Dev Khare | Silent killers of start-up growth

Building a start-up into a successful high-impact company is not easy in India, despite the macro outlook almost always looking rosy—1 billion-plus people, strong economic growth, being an emerging market and a BRIC (Brazil, Russia, India, China) country, technical expertise, many underserved needs, etc.

add_main_imageDespite this, many Indian start-ups have navigated a maze of challenges, creating leading brands and sustaining themselves for long periods of time. Start-ups that have created successful brands include Cafe Coffee Day, Flipkart, Indian Energy Exchange (B2B), IndiGo airlines, Infosys (B2B), InMobi (B2B), Justdial, MakeMyTrip, Naukri (B2B), One97 and Snapdeal.

Here are some of the environmental challenges that I see many start-ups facing here:NextMAds

Market friction

Many of the successful companies we talk about today in India took 10+ years to get to escape velocity and impact. Why? India-focused start-ups have to change buyer behaviour and/or create infrastructure (eg Flipkart’s several thousand people in logistics or Meru Cabs’ owned and operated taxi fleet), as opposed to purely focusing on better/faster/cheaper solutions. As a result, I generally see linear organic growth in companies targeting the Indian market. There are some companies that have overcome this by creating low-friction offline models e.g. Dr. Lal Pathlabs with low-capex collection centres. Friction also comes from difficulties in payment collection, gatekeepers, government compliance and regulatory uncertainty.

A series of small markets

Start-ups need large markets ( ₹ 2,500 crore plus or $500 million plus) to get large and succeed. This is hard to find in India, perhaps due to early consumer demand, unorganized markets or regional differences. For example, digital advertising is a roughly $400 million annual business here, with mobile at 10% of that. To access and maintain growth, almost every new start-up here needs to increase their focus on creating and evangelizing their category versus just focusing on their own growth.

While many start-ups choose to access existing categories abroad (eg smartphone apps), many Indian start-ups have successfully created India-specific categories, including inbound marketing (Justdial, ZipDial), B2B marketplaces (IndiaMART, Indian Energy Exchange), assisted services (OneAssist, Onward Mobility, Suvidhaa), MVAS (OnMobile, IMImobile), entertainment services (Dhingana) and transport aggregation (redBus, OlaCabs).

Lack of trustsixthMAds

Lack of trust is endemic in India, whether you are driving through the streets (and perhaps Delhi is an extreme example of lack of trust!) or negotiating with corporate partners. Examples include the trust gap between regulators, law enforcers and businesses; and the trust gap between promoters (aka founders) and investors.

Relationships, not contracts, govern deals. As one consequence, I believe more start-ups should think about brand-building here in India relative to if they were in the developed markets.

Hard to find strategic talent

Strategic talent is hard to find, including executives, product managers, product marketeers and design experts. We find ourselves scouring large established companies in India for executives and many times find these executives short on ability to take career risk and lower start-up-level compensation in exchange for equity. We look abroad sometimes to import talent. One other friction point tends to be lack of middle management willing (or empowered) to take their own initiative and a cultural bias for say:do ratio > 1.

Not enough experienced mentors

India has an early (but fast-growing) ecosystem for new venture creation. I see successful founders giving back to the founder community in a big way through investments, mentorship and driving industry hygiene. However, there aren’t enough successful founders yet to cater to the much larger group of new founders who need help. Without the perspective provided by aligned mentors, many founders are finding it tough to pivot or accelerate.

Constricted access to capital

Many would point to investors being over-cautious and risk-averse. I think that the environmental factors mentioned above are the causal factor for investor cautiousness and not vice-versa. I would argue that the $1.1 billion that went into venture in India in 2011 and the $762 million that did so in 2012 (source: Venture Intelligence) was perhaps more than what the market could absorb efficiently. Capital is abundant in the growth stage, once product-market fit and/or profitability has been achieved, and hard to come by in the development stage (ie pre-revenue and/or pre-traction stage).

The author is an early-stage venture investor at Lightspeed Venture Partners in New Delhi.