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)

Advertisements

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.”

%d bloggers like this: