Venture Funding Is A Shot In The Dark
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Group thinking, herd mentality, or bandwagon effect - one of the most serious cognitive biases leveled against venture capitalists by entrepreneurs in the consumer space for picking already “proven” business models over otherwise “new, and innovative ideas” with no global precedence. The argument hence is that such an act is stifling innovation - one of the reasons why a consumer Internet start-up with a global footprint is yet to emerge from the world’s third largest startup ecosystem.
VENTURE CAPITALIST (VC): How much is your monthly traction?
FOUNDER: Around 100 downloads…
VC: So… You think 100 is enough for the amount you want to raise?
FOUNDER: Our app abandonment rate is very low and moreover, this is a new market altogether.
VC: Hmmm…Oh! Have they (another premier VC) committed to invest in you? We might join as a syndicate if they lead the round.
FOUNDER: They probably would… This is the excerpt of a Delhi-based hyperlocal travel start-up founder’s interaction with a tier one VC firm in India in February this year.
Globally, early stage investors bet more on start-ups, which either belong to large established markets like retail, finance, healthcare, and transportation, which have been validated with existence of different start-ups, some that have scaled, while few others that have burned their fingers; or which have already raised funding from some marquee investors, which again acts as validation of those start-ups’ business models.
This is because of the high risk nature of early stage investments and it is fine with entrepreneurs who are digging into completely new spaces, but what’s irking them is that in the process, their completely new ideas and innovation that have no similar businesses globally to act as a measuring stick are being left high and dry by investors. So, investors fear of missing out on backing scalable ideas in high performing sectors that can offer handsome returns and hence run after few selective markets instead of staying true to their high risk profile and backing crazy yet scalable ideas.
This is one of the reasons why no global consumer Internet story has emerged from India despite of Indian start-ups and those from the Valley (which are now spread across the globe excluding China which is a closed economy) like Uber, Airbnb, Twitter, Pinterest, Snapchat, and Instagram came up around the same time that is 2006-07 onwards, even as Practo and OYO have just moved out apart from Zomato.
Amaresh Ojha, Founder and CEO of Gympik – A Bengaluru-based online marketplace for fitness and wellness centres, and trainers, is quite vocal about the fact. “This is one of the reasons why Indian companies haven’t been truly global as they don’t have a unique offering. I met so many investors and every time they ask me if there is any equivalent of my business in the US or anywhere else. They would listen to a company if it is in fintech, IoT, etc., even if the idea is half baked. While there is no equivalent to Gympik in the US, I am confident that this is going to work.”
Gympik raised an undisclosed sum in pre-Series A round from US-based VC RoundGlass Partners in March this year. Bharat Sethi who runs two start-ups, PosterGully (online marketplace for artists and designers) and Drooly (discovery platform for creative professionals) echoes the mindset.
“It happens in every matured or maturing market. The capital infusion in Indian start-ups has been very disproportionate. Huge chunk of capital has gone into few particular sectors when the ecosystem is thriving with fresh ideas.”
Around March 2016, during an investor meet, investors told Sethi that they would back him if he can get the other big VC on-board. Then there is Archit Gupta, Founder and CEO of tax filing platform, ClearTax backed by Silicon Valley’s esteemed seed accelerator, Y Combinator adding to the chorus. “If there are global proxies for that new idea and market, then it becomes easy for investors to internally also justify their investments.”
Investors too confirm to this mindset, however they lay the blame back on entrepreneurs. “Entrepreneurs are not completely wrong when they complain of investors’ herd mentality, but when start-ups with completely new ideas (90 percent are copy cats of businesses in the US and China) pitch to VCs, including us we find that the market understanding, the level of conviction and research required is mostly lacking in them.
So, it becomes tough to take a call on such ideas as most VCs are very lean team and hence they don’t have the bandwidth or desire to research whether that idea will work or not in India,” says Madhukar Sinha, Partner, India Quotient. The micro VC fund was among the top 10 start-up investors in 2015 in deal volume. It is reportedly planning an accelerator program called IQ Snipers.
While waiting for entrepreneurs to do the complete research, if other players also come up in the space, it leads to a herd or if a large VC firm invests in that new space, it certainly validates the size of that market. Then each VC backs a player in that space which they believe would out smart other similar players and as a result, it looks like all investors like a herd are getting into the same space while other new businesses have to prove themselves, according to Sinha.
However, there are naysayers as well like Vivek Gupta and Abhay Hanjura, Founders of online meat ordering platform Licious. They have a pragmatic view to the problem. “There are some references investors always draw from the developed economies if the market size is very large and if they think that few players can exist. However investors do support if a new market is getting created or an existing one is getting organized, an example of which is Licious which has no global reference as the problem of meat delivery next existed in other economies.”
Among other reasons why Indian ecosystem is around a decade behind the US include huge differences in terms of early stage or angel ecosystem, disposable and per capita income, technology infrastructure including Internet and digital payment ecosystem; engineering talent; and mindset towards entrepreneurship and failure. This framework started developing in the US in 1990s itself that these unicorns leveraged quickly to first capture their home market and then expand globally, unlike in India where it wasn’t quite there and is still evolving. So, Indian companies which have unique global products are still busy with the domestic market.
“If you don’t win your home market, then how can you win a foreign market? When Amazon came to India, it basically claimed to be the biggest player in the US, whereas if Flipkart launches in the US, people would say that it is struggling in India, how you would win the US market. However, the expansion of Indian companies would be quite faster from now on,” adds Sinha.
Nonetheless for copy cats to go global makes little sense because there is no unique offering and if at all they would, it would require massive capital raise to fight global competition, which looks tough in the current scenario while those that can go global are making efforts even as investors’ raising new funds for allocation are gradually loosening their purse strings for them.
This article first appeared in the Indian edition of Entrepreneur magazine (July 2016 Issue).