Does Business need Investment Alone?

Published in Silicon India

https://enterprise-services.siliconindiamagazine.com/viewpoint/cxoinsights/does-business-need-investment-alone-nwid-10287.html

I am reminded of a Tenali Rama’s tale in which one infant was claimed by two mothers as their own. When they could not resolve, the matter reaches King Krishna Deva Raya. He asked his courtier to suggest a solution and his wise courtier Tenali Ram was entrusted with this task to find out the truth. He feigns after intense discussion with the two women, that he could not arrive at the truth and now solution lies only in dividing the infant among the two mothers. Division could be by cutting the infant into two and giving a piece to each so called mother. One woman agreed to this idea, while other wailed in pain at the thought of her child’s death. This was enough for Tenali Rama to pounce back on the conclusion that only real mother would have pain.

Out of nearly average ten founders each week that I meet since the past 6 months, nearly 85 percent of the people are roaming around, meeting people and talking only for investment, as if they seem to have everything else needed in the business in place! About five years or prior ago, you would come across people in business at events coming for networking and learning leadership skills, making contacts, generating business ideas, setting up their own channel, securing bank finance (debt), hiring or identifying key people, among other things. All these were very natural and aimed at enhancing the value of business. When the money was available as Debt, founders (who had the intention to return the money) were not mad about acquiring customers at any cost, not at supersonic pace, and not definitely for short term gain. Business was developed for lasting and sustainable value proposition. Debt was at high cost, but that was also the reason for relative cautious approach in spending it. These days, I woefully miss this vocabulary from the venture founder, most of the times.

What has changed?

In 2016 and H1 2017, over 200 visible startups in India failed. It is not that all of them failed due to non-availability of funds, but in-fact otherwise.

On analyzing the invested startups, we can draw conclusion that many startups failed either because they got more money they could chew or they were starved off the funds. Many Hyperlocal companies like PepperTap, LocalBanya, GrocShop shut their shop in 2016 and 2017, due to their splurging big money in customer acquisition, to the extent customer acquisition costs were higher than lifetime value of the customer! In case of PepperTap, they offered a discount of 20 percent on grocery to first time users and got volume of orders from each new user id, but mostly at repetitively same address, which missed the analysis at management level. Local baniya pocketed the deep discount, while PepperTap bled. This problem occurs when money is available in plenty and our desire is to scale fast, even fulfilling artificial KPIs and focus is only on one KPI–growth in new customers.

On analyzing the invested startups, we can draw conclusion that many startups failed either because they got more money they could chew or they were starved off the funds

I do not see the focus on mentoring, business value creation, profit margin, profitable lifetime value of the customer or revenue sustainability. Atal incubation center (Niti Aayog) as well as DST gives most weight and asks from their funded incubators the most prominent parameter of success as funds secured by their incubated startups. Accelerators also rate the performance in terms of ratio of funded startups versus incubated startups. This myopic dedication to judge the performance of the eco-system partners to arranging funds, has everyone working overtime to arrange just that – funds. Other ‘doing business’ parameters are just being given a step motherly treatment. Why don’t we generate statistics for number of jobs created, revenue growth (value and percentage), profit earned, market share gained, ROI etc. 

This behavior is giving impetus to the venture founders behaving successful as soon as they secure the funds, irrespective of their struggle thereafter. Many founders believe the journey was up till here and loose interest soon after. Other fly-by-night operators by hook or the crook also join this race and get the funds (which are relatively easy to get these days in the absence of proper due diligence by fund managers, as they have to show the numbers in disbursements) and close the shop. All this is giving a bad name to the sustainability of the startup India movement itself. Promoter’s share keeps reducing at every successive tranche of investment. Hiving off shares of one’s company is not frowned upon, and promoters are ready to settle for a minority share, dividing their company, without pain, just the same way as deceptive mother in the Tenali Rama’s story, as not many are interested in saving the baby. 

Let’s re-think our focus and approach.

Startups - A new investment opportunity

“What’s the use of savings? It hardly provides enough returns.”

If someone ask, why is interest rate reducing, the answer is all developed and high growth economies tend to be business friendly. In that process, cost of money i.e. interest rate at which individuals or corporates get the funds from banks, reduces to make putting business venture attractive. If lending to businesses are low, interest on deposits are lower too. Developed countries like USA has interest rate of 1.25% on savings, UK has 0.5% and so are with the other developed nations.

Traditional avenues of investment in Gold / Silver, Forex, Real Estate, Equity, Mutual Fund, Fixed Deposit among others have diminishing ROI over the last 5 years. Here are some statistical facts 

• Ø  Silver and Gold have slipped from $32 to $17 & from $1608/oz to $1270/oz respectively, over the last 5 years
• Ø  USD, EUR & GBP [against Rupees] have moved from 55, 70, 87 to 65, 72, 83, giving returns of 2.7%, 0.5%, -0.8% respectively over the last 5 years
• Ø  Sensex moved from 19427 to 31109 and Nifty from 5905 to 9605, giving returns of 10% and 10.4% of an investment on index based funds, over the past 5 years
• Ø  FD returns have changed from 8% to 6.25% and trend is reduction in interest rates further
• Ø  CAGR returns on Real Estate investments have been roughly about 8% (over last 5 years), 13.4% (over last 10 years), 10.8% (over last 15 years) and 6.2% (over last 20 years) [Source: Morgan Stanley]

Indian prices are directly proportional to prices quoted above in dollars. All the above returns are pre-taxed. Trend is not only relevant between the end node points of these last 5 years but also applicable equally during these last five years.

Investment in Real-Estate and Gold were giving positive and healthy returns when substantial investment was being funneled through black money. It is still possible but it is becoming difficult basis various government initiatives.  It may not be worth such a risk.

Alternative

If better returns are to come from business, why not invest in the business itself. If you believe start-ups have a promise in the near future, not only to solve problems in our society but also for financial returns, please read further on. Investing in the startups as angel investor, to start with, is new asset class.

India has caught on start-up culture after USA (Silicon Valley), UK, China and Israel. Investment in start-ups is being done by family and friends at ideation stage, by angel investors at seed stage and by venture capitalists at growth stages. With high availability of quality founders, bright mind and unmatched passion, many startup founders are succeeding and generating returns of unparalleled magnitude to their investors.

With so many startups failing, is investment in startup not risky? Yes and No. Like any investment – be it equity – primary or secondary, silver, gold, real estate, etc. you are not sure any longer of positive returns. I will be surprised to see a portfolio manager committing any returns at all, if not investing in gold bonds. In that sense, Startups too are risky. However, this risk can be reduced, just like knowledgeable people who manage your money in other asset class, The Startup Board and others, who understand due diligence process, reduce the risk, by considering level of risk consciously. It is just like in a business.

Consider the benefits to individual angel investors – a) high possible returns from this new asset class, b) opportunity to mentor the invested founders and keep a watch on the risk, c) spreading your risk profile into new asset class, balancing the portfolio d) enhancing tax incentives for your portfolio, e) possible position on the board of possible next wave technology startup, to help solve problems in the society (also making money).

For big corporates, instead of setting up new R&D or investment into product development, let it be left to a startup, who can turn-around the idea into execution much quickly and inexpensively. Services companies, who know little on product development and management, can better partner and take the offering to market together, to their customer or startup selling it to others, thereby getting better traction with low operating expenses. A hands away approach immune the corporate brand, in case product does not succeed. Both corporate and startup can avail tax incentives that exists. It also rejigs the innovation landscape of the organization, from an external catalyst doing innovative thinking, product development, roll-out, all of which organizations take longer in refreshing themselves. Startup company, with such close watch, may be good inorganic investment opportunity too for the corporate.

How to invest

If you have sensed benefits already, there are multiple ways to go on to identify the startup and invest. You can do it yourself, take help from those working in the eco-system and know startups and market trends better, or approach through chamber of commerce.

Key parameters needed to look in the startups (in that order) are a) value system of the founders b) their educational and experiential background c) potential of the sector in which venture is operating in d) business model of the startup and e) scalability of the business, model or sector

Once these basic things are in place, it is all business acumen of the investor or advisor. Happy investing.

Ashish Jain is Chief Evangelist at The Startup Board

Published in Financial Express, Delhi on 10^th Nov 2017

http://epaper.financialexpress.com/1424494/Indian-Express/10th-November-2017#page/15/1

Tips to avoid failure in startups

Investment or mentoring - Which should be first?

In 2016 and H1 2017, over 200 visible startups in India failed. It is not that all of them failed due to non-availability of funds, but infact otherwise.

On analyzing the invested startups, we can draw conclusion that many startups failed either because they got more money they could chew or they were starved off the funds. let me explain.

Many Hyperlocal companies like PepperTap, LocalBanya, GrocShop shut their shop in 2016 and 2017, due to splurge in customer acquisition, to the extent customer acquisition costs were higher than lifetime value of the customer!

PepperTap got $50m including $36 from SnapDeal and they continued their operations on negative transaction cost over a long period, inviting it attracting for local grocer to make a purchase, pocketing a discount of 20% (offered in the name of new user discount) and sold to his customers as otherwise he would have. Operations were not reviewed and trends not seems to have been analysed. This problem occurs when money is available in plenty and our desire is to scale fast, even fulfilling artificial KPIs.

On the other hand, food delivery startups, who started with promise as last mile delivery is still a issue to be resolved efficiently, TinyOwl, ZuperMeal, iTiffin, BiteClub all folded up, as money which was easily available last year, isn't available this year that easily, as investors have tied their purse, witnessing bloodshed at the marketplace. Scale of these startups needed, as per design, higher infusion of capital and that was not available this year.

In both of these situations, somehow, the trust between founder and investor got broken.

I am of the believe, before investing, due diligence should happen over a period of time when founders should understand the investors and like wise the reverse. This can happen when mentoring happens before the investment in the venture.

With this view, we have structured our next accelerator program, different from the market offerings. Accelerators generally give money first and then mentoring take place. The Startup Board is coming up with a accelerator program in which about 15 founders and over 30 top industry CXOs will meet every Saturday for 16 weeks, and virtually thereafter for over a year, to not only expose connections, guide as board of directors guide the management team, but also hand-hold on strategic direction and resolution of strategic issues. This approach will be better to build trust and consequent investment, when maximum weight investors have started giving on the execution capability and value system of the founders.

I would love to get your views.

Cheers! Ashish Jain

Chandigarh - a city of start-up opportunities

Start-up eco-system in Chandigarh

Chandigarh - ‘The City Beautiful’, is an appropriate mix of entrepreneurial spirit (many big business houses are here) and government employees (being the two-state capital).

Chandigarh is first planned Indian city, wide roads, efficient administration and good infrastructure and well educated and well-off residents. It is 2^nd highest per capita income city in India. It boasts of educational hub with fine mix of engineering, architecture, medical, management and arts colleges and universities. It also has higher education institute like reputed Indian School of Business.

Chandigarh boasts of an emerging IT Park and along with its sister cities – Mohali and Panchkula (together known as Tricity) – is home to some major multinational corporations like Quark, Infosys, Dell, IBM, and TechMahindra.

Chandigarh is in close proximity to Haryana, Punjab and Himachal Pradesh and attracts a lot of talent from these states. The availability of a large number of motivated and talented people ready to take up new roles and responsibilities is one of the biggest advantages that the city provides.

Morpheus is the India’s first private sector incubator and is from this city. It has 80 odd startups including CommonFloor, Practo, and Akosha. ‘The Hatch’ (now defunct) founded by Puneet Vatsayan was another incubator that grew out of Chandigarh. In-fact Flipkart founders Bansals belong to this city.

Some of the prominent names in the start-up from Chandigarh are

- uTrade Solutions - a financial trading technology startup

- Jugnoo - auto rental and food delivery startup

- Exito Gourmet – Food Delivery

- Bulbul – Beauty service on demand

- Bistro Offers – Restaurant offers on mobile

- Soulbowl – Groceries delivery (like BigBasket.com)

- DSDInfoSec - Network Security

- MobiProbe - Efficient App Diagnostics

- INOEVE - Internet of Everything 

- Naukri Se Pareshan - Exciting opportunities beyond office life

- Olai - A flexible static pages engine

plus more than 100 more start-ups

Advantage Chandigarh

• ·         High availability of youngsters (due to large number of educational institutes)
• ·         Some of the big corporates in IT
• ·         Better living standard than tier 1 cities
• ·         Low attrition
• ·         Entrepreneurial spirit due to presence of historical business community in Punjab and Haryana
• ·         Efficient administration with great infrastructure