Why Indian Start-up Ecosystem Suffers from Extrapolated Market Depth

Growth and consequently capital for start-ups to come is an inherent function of the depth of the overall market or ecosystem.
Why Indian Start-up Ecosystem Suffers from Extrapolated Market Depth
Image credit:
Features Editor
7 min read
Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

It’s been around two years since large funds including the likes of Tiger Global Management left the early-stage capital, including series A, high and dry. The problem, which was necessitated due to lack of start-ups’ growth, is yet to see a full turnaround. But that’s the front of it. The backdrop unfolds a ‘deeper’ story.

Angel tax, stricter due diligence and largely lack of exits are some of the convenient reasons by the investors that one gets to hear for lack of early stage and Series A funding. However, the growth (and consequently capital) for the start-ups to come is an inherent function of the depth of the overall market or ecosystem (instead of the sector it operates in). And that’s what lacking.

“There is a lack of market depth for Indian start-ups. However, it is not about any particular stage of funding,” says Rajesh Raju, Managing Director, Kalaari Capital.

Figuring out the Real Market

Now to understand why it is lacking, let’s understand what it (market depth) means because the term is attached too frivolously to everything start-ups and opportunity. The popular opinion holds two definitions - first, the ‘actual’ market size; second, the number of ‘good’ start-ups with the ability to scale. The actual market size is more comprehensible than the ‘market size’ to understand market depth. Generally, market depth (for every sector) is relative to the expectations of entrepreneurs and investors. They extrapolate the opportunity for any start-up assuming that it would have X percentage of growth in Y years, by tapping entire population of India. However, catering to 1.3 billion people via e-commerce is not the real market size for either a small fashion start-up like Fynd or unicorns such as Flipkart, Zomato, Quikr, Hike etc. Certainly, the challenges here are less infrastructural.

“While we say we have 1.3 billion people but the willingness to purchase is not very high. In fact, even if they want to buy, not everyone has the purchasing power. People using digital payment platforms are also limited. Hence, the market is much smaller than it is perceived and so there is a lack of market depth,” says Kartik Hosanagar, Professor, The Wharton School, University of Pennsylvania.

Essentially, here affordability or purchasing power is at the base to drive market depth. Affordability, however, is directly linked to the per capita gross domestic product (GDP). For countries like India where it is under $2000 per capita income, it means people are more or less surviving. “Three-fourth of India is still worried about basic necessities of food, clothing, and shelter. If you are trying to sell them fancy and expensive products, your customer base is very limited,” explains Raju.

On the other hand, countries like the US, the UK or China which have seen hockey stick growth in consumption are the ones that have more than $4,000 GDP per capita.

“Affordability drives consumption. It further drives the market size and makes it more deep for businesses to scale. Unless per capita income increases there will be limited consumption for few disposable goods,” says Nipun Mehrotra, Chief Digital Officer, IBM India/South Asia.

Finding Good Density

Coming to the number of ‘good’ and scalable start-ups, considering that the ecosystem is just around a decade old, India certainly doesn’t have the problem of start-up density or lack of start-ups - around 7,000 with roughly 1,000 added annually.

“The problem is the lack of good start-ups. A raw number is not indicative of the right number of start-ups. It is an Indian problem that we equate quantity with quality. There you have the lack of depth,” says Sharad Sharma, Co-founder, iSPIRT – think tank for software product industry.

The goodness can be from different perspectives, one of them being able to respond to the market shifts. “Indian entrepreneurs are very poor in catching up with the market shifts. If they can, then they are unable to execute on their intentions even if they have identified their target audience,” adds Sharma. He mentions a popular online ticketing site, a major e-wallet firm and few emerging payment start-ups, requesting anonymity, that are or would be in panic mode soon for the entire or some part of their businesses due to changes in their respective sectors.

The other perspective is about the challenge in right product positioning. The bigger problem in this context is that Indian entrepreneurs don’t seek feedback on their products. “It is because they believe in the philosophy of ‘I know it all’. This is where we differ from mature entrepreneurs like in the US. This also adds to lack of market depth,” says Ritesh Malik, Co-founder, Innov8 – among the biggest co-working start-ups in India. For instance, he says, “Based on feedback, we have understood that co-workers only need a great location, office design, air conditioner and hi-speed internet. One of our competitors serves liquor but people don’t want that. We don’t position our brand that way.”

Then there is the cost of customer acquisition (CAC). A good start-up would have lower CAC while it is scaling as people get aware of the brand. For instance, if $100 is spent by a start-up annually on marketing to acquire 100 customers in the same year, the CAC is $1. However, this works only when future customers also want to buy the product. If they don’t and sales are only pushed through then it leads to discount-based growth. But, that means heavy losses and eventual shutdown. It’s akin to creating a fake depth in the market.

“If CAC doesn’t come down with growth (because it is directly linked to your net promoter score (NPS)) then it means that your product or service is not worthwhile. Best firms are the ones with negligible CAC,” says Malik. For example, Little Black Book (local recommendation platform for food, lifestyle, and events), adds Malik, “Has among the lowest CACs globally to acquire customers. This means its customers are its brand ambassadors. Also, globally, caller identification app Truecaller also has one of the lowest CACs.”

Once India solves this issue of market depth, then there is the question of whether we need a local SoftBank, and Tencent etc. to limit capital going out of India, which happens in case of foreign funds. The answer to that is subjective. “It doesn’t matter because it is no different from borrowing from World Bank to build highways, which will take its money back with interest,” says Raju.

Mehrotra disagrees with that analogy. “The right analogy would be of Indian stock market. Though foreign institutional investors (FII) play a big role but despite FIIs pulling out $25-40 billion so far this year, the stock market has gone down by only two-three per cent. That’s because of the depth of the domestic investors. Similarly, for the depth of the start-up ecosystem to improve, we need local large investors.” While India cannot compete with the cheap capital that the likes of SoftBank brings, hence ideally we should use this capital. The question must be raised if it helps a foreign company in India and not an Indian company.

(This article was first published in the July 2018 issue of Entrepreneur magazine. To subscribe, click here)

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.

Scalability Secrets From One of America's Fastest-Growing Software Startups