Indian Entrepreneurs Challenges & Niches

By Knowledge@Wharton | July 20, 2013

Starting a company isn’t easy under the best of circumstances; entrepreneurs find themselves juggling talent recruitment, cash flow, customer relations and more. In India, startups have to keep even more balls in the air including government licenses, power outages and the like. Even uncooperative family members can cause an enterprise to struggle or fail.

Sashi Reddy, vice president and general manager of big data and analytics at Computer Sciences Corp. (CSC), who earlier founded AppLabs, which was taken over by CSC, sees potential for “small-format retail that can scale to tier II and tier III Indian cities.” Among the possibilities are restaurant chains and fitness gyms, as well as agricultural technology and food processing businesses. Mobile payments, education and health care are other areas where he said there is room for growth. What’s not hot, in his opinion? “E-commerce, any retail play requiring more than a certain amount of space in tier I cities, or anything too reliant on infrastructure,” he noted.

According to Aneesh Reddy, co-founder and CEO of Singapore-based Capillary Technologies, in the technology sector, software as a service for small-to-medium enterprises is a promising area. “Unlike in the U.S. or the U.K., where companies are moving from old software to new software, in India they are adopting it for the first time — on a massive scale,” he pointed out.

Samir Mitra, an angel investor and a senior advisor to the office of the prime minister of India, mentioned two areas he found interesting. “One is health care,” said Mitra. “There is a worldwide arbitrage opportunity, especially because the U.S. has regulations inhibiting innovation in delivery. India can deliver service and product innovation; it can incubate and come up with new business mechanics and export that.”

The second area where Mitra sees potential is high-value manufacturing. “We’ve decided we need to make electronics manufacturing a key priority for the country,” he said. “By 2030, the import bill for consumer electronics and hardware may surpass the cost of petroleum imports. So we’re trying to bring that (on shore), starting with two semiconductor (fabrication plants)” Like CSC’s Reddy, Mitra also noted the potential in food processing.

Sasha Mirchandani, founder of early-stage fund Kae Capital and co-founder of Mumbai Angels, said that while e-commerce may have slowed down, “ancillary services around that space” are still in play. “We’re quite bullish on that,” he stated, pointing out that there are Indian companies doing “hard-core innovation” at a global level. Online payment systems are another hot area, he added: “While the past saw lots of failures, we think that 2013 onward, Payments 2.0 (will be big), with an ecosystem around that coming into place.”

The Funding Is Coming

The good news, according to the experts, is that India has experienced a steady rise in funding sources for nascent companies. Mirchandani observed that in previous years the problem was that there were no angel investor clubs in India. Now, several exist, including the Indian Angels Network; Bangalore, Hyderabad and Chennai Angels, and Calcutta Angels. “There are several accelerators and some incubators,” he said. “So the market is segmenting itself nicely. It’s still a small industry, so we have a long way to go.”

Reddy of CSC shared that view. “Funding sources have increased,” he noted. “There are angel networks, seed funds, U.S. venture capitalists with India arms and Indian venture capitalists. Unlike in the U.S., VCs (in India) are comfortable with non-tech companies.”

Mitra painted a fairly bleak picture of the current situation but was optimistic about the future. “Right now in India we have a funding ecosystem problem,” he said. “In certain areas we’re doing well, but it’s still a drop in the ocean.” A two-pronged approach is needed to serve both the top and bottom of the pyramid, he noted. “At the bottom, (start-ups) don’t get funding. Credit is a huge problem and, if it’s a services-oriented business, there are no fixed assets and therefore no collateral. So banks don’t look at you.” Mitra added that in his government advisory role he is trying to establish seed funding for such ventures and to encourage other groups — such as domestic pension funds — to allocate some of their assets toward those investments.

Experts on the private equity panel note that a good deal of capital was deployed earlier did not get any returns for the limited partners. “The froth is yet to get cleared out,” said Vikram Deswal, chief investment officer and portfolio manager at East Bridge Capital Management. “Lots of capital we’ve raised is from people who earlier had given capital to private equity funds in India. As of today, there is a lot more capital raised but not deployed. Interest in India remains, but people are licking their wounds.”

Anurag Bhargava, chairman of Gurgaon-based real estate fund and developer Ireo, agreed. “The industry is maturing,” he said. “You didn’t have as many experienced teams five to 10 years ago. Now capital will flow back, but on a more selective basis.”

Mukund Krishnaswami, a founding partner of PE company Lighthouse Funds, exhorted investors not to worry about the pedigree of a company’s principals. “The quality of your promoter is most important. (If they are good) and they understand the business on the ground, don’t be afraid to put more capital behind them.”

Problems Facing Start-ups

But there is also no shortage of reasons not to start a company. Devita Saraf, CEO of Mumbai-based high-end television company Vu Technologies, noted that in India it is 5% more expensive to manufacture a cell phone than to import it. “Duty structures mean that it’s harder to produce (goods) in India,” she said. “Rupee depreciation is affecting industries like ours. Unless the government either stays out of the way or makes it simple, we will continue to face these issues.”

Capillary’s Reddy added that his business focused on India for the first two years, but found a limited market for software-as-a-service. “We had clients referring us to other clients in the Middle East, in the U.K., etc. But it would take us weeks of paperwork every time we had to (get) salaries out to (our subsidiaries there). We said it’s time to get rid of this mess.” The company decided to incorporate in Singapore instead, because of “the ease of doing business there” and the fact that “investors are more confident putting cash into a company with headquarters in Singapore.”

Social pressures can be a big challenge, observed panelists, when it comes to hiring new talent; people are skittish about joining a start-up because their families might object. The hierarchy of acceptable employment, from a parent’s point of view, is clear, said Wharton operations and information management professor Kartik Hosanagar: “They want (their children to join) a multinational company (with a brand reputation). (The next best is) an unbranded multinational, then an Indian branded company and only then a start-up.”

Saraf agreed that social issues could be an obstacle. While her family was supportive of her business — her father, Rajkumar Saraf, is chairman and CEO of Indian PC manufacturer Zenith Computers — potential distributors were skeptical. “When Vu first came out with LCD TVs six years ago and sent them to the market, about 50 different channel partners came back with the same answer,” Saraf noted. “They said, ‘Your TV is great; the quality is great; they’re selling out, and the service is good. But your boss is a Marwari woman. Once she’s married, what will you do to get us spare parts?’ We told the team to say, ‘She’s there just for show; her brother is really running the business.’ Then they were fine.”

Capillary’s Reddy illustrated the point with another anecdote. “We asked a close friend to join our company,” he said. “One day before starting, he told us his mom and dad were not cool with his joining a start-up: ‘My value in the Tamil marriage market will fall,’ he explained. So the parents have to be taken care of. Once we had (money) coming in, we’d talk to (new hires’) parents, their spouse’s parents, etc. That was helpful.”

Mirchandani acknowledged the concern but warned that some candidates could be using such factors as an excuse. “I’ve seen people who don’t want to be at a start-up and have dropped out,” he said. “Yes, the parents are there, but if someone wants to do it, that won’t be an issue.”

CSC’s Reddy offers some words of wisdom for entrepreneurs. When starting a company, the numbers don’t tell the whole story, so “don’t over-think things,” he said. “We create complex models, we tweak one cell, see how it affects others and get confident about it,” he noted. But with start-ups you have to go with what your gut says. “There’s no perfect business plan. Do some analysis, but then take the plunge.”

He cited the example of a video game business that he had tried to start. After $100,000 of market research and careful study of the Chinese marketplace, he launched the business in India, recruiting talent from Electronic Arts and other places. “It was a horrible failure,” he said. “The analytics didn’t capture everything.”

Small is Better

Being No. 1 in a small part of a large market is preferable, Reddy said. In big markets, lots of mistakes are forgiven. “You get more leeway to work through mistakes since there is room for everyone.” Such markets allow new players to enter, so playing off big trends is a plus. But it can be hard to identify new trends — “By the time they’re in The New York Times, you’ve missed the bus.” So he advised the audience to look at where VCs were investing. If there’s too much buzz, it’s too late, he noted. “Select a tiny area of a huge market and become No. 1 in that. Then you can always expand that box.”

At first, Reddy said, the idea for AppLabs was to be the No. 1 software testing company in the Bay Area in California. “Then we expanded to the U.S. Then we wanted to be tops in enterprise apps in the U.S., then in the U.S. and the U.K., etc.”

Reddy’s final piece of advice? “Boring is good. While (business-to-consumer) gets all the attention, (business-to-business) is easier to make money in. Don’t lose sight of the value you bring to customers. Process innovation, frugal innovation, pricing innovation, marketing innovation — all of these can make a boring business profitable,” he said. “The routine stuff isn’t easy — it’s just that people don’t want to do it because it’s boring. Execution will be the only differentiator, so embed that into your organization’s culture. Great execution will always beat big ideas unless you are Steve Jobs.”