Home / Companies / News /  Khosla Labs bets on solutions for Indian problems

Bangalore: Vinod Khosla, the Silicon Valley investor and entrepreneur known for his off-the-beaten-path investments in newer start-up experiments, is betting on building profitable products that solve India’s complex problems in financial inclusion and unorganized retail.

Khosla Labs, the technology product incubator launched in November last year with Srikanth Nadhamuni, a former technology head of the Unique Identification Authority of India (UIDAI), is readying products that can potentially be spun off as stand-alone firms and even get funding from Khosla Ventures’ multi-billion dollar fund when they are ready to launch.

“Vinod and I kept meeting at various conferences and talking about large transformational projects in India, like Aadhaar, where I headed the technology team for four years since inception. I was planning on transitioning from Aadhaar since the technology platform and operations were stabilized and the managed service provider had been commissioned," said Nadhamuni. “Vinod was keen to do something in India and I was looking to do my next thing. I set up office in the garage of our house in October 2012; this was the beginning of Khosla Labs."

While Jain and Bandyopadhyay are piloting products and solutions for a branchless, cashless banking system powered by mobile phones, Rao is testing a product aimed at helping millions of small retailers manage their inventories and finances more efficiently.

Over the next six months to a year, these start-ups are hoping to raise fund from Khosla Ventures and branch off as individual firms.

“It’s actually like setting up an assembly line for cars, which was what we were doing since the labs started. In the first one-and-a-half years, we would have done at least two companies," said Nadhamuni.

Unlike traditional start-up accelerators such as Y Combinator in Silicon Valley, Khosla Labs does not follow the model of selecting entrepreneurs in different batches, invest seed money, and pick early equity stakes.

“We thought that a better model would be to actually work with the entrepreneurs. So we bring entrepreneurs on board, as entrepreneurs in residence, we all brainstorm, come up with ideas, and then go on to experiment, prototype the ideas, do market validation. If after all this there is traction, we fund them through the Khosla Ventures fund," said Nadhamuni.

For the entrepreneurs who are part of Khosla Labs’ first batch, the model allows them to experiment better and aim at creating products that solve big problems.

“I have always been an entrepreneur and even while working at Infosys where we built products," said Bandyopadhyay. “How we all see the same problems of financial inclusion, the challenges involved, and new opportunities in Aadhaar and new devices, environments offered quite an opportunity."

Rao, who is piloting a cloud computing-based solution for smaller retailers, said traders need more sophisticated solutions. “India fundamentally has been a shop-keeping country and a lot of retail is still in that mom-and-pop format. So how can we enable trade and the traders to get more efficient?" said Rao.

By focusing on building products that solve India’s problems, entrepreneurs in the country have better chance to succeed, said Rahul Sood, general manager and a partner at Microsoft Corp.’s newly created corporate venture arm, in a recent interview.

“When I looked at the Indian start-up ecosystem, I was a little disappointed. What I found was that many of the companies that were coming out of the start-up ecosystem are trying to solve problems in the US," Sood said. “They are trying to ape what’s already there in the US. There are so many local problems to be solved."

For now, all the three entrepreneurs and Nadhamuni are tight-lipped about the products.

“The mandate we got from Vinod was to solve problems around us, using technology at a scale. We are in a phase where we are working with multiple partners and figuring out. We are now beginning to pilot and test," said Jain, who is working on creating a mobile payment solution.

On financial inclusion, Khosla Labs is testing a solution that could potentially leverage Aadhaar numbers to enable transactions. Nadhamuni said it can have an impact similar to how PayPal Inc. used email addresses for money transfers.

“PayPal said, if you have an email address, we can send money, and that was over 10 years ago," said Nadhamuni. “Can we apply that with Aadhar numbers?"

In unorganized retail, the opportunity is huge, Nadhamuni said.

India’s $455 billion retail market is dominated by the unorganized retail sector. The organized segment accounts for 8% of the overall retail market in India, according to a Booz and Co. and Retailers Association of India (RAI) February study. The overall retail sector will grow 9% in 2012-16, with organized retail growing at 24%, according to the study.

For small retailers such as Gulab Chand in Bangalore’s HSR Layout, a residential pocket, the challenge is to keep a tab on inventories across several dozens of categories of products, and manage vendors and working capital. And above all that, to ensure that his loyal customers do not switch to the newer large format retail shops in the locality just because his shop does not stock what the customers are looking for.

“We don’t need a computer; it will take lot of space. If I could track all of this on my Nokia handset, that would be great," said Chand, who migrated from Rajasthan around 10 years ago and deals mainly in grocery items.

Vivek Wadhwa, vice-president, research and innovation, Singularity University; a fellow at Stanford Law School; and a director, research, Duke University, said Khosla Labs’ experiments with these products can actually become profitable ideas.

“There are immense opportunities in India to solve not only India’s problems, but also the world’s. There are billion-dollar market opportunities there," said Wadhwa.

Others such as Sanjay Swamy, managing partner, AngelPrime Partners, a seed-stage start-up incubator, said for somebody of Khosla’s stature, India offers a tough frontier to conquer.

“For people like Vinod Khosla, who are entrepreneurs first and investors second, the primary objective is to take big risks with the sole purpose of make the world a better place—and reap the rewards of the risks if they do succeed," said Swamy.

A rival executive running a start-up accelerator said the real test for Khosla Labs will be when the companies are spun off. “Managing that transition when these entrepreneurs in residence are branching out and meeting individual ambitions will be the real challenge," this executive said, requesting anonymity. “How much stake will Khosla Ventures pick and corresponding valuations of these firms are also future questions."

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