Be careful before investing in a startup in India with no strong leadership

Many times, I have heard VCs in the US talk about investing in a great product or concept without a strong CEO. Typically a bunch of engineers build a great product that can change the world, but there is no management leadership within the founding team to build a business around the product. In such a situation, a VC invests in the company and brings on an entrepreneurial CEO who can run a very young company.

Given the risk taking psyche and the robust entrepreneurial ecosystem in the US, hiring a professional management that can successfully lead a startup is possible. However, this is not as easily done in India for several reasons :

1. The risk taking ability amongst these managers is low. What if the company fails? The lack of a safety net in case of failure scares many potential managers from joining startups.

2. Parents, family and friends have a big influence on career decisions. Leading unknown companies are not widely accepted as a mark of success. Joining a Mckinsey or Citibank is looked more more favorably than joining an unknown small company.

3. Cash is more important than stock to many of these managers as they have to look after not only the spouse (who typically doesn't work) and children but also the parents and in many cases siblings as well. Typically startups don't offer the renumeration that can sustain these obligations.

4. Many of the managers are not trained as entrepreneurs. They may be bright, but they are not comfortable with selling unproven concepts to customers, hiring top talent to an unknown company, thinking out of the box on pricing, promotion, processes, etc. So even if you are able to convince a professional manager to join the startup, the chances of being able to successfully execute during the early days of the company is low.

As the entrepreneurial ecosystem builds over the next several years as more and more startups get funded, hiring strong entrepreneurial leadership into a start up will become easier. However, for now, I would caution any investor that is looking to invest early stage with no strong leader who can run the company in its early years to think twice before investing.

Investing in early stage retail is not as easy as it seems

India is a nation of shopkeepers. In a growing consumption led economy, it would seem very logical for a venture capital fund to look at investing in the retail sector. I hear a lot of VCs talk about how they would like to invest in businesses that are consumer focused and retail in particular. There are many good entrepreneurs selling services and products via retail in India and it is very tempting to believe that if they could only replicate thier initial success across a few stores nationwide, a large enterprise can be created. I believe there are several challenges in the sector, especially in India, that raises questions on whether extraordinary returns are possible in a 5-7 year timeframe for a Venture Capital investor.

Some of the salient challenges for a VC are :

1. Capital Intensity - Rentals in tier 1 towns in the best locations are still relatively expensive compared to most parts of the world. Annual rental deposits, inventory, marketing are all costs that can multiply as you scale. The company may need to raise working capital debt which further burdens the companies cash flows.

3. Lack of Brand Loyalty - The Indian consumer is very value oriented. He or she will shop where there is better value. Brand loyalty is limited.

4. Heterogenous Markets - India is a conglomeration of states with different laws, languages, cultures. To be able to scale across states requires local market knowledge and relationships which can take time to build. There are many cases where a product or service has been successful in one city but it has taken years to crack another location within the country.

5. Inefficient Labor - While labor maybe cost effective, there can be a challenge in finding productive, honest pool of self starters (executives and managers) that can help the company scale across the country.

While I am sure that there could be some unique opportunites that could counter the challenges above, one needs to be cautious about investing in early stage retail ventures if you are expecting rapid growth in a relatively shorter time frame (5-7 years). If an investor has a longer time horizon ( 8-10 years at least), then it may be more attractive.

Slumdog Millionaire = Investing in Indian Technology Ventures

Recently, I had the privilege of sitting next to the cast and crew of Slumdog Millionaire on a Mumbai- Delhi flight. It was interesting to learn about how British Screenwriter, Simon Beaufoy came up with an original script that was an adaptation of a book by an Indian author and British Director, Danny Boyle made a film based on that script using largely Indian cast and crew. A non Indian director and screenwriter had the global mindset, key relationships, access to capital, and the agility and smarts to leverage Indian talent where appropriate to create a global runaway success.

Many of the technology product companies that are being financed by Venture Capital firms in India today have similar team characteristics to Slumdog. An Indian or Non Indian entrepreneur that resides outside India or has recently relocated to India, with a global mindset and key relationships worldwide , leverages Indian talent to produce a globally successful product. Nexus India Capital has several companies of this nature in its portfolio - Kirusa (designed in New Jersey, developed in Bangalore), Pubmatic (designed in San Franscisco, developed in Pune), DimDim (designed in Boston, developed in Hyderabad).

Both film making and technology development are huge industries in India where there is a lot of mid and junior level talent that is available to execute projects. However in both these sectors, a critical mass of globally focused entrepreneurs doesn't seem to exist in India today. While we hope that this will change in the future, for now it seems like the mantra for globally success in film and technology will largely continue to be "designed outside India and developed in India."

Ten Tips for startups to ride out the economic slowdown

1. Don’t panic! Economic cycles are a part of life. The best companies are built in the worst of times. If you panic, your employees will panic.

2. Conserve cash. Delay spending on non-critical things that do not result in revenue generation. Renegotiate vendor contracts, rental contracts, etc.

3. Improve productivity. Get more out of your team.

4. Differentiate between high and low performers. Reward high performers. Counsel out low performers.

5. Optimize the organization. Hire critical talent as they may be available at a reasonable cost. Transition or re-deploy non critical resources.

6. Continue selling or marketing your product or service. Being in front of customers or vendors builds confidence that you are a long term player.

7. Focus on growth with an eye on profitability. Since the cost of capital is high today, be cautious on how much capital you raise to invest for growth. Avoid over-investing in the business in the hope for exponential growth in the future.

8. Communicate with your team internally. Make sure that your team understands that you’re building a lasting and successful enterprise and that some of the cost cutting measures, including layoffs, are necessary for the health of the company. Anxiety levels can be high in tough times.

9. Act swiftly. Try to deliver any bad or tough news at one shot to the company. Continuous bad news can affect morale and instill fear.

10. Have fun! Make sure your team is having fun. A happy environment builds loyalty and performance for the long term.

Venture Capital is about investing in the right people

Markets change. Competitors change. Customers change. Regulations change. Suppliers change. But people rarely change. What differentiates a great venture capitalist from a good one is the ability to identify and invest in the right people or "six sigma" entrepreneurs as we like to call them at Nexus India Capital.

TOP 10 TRAITS OF A "SIX-SIGMA" ENTREPRENEUR :

1. Smart - High on common sense
2. Passionate - Really believes in the idea
3. Quick - Acts on things immediately
4. Great listener - Understands the customer's needs
5. Adaptive - Willing to change course midway if needed
6. Team builder - Can attract and retain a leadership team
7. Self aware - Understands own strengths and weaknesses, leverages the strengths and finds ways to compensate for the weaknesses.
8. Focused on execution - Spends majority of the time on the high priority issues. Does what it takes to achieve a task.
9. Visionary - Dreams big. Spots trends in the future before anyone else
10. Ethical - Honest. Genuine. Can be trusted

More often than not, companies fail because of the wrong person at the helm. It is better to back an "A" entrepreneur with a "B" idea than to back a "B" entrepreneur with an "A" idea. Many of us Venture Capitalists get swayed by domain experience and/or top tier eduation as that is something tangible we can relate to. For e.g., we are more likely to fund someone from the travel industry to start an online travel company than someone who has worked in garment exports. We are more likely to fund an IIM MBA who has worked at Infosys or Tata than someone who has worked at a small software shop with a local chartered accountancy degree. While domain expertise and a decent education can be a plus, it is not what makes a six sigma entrepreneur.

Identifying six sigma entrepreneurs is more of an art than a science. It requires a killer observation, good listening skills, laser focus and a lot of intuition. And those who are good spotting these entrepreneurs make great venture capitalists.

Is there money to be made on the Internet in India?

30 million + internet users in India is not a number to snigger at. Check out Linkedin, Facebook, Orkut, Expedia, Amazon, Youtube, Google and you will find that there are hundreds of thousands if not millions of Indians actively engaged with these sites. On the home front, names like Rediff, Naukri, Shaadi , Bharatmatrimony, Baazee, Makemytrip, Yatra, Cleartrip, Indian Railways boast similar usage patterns.
Indians are accessing the internet from home, office, cybercafé, college, mobile, wherever. Indians are no different from the rest of the world in their online needs – they are looking for entertainment, information, convenient commerce, social communities like their counterparts in Brazil, Poland and China and the US.
So why is there so few online successes in India today when there is such a great need? The popular reason seems to be “lack of broadband”. While broadband can definitely enhance the user experience, lack of broadband is not the reason why millions of Indians today are not widely adopting internet sites within India today. Multi user environments like office and cybercafés do provide ample broadband access today. Many applications also work fine on narrowband access. Many global and domestic companies have done just well with the current internet situation, so why can’t more such companies exist?
The answer is simple. The main reason is that there are not enough compelling applications online today that really solve a customer need. Take for example, bus ticketing online. Intuitively, a great concept. There is a consumer need to book bus tickets online and get them delivered to your doorstep. There is no reason why bus ticketing online cannot take off just like railway bookings did. However, if you go to any of the popular bus ticketing sites today, you will find limited inventory which either kills the consumer experience or limits the audience appeal. The reasons for this are structural within the bus operator industry – fragmentation, lack of online connectivity, questionable practices (double booking), lack of manpower to manage orders and fulfilment, etc. So unless the bus ticketing sites decide to solve these issues, consumer adoption may never take off. A pretty looking site with limited inventory doesn’t solve mass need. The day these bus ticketing sites offer breadth of inventory, instant bookings where the seats are guaranteed without a fear of double booking, flexibility of payment options and prompt fulfilment, you will see adoption take off. Online companies, especially in ecommerce sometimes need to solve offline structural issues to succeed.
Another good example of a lack of compelling application is social networking . There are more than a dozen Indian sites seemingly trying to solve a need. Don’t understand what the need is given that Facebook, Orkut, hi5, etc allow Indians to connect, chat, poke, play games, flirt, form community groups, share their moments, etc. I firmly believe that if there is a site in India that meets a compelling social need that is not being addressed by the global sites today, it will take off, no question, broadband or no broadband.
There is a lot of wealth to be created by Indian entrepreneurs who come up with Internet companies that address a real need. And it may require more than just putting up a pretty site and praying for something great to happen. Nexus India Capital has invested in two companies that are trying to solve a real need online - Komli and DimDim. Komli is an online ad network in India and DimDim, is a free web conferencing platform - both addressing real needs in the country today. Komli is helping Indian advertisers advertise across a list of online publishers that would otherwise not be accessible to them and Dimdim allows small businesses to hold a web meetings for sales training, seminars, etc at no cost to them.
Hope to see more online companies emerge in the future that address a real need. There is tons of money to be made on the Internet in India.

Raising the appropriate amount of capital is key

Many times, I run into Indian entrepreneurs who want to raise less capital because they dont want to dilute equity in their company. They feel that they could raise less money initially, cut corners to make the capital last, try and build some traction, and then go out and raise further capital later. Sounds very logical. However the danger with this strategy is that you if don't raise enough initial capital to be able to execute effectively to get some decent traction, raising the next round of capital may become a big challenge!

It is very important to really understand what it will take to take a company from a concept to early growth - people costs, product costs, operating costs, capital equipment costs, marketing costs, etc. It is always good to overestimate costs and underestimate revenues in the early days to really get a sense of cash requirements. More often than not, the best people you want to hire in India will come at a cost that is higher than budgeted. Sales cycles with corporate customers are generally longer than expected. Small missteps in execution can cause unexpected capital outlays.

My advice to entrepreneurs is to raise a bit more capital than you think is required even it is means a little more dilution. The main focus should be on building a successful enterprise and not on immediate ownership levels. Having said that, too much capital is not a good thing either. It can ruin fiscal discipline and dampen the entrepreneurial spirit in a company. The right balance is key.