BackThe pump has been primed for Indian start-ups: Piyush Chaplot
The partner at Innosight Ventures on how the start-up scenario in India is an organically grown ecosystem, built without government grants
Premium
Singapore: The start-up scenario in India is an organically grown ecosystem, built without government grants or subsidies, said Piyush Chaplot, partner, Innosight Ventures, the strategic investment arm of Innosight Consulting, in an interview.
It has all the ingredients to take it to the next level and is attracting global capital and talent despite regulatory uncertainties, he said. According to him, “we are going to see lot of ‘build local, go global’ in the coming years".
Edited excerpts:
Big picture, what is your take on the start-up scene in India?
I am very bullish on the Indian start-up ecosystem. It now has the momentum and all three basic ingredients that are needed for an ecosystem to thrive—talent, market and capital. Talent is capable, ambitious and abundant. Market dynamics are in favour. Capital is not scarce any more. In short, the pump has been primed.
In terms of maturity, the Indian start-up scene has so far only seen the first wave of e-commerce businesses—MakeMyTrip, Yatra, Naukri, Shaadi, Snapdeal, Flipkart, etc. These start-ups have created a lot of awareness of what technology can deliver. Now is the time for the next wave of start-ups serving enterprises. Most geeks are itching to move away from sustenance-earning service businesses and make it big in the world of product creation. This is a very healthy trend. And, hopefully, if this continues, there is immense potential to move up the value chain.
And the best part is that it is an organically grown ecosystem. It is not built on any government grants or subsidies. It is attracting global capital and talent despite all the regulatory uncertainties. So the ecosystem has the capacity to survive even if the tide turns low in the short to medium term.
Money also goes further in India as the costs are relatively much lower than (in) other ecosystems. One can raise half the amount of a counterpart in the US and comfortably compete with it.
You have been investing in start-ups in Singapore, and you’ve seen start-ups in the region (South-east Asia). What are the key differences when compared with India?
In India, the start-up ecosystem might be young but the offshore software development industry is quite mature. There is good availability of both experienced and raw talent. However, in South-east Asia, the talent pool of experienced tech talent is fairly limited. There are fewer people in comparison who have gone through the scaling phases of a product. I also feel the market in South-east Asia is less competitive than (in) India or China. Early movers get a lot of time before any significant competition pops up on their radar.
When you look at start-ups in South-east Asia, India and even China, a lot of them are copying successful start-ups in the US. Investors, too, appear ready to fund these clones because they’ve seen it work in another geography. Has this led to a scenario of too many start-ups trying to just copy western models? Are we headed for a scenario where more start-up failures are likely in unproven businesses where a large number of companies are vying for customers?
In principle, I do not have problem with people copying or stealing ideas or business models—proven or unproven. There is not much difference in copying a proven or unproven idea. A proven idea from a different geography or industry can fail in another geography or industry and vice-versa. You always have to localize the original idea and test the assumptions as if it is a fresh idea.
Having said that, fast cloning has in itself become a strategy to get rich quick. This trend actually caught fire with Groupon buying one clone in each country. A lot of people copied it quickly and became millionaires. Rocket Internet made money doing this in Europe and now they are building an empire buying one food delivery start-up in each country in Asia and Africa.
Founders are playing this game and investors are encouraging it. This trend will continue as long as there is liquidity in the market.
Once the tide is over, you are bound to see failures. If people are investing blindly without applying their brains, they deserve to lose money.
But don’t you agree that a lot of entrepreneurs don’t realize that many of the US-based start-ups are successful because they are solving mainstream problems of the West. These may not be real problems for India or for that matter China. So does, say, Bengaluru or Shanghai, Jakarta or Hanoi build start-ups that address genuine India- or China- or even Indonesia- or South-east Asia-specific problems, using creative and scalable approaches?
Absolutely. The local markets are sizeable enough to support technologies solving local problems. For example, local small and medium enterprises in Asia are still underserved and looking for solutions that are customized to their needs and are available at Asian price points. Silicon Valley is not likely to build those. We have to build them ourselves.
Likewise, there are various sectors such as agriculture, logistics, healthcare and finance which are crying for local innovations. I am quite optimistic that we are going to see lot of “Build local, go global" in the coming years.
There are a lot of concerns being expressed when it comes to valuations regarding Indian start-ups. What is your take? How does India compare in valuations with its peers in the region?
The valuations are definitely on the higher side as against what they were three years ago. However, by and large, they are not unreasonable. The valuations are an outcome of demand and supply. Globally, demand for innovation is much higher than supply. So valuations are going to remain high.
In emerging markets, there are two tiers in the market. There are popular sectors such as e-commerce and marketplaces that are addressing the huge consumer opportunity. They get valued relatively higher because they are easy to understand for the financial value chain. And then there is everything else that is not so popular, which is where there are a lot of hidden gems.
Leaving aside the newsmakers, I still think there are plenty of good opportunities at the right prices.
At these valuations, will exits become a huge issue? We don’t hear many stories of successful exits. Are exits a problem venture capitalists are already confronted with?
I do not worry about exits for a second. If start-ups continue to perform, they will get expected exits. Demand from incumbents is very high. Corporate investors are doing early-stage investments as well as early acquisitions. They are investing in venture funds to get visibility into the pipeline. They are co-investing along with venture capitalists. Corporates are even prepared to play at the seed stages. Every second day there is a new corporate accelerator launch.
The Securities and Exchange Board of India (Sebi) chairman recently said the regulator will soon issue norms for electronic initial public offerigs, which will make it much easier for investors from across the country to invest in public offers. How significant is this move from Sebi? (Sebi on Tuesday, 23 June, announced the norms for companies to launch IPOs in electronic form.)
To me, this move is incrementally good. This is good in the sense that it reduces the cost of going public and provides incremental access to people in smaller towns. However, it still doesn’t open up retail investors to the asset class called venture capital. Most regulators across the globe think putting money on an incumbent is risk-free and suitable for retail investors, whereas putting money on disruptors is risky and only suits accredited investors. By doing this, the regulators actually ensure that retail investors only get the opportunity to enter a stock at a point when everyone in the company calls it an “exit". Sebi should look at how FCA (Financial Conduct Authority) in the UK is regulating equity crowd-funding and unlock this opportunity.
Even after a record number of venture capital deals in India’s start-up ecosystem, do you agree that very few disruptive start-ups have come out of the country?
The definition of disruptive is different for different people. For me, an innovation that creates a new market by applying a different set of values, which ultimately and unexpectedly overtakes an existing market, is disruptive innovation. Flipkart and Snapdeal are disrupting traditional retail. MakeMyTrip and Yatra are disrupting travel agencies. If you are asking when are we going to get our first Google or Microsoft, then we need to wait. We are only starting to build product companies now. It will take some time.
In Singapore, how big is the gap between “seed" and “Series A"? Is the situation similar in India, too? Do you see a lot of start-ups getting caught in this space? After seed, there appears to be no problem when it comes to Series C, but don’t you think that many companies are getting stuck in the $1-4 million stage?
In Singapore, the start-up ecosystem is still dependent on government support. Policy changes have quite an impact on the ecosystem. With restructuring of the technology incubation scheme, the early-stage funding for “low tech" start-ups has become tighter. The government is actively encouraging start-ups to leapfrog by moving up the value chain and build hi-tech businesses.
In India, it seems more organic. However, venture capital as an industry is still in its early days. More early-stage funds are needed to fill the gap and support the ecosystem.
When you look at many venture capital firms in the region, they are run by financiers, not business operators. So when start-ups pitch to them, these companies are mostly evaluated based on profit and loss spreadsheets. Besides, most VCs are looking for revenue to growth companies and you often find that VCs themselves have no specialization in operations, except financial engineering. In this scenario, do you see the possibilities of them missing on the future unicorns? Do they have the vision to see such firms early?
I would begin by cautioning that stereotyping is not good. It is not necessary that a “financier" will not understand the dynamics of a business.
A good idea is one which is very easy to understand. And a good founder is one who can make a complex business easy to visualize. It is also not guaranteed that a successful founder will be a great VC and will have the vision to see future unicorns.
We can’t and shouldn’t be running after unicorns. We should be after identifying potentially huge “jobs to be done", that is, the fundamental problem of the consumers or enterprises that are being solved by the business. Doing that needs more of passion and less of credentials.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
