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)

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.

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