Incubated companies are not easy to pull off in markets that are not soon to mature

1:42 AM Suvir Sujan 3 Comments

There has been some activities by international incubators in india, especially in the consumer internet space. This is the path they seem to be following :
a. Think of a copycat idea that has worked globally
b. Fund the company with reasonable startup capital - own most of the company
c. Hire smart consultants/bankers, give him nominal equity, and make them work real hard for 4 years
d. Build the company with the hope of an exit in 4 years

There are several flaws to this model :

1. Hiring CEOs into ground zero startups rarely work and more so in India where there is a lot of friction to starting a company. Many hired CEOs dont have the entrepreneurial gut to tide through the myriad issues at the early stages of a company. And given that it is not their baby, there is limited passion.

2. In markets that take time to mature, hired CEOs don't have the staying power to stick it out for a decade or longer. Given that it is not their idea, there is no pride of ownership, economic incentive or moral responsibility to stick around.They look at the opportunity as a learning experience for a few years and decide to move on well before the company has really matured. Typically in such markets, an exit is unlikely in 4-5 years.

3. Sometimes Consultants/Bankers may not make the best entrepreneurs. Just raw smarts may be a necessary but not sufficient condition to becoming a great entreprenuer. And if they are really smart, they realise that working in an incubator with miniscule equity for a long period of time is less desirable than starting on thier own since the equity in these incubated companies will take a lot of time to be worth anything and it is better to start your company if you are going to put in a decade of hard work.

Several incubated companies started in 2009-10 have now begun to crack.  Management is leaving these companies en masse. Moral is not high. I am sure the incubators are worried. And if not, they should wake up and smell the Indian coffee....

Moral of the story -  Try and implement this strategy in developed markets where you can incubate, hire for smarts, micromanage the hired help for 4 years and then flip the company. In India it can take a lot lot longer and this formula may not work.

 

3 comments:

Sandesh said...

Good food for thought Suvir.

Guna said...

Freudian slip
"Just saw smarts may be a necessary but not sufficient condition to becoming a great entreprenuer. "

:-)

sriram said...

Very fair argument, and I'd like to agree. But then, whats your view on Jabong?