The indian Startup Opportunity: A few personal beliefs

I often get asked by friends what it’s like being back in India after almost a decade and what my views are on the Startup Ecosystem. There is one universal truth from my eighteen months here, I leave every founder interaction inspired by each founder’s commitment, their deep desire to solve a problem for India and humbled at the opportunity to hear and be a part of their journey. Below are a few other of my beliefs on the Indian Startup opportunity.

I apologize in advance that this is long, dense and could have been written in five bullets but am hoping @semil of @haystack_fund is right when he says, “but it’s great fun to just type and hit “publish” and then see what happens.”

Acche din aayenge, Apna time aayega.

I left India at the impressionable age of 17 with this romantic notion of returning to the place that would always be home and to be a part of the growth story that lay ahead. Many years went by and as I graduated from business school, I had made the choice to return to India. The decision was an emotional one and one that at least a year later I can say is one that I would make again albeit a little bit more data backed.

Rapid economic growth off of a sizeable GDP base leads to astronomical economic value creation in absolute terms and represents a paradigm shift in a country’s economic history. This shift happened in the United States in the late 1800s, and in China over the past few decades. What we are seeing in India today suggests that we too shall see this growth over the coming decades and are definitely theacche dinI am betting on.

In both US and China, the economic growth in addition to other factors was triggered by the mass access of an infrastructure to the people of the nation. In the United States, it was the mass access to the telegraph, a technology infrastructure that drove the industrialization in the late 19th Century.

The telegraph network significantly reduced the cost and time of transferring information significantly when compared to the prior decades of sending messages by the rail road or on ponies. Transfer of information became effectively instantaneous at a significantly lower cost.Informationpaved the way for significant enhancements across industries: railroad industry (knowingwherethe trains are), logistics industry (knowingwhento send goods) and financial markets (knowingwhatthe price is). [1]

In China, one of the major factors was the internet. It provided businesses the opportunity to reach many hundred million consumers around the world. It’s world class manufacturing capability was able to drive it to receive order volumes that ensured it was the lowest cost provider in the world.

In India, I believe that data access on mobile to the nation is that trigger. 320M mobile broadband subscribers going to 640M in the next few years is a force to reckon with. The 93% reduction in data cost triggered by Jio will enable entrepreneurs to reach a much larger set of customers at costs lower than ever before and will enable consumers to access and consume products and services at a rate faster than ever before. Definitely no better time than now to be an entrepreneur in India and by consequence, a venture investor in India.

Distribution Market Fit

In an under penetrated market like India, what is on the proverbial shelf sells because getting to the shelf is the biggest challenge. India has 320M broadband subscribers however only ~80M people in India have bought a product online and another ~60M that have also bought a service online (mostly recharges). In the US, customers are easier to access and so for customers it’s about choosing between products. The discovery problem is solved and the trust deficit has shrunk significantly over the years. In India, given the significant under penetration of most services and the price sensitive nature of the customer base, an average product with superior distribution will see much faster adoption than a potentially superior product. For early stage Indian founders, improving discovery and reducing trust deficit, in my opinion should be relatively much greater priorities than a maniacal focus on product as is often the wisdom in the west.

So, while most startups spend time finding product market fit, I think in India it’s equally important to identify distribution market fit. Building a competitive advantage on distribution will enable you to own the customer, build your business in a capital efficient manner and provide you with the ability to iterate on your product over time to meet more and more of your customers’ needs.

As a consequence, I also believe partnerships to drive non-linear growth should be much earlier in the plans of a startup in India. As and when some time frees up, I will hopefully write more about this.

Full stack atoms critical to Indian start up ecosystem

Bits (software) are more conducive to exponential growth (low marginal cost), are less capital intensive (no physical assets) making them more financially attractive (higher ROE) and why venture capital investors in particular are drawn to them. That said, atoms (physical asset) based businesses are in my opinion going to continue to generate large venture investable outcomes in India. This is because there is tremendous opportunity to disrupt existing GDP and a lack of ecosystem readiness for pure Bits in many cases.

The core value proposition of a tech or tech enabled service is providing customers with access to a predictable, repeatable, seamless, quality customer experience. While Bits often enable the first part of the value prop, the second part requires a business to be architected as an atom. This full stack architecture is critical because the Indian ecosystem is not ready to provide that end to end experience and to get sticky user adoption, the startup has to own the transaction end to end.

In ridesharing, for example, in the west, drivers and car ownership penetration was high and the solution to the supply problem was just about incentivising drivers to come online when the demand was high. In India on the other hand, car ownership penetration is much lower, access to credit is limited which made it critical for the ridesharing players to setup entities where they would own cars and lease them out to their driver partners. While they may have chosen to be a pure play software company to serve their customers, the full stack execution is what has made the Indian companies very valuable.

Disruption theory at work

Christensen proposes two clear strategies to innovators: New-market disruption and Low-end disruption. The latter is focused on going after an existing customer base that is being over served by the incumbent at a cheaper cost and a simpler offering. The former is focused on going after a customer base that is currently a non-consumer and is measuring the value of the service on a different variable.

I came in to India expecting a lot of Low-end disruption. From the outside, I expected more startups and value creation to come from startups going after the customers of the big hospitals, the big banks, the big real estate developers, the big car companies. What I realized very quickly though is that these large institutions are not over serving their existing customer base as with incumbents in other parts of the world but are under serving them with the customers being limited by choice. Part of this likely also stems from the historic low willingness to pay of the customer which has focused the incumbents on keeping prices low rather than improving product quality.

The Indian entrepreneurs that have truly disrupted the industries they are operating in have used technology to develop products that better understand the needs of the population and are changing the dimension on which customers measure them. For example, customers availing food delivery historically thought of it as a luxury whereas companies like Swiggy are bringing in to question the need for a kitchen altogether. Or companies like iD Fresh Food which are enabling families to get dosas on demand, changing the performance measure for a family wanting to have a dosa meal.

I am not saying that there is no low-end disruption, we are seeing a lot of it, especially in financial services where the less profitable customers of the banks are being pursued aggressively by fintechs. However, over the past many months, I have been very impressed by founders focused on reimagining goods and services with the use of technology and look forward to being a part of many such founder journeys.

If you share a similar passion for the startup ecosystem, would love to hear from you atSarthak@matrixpartners.in

[1]https://eh.net/encyclopedia/history-of-the-u-s-telegraph-industry/

Please Note: The views expressed in this article are personal.