Hunting for Elephants in India with Water Pistols
September 23, 2012 Editor 0
When you turn entrepreneur in India, you soon feel like the storybook character who wants to lead a simple life in a village. But he finds a mouse in his room one day, and has to get a cat to catch it. To feed the cat, he has to buy a cow and then, a dog to prevent the cow from being stolen. Soon, he turns into a full-fledged farmer, with chores from dawn to dusk — the very fate he set out to avoid.
That’s exactly how it felt after I made my entrepreneurial debut in India. I was forced to shift from my initial focus on creating great content to setting up a distribution system, to coming up with an innovative in-shop presence to reach consumers, and so on. There was an endless list of things to get done for success.
Entrepreneurs the world over know they must try to excel at just one thing, given the limited resources at their disposal, when they set up shop. In India, that is impossibly hard.
Companies, both old and new, have no choice but to stray far and wide from their core businesses.
Until two decades ago, India’s business groups diversified wildly because of the constraints to growth posed by licensing and anti-monopoly regulations. Companies that have sprung up after the reforms of 1991 must diversify because of the “infrastructure deficit” — rotten roads, power shortages, and a poorly trained workforce, to name some realities. India’s leading IT companies, for instance, have developed their infrastructure themselves: They operate transportation systems round the clock, generate huge amounts of power, and run gigantic training operations to remain competitive.
The infrastructure deficit translates into higher up-front investments and longer break-even periods for new ventures. The burden can be particularly large in the case of consumer-product businesses because of the steep distribution costs and the lopsided terms of payment; the credit cycle is usually more than 180 days.
While business opportunities in India’s consumer market may be elephantine in size, it’s a challenge to find sufficient ammunition — that is, capital — to go after them. Flipkart, the Amazon clone that launched in India five years ago, embodies the country’s promise and problems.
India’s e-commerce opportunity is large. Although less than 2% of the $500-billion retail business is conducted online, sales are migrating online quite rapidly. Flipkart has grown at breakneck speed, and it has earned a terrific reputation for customer service.
In order to deliver products reliably to people’s homes, unlike Amazon, Flipkart has been forced to create a dedicated team, system, and processes. Moreover, because of low credit card usage in India, it has created an expensive Cash On Delivery (COD) system, which accounts for a majority of payments. Both investments would have been unnecessary had there been a reliable and inexpensive courier service and a widely-trusted electronic payment system.
Flipkart’s investors are implicitly betting that the company will execute well on three different and difficult businesses — e-commerce, logistics, and e-payment systems — which will result in an amalgam of Amazon, UPS, and Paypal! Even if Flipkart succeeds in pulling off that trifecta, it will take longer to turn a profit than a company in the US.
Flipkart is one of the best-funded startups in India; it had raised $31 million by 2011, when its revenues were just $11 million. Since then, it is reported to have grown revenues eight-fold and raised two more rounds of funding. Perhaps reflecting the toughness of the investment environment, the terms of these deals have not been made public. Besides, it isn’t clear that the capital infusions will be sufficient to keep Flipkart on the growth path.
Not having sufficient capital to overcome the infrastructure deficit is the single biggest threat to new ventures in India. Even for entrepreneurs entering India’s ideas-driven knowledge economy, the harsh reality is that the basis of their competitive advantage is the amount of capital they can raise — not the uniqueness of their ideas. That isn’t something that appeals to most entrepreneurs.
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