How Indian tech startups win by repeatedly expanding their market

(Successful consumer Internet companies often start with dominating what looks like a niche market, but then expand their market repeatedly. For successful Indian startups, this often happens much sooner in the lifecycle than say Silicon Valley startups. How should founders and investors use this to inform their decisions?)

Take a look at the list of startups that are closing angel financing on the leading fundraising platforms this month, and chances are, that many would appear to be focused on rather niche markets. Are we reaching a point where a bulk of the mobile and Internet value creation is done, and only small problems are left for companies to solve? Are startup teams thinking big enough?

Flipkart CEO Sachin Bansal recently had an engaging Twitter conversation with several early stage investors and startup enthusiasts revisiting the classic debate of whether investors prioritize founding team or the idea in their funding decisions. The overwhelming investor response was that they bet on the team first and foremost.

The two observations above are linked. Successful startup teams start with a great idea in a market segment that may initially look small, but then build upon initial traction to either significantly expand the market or catapult into broader adjacent market segments. That is why investors say they look first for team quality (along with size of the broader market), and also the reason why a handful of the niche-sounding angel funded startups may turn into unicorns a few years from now.

Many Indian consumer Internet startups that are reaching superlative scale and valuation numbers today started by addressing niche markets at their early stages. Take Zomato for instance. If you looked at them in 2011, it would have been very hard to envision the scale that the market is expecting them to reach now. At the time, the company primarily monetized by tapping into the Indian restaurant brand advertising market. This market is tiny, and almost none of it was online at that time. If you used reasonably liberal extrapolation, the total available revenues in five years would top out at perhaps $20-25M. The company has, via the ingenuity and drive of its founding team, continually expanded its market by growing its core offering, entering new geographies and bolting on new business models.

A recent post by Todd Francis (“What Billion dollar companies look like at Series A”) touches upon this ability of high performance founding teams to expand the market:

“However, successful companies often start with executing very well on an initial concept that is the beginning to a much bigger offering.”

 

In India, this market expansion often happens much sooner in the lifecycle of companies than it does in say US (or China). That’s what we have found over the past several years looking at various investment themes across US, China, Europe and India. Many market segments in India could be relatively thin due to low monetization levels, but that hasn’t prevented the best entrepreneurs from building companies of massive scale. This is one of the key reasons you see disproportionate amounts of investment going behind stellar teams which at present may operate a business that does not appear to justify reported valuation levels.

The tech industry, unlike say the airline or telecom industries (which also deliver services to consumers/businesses), allows platform businesses to leverage their customer bases, data and market knowledge to expand into adjacent segments rapidly, and to disrupt status quo dramatically. Tech companies can create new experiences, use cases and price points which can alter market size significantly.  Benchmark’s Bill Gurley has written an insightful post on how Uber has expanded its market size well beyond what conventional wisdom would have entailed.

Here are some ways successful Indian startups have been expanding their markets beyond their initial niche:

  • Expand into adjacent verticals, and verticalize offerings. Flipkart at Series A was a tiny online book-seller. Many other vertical-focused eCommerce sites were funded in the same general timeframe, but Flipkart rapidly built on an early lead and expanded systematically into many other large eCommerce verticals. Similarly, Ola is beginning to leverage its market position in the taxi/transportation vertical to enter various other logistics/delivery verticals (e.g. food, grocery deliveries), which would help it grow into its heightened expectation and valuation levels. Quikr in an example of a successful internet company that is expanding by driving deeper into its verticals of focus.
  • Expand into adjacent market segments. Some successful startups use their expertise, data and customer base to offer a different type of product that builds upon their position and enhances customer stickiness, revenue per customer and sales ROI. Vizury, which started off with an ad retargeting product, has expanded its product portfolio to include various big data and marketing-tech offerings that it sells to its marquee client base. Netmagic added cloud offerings and managed services to its solid datacenter business, which helped it get to a substantive sale to NTT in 2012. Snapdeal, one of the leading online marketplaces, started off as a card-based couponing play, and expanded or morphed its model several times before getting to its current broad marketplace model.
  • Expand geographic footprint. Companies such as Vizury, Zomato and InMobi expanded into multiple other countries very early in their evolution, and are creating a global or transcontinental footprint with products that would have appeared to have a relatively small addressable market in India. These companies built strong products in India and ventured out into distant markets at a time when there were few successful precedents. These days we see geographic expansion highlighted as a key growth lever in many pitch decks, especially those for B2B product companies. Expanding into foreign countries for early startups is never easy, but there is often great value in doing things that are not easy.
  • Expand business model.  Many companies start with a business model that suggests a moderately sized market, but later tag on deeper monetization models e.g. JustDial and Zomato, which initially focused on listings/lead generation models, are actively moving into transactional local commerce models
  • Use low margin consumer aggregation products to get into more attractive segments. PayTM (which recently raised $575M) and FreeCharge (recently acquired by Snapdeal) both used low margin mobile recharge models to rapidly aggregate massive bases of transacting customers, and are now beginning to funnel these consumers into marketplaces for a wider range of products. In the process, they sidestepped competition from the leading eCommerce marketplaces, which had a significant head start at the time these two started
  • Integrate vertically: Many eCommerce platforms including FashionAndYou, Healthkart, Myntra, UrbanLadder and others have focused extensively on private labels and vertical integration in order to drive higher margins than the base e-retailing business. eCommerce marketplaces building their own logistics networks is another example.
  • External Investments and Corporate Development: This classic growth tool was nascent in the Indian startup/Internet ecosystem till about a year back (except perhaps Info Edge, which has used this tool well for almost a decade). This is starting to change rapidly with Flipkart, Snapdeal, and Amazon building out significant capabilities for minority investments and acquisitions that will help them expand their markets further. We are now starting to see smaller companies leverage corporate development/M&A successfully in India, and are likely to see much more activity on this front.

The above list has an obvious selection bias. It only lists a handful of companies that succeeded in expanding/reinventing their markets, but there are of course hundreds of other funded startups that failed to do so.

So if you are an entrepreneur starting off with a new venture, how to do you decide whether your idea, which may appear niche, is worth pursuing?

Or if you are a tech investor, how do you take a call when it may seem that most early startups you look at are operating in small market segments?

Here are some thoughts:

  • Team, team, team. Clichéd but true. The above list is a testament to why angel/venture investing is first and foremost about team. Great teams can expand their business well beyond the initial idea or model. In addition, the ability to raise future financing rounds of increasing size has now presented itself as a core requirement of any team looking to drive towards a large outcome. Unfortunately, the above abilities are nearly impossible for investors to predict based solely on the team’s resumes or institutions they attended. These are also often hard to evaluate based on an initial meeting. It takes a several meetings, some smart background work and/or observing over a period of time to see evidence of the persistence, drive, ingenuity, single-mindedness, passion, resilience and leadership skills needed to continually expand the pie. 10x founders leave their fingerprints in various aspects of the business, and smart investors learn to pick those up.
  • Keep an eye on new disruptive technologies, and how your venture/investment may be able to harness those to ride a massive upcoming wave. Internet of Things, Wearables, Drones, 3D Printing, Autonomous Driving Cars, Deep Analytics, VR/AR and AI will provide today’s early stage ventures with powerful catalysts to explode their market, just like mobile, social, local and cloud did for many of today’s unicorns
  • Founders must define their target market more broadly for the medium and longer term. If you are an entrepreneur, lay out a plan, perhaps a decision tree of segments/models you could eventually expand into and disrupt. This will not only help in your conversations with potential recruits and investors, but also serve you and your employees as a guiding light at various points in the journey. Your eventual path will almost certainly look different from your initial plan or decision tree, but a well-thought plan will help immeasurably. Similarly, investors sizing an addressable market must look for and understand large adjacent markets that the team, if successful, could address. Build out your outcome scenarios layering in different levels of success with addressing these adjacent segments
  • On the flipside, management teams and investors should keep in mind that many existing consumer Internet leaders or startups can and will enter your space, since they will also look to expand their And the massive amounts of funding that is going into leading Indian consumer Internet companies will only accelerate their expansion into adjacent segments. Have a plan to deal with this. Identify the moat you are building, and build it fast.
  • Investors must think critically, maintain high risk appetite and create a broad, balanced portfolio. While a few select teams will expand markets, ride new S-curves and create massive value, a vast majority will spend their time tackling the base market, and may stumble along the way. Out of ten very high caliber teams in ten large markets ready for disruption, you may only get one outsized outcome if you are fortunate. That’s the law on which venture investing works. In the new world of massive private funding rounds, this dynamic will only accentuate further. Be prepared.

Comments and feedback are welcome.

(Anupam is a VC investing in mobile, internet & technology businesses in India and the US since 2007. Companies linked to are NGP portfolio companies. Data and facts cited are based on public sources. Views are personal)

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Why eCommerce in India will meld into Local Commerce

It is no secret that e-retail in India has been growing at a dramatic pace. It is expected to exceed $22B in three years (from a negligible size five years back) after attracting billions of dollars in venture investment. Several unicorns have been created in this space. 40M+ users already shop online in the country, and this number is expected to rise rapidly towards the 100M mark.

The classic eCommerce model entails a small number of large efficient warehouses built across the country, coupled with a well-oiled logistics network that can deliver merchandise to consumers anywhere within a few days. However, this model has three basic constraints that will lead to its disruption and evolution:

First, the big centralized warehouse eCommerce model is economically sub-optimal in India. Shipping one package across the country and into smaller towns costs significantly more on a unit basis than ‘caching’ goods closer to where the demand is. This issue is more pronounced in India than it is in many other markets – the ASPs in India are typically low, while the logistics (shipping, warehousing) costs are not proportionately low. E.g. for a generic retailer, the AOV in India may be Rs 1000 ($16) vs $50 in the US (i.e. a third) for a retailer with a similar category mix, but the unit logistics cost at scale may only be 40% lower in India. Return shipping and logistics increases unit costs further. The marketplace model with platform fulfillment could add in yet another leg of shipping. Shipping and logistics can cost 8-10% of the gross merchandise value for many e-retailers and marketplaces, and this cost item appropriates much of the gross margin/platform fee for several e-retail categories. In fact, classic eCommerce in India may not have the structural cost advantage over traditional brick and mortar retail that it has enjoyed in many other markets. Charging separately for delivery on a widespread basis will always be hard in a highly competitive market like India. In order to drive towards profitability and better unit economics, eCommerce companies will need to find disruptive ways to optimize their shipping and logistics expenses.

Second, as the consumer gets used to instant on-demand services such as food delivery and taxi services, waiting say three days to receive the USB drive s/he ordered from a distant seller will become increasingly unacceptable even to consumers in smaller towns. With the traditional eCommerce model, delivery to various parts of the country could take several days on average. This is further impacted by additional areas of friction such as inter-state taxes and state border check-posts. Many large eCommerce companies are already racing to build next day and same day (in larger cities) delivery, often via a combination of local warehouses in larger cities and overnight air shipping. Instant gratification is a key advantage of local purchase at offline retail stores, which needs to be countered or offset by eCommerce platforms. Thus the natural pressure is for eCommerce to move towards more instant models, such that consumers can receive goods they ordered within a few hours or less. Amazon, JD and others are looking to achieve this by building a chain of metro area warehouses across their respective geographies of focus. Leading Indian marketplaces have also set off on this path. However, this model is highly capital intensive, and by itself, may not be ideal in the Indian context where unit real estate/rental costs are high. Additionally, while it may work for some categories such as consumer electronics, it could be cost prohibitive for other categories such as appliances, furniture or home goods. Further, this approach does not work as well with the marketplace model which is predominant in India.

Third, the eCommerce model doesn’t lend itself to instant returns and exchanges e.g. consumers do not have the option of taking a defective product back to a nearby store and exchanging it immediately for a functioning one. For many consumers, this is a significant mental barrier to ordering some categories of goods online, and a big psychological advantage of shopping locally.

Most large eCommerce platforms in India function as marketplaces with tens or hundreds of thousands of merchants. Many of these merchants are local shopkeepers who have begun to sell online via these platforms. These merchants already stock the goods at their own premises in local neighborhoods.

The Evolution to Local Commerce

Several of the above constraints could be addressed by scale marketplaces with sufficient density of local merchants such that a reasonable volume of transactions is fulfilled locally. This would bring down unit shipping costs, provide significantly faster delivery, and provide consumers the comfort to return/exchange merchandise more expeditiously when needed.

This model makes imminent sense for categories where local availability of merchandise is high, and the logistics cost form a relatively high proportion of net revenue, e.g. appliances & furniture (where shipping long distance is cost prohibitive and time consuming), groceries (which constitute 60% of overall retail sales in India), home goods and books. We are already starting to see various leading horizontal marketplaces launch the grocery category via a local fulfillment model, e.g. Amazon’s recently soft-launched Kirana Now service, which aims to deliver groceries locally within 2-4 hours via tie-ups with local stores.

This local commerce model will expand to several other major e-retailing categories.  The LCD television, microwave, book or even smartphone could be conveniently delivered in an hour from the nearby electronics or book store rather than making its way across the country via various modes of transport.

The eventual optimal model may be a hybrid one with a reasonable bulk of demand being fulfilled locally via neighborhood merchants or fulfillment centers, and only long tail products (or those more readily available in other regions) being shipped individually to the customer from a centralized warehouse.  As eCommerce/marketplace platforms push ahead in their quest for profitability and compete on faster delivery times, they will push harder into local commerce, and converge with various other startups already building out the local delivery model.

Consumer Internet in India – Bubble or Massive Opportunity? Seeing both sides

There has been an incredible, unprecedented rise over the past year in the sentiment around the consumer mobile and internet space in India. There are now several private companies in the ecosystem valued in the billions of dollars and a slew of new deep pocketed global investors active in India ready to invest tens or hundreds of millions of dollars into relatively young companies. 2014 saw tech VC/PE investment of over $5B, more than double of any prior year on record. 2015 so far appears to be on pace to beat that high watermark.

Having been active as an investor in India for the past several years and having seen the ecosystem and many companies negotiate both ups and downs of investor sentiment, this is a very interesting time. Every week I speak with multiple potential investors – usually those looking from afar or just entering India – who are brimming with optimism, and I speak with many others – usually those who have been on the ground for a while – who privately voice that we are in some form of a frenzy or bubble.

Here I capture some thoughts looking at both sides – the bull case as well as the key risks around investing in growth stage consumer mobile/Internet companies in India in the current environment.

There is a strong Bull Case…

  • Digital platforms at scale: Mobile Internet has unleashed digital platforms of massive scale in India. There are over 200M unique Internet users in India today, likely to cross 500M in five years. Most of those 500M users will access the web primarily over mobile. When you have hundreds of millions of users with a connected device on their person, the platforms and services you can create are endless. With 175M+ mobile internet users, 200M+ internet users, 900M+ mobile users and 150M+ social media users, India’s digital economy has reached critical mass, and continues to grow faster than most other large markets. For the foreseeable future, India will be second only to China in the sheer scale of digital platforms.
  • China benchmarks: For India, China provides a direct upside benchmark of a buzzing Internet ecosystem at scale in a large emerging market. The Alibaba IPO was arguably a major trigger for the ongoing consumer Internet investment boom in India. China has 30+ Billion dollar consumer digital companies, which are cumulatively worth over $500B on the public markets. In China, almost every large vertical and model – eCommercce, social, search, gaming, classifieds, mapping, payments, portals, travel, real estate, jobs, taxi – has seen billion dollar outcomes. And the Chinese Internet market still has a long runway ahead of it.

India, by contrast, currently has just three public Internet companies with a total worth of under $4B, and only a handful of Billion dollar private companies (even after the funding frenzy of the last twelve months). Given the fact that India has a population similar to that of China, is now reportedly growing at least as fast as China, and has a political dispensation perceived to be business-friendly, most investors agree that this gap represents a large opportunity for value creation in India. Purely based on this macro comparison basis, we should expect to see many more ‘unicorns’ coming out of the Indian consumer digital space.

  • Global product companies from India: The other leg of the India tech story is the emergence of global product companies being built out of India. Given India’s deep entrepreneurial and technical talent pool, a large itinerant base of global Indians, and lack of linguistic barriers, India is well positioned to create an Israel-like ecosystem of startups that builds locally but sells globally. There are already examples set by companies such as Vizury, Zomato, Druva & Freshdesk, and this trend will only accelerate over time as cities such as Bangalore develop into startup and innovation hubs rivaling Silicon Valley.
  • Network effects and betting on the winner: Many consumer Internet segments have a strong network effect, and thus have a strong winner-take-most dynamic. Segment-leading Internet companies in India have had relatively high historical survivability, and have generally demonstrated ability to maintain market position through tenacity. Therefore in many cases, investors believe they can’t go wrong when investing in a market leader, even if they understand well that they are entering at a very high price well ahead of current traction. Given the large long term potential and network effects, market leaders in many segments should still fetch outsized returns over the long term.
  • Local winners: Unlike the first wave of the Internet (search, portals, news, social), most emerging/growth segments in the consumer space (eCommerce, taxi/transportation, real estate, food, local deliveries, local merchants/services) have a strong offline or local component. Local well-run companies are better positioned than their global counterparts to address the unique nuances of building large offline operations in the Indian market
  • Internet/Mobile eating up industries: Entire industries are being created or disrupted by consumer tech companies. Take the retail, travel, taxi/transportation and food industries today. Over time, this will extend to many other spaces such as education, healthcare, real estate, local services, automotive and others. In fact in India, the opportunity for technology led industry disruption is perhaps higher than in many developed economies. India may leapfrog a generation of companies given limited penetration of organized offline businesses across these industries, e.g. eCommerce in India is in the process of leap-frogging traditional organized retail, which remains relatively small in proportion to the economy. Other sectors such as transportation, real estate and travel may also see Internet companies emerge as bigger value creators than first generation offline companies

 

…But many challenges to be overcome

Where there is opportunity, there are challenges. And challenges continue to be aplenty in the India consumer digital space. However, the good news is that many of these question the “when”, not the “if” about the opportunity, and the smart ones will figure their way around.

  • Low Monetization: India has the unique dichotomy of extremely large user numbers and extremely low monetization per user. India’s average per capita income is still barely above sustenance level (~$1500), leaving very little disposable spend per capita. Take the digital ad market for instance. Digital ad market in India is around $600M/year. At 200M Internet users, this implies a digital ad spend of about $3/user/year. The analogous figure for China is about $50/user/year. For the US it is over $200. For sure this represents room for upside. However, the Indian digital ad market, while growing rapidly, is not yet growing meaningfully faster than user base growth, i.e. ad monetization per user is only growing at a moderate pace. The wide differential in monetization levels holds across other sectors with direct monetization, including eCommerce and travel. E.g. in the relatively mature online travel space, for India’s leading OTA, net monthly revenues are estimated to be $0.4 per MUV, while the same figure for China is around $1, and for the US around $18. These gaps will converge, albeit over a period of several years (or decades).

Add to this the fact that direct monetization is harder in India outside of areas where the consumer is already used to paying for a good or service offline, or where online services provide a large discount to alternatives (e.g. travel, eCommerce, local commerce). Sectors such as digital music, gaming, consumer/SMB SaaS have created large winners in markets such as China and the US. However, in India, digital content, virtual goods, software subscriptions have so far been relatively hard to get customers to pay for, and companies in these spaces will take longer to get to scale.

Companies and investors must thus look for models with direct monetization where possible, and/or be geared to build slowly as the market expands.

  • Challenging unit economics and high burn rates: I look at local marketplace businesses across geographies, and India has by far the toughest unit economics of all markets I look at. Monetization levels per customer are low, but costs are often not proportionately low owing to systemic inefficiencies. Customer acquisition is expensive (relative to ticket sizes) given the highly crowded environment and inefficient acquisition channels. Real Contribution Margins for many high growth businesses are negative, even in their steady state localities or segments. Discounts and aggressive competition push the unit economics further into the red. Many businesses, including several of the large ones, seem to perpetually be in ‘investing’ mode (known less charitably as selling 100 Rupee notes for 90 Rupees).

While in many cases investing ahead of the curve is a necessity to build the market and stay ahead of competition, companies and investors need to have a very clear view of how they will/can get to positive unit economics. Not all companies and segments will be able to make that transition.

  • China analogs not directly applicable to India: The Chinese internet economy is arguably one of a kind, the scale and vibrancy of which may remain unparalleled for a long time to come. Indian Internet may not mirror what has happened in China. There are several reasons for this. Everyone is familiar with statutory constraints on foreign entrants in China, which created a natural walled garden and a facilitating environment for the hyper growth of local companies. An equally important but less appreciated difference is that traditional media and distribution are not as developed in China as they are in India. E.g. India has a well-developed ecosystem of hundreds of private TV channels, print media, radio, local entertainment etc, while in China, the Internet forms the predominant channel to access information, entertainment, communication, commerce etc, especially for the younger population. Lastly, China’s per capita income is about 3.5x that of India. But for many relevant consumer discretionary segments the gap is much larger, as the ratio of disposable incomes is much more skewed than the ratio of incomes.
  • Diminishing returns: While the Internet user base in India is on track to get to 500M users in a few years, it is important to realize the hurdles associated with engaging and viably monetizing the incremental users getting online. The incremental users will predominantly be those with significantly lower spending power than current Internet users. Many of these users will be based out in the hinterland and may have needs very different from what many current services offer.

Many vertical marketplaces getting funded today dispense products or services that are applicable to a relatively small subset of today’s online user base, let alone the next 300M Internet users. Business plans and investment theses need to appropriately bake this in.

  • Valuations: It is no secret that current valuations in the consumer internet market in India are priced for perfection. Any global or local macro event, or a couple of adverse ecsosystem situations can send the party into a tailspin. India has gone through these cycles before, as has rest of the world.

Many growth stage investment cases today must necessarily rest on the “Greater investor theory”. At current pricing levels, many growth stage investments can only be justified based on aggressive growth investors purchasing the asset at some point in the future. Many companies will not in the next 5-7 years reach anywhere close to a level of baseline profitability where exit at a fundamentals-driven valuation would provide a reasonable return to investors getting in now. So exits must be timed during a future period when the music is on and there is a high appetite for assets of larger size than today.

  • Macro view and Hot Money: The current rally in tech investing got triggered primarily after the change of political dispensation in India (along with the massive Alibaba IPO), with the new establishment viewed widely as business friendly and growth oriented. This has triggered an inflow of large amounts of capital from various geographies and sources that see India as a bright spot in a world that is largely slowing down. These cycles unfortunately tend to be ephemeral. Hot money is always on the lookout for the next Brazil, Turkey or Indonesia. Interestingly, the last such upcycle lasted till as recently as 2011, when the global macro view on India was incredibly positive, there was a positive vibe on Indian political dispensation and its reformist credentials. All that changed rather quickly in 2012.

Companies must at all times have a plan of action for an environment where they may not be able to raise sufficient money to fund tens of millions of dollars in monthly burn.

  • Last but not least, Talent Shortage: Anyone who has invested in or run a company in India is familiar with the level of talent crunch the country is currently going through. There just aren’t enough engineers, salespersons, product managers, CXOs, data scientists to execute against all the opportunity. Capital is abundant, and so is entrepreneurial talent. But there just aren’t enough skilled folks to do all the work! The well-funded will fight fierce and pricy talent wars, while many others will be forced to drop off the radar. While VC funding may have grown 2.5X in a year, talent availability in India will grow linearly at best. This may be the prime supply side constraint to the growth of many startups.

So is this a good time to invest in the consumer digital space in India, especially at the later stages? Well, as always, there are no blanket right or wrong answers. Outcomes will vary by company, sector, specific situation and level of preparedness.

Larger funding rounds earlier in the lifecycle of private tech companies

There has been a surge of mega growth stage financing rounds globally, especially in the Internet, mobile and SaaS spaces. Venture capital funding in 2014 was up over 60% year over year across major markets globally. Average VC deal sizes have grown by over 50% on average over the past five years.

Why?

It is certainly true that funding for private tech companies is going through a phase of exuberance and globally there is significantly more risk capital available than in the last several years. There are many reasons for this. Business cycles are complex, and this can be the topic of an entire book. In this blog post, we’ll focus on the other side – why raising more money earlier in the life cycle could be a good idea for certain companies once critical mass is achieved.

Here are some good reasons to invest larger amounts of capital than before into companies where the basic model (product market fit, business model) is proven and market opportunity is perceived to be large:

  1. Scale as competitive barrier. A large number of growth stage companies (especially in segments such as Marketplaces, SaaS) are being built upon previous layers of platform innovation/adoption e.g. ubiquitous smartphone + social are key enablers for unicorns such as Uber, AirBnB. A vast majority of growth stage companies today are not built around defensible breakthrough technology. The main competitive barriers for most models are execution speed, scale and network effects. In this situation, once product/market fit and business model are proven, it often makes sense to grow as fast as possible, globally
  2. Competitive strategy.In many cases, raising a very large financing round is a way to send a strong signal to of competitors’ existing and potential investors, thereby limiting the rise of competition and creating a more dominant place in the market
  3. Attention is getting more expensive. It is getting increasingly expensive to acquire customers, especially consumers, given intense crowding of services vying for finite amount of attention on app stores, search engines and social platforms
  4. Larger digital user bases. There are ~3 Billion internet users in the world now, compared to 800M a decade back. The growth in India over this period has been even more pronounced. Consumers and Enterprises are much more engaged and are using digital platforms for a much wider variety of tasks than they were a decade or even five years back. Much of the growth capital raised is often spent by companies on customer (and supply) acquisition. It takes more money to acquire a meaningful fraction of this much larger user base
  5. Opportunity is global.There was a time when companies were built in one country, and then considered global expansion after getting to significant scale over several years. This created opportunities for business model arbitrage across geographies. Companies such as eBay ended up acquiring several companies with similar models across the globe. However, category-leading companies and their investors have realized that this leaves opportunity on the table for others (which could additionally be future threats), and in many cases it makes sense to enter multiple markets much sooner in the company’s lifecycle
  6. Lower startup costs, evolving venture model.The traditional venture capital model was born and evolved largely to fit the requirements of funding breakthrough technological innovation. E.g. a company developing a new hardware chip or a breakthrough search engine. Startup costs were high. Each progressive round of early stage financing helped the company alleviate a different form of risk one after the other: technology risk, productization/manufacturing risk, product/market risk, business model risk, scaling risk. Many of today’s high growth tech businesses do not have significant technological or manufacturing risk, and the cost to prove product/market fit and business model has reduced very significantly over the years. Companies can reach the “ready to deploy large amounts of capital” stage much faster, but so can their competitors. Given this dynamic, once the product/market fit is proven and the market is deemed to be large, it often makes sense to capitalize category leading companies more heavily and focus on acquiring customers as fast as possible

What all this means is that in many cases it makes sense to deploy more capital into companies earlier on than it did five or ten years back. However, how fast these funding levels should grow, what this means for valuations and whether investors in certain sectors/geographies are currently underestimating risk is another question.

A Wonderful Time to be an Entrepreneur in India

Spoke recently with Silicon India on the entrepreneurial and investment opportunities in India. Here is the version that was published:

“Founded in 2005 with offices in India, U.S., China and Europe, Nokia Growth Partners (NGP) has over $700 million under management and invests largely in mobility, communication and internet.

Areas of Focus & Emerging Technologies to Bet On

There is immense ongoing innovation surrounding the mobility space. NGP has always focused on mobility and within that space, we have outlined five key investment areas that we have focused on for a decade and built up strong thematic expertise in. In each of our areas, we see long term fundamental shifts and disruption which creates good investment opportunities. Those areas include:
Local Commerce driven by deeper digital intermediation of offline consumption, SMBs coming online and the rise of the sharing economy. Investment examples include India’s Quikr and Ganji, Quikr’s equivalent in China.

Mobile Enterprise driven by the ongoing shift of enterprise software from premise-based monolithic systems to the “mobile+cloud” paradigm. Investments include NetMagic and Kaltura among others.

Big Data, Analytics & AdTech driven by a number of disruptive shifts in advertising towards technology-driven programmatic buying using AI and algorithms as well as a need for larger data management capacities and analytics driven businesses. Here great examples of companies we have invested in are Rocket Fuel, PubMatic and Vizury.

Mobile consumer-facing platforms are rapidly raising consumption of content and services over smartphones, tablets and other platforms. Here, we have investments in UCweb, Babbel and MAG interactive just to name a few.

Connected Car driven by the use of connectivity to the cloud to deliver better safety, entertainment, navigation and utility services to the automobile. We have a number of companies in the portfolio specializing on sensors and location technologies.
We also focus on growth stage investments, meaning that we invest at a later stage in companies who already have a shipping product and a few million in revenues. Our approach is global with offices in India, China, Europe and U.S.

The envelope of innovation is expanding swiftly beyond mobility, towards a more comprehensively connected world – with significant activity in areas such as wearables, connected car, smart homes and Internet of Things. Nokia recently announced its vision and new focus around this “Programmable World”. NGP has a keen focus on this space, and is looking to back strong entrepreneurial teams with solid execution skills and differentiated technology in these areas.

Indian Venture Capital Ecosystem is Nascent Yet

Each venture market has a combination of common universal fundamentals and specific local practices and flavors. The Indian venture capital and entrepreneurial ecosystem is relatively young, but shaping up nicely. The ecosystem now already has many companies of a caliber which is comparable to the best globally.
Teams in India tend to be earlier in their careers, but are often very high on energy and optimism. There are very few serial entrepreneurs around, simply because the ecosystem has not existed for very long. Companies often have to build basic infrastructure and systems along with their core product, and deal with significantly more baseline friction in getting businesses off the ground. Enablers such as digital payment mechanisms and reliable logistics, which are taken for granted by global companies, often need to be created from scratch or worked around. Hence, execution capabilities, resilience and resourcefulness become paramount.

The Indian market offers significant first order opportunity for value creation, as many segments are growing rapidly with increase in overall consumption or shift from offline to online. However, for companies selling to the Indian market, monetization is often tougher, acquiring customers tends to be expensive, collecting receivables is hard and scale could be elusive. So, entrepreneurs need to be very thoughtful, frugal and ingenious in order to create a viable business. The good news is that once you get the business off the ground, the aforementioned challenges create a large natural barrier for competitors and make your business more valuable.

The pace of value creation in the Indian startup ecosystem is rising rapidly, digital platforms (Internet, mobile, social) are reaching scale, and we are starting to see many successful cross-border companies. With this, many of the differences and challenges are beginning to diminish.

My Piece of Advice to Entrepreneurs

Great companies begin by solving a real customer pain point in a large market and becoming the best solution for that over time. Once past the hurdles of getting to a product-market fit and getting the basic business model right, keen use of analytics and metrics to drive growth and leveraging best practices from other companies, industries, and geographies can provide the edge in a competitive business environment. This is where the right board, investors and mentors who have a view into a broader set of companies and geographies can be instrumental.
The tech startup ecosystem in India is at a very exciting juncture. With mass adoption of digital platforms, rising propensity to consume online, and increasing proof points around cross-border product companies, it is a wonderful time to be an entrepreneur in India.”

Capitalizing on opportunities in local commerce

Wrote the following guest post recently for Techcircle/VCCircle:

The retail commerce market in India is estimated to be worth nearly $500 billion per year. Despite several years of rapid growth, e-commerce still constitutes well under 1% of the retail market. The remaining 99% of retail is still offline and mostly local, which represents a large business opportunity. As a larger number of consumers in India are getting digitally connected, they are making use of online platforms like mobiles, smartphones and tablets to influence their offline purchase decisions, opening up massive new market opportunities.

Global disruption in local commerce

Globally, significant value has been created in the local commerce space by platforms that help buyers connect with local sellers and service providers. The last decade has seen the rise of B2C local commerce companies such as Angie’s List, Yelp, Groupon, Zillow, Trulia, RetailMeNot and Opentable – each a public company with over $1 billion in market capitalisation. These platforms help small merchants get discovered or chosen by consumers using various models such as listings, reviews and recommendations, deals, deep information and table reservations. Each of these models succeeded by aggregating a large number of local merchants on one side, and consumers on the other.

Over the last few years ubiquity of mobile, local and social has enabled a new class of collaborative consumption platforms, exemplified by AirBnB and Uber. These models have successfully opened up new forms of supply beyond traditional local merchants as well as transformed consumer behaviour meaningfully via the use of a social layer to create trust, the use of mobile, better UX and analytics to increase convenience as well as reduce information asymmetries between buyers and sellers. Innovative companies in this genre are beginning to disrupt large existing industries such as car rental and sharing (GetAround, RelayRides), local services (Thumbtack, TaskRabbit), ride sharing (Zimride, Ridejoy), car repair (Your Mechanic), local freelance work (Gigwalk), local experiences (Zozi, Sidetour) and even food consumption (Grubly). While the collaborative consumption space is still young, several of these companies will transform the way people discover and consume local services and products.

Local commerce in India

In India, the local commerce space is starting to see meaningful traction. JustDial has gone public and commands an impressive valuation. redBus built a valuable business by painstakingly aggregating numerous small bus operators to give the consumer a unified platform for bus bookings. BookMyShow and Zomato are growing rapidly with their vertical specialisation on entertainment and F&B industries. At NGP, we focus on this space and are investors in Quikr, a leading classifieds platform, DealsAndYou, a local deals and couponing platform, and several other companies globally.

The local commerce space in India is large and its digital intermediation is still in an early phase. The rapid penetration of internet and mobile internet along with consumers’ increasing propensity to transact online enables rapid future growth. There are 45 million small merchants in the country, of which under1% are estimated to currently have an online presence beyond basic listings. A growing number of merchants are looking to leverage online platforms in order to get discovered more effectively by consumers. Local merchants, especially those that sell higher margin services, spend a significant percentage of revenues directly or indirectly on various forms of marketing and customer acquisition. A substantial part of that spend will move online over the next several years.

Opportunities come with challenges

A brief way to summarise the key challenges in the Indian local commerce space is that there are limited barriers to entry, but tremendous barriers to scale. Creating a basic local commerce platform and getting it to market is not very hard. But getting and retaining a large number of merchants and consumers onto the platform in tandem is. Let’s summarise some key challenges and decision points associated with scaling local commerce platforms.

1. Developing a clear value proposition

There are already many types of digital platforms that help consumers connect with local businesses—search advertising, social pages, listings, classifieds, merchant websites, mobile apps, vertical specific content sites, deal platforms, ticketing and booking engines and much more. It is increasingly harder and more expensive to get consumers’ attention with yet another local commerce platform—unless it solves a large unmet need, enables a new experience, saves money or significantly reduces friction in an existing activity. Similarly, urban local merchants are confused by the large variety of platforms that they could potentially promote their businesses on. They may not typically understand technology or complex marketing terms, but implicitly look for good, demonstrable ROI on their spend and repeat business.

It is imperative to have a clear, compelling and ideally measurable proposition for both consumers and merchants. Eventually, for a local commerce business to sustain, there needs to be a natural pull from both consumers and merchants for the service. Aggregating merchants via large sales forces and aggregating consumers via marketing are otherwise likely to be ineffectual.

2. Creating the sales machinery

In India, convincing small local merchants of the value proposition of a new platform often involves multiple face-to-face meetings with the right decision maker, typically the proprietor. Moreover, small businesses are notoriously hard to collect payments from. Self-serve models are ideal, but will only work once the market reaches a higher level of maturity. Telesales and channel sales, which predominate in Western markets, only work in selected cases in India and often only in combination with own feet-on-the-street sales.

Creating and managing a well-oiled feet-on-the-street sales force is thus one of the key challenges to scaling a local commerce business in India, especially in the near to medium term.

For instance, JustDial has a team of thousands of sales people, and spends a significant percentage of its revenues on selling activities. The local sales infrastructure is one of the key barriers to entry for its competitors.

It is important to get the dynamics and unit economics of the sales team right. This involves careful, continuous planning and refinement around key areas such as: what type of sales persons to hire, which localities to focus sales efforts on, how to incentivise sales persons, what the up-selling strategy is, how to improve cash collection cycles, what the right target for ROI on sales costs is, and much more.

These questions don’t have any stock answers and each organisation must evolve its own set of answers.

3. Customer acquisition

On the other side of the demand and supply equation is customer acquisition. Getting consumers onto a platform is a slow and hard process—organic methods typically call for a great product with strong value proposition, and a long baking period for network effects, high search rankings and social virality to kick in. Trying to scale platforms any faster than the natural viral/SEO growth process entails higher spends on customer acquisition which is capital intensive.

Many local commerce models have strong network effects (i.e. scale provides disproportionate value to both buyers and sellers), and are consequently “winner-take-most” businesses. Therefore, unless a business has the luxury of limited competition for a long period of time (like what Craigslist did in the late 90s and early 2000s in the US), there is a compelling argument for ramping up customer traction rapidly.

The key is ensuring visibility into the right unit economics before investing heavily in customer acquisition. That is, can the customer acquisition costs be realistically offset by the customer lifetime value? It is here that many daily-deals oriented models faltered when they indulged in expensive marketing too soon.

4. Balancing marketplace dynamics

In local marketplace businesses, demand and supply need to be scaled in lockstep, locality by locality. The marketplace needs to have sufficient liquidity at the locality level in order for it to be relevant and valuable to both consumers and merchants.

The key questions then are: Given finite resources, do you go deep in a few localities (and risk leaving other markets to the competition), or do you go after a wide footprint and risk low liquidity and poor customer/merchant experience? Do you focus on one vertical or do you enter multiple verticals in an effort to expand more quickly? What metrics and proof points do you need to see in order to trigger expansion to additional cities?

Here, different platforms have taken varying strategies. Yelp grew organically for a number of years. It initially focused on a few cities, developed a set of processes for starting and scaling a new city, and then methodically rolled its platform out market by market, with a clear model to reach critical mass within a few months of entering a new city. Groupon, on the other hand, expanded across markets rapidly via heavy spending on its sales force and marketing, and additionally made a number of acquisitions in markets it hadn’t already entered.

5. Scaling operations and customer experience

Local commerce businesses can range from being purely informational to highly transactional. Typically, the closer a platform is to the transaction, the deeper the monetisation potential and ability to ‘own the customer’, but the more operationally intense it is.

For many local commerce businesses, the transaction (or merchant discovery/selection) happens in the digital layer, but the fulfillment happens offline, often by a merchant who may not directly own the customer. The presence of multiple parties in the transaction chain makes operations challenging. Moreover, customers tend to implicitly expect a higher level of customer service from online/mobile platforms than from local offline merchants. The online taxi dispatch and food delivery spaces are examples of local commerce businesses with high operational complexity due to the above reasons.

It is imperative to invest early in creating the team, culture and processes to put in place an operations function that not only supports the business, but also becomes a source of differentiation by creating customer delight.

It is challenging to build and scale up a local commerce platform, especially in emerging markets such as India. However, the opportunity is large and well worth the effort. Businesses which are able to overcome the aforementioned challenges create natural barriers to entry and are hard to replicate once at scale with defensible margins.

In this series of blog posts, we will take a deeper look at some of these opportunities, challenges and strategies related to scaling local commerce businesses.

Revisiting Product Innovation in India

Reduced down to the core basics, a successful business involves building a product (anything of value) and selling it. Both building and selling are core to most businesses.  However, typically one of these areas is the main differentiator, which makes a company the leader in its space, while the company ‘checks the box’ in the other area.

Amazon, Facebook, Google, Apple and most other global consumer Internet leaders today are product driven companies. Product is their core strength. They are (usually) good at sales too, but that’s not where they differentiate. They are  simply outstanding at building products, and consumers self-discover their products/services and stick with them.

The Indian tech landscape has looked different historically. The first wave of IT and Internet leaders in India excelled at sales and execution, while (often barely) meeting the baseline on product. Market leaders emerged from innovative use of offline sales forces, larger marketing spends, offline presence, stronger sales teams, partnerships and better distribution. Product development was secondary. And rightfully so, given the market dynamics that existed.

There have been both demand and supply side reasons for this. On the demand side, the online consumer base was small, non-so-discerning and spread-out. Good self-discovery mechanisms didn’t exist. So market leadership was established primarily through sales, distribution and reach. On the supply side, there wasn’t enough availability of product talent or venture money. I blogged a few years back about this.

I think we are starting to see an inflexion point in this dynamic now. As customers get more savvy and approach a critical mass, they figure out ways to beat down a path to the product that works best for them. In the era of social, this is easier than ever. The game is changing quickly from constant paid acquisition and re-acquisition of customers to virality and retention. On the supply side, the number of ‘product’ persons (engineers, architects, UX designers, visionaries) is slowly building up, propelled in part by global osmosis. Venture money is abundant now, even for product plays. Consequently there is an increasing number of Indian offerings now with great products and user interfaces.

This momentum will only accelerate, as the above is a virtuous cycle – Consumers become more discerning after using better products.  We’ll see an era of intensely product focused businesses disrupting the Indian online space. Some of these products will also go global. Those companies that don’t pay sufficient attention to product and continue to play by the old rules would do so at their own peril.

Agree/Disagree?

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