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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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.

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.

Big ‘unsolved’ problems in the Internet world

Thought I’d take a moment to jot down a few big problems/opportunity areas in the Internet world. The technologies to solve each of these exist today, but an elegant solution that scales massively still seems to elude us on each of these.

Here are some such areas that come to mind (in no particular order):

  • Linear TV. Why do we still use remote controls from the sixties to look for content? In the era of search, discovery, AI, predictive analytics, social, mobile we surely have better solutions, but haven’t yet found a scalable way to mass adoption. Till we do, happy channel-flipping.
  • Personal Information Management. We live in the age of information explosion, from all directions – twitter, blogs, news sites, pictures, videos, email, facebook, calendar items, youtube, deals, sms, chats, iTunes, yada yada. Too many passwords. Too much useful information. Too much content. Too much news. Too much personal data. More than one can manage. Dropbox, Evernote and Flipboard are addressing various pieces of this problem, and have  built spectacular businesses already. I think we’ll see immense further innovation in this space
  • Digital payments. Beyond the Paypal variety. Pulling out your credit card and entering the digits and your address, and/or your password is so 20th century. How about if there were a system that you could use from any device anywhere, using biometrics, and transfer any amount however big or small to anyone else? No passwords. No credit card numbers. No addresses. No minimum amounts. Just a swipe of a finger or an iris scan. Just imagine the kind of consumption this would fuel.
  • Online content monetization. There is so much great content being created all over the world, but how does it get paid for? Advertising is great, but its not the one-size-fits-all for monetizing all content. A couple of years back, I wrote about the huge opportunity in micropayments. Micropayments have indeed continued to take off significantly since, but I believe we are still in the early phase. There is still no good model to universally purchase content. Movies, news, books, TV shows, music, games, whatever. On one platform seamlessly, from any device. Amazon, Apple, Netflix are all moving in that direction, but we aren’t quite there yet. Consumers are consuming content voraciously online, and sometimes willing to pay for it. And content owners (ask the studios or publishers) are desperately searching for models that help them better monetize their efforts online. There just isn’t any good universal platform yet to connect this demand and supply.
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