to succeed as an Entrepreneur in India.
January 4, 2014 at 12:54 pm
My final comments on a Twitter discussion about Design & India focused startupsProductNation | ProductNation
[…] The Silent Killers of Startup Growth […]
January 4, 2014 at 10:15 am
My final comments on a Twitter discussion about design & India focused startups | In a startup frame of mind
[…] The Silent Killers of Startup Growth […]
June 6, 2013 at 11:46 am
Manoj Shinde (@mSolstice)
Great funneling Dev ! I would like to label us as content absorbers than content creators. That void leaves many startup companies in the hand of AD or PR agencies to build consumer marketing strategy which is obviously an expensive proposition. The other void is ” Educating customers on new-age solutions” most of our offline or mainstream media still talks about capital intensive businesses on everyday basis rather than creating stories around startups and how, they could add value to your everyday life
(excluding deep pocketed startups)…..inadvertently so, content is a missing element in indian startup eco-system.
June 6, 2013 at 2:37 am
Amrita Mathur (@AmritaMathur)
Lack of trust is a bigger problem in India, spanning more than just misrepresentation — the lack of online identity, the fact that anyone can easily get lost in a crowd and untimely/ ineffective law enforcement are the biggest barriers. Founders, VCs, customers and the general public find themselves constantly at odds with one another instead of working together.
Further, India and its many microstratas of society tend to have greater trust in ‘large, brand name’ even though startups may have the better product, value props etc. India’s general public is highly reliant on recommendations and hearsay rather than actual results and data, leaving startups to the mercy of giants who either squash them or buy them up.
June 6, 2013 at 5:28 am
dkhare
What do you think can improve the trust deficit between founders and others?
June 4, 2013 at 11:00 am
Go West, Young Man And Other Tales From The Entrepreneurial Crypt | Frontiernxt
[…] The context maybe different, but the theme — that the fight is simply not worth it here, aim for the Western market — is a recurring one in the digital entrepreneurial space in India. The difficulties in starting up in India are well known and documented. The most recent notable one was Dev Khare‘s ‘The Silent Killers of Startup Growth‘. […]
June 2, 2013 at 9:01 am
Saket Kumar Singh
I agree. Good article. I find lack of trust is the major issue in solving other issues mentioned here.
June 2, 2013 at 4:11 pm
Communal Award
Govt must NATIONALIZE Infosys before it becomes SATYAM.
May 31, 2013 at 10:30 pm
dkhare
There’s a fairly active discussion thread on this post here: http://news.ycombinator.com/item?id=5796954
May 31, 2013 at 4:55 am
Prasad Gune
On the “negotiating corner cases”, I remember an article from the Economist about an Indian business group that lost a deal to a Chinese team, since they excessively redlined contract details. The money quote was that the Indian team had “no concept of materiality”.
June 6, 2013 at 5:27 am
dkhare
Prasad, I’m at LinkedIn tomorrow. Will try and ping you when I’m there.
May 30, 2013 at 6:50 pm
Sree Vijaykumar (@Sree_Vijaykumar)
Good analysis, Dev. Couldn’t agree more on the ‘negotiating corner cases’ point.. Overall, I feel that startups are handcuffed because access to capital and the general lack of trust create a natural advantage for large companies, even if startups are nimbler and may have a better product.