Copying internet models that have worked in the early internet markets like the US has been a prevelant business practice worldwide ever since the internet was invented. From the Yahoo, Amazon, eBay, Expedia clones half a decade ago to the more recent Airbnb, Gilt, Uber and, Zillow and Yelp clones today. Almost every successful internet business model has seen copycats come up worldwide. There are some investment/incubation firms that seem to have made "Immitate and Invest" a business model.

Entrepreneurs/investors that are making a living from copying business models that have worked elsewhere need to understand the business drivers of the business model worldwide and try and understand if these drivers exist in India and what local tweak may be required for the business in India. Couple of examples in the Indian context
 a. Dating  (Match.com of India) - Do women feel safe to put up their profiles on an internet site? Are they culturally open to doing so in a largely conservative Indian society?
b. Ecommerce  (Amazon of India) - Is there brand loyalty while shopping online in India or are consumers price sensitive?  How does one pay in a largely cash dominated societey in India? 
c. Social Travel (Airbnb of India) - Is there enough trust for end consumers to list their homes for daily/weekly rentals by strangers? Is tenancy regulation amendable to this business model?
d. Private Taxi Marketplace (Uber of India) - What are the altenate modes of transport available to the consumer? What pricing is neeed for the private taxi operator to make money? And how does that pricing compare to the other modes of transport (Can that pricing being sustained in the market? Given the traffic in key cities like Bangalore and Mumbai, can the taxis reach on time?

In all of the above examples, the "me too" business clearly requires significant local innovation in order to make the model viable. An entrepreneur needs to build in the friction involved in trying to localise the business to Indian conditions which could impact time to market and profitability.

Some Me too models that don't require on ground execution in an English speaking country like India may not work at all. For example, if it is a product play only that consumers need to adopt, there is no advantage of a local player over an international player if there is no langauge barrier. So India doesnt need a local Google, Facebook, Whatsapp, Pinterest while China may due to the language barrier. The business driver in the above is mainly marketing/customer adoptoin which an international company can do as effectively as a local company. So a "local moat" doesnt really exist in these businesses.

It is encouraging to see "me too: entrepreneurship flourish in India. However, there is no free lunch when it comes to copying business models. It requires a lot of deep thinking and superlative execution and long long hours at work.

In a recent board meeting of an early stage internet startup, one of the senior executives asked me "Should I hire a Senior Sales Head who has experience in the Industry or should I hire someone who maybe good with managing a sales organisation but in a different industry?". My immediate answer was "Experience is Overrated!".

Let me explain.

What is required from a Sales Head in an early stage startup is someone who can roll up their sleeves and do the initial selling to the customers, someone who understands the product roadmap well and can dynamically adjust the product positioning and pricing based on market needs, can build a motivated team, can design and implement processes, operating metrics, etc.   Given the nascency of the internet in India,  there are few companies on the internet that have scaled where one can find Sales Heads with the right mindset and experience in a fast growing  innovative and dynamic setting . And many times in the offline world, the experience is a lot more structured where there is less "out of the box" entrepreneurial leadership thinking.  And often times, an experienced hire can come with unwanted baggage from an industry or a company that then requires "unlearning".  Or the hire can come with strong views of how to approach things which may or may not work in the context of what the startup is looking for or may bring on board a team that may have performed well in a different context or environment (may still be the same industry but sometimes online and offline skills in the same industry can be very different) but may not be able to adjust to the new environment.

So unless there is deep domain that is absolutely required (in some fields like pharma, medicine, etc, this maybe required), the core functional skills and mindset of the person is more important than the experience. Obviously if the core skills check out in a candidate that also happens to have the experience, it is an added bonus.

Many first time entrepreneurs we fund at Series A think the fund raising process in Series B/C maybe somewhat similar to Series A where the entrepreneur meets the VC a few times, the VC does their diligence and issues a term sheet in a few weeks.  Many times the process doesn't play out like this. The Series B/C process can be lot more involved where the Growth investor wants to see traction on many business metrics, comfort around the capital needed to get to profitability, a fully built out management team, a functional product with revenues, etc, etc.  And surprisingly there is very little co-relation with the amount of capital being raised and the intensity and lenght of the process.  This can sometimes throw  the entrepreneurs into a spin as they have not budgeted  enough time for their next round and they end up with a bridge round before the next financing which is always a very tricky position to be in. It is therefore important that the capital being raised in Series A is sufficient enough to get an entrepreneur to a point where some of the product, team and market risks are mitigated to enable an effective future fund raise, even if it means raising slightly more early on. And the entrepreneur should also be paranoid about spending the Series A monies raised effectively (ie it is better to spend monies on demonstrating early traction on a product even if it is not fully built out rather than building all the bells and whistles on the product at the cost of showing early traction).

Capital raising is an art and a science and entrepreneurs need to understand and master that skill along with the zillion other things on their plate.  I have seen situations where very strong entrepreneurs have lost out to their weaker counterparts who have been better fund raisers than them.

As early stage VCs,  we are witness to the entire lifecycle of companies from birth to successful exit, distress sale or death.  In several situations, companies go through tough times along the way for various reasons, some internal (management discord/competence), some external (market doesn't exist, competition has more spending power, funding has dried up, regulatory hurdles, etc).  Some of the learnings from companies that have successfully weathered the tough times and turned themselves around are :
1. Quickly adapt Product/Service Offering  - Understand whether there is a product/fit gap, inherent structural problems with the current strategy or whether competition has a leverage over you and quickly adapt the business model and positioning. Dont fall in love with your strategy or product.
2. Assess Leadership team strength and make immediate changes - Are some of the current leaders not cut out for the job? Take the tough calls early, communicate to the rest why these calls are being taken to eliminate insecurities and confusion amongst those that are staying.
3. Dramatically cut costs and increase company runway  - Look at every cost closely. A lot of fat can acculumate in a start up. Be ruthless. Profitibility and financial health is something that can go a long way and allow for some mistakes as the company is turning around as the cash in the company can last longer.  Some of the changes do take time to frcutify. No cash, no company. Simple rule of thumb. Sometimes entrepreneurs who have had it easy in their financing forget that cash is not infinite and the good ones internalize that quickly and make the right moves fast to address this.
4. Overcommnicate the vision and mission across the company and energize the company towards a common vision.  Do not underestimate the power of communication.  A "can do" attitude at every level of the organisation can go a long long way.  This attitude starts at the top.



 

In Silicon Valley, we keep hearing from investors that they would only fund companies that are based locally. And the entire management team needs to be based there (outside field sales of course!).

As an India fund that has made prolific cross border technology investments in the India/US Corridor, we have seen a number of successful investments where the management team is distributed across the globe :

Examples in our portfolio :
 1. CEO in India, CTO and Head of Sales in the US
 2. CEO and Head of Sales in the US, CTO in India
 3. CEO and CTO in the US, Inside Sales leadership and team out of India
 4. CEO and CTO in India, Head of Sales in the US


Having run a company in the consumer internet space in India where the CTO was based in New Zealand, I have first hand experience with distributed teams.  Clear communication protocols are required between these functional teams along with a high level of chemistry and trust. The CEO needs to spend time making sure the distributed teams are culturally integrated within the organisation via frequent "all hands" meetings virtually or physically and the functional teams need to be very disciplined on communicating and sometimes overcommunicating.

The positive thing about distributed teams is that an organisation can hire the best talent possible given the lack of geogrpahic boundaries which they couldn't find locally. There are definitely challenges to running a distributed organisation, but with the right talent and processes, it can be a real strategic advantage.
 

Rapidly growing young companies inevitably hire a lot of senior resources and then leave them to execute their broad responsibilities without setting clear initial goals.  While this can work out for many hires, there is a possibility that an expectation mismatch could cause organisational heartburn. One must remember that senior resources have had functional responsibility elsewhere and naturally tend to spend on what they know and do best. So if there is a specific expectation of the senior hire that may be different from what thier core responsibility has been earlier, it is best to discuss that earlier.

We have seen this in a few of our companies that have hired star CXOs. When they joined the portfolio company,  there was an expectation that they would play a multi faceted role,  like is expected in most startups at the rapid growth phase. However, since the expectations were not clearly set, they gravitated to doing what they did best in their previous job and ended up sacrificing some of the priorities in the early days.

While this worked well for some, for others this has resulted in organisational friction as the priorities of the CEO and incoming CXO were different. And sometimes this could result in a significant lost opportunity in a rapidly changing environment if senior resources are focusing on what they know best versus what is best for the organisation at that moment.

Some examples of potential conflict of initial priorities of  a) CMO- Brand positioning versus customer acquisition, b) CFO- Business planning/Budgeting versus closing of accounts c) CTO - New product launch versus stabilizing the existing product d) COO - Cost cutting versus process setting.

 
 

Recently one of our portfolio companies was hiring a CXO, and there was a discussion around compensation.  The CXO was offering a healthy ESOP package + 80% of the base salary he was currently making.  In turn, he was negotiating for a 110% of the base salary he was currently making and was willing to take 50% of the ESOPs offered in return. 

Given that this person was coming in at a senior level, it was clear the compensation being offered was healthy enough and that the negotiation from 80% to 110% of base was not to "meet" his living expenses, but more of a belief that the 30% increase in monthly cash flow is worth a lot more than a % of the company.

It is surprising that this trend is very common across the startup world in India today when there have been real examples of wealth creation across the country with employee stock options.  Indian employees in our own portfolio hvae seen stock option gains on the exits of Dimdim, Netmagic, OLX, Gluster, etc. let alone the examples of Naukri, Makemytrip, Baazee, Infosys, Cognizant, WNS, SKS, etc. I believe part of the problem lies in the value of ESOPs not being understood.

The onus lies on the entrepreneurs to spend more time educating their employees on what stock options mean, what they believe could be the various exit opportunities and various values at exit with probabilities attached to those outcome along with the risks. While there is no gaurantee at the end, it is helpful for the employees to really understand how the entrepreneur is thinking and what the entreprenuer believes are the probabilities and risks attached.

The entrepreneur also needs to work on building excitement and trust with potential employees pre-hiring where the employee believes in the company's vision and dream and is viewing the company as an owner and not just an employee where he or she is contributing to the wealth creation of company and self.  This is especially critical at the senior levels.

There has been a fair bit of early stage investing in the Indian internet sector over the last 6-7 years across sectors. Many of these companies have scaled, achieved market dominance, but are still burning cash and are looking for $25-50m in capital that will take them to profitability and/or a public listing.

If these companies were in the US, many would have raised a growth financing round relatively effortlessly - market leaders in their space in open ended spaces with potential supernormal return opportunities.  The investors understand the risk associated with the investment and fully understand that this is a higher risk higher return opportunity and they have a portfolio strategy that take this into account.

However raising capital for many of these unprofitable internet ventures has not been easy for a variety of reasons, one of them being the legacy of investing in India at the growth/later stage that have been profits/cash flow based with structures that protect downside and limit upside. Certainty of return is more important than magnitude of return.  As one of the growth investors put it succintly, "I cannot afford an investment to be worth nothing. We don't take a high risk high reward portfolio approach. I don't care how big this upside can be". Most of these investors don't have a portfolio strategy that allows for an investment to fail and are looking for safe returns on most of thier investments.

So many of the Indian internet ventures have unfortunately have had to turn to growth capital from financial or strategic investors outside India who have an interest in investing in India. But because many of them are not based in India, they are concerns on trying to manage an investment remotely without being close to the market. So it has not been easy to raise this capital.

For Innovation to thrive in India in the Technology and Internet space,  India will not only need more risk capital at the early stage but also more risk capital at the growth and later stage.  Hopefully, either some of the global investors in this space will decide to focus on India and set up teams or the Indian PE players will start to change their strategy and approach and start investing in these sectors. Till that happens, the Indian Innovator will have to continue to look overseas for growth capital.