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Event Report: What markets to do a startup in India – by @dkhare (Lightspeed Ventures)

(This is essentially a live-blog of Dev Khare’s talk on the Fund Raising Environment in India at the Pune Open Coffee Club. This is essentially a list of bullet points and notes jotted down during the talk, so please excuse the lack of organization and coherence (the fault is mine, not Dev’s). The article is also just a subset of what was talked about but is being published because something is better than nothing.)

If you’re pitching to a VC, better pitch to someone who is already interested in the area that you are doing your startup in. If you have to convince them of the potential of an area, it is an uphill battle, and they will not be particularly useful to you. Also, areas that VCs are interested in tend to be areas where there is a lot of potential money to be made.

With that in mind here are the areas Lightspeed is interested in – and by definition, this are areas that Dev thinks have a lot of potential. So start-ups should go after these areas. Interesting markets and investment themes (The names in parentheses represent companies Lightspeed has invested in):

  • Internet has about 120-150 million internet users. Here, the important theme is networks and marketplaces (Indian Energy Exchange, Fashionara, Limeroad)
  • Mobile has 900 million users, and here direct to consumer business models are of interest (askLaila, and Pune-based Dhingana)
  • Education, with 350 million k12 eligible students, in which education technology platforms are interesting (tutorVista, acquired by Pearson)
  • Financial services, which has 250 million un-banked population, where speciality lending and payments/loyalty are interesting areas (ItzCash)
  • and finally Consumer, with a 150 million middle class in India, and the interesting areas are emerging consumer brands and consumer services (OneAssist).

Mobile is a big and very interesting area. In mobile, there are about 30 million smartphones in India and it could go to 100 million by end of next year. That is a large enough population to build some great companies. The investment horizon of Lightspeed is 5 to 7 years, and if you think that far ahead, there could be 500 million smartphone users in India. Companies serving them have a huge potential. One problem is that it is very difficult to make money in the mobile space, except if you are the service provider. But the money service providers are making from VAS is going down, and that is a business that is dying. So they have to start working with app developers. Vodafone has already started sharing 70% revenues with developers, Idea will do that soon, and others will follow. But remember, they are taking 30% just to allow you to be on their platform – they will not do your marketing. So you still need to do the marketing yourself.

In mobile, various companies have tried to do Indian games (Ramayana games), and that has not worked out. General/betting games like bingo/rummy/poker are doing OK. But this is probably not a big space.

In the mobile enterprise space, there are various problems, including the fact that people bring their own devices, and you have to integrate with various backends. So some horizontal solutions (like email) have gotten traction, but nobody really made much money, because of the competition. So this area is limited – it is more suitable for ISVs and service providers rather than product companies. And one thing you don’t want to do is build a mobile app development framework/platform. 50+ such companies have been funded but none of them are going to make it.

Education is a big and interesting market, where there are lots of pain points, but the biggest challenge is that you cannot sell technology without having to go through schools and colleges and their administrators and trustees and that is a very long and painful road. So it is a big market, but a challenging one.

Question: Why don’t Indian VCs take risk?

Answer: The problem is that there are lots of challenges in the market in India. There are lots of companies who are funded at the seed level who are not going to make it to Series A. And a typical Indian company takes maybe 15 years to give returns, and a VC company cannot really afford to have a number of such investments, since they have a 5-7 year outlook.

Question: There are 7-8 accelerators/incubators in India. What value do they add?

Answer: One of the problems in India is the lack of mentorship in the startup space. There are not too many people who have succeeded and are accessible. (Lots of companies have create a brand (e.g. Zomato, OlaCabs etc) but are still 10 years away from really making it big.) So, all the good accelerators/incubators in India are really run by one person who succeeded and is now trying to give back to the community. And the most important value that the incubator adds is mentorship from that one person. So, if you engage with an incubator, you need to ensure that you do get mentorship from that person. Another thing they do is some branding/marketing in the form of demo days, and just the stamp of approval of being a graduate of that incubator.

Scaling challenges in India: market friction, series of small markets, lack of trust, scarcity of mentors, scarcity of strategic talent, and constricted capital. This ensures that it will take you much longer to grow your company than you think (and than what would be needed in the US).

So how do you grow? You need to figure out your strategy: are you going after India only, or are you going to start from the Indian market and then go to the US market, or some other adjacent market. Another problem is that there are many markets that are really small in India, and there is no point in going after that market (at least for a VC backed company).

Lack of trust is a big problem in India. In general, everybody from banks to entrepreneurs themselves try to protect themselves from fraud that is going to be committed by 1% of the people, and are hence making life hard for the remaining 99%. There are not many people here who are able to think that they are OK with losing money on that 1% but that will be more than offset by the money they make from the remaining people. Everything has to be pre-paid which is another thing that slows down growth. (One solution to the trust problem is to build a brand – and have radio/TV advertisements. See below for more on this.)

Enterprise selling or SMB selling in India is tough. Market sizes are small. Most enterprises in India do not value packaged products, and are unwilling to pay. Even when they’ve agreed to pay, getting them to actually pay is difficult. The sales cycles are very long, and the markets are all very fragmented. Small business lead-generation, subscription (prepaid) companies are doing OK – where it looks like it is a consumer company (like Naukri, Zomato), but is really making money from the small businesses.

It is possible for companies in India to go after enterprises in US. If you’re going to do this, go after a market in the US that is mature, self-service oriented, and SaaS. An example is ZenDesk. You need to build a very easy self-service product, with a very easy on-ramp, it should be easy to pay and easy to use. Druva started off that way. There are 10 other good companies in India doing this. (Note: self-service for the Indian market does not work. It has to be feet-on-the-street, and that will only scale after 10/15 years, and it will still be a mid-sized company.)

Question: Which city should I be in to do a startup?

Answer: If you’re doing a tech company, you should be in Bangalore or Delhi. Pune is OK – investors have started showing an interest, and Bombay is close enough. Places like Chennai and Hyderabad also have hopes. But if you’re anywhere outside (e.g. Lucknow), you need to move.

Question: What are your thoughts on education as a space?

Answer: If you’re in the education space, you need to be in the curriculum, not as something supplemental. Also, it is very difficult to sell to parents directly – you have to sell via the schools. Remember, selling directly to the consumer in this space is very difficult unless you have a brand and strong marketing. Another point, if you’re selling to schools, your product does not really have to be that good – you don’t have to be good at student outcomes, you have to be good at selling to schools. So invest in a sales team, and not so much in the product. Distance education / e-learning is an interesting area. Also online assessments are an interesting area – like doing tests for Infosys for recruitment, or exams for schools.

Question: How come there isn’t much investment in India for clean energy?

Answer: One of the issues is that the VC community wants to invest in areas that have high margins and low capital expenditure. They like to do a few million dollars to do an experiment, validate the market and then scale the business. By contrast, energy is an area with lots of capital investment and long gestation periods. It takes 5 to 7 years for the science to work, then the real product starts, and then there are other challenges. So this is a problem everywhere in the world. In the US there was a clean energy bubble a few years back but that has burst, and those VCs have fled. And in India, the situation is worse – whom do you sell the energy to, in India? The government, which is a problem.

Question: How do you get advertisers, especially from the US?

Answer: First, you need to have scale before advertisers are interested. If you have less than 10 million monthly unique, don’t even bother – it’s a waste of time. Just focus on scaling your traffic. Once you have reached those numbers, there are various options open to you, including outsourcing the sales of your ad inventory to third parties.

No consumer company in India can really succeed without a physical infrastructure of some sort. And that is painful, difficult and slow. But once you’re able to do that, then you can really leverage that well, and it becomes a barrier to entry. Another issue in India is that a consumer company really needs to build a brand (because of the trust issue mentioned earlier). Hence, it is a good idea for a consumer company to start spending on radio/TV ads early. But remember, do not try to scale before you have a microcosm of your business working in a profitable, sustainable way in a small way. i.e. get something working well in Pune, and then scale to 20 cities.

Question: Should startups go after existing markets, or create new markets

In India, the only real way to grow a company is to grow your category. You cannot really simply survive on steal a market away from others – you have to grow the market. And for this, you need to evangelize your market – use the ecosystem to do this. And this takes time – so you need to raise a lot capital and then go big.

Question: What are some areas in which entrepreneurs should not do startups

These are some areas in which entrepreneurs keep trying to start companies, inspite of the fact that there is no real hope for anybody in that area: Development tools (framework for mobile app development, library/framework for easy software development), e-commerce and daily deals (this area is overfunded), unified communications.

Question: Where to get seed investment from

List of active seed investment groups in India: Blume Ventures, Harvard Angels, India Internet Fund, India Quotient, Indian Angel Network, Jungle Ventures, Kae Capital, Morpheus, Mumbai Angels, Qualcomm Ventures, Seed Fund, Venture Nursery, Yournest.

Early-stage investment up to Rs. 25L available from Venture Center, Pune

The Venture Center, a Pune-based Government of India Initiative that helps technology innovators and startups, has instituted a Rs. 1 crore seed fund that they plan on investing in early stage technology startups (or even innovators with just a science & technology idea).

Investment proposals are being accepted upto 30 November 2011.

Here are more details from the Venture Center website:

The Entrepreneurship Development Center (‘Venture Center’ ) recently received approval under the scheme “Seed Support System for Start-ups in Incubators” of the Technology Development Board, Department of Science & Technology to host a seed fund with a corpus of Rs 1 crore.

The purpose of the seed fund is to provide a technology driven startup with the much-needed early stage financial support for deserving ideas/technologies requiring up-scaling and related work.

Incubatees of Venture Center are encouraged to contact Venture Center for further information.

Quantum of financial assistance to the incubated entrepreneur

  • Minimum: Rs. 1 lakh
  • Maximum: Rs. 25 lakhs

The disbursement is normally linked to benchmarks / milestones. Broad Areas to be covered under the financial assistance include:

  • Product development
  • Testing and trials
  • Test Marketing
  • Mentoring
  • Professional consultancy to engage Professors / experts with small firms
  • Filing of Indian/International patents
  • Man power for day to day operations
  • Any other area as deemed necessary and recommended by the Management Committee.

Here is a list of make/break criteria for applicants:

  • There must be at-least one dedicated entrepreneur involved in the venture
  • There must be a formal business plan
  • The venture and the team must have high ethical & professional standards
  • The venture must have a strong technology/knowledge component
  • EHS requirements must be met
  • Key Proof-of-Concept must be demonstrated & must be reproducible
  • The venture must be registered as a private limited company, or must be in the process of registration
  • The amount of funding requested must be less than Rs 25 lakh
  • The entrepreneur(s) must be willing to share equity in the venture
  • The seed funds requested must be for activities such as product development, prototyping, scale-up, developing IP portfolio, test marketing, trials, certification, testing

Applications for the seed fund will be reviewed based on criteria such as (but not limited to):

  • Is amount of funding requested enough to reach critical milestone?
  • Does the venture have a clear, potentially significant/singular value proposition
  • How big/fast growing is the potential market?
  • Are target customers clearly identified?
  • How credible is the technology? (Is PoC credible in the opinion of subject-matter experts?)
  • Are there regulatory/certification/policy risks?
  • What are the sources of sustainable competitive advantage (eg. novelty, patentability, etc.)?
  • What is the quality of the business plan (revenue model, product roadmap, market segments, etc.)?

Typical terms for seed funding:

  • Investment mode: Equity ownership in a private limited company
  • Equity stake for seed fund: 10% – 25%
  • Investment amount: Rs 1 lakh – 25 lakh (preferably, Rs 15 lakh – Rs 20 lakh)
  • Investment to be deployed in instalments, tied to significant milestones
  • BoD representation: 1 BoD seat or 1 BoD observer, with special rights
  • Promoter/founder stakes: Vesting requirements
  • Reporting: Bi-annual presentation to seed committee + Quarterly/annual financials

Application forms can be downloaded here

Business plan templates and other details are available at the Venture Center website

For more information, please contact bdm@venturecenter.co.in

Pune’s Anil Paranjape joins cleantech fund Infuse as Venture Partner

Anil Paranjape, an active member of the Pune Tech community, one of the driving forces behind PuneCleanTech, director at FusionTech Ventures, (and owner of Grubshup Restaurant) is joining a new cleantech fund, Infuse, as a Venture Partner.

Here are details of the announcement in his own words:

I am happy to announce my association with a unique new cleantech fund: Infuse Capital. I will be helping them as a Venture Partner.

Infuse (Indian Fund for Sustainable Energy) is a new fund with some of the most influential promoters and investors in India and the world.

Infuse is anchored by MNRE (Ministry of New and Renewable Energy, Government of India), DST (Department of Science and Technology, Government of India), IIMA (Indian Institute of Management, India’s most renowned business school) and BP (the global energy giant). All four of these institutions have made substantial investments in the fund.

This first close will be followed by the second close thru a few other investors: mostly institutional and a few individuals (both Indian and Global)

Infuse is an early-stage fund focused exclusively on Clean Technology companies. We believe that our influential investors (such as MNRE, DST, IIM-A, and BP) bring us the best chances of developing a good pipeline and will make the crucial difference in helping our portfolio companies thru the right policy mechanisms, technical help, unparalleled business network, and global cleantech reach. No other fund can boast of active participation and funding by such institutions. As you all know, Cleantech investments and business is very tough because many issues such as technology, talent, business models, and policies need to work together. We feel that Infuse covers all these aspects with active investments from the best and the most influential Indian and Global institutions to do that.

Besides that, Infuse is backed by a very strong advisory committee (and investment committee) consisting of some of the biggest and most successful stalwarts of Indian and Global cleantech industry.

My role with Infuse will focus on building a robust pipeline, making investments and managing the portfolio with active help to the portfolio companies. All my current associations and engagements will continue.

Infuse is now open for business (inaugurated last month by Mr. Narendra Modi who is the most forward-looking politician in India and Dr. Faroukh Abdullah, the Minister of New and Renewable Energy) and we are actively building a pipeline. If you know of entrepreneurs and/or companies working in Cleantech and could be looking for funds, please connect them to me at anil@infusecapital.in

More information is available at Infuse website.

News in Brief: VMWare, QLogic to invest; Symantec interviews own employees; Aar-em lights up villages

VMWare to invest $100 Million in India

VMware Inc. announced today that it plans to invest more than $100 million in India by 2010, partly to double its research and development workforce in that country to more than 1,000 employees. VMWare currently has R&D centers in Bangalore and Pune. While a lion’s share of the new investment will go to Bangalore, some of it will also be used to expand VMWare’s Pune facility.

Source: VMWare Press Release

QLogic announces Development Lab in Pune

QLogic Corp. (Nasdaq:QLGC), a leader in networking for storage and high performance computing (HPC), today announced the opening of the QLogic International Development Lab (QIDL) in the heart of Pune, India. QLogic is hiring engineers now for the QIDL, located in the ICC Trade Towers off Senapati Bapat Road. According to their press release the QIDL development team is expected to help “design the future” of networking for storage and HPC. For details, contact hr-india@qlogic.com.

Source: TechNewsRelease.

Symantec Pune conducts interviews of own employees

It is common practice to conduct exit interviews of employees leaving a company to find out why they are leaving and thus identifying weaknesses of an organization. Symantec, Pune is turning the concept on its head by conducting interviews of employees who have been with the company for a long time, and focusing on the strengths of the organization that made them stay back.

After selecting leaders from this group of Symantec loyalists, their example and achievements were put before the others on the company intranet. “This benefited us. Now these leaders have not only got recognition for their extra-efficiency, it has also encouraged others to see whether they can be incorporated in this list of leaders,” says Abhay Valsangkar, Symantec India’s head of HR.

Source: Sify Business.

Aar-em Electronics Pvt. Ltd. a Pune based firm known for its Champion brand of Uninterruptible Power Supplies now has entered the field of providing Uninterruptible light source for villages after sunset by providing them lights and other utilities powered by solar energy.

“MOHRI” a village situated at 100 kms from Pune City Maharashtra, India having 27 houses and a population of 160 of which 75 are children today boasts of having electricity which has been provided by Aar-em Electronics Pvt. Ltd. Where once life practically came to a standstill at sundown are now abuzz with activities. The solar-based devices have illuminated the villagers’ houses like never before- kerosene lamps are a thing of the past now. Even, infotainment is beamed to them through solar-powered television sets.

Aar-em is offering a system which typically contains a roof-installed solar PV module, storage battery, charge controller, interior wiring, and switches and fixtures with the capacity to power two- low-wattage high power LED modules.

Source: Business Wire India