(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.