The challenges of an Indian ecommerce entrepreneur..

Ecommerce is here to stay in India. There is not a single person I have spoken with in recent times who doesn't believe that ecommerce will be an important channel of consumption for Indians within the next decade. Given infrastructure challenges with physical retail, ecommerce has the ability to do to shopping what wireless did to telephony - allow a new technology to leapfrog traditional industry and bring access to the entire nation. However, the challenges that face an ecommerce entrepreneur in India are non trivial, and agruably different and more difficult than ecommerce entrepreneurs in many parts of the developed world :


1.  Payment and Logistics

India will continue to be a cash economy for a long time. Various factors contribute to this including cultural aversion to debt, fear of misuse of credit or debit cards, inability to qualify for credit, lack of merchant trust (would prefer to see the product before you pay for it), and availability of cash at home driven by a cash driven economy all around.

So this requires meeting someone in person to collect the cash.  This can complicate the delivery as this could now entail multiple contacts with the customers, a communication/interaction with the customer beyond just packet drop off , etc which many third party couriers are not equipped to do in a consistent, professoinal and scalable manner.  Plus outsrourcing this to a third party can be an expensive proposition as the third party courier needs to factor in their own margins, etc.  So an ecommerce entrepreneur has to now think about building in house logistics to be able to collect cash at the point of delivery cost efficiently and consistently.

Credit card penetration in India is still very low.  Many consumers have access to debit cards which are primarily used to withdraw monies from the ATM.  So while cash will remain an important payment method,  an ecommerce entrepreneur has to figure out the best way to convert payements to digital both at the point of purchase and at the point of delivery . So tied to logistics is not only cash payments, but also ability ot accept other modes of payment which an ecommerce entrpreneur needs to focus on.

2. Supply chain

India's supply chain has its challenges.  The systems that track inventory at the vendor's side are either non existant or antiquated.  Many categories have fragemented vendors and a long tail of unknown brands which can increase sourcing complexity.  An ecommerce entrepreneur needs to work with and develop this complex supply chain.

3. Value Buyers

Many of India's buyers are value conscious.  Discounts and deals are expected. So maintaing healthy margins while offering affordable shopping (good prices, low delivery charges, etc) is a challenge that an ecommerce entrepreneur has to tackle.

4. Awareness and Trust

Many Indian customers are suspcious about the products and goods being purchased online as they are used to a fragmented, unorganised buying experience that focuses on making a quick buck over  customer satisfaction.  To overcome that perception, ecommerce entrepreneurs have to work extra hard on brand building, customer service, generous returns policy, etc.

5. Access to Capital

In order to be able to successfully address the challenges in building an ecommerce company in India, an ecommerce entrepreneur will require capital. Lots of it.   Many growth investors with large cheque writing ability are trying to understand the economics of ecommerce before writing that cheque.  The  question on the minds of many of these investors is "how much capital is required to get to profitability?" . An ecommerce entrepreneur needs to make a growth investor comfortable that they understand the economics of the business and that they are utilizing the funds in the right way with the focus on path to profitability. Not a trivial task when you are focusing on the various infrastructural building blocks that sucks capital  and are still in the early days of the life cycle of the company to really understand true lifetime value of a customer.


Being an ecommerce entrepreneur in India myself, I salute all those ecommerce entrepreneurs who are braving the extreme challenges above in the effort to build world class scalable ecommerce organisations.  Kudos to all the efforts being put in to create a new paridigm of shopping in the country!!

Timing of exit is very important

Having run a venture firm for 5-6 years now, some of our portfolio companies are at interesting stages of the company life cycle - proven technology, early leadership, strong management with a lot of further room for growth. And not surprisingly, a few of these companies have recevied strategic interest from buyers globally. Potential buyers always want to catch a company early enough before it becomes too expensive for them to buy.

For first time founders in their late 20s and early 30s, a buyout offer where they can make a few million dollars can be very tempting. And this is even more tempting in India where the dollar or rupee goes a longer way. The risk of turning the millions down and continuing with the company can be daunting. Many founders feel that they are young, and it may be better to sell, build a cash cushion, and then start another company in the future.

I have tried to counsel many founders within my fund and outside, that building a successful enterprises is a non trivial task and just because they have been successful once, that is no gaurantee that will be able to pull it off again. In fact, the odds are low that they will be able to pull off another successful company which requires executing the right idea at the right time with the right team.

If a founder feels that there is a threat to the continuing the business independently and that a strategic can add value, then I think that selling the company may be the right thing to do. Or if the founder feels that the value being offered today is the value he or she can hope to create many years out, then financially it may be a good move to sell the company today. However if the founder feels that there is a lot more value could be created, and that they are in a strong leadership position, then I would suggest that the founder not sell even if they are getting a reasonable cash out, because creating similar value again may not happen and most likely will not happen.

Timing of exits is very critical. It can change the outcome of the company by many multiples if done right.



Ecommerce Entrepreneurs : Choose your investor wisely!

Everyone I meet today wants to start an ecommerce company - groceries, furniture, jewellery, mobiles, handicrafts, carpets, toys, food, diebetes monitors, stationary, and the list goes on and on.....And there are investors flying down from New York , San Francisco, Delhi, Mumbai and Bangalore, meeting many of these budding entrepreneurs with a blank cheque book asking "how much?".

There is no doubt that the internet has reached critical mass in India today. And ecommerce is very important for the country as it has the potential to leapfrog the inefficiencies of rolling out traditional retail in an infrastructurally challenged country like India. But creating an large ecommerce company is non trivial. For every Amazon created, there are thousands of boutique ecommerce companies that couldnt scale. This ratio is going to be very even more stark in India give the complex supply chain, cost and complexity of delivery, cost of Cash on Delivery (many shoppers dont use thier credit cards to shop), high marketing costs, cost and complexity of enabling returns, low switching costs, state taxes, which all add to the challenges of running a profitable ecommerce company.

I have no doubt that many ecommerce entrepreneurs will be able to raise thier initial financing due to the hype today. But if they are not able to continue to attract future financing/capital, there will be no choice but for them to scale back significantly or shut shop given the challenges articulated above. Early signs of this has already begun. I personally know of a few ecommerce companies that got funded in 2009/10 who are unable to raise further financing today primarily because they have not been able to demonstrate that they can scale on various dimensions and/or show a clear path to profitability and are now contemplating a fire sale. I predict that this trend is going to magnify in the coming years.

Word of caution to the ecommerce entrepreneur - don't take external institutional capital (bootstrap as long as you can), till you are convinced that you have understood the challenges of building an large ecommerce company and convinced that you will be able to build a large profitable company in the long run. If you cannot bootstrap initially, take money from friends and family or institutions whom you think will be able to help you address the challenges menitoned above to be able to build a large ecommerce company or will be open to you scaling back and continue running your company and not pressurise to shut shop if you cannot grow fast enough, show path to profitability and/or raise further financing.

Select your board member wisely

I think it is as important for a start up entrepreneur to be selective about his or her investor representative board members as it is for the investors to be selective about the entrepreneur. Often times, the entrepreneur is only focused on raising money at the early stage and forgets that they will have to deal with soemone from the investor side at the board level if they have given that investor that right.

Having been an entrepreneur who has dealt with investor board members and now an investor who participates on boards of companies we invest in, board members come in all shapes and sizes. Here are a few common examples :

1. The "friend" - Wants to look good and avoid conflict of any sort. Doesn't want to stir the pot in any way. Doesnt ask tough questoins at the board. Completely hands off.

2. The "operator" - Thinks he or she knows it all. Tries to tell the founders how to run their company at the granular level. Likes to get into the operations. Likes to interview candidates that the founders are hiring.

3. The "doubter" - Always questioning the market and execution of the founders? Do you really think you will meet your numbers? Why cannot you execute faster, better?

4. The "big picture guy" - Discusses the big picture only. The market size is so big, therefore we should enter this space. Somebody else executed an initiative, so we should also do it.

5. The "coach" - Likes to give advice on how the founder can do his job better. Constantly advising the founders how to improve at various levels.

6. The "shrink" - Is a sounding board for a founder when he or she is in distress. Helps the founders cope with the emotional rollercoater of a startup.

I personally think that a good board member of a startup has a blend of all of the above characteristics. I would strongly recommend that entrepreneurs do their homework on the board representative before signing on an investor at the early stage as it is a relationship that will last from inception to exit and be an important influence in shaping the direction of the company. I have seen many companies fail solely due to dsyfunctional or ineffective boards.

Avoid raising too less at the seed stage...

Seed investing in India is garnering a lot of interest. From angel networks to seed funds to individual investors, there is a lot of interest in funding entrepreneurs in India who are starting out. Professional Indians who have made money globally and in India over the last decade are now wanting to allocate some of that towards this high risk and potentially high reward asset class. While this is very good for entrepreneurs looking to do their own thing, one must really understand the capital needs of a company and understand what is the likelihood that there will be follow on capital available if needed once this capital runs out. Let me give you an example. A very solid technology entrepreneur who has build a strong product in the internet space had approached me for financing earlier and I mentioned to him that this space is very difficult to scale beyond a particular limited size due to market restrictions in India and therefore it is unlikely I would look at this company for financing unless he can demonstrate that he could expand the scope of this product offering to cover a larger market opportunity and that potential customers would be interested in that expanded scope. Since he was a really solid guy, there were many angels willing to write him a cheque. My opinion is most angels in India dont really pay attention to how big the opportunity could be and are happy to write a cheque hoping that they will make something if they like the entrpreneur/technology thinking that they will sell out to someone someday. So this entrepreneur raised usd 50-100k from a few angels. 6 months post the financing, he had a few paid customers and now decided that he would like to go for VC funding as his angel capital would be running out soon. When he approached VCs, he got the similar feedback I had given him - market is too small to build a large company and unless there is proof that he could build adjacent products that he can monetize or enter new markets, it will be tough to raise financing. A few months later, he ran out of cash, his angels didnt want to fund him anymore since they were scared they would lose money since the VCs were not interested, and so the entreprenuer had no choice but to close down the company. In this case, had the entrpreneur raised usd 500-700k, he may be in a different place today. Moral of the story - Raise enough cash to get to a milestone that will attract follow on capital or allow the company to be self-sufficient, assuming that you may not have the capital yourself to keep funding the venture yourself. If you are unable to raise enough cash at the seed level to get to the milestone, then may be better to rethink whether you want to start the venture with sub optimal cash. If you are rational about why you need a certain amount of cash to get to a milestone, most angels will understand this and fund the company so long as the cash requirements are not absurdly high.

Look Beyond the Resume

Many times, start up entrepreneurs seem focused on education and experience when recruiting. IIT, IIM, Tata, Reliance, ICICI, Hindustan Lever, Mckinsey, etc are some of the that I keep hearing in discussions about recruiting. No doubt, some of these people who studied or worked at these hallowed institutions are very smart. But that doesn't necessarily translate into being able to succeed in a start up environment. What you need in a start up environment is what I like to succincitly call "edgy", especially in a business role - someone who is willing to challenge status quo, try and not take "no" for an answer, not be afraid to make cold calls to potential customers if needed, finds ways to get things done, think out of the box, make decisions quick, adapt plans quickly if needed. Most of this cannot be gauged by a resume. So spending time with the person to judge these inherent traits is critical. Asking open ended questions and listening not only for what the person is saying but what the person is the motivation, aspiration, intention behind what the person is saying and extrapolating competence and execution ability from that is critical. It is part art, part science. But worth spending the extra hours doing that, rather than hire for education and experience solely and later learn that this person is unable to adapt to a start up situation.

Let me give an example. An entrepreneur in one of the startups I am associated with wanted to hire a senior CXO level candidate. He hired an IIT/IIM topper who had worked as a CXO in another MNC for a decade. This person was rated very high by the MNC. This entrepreneur spent most of his time convincing this person to join him and very little time gauging whether this person would be the right fit. When this person finally joined the start up, he was ineffective from Day 1. He didnt have an army of people to execute below him and didnt have a brand platform to recruit top talent like he did in his earlier job. This startup was venturing into a new service never been offered before in the country and he didnt have the "gut" judgment to really know how to position and price the service. He was not used to rolling up his sleeves to talk to potential customers to really figure out the pain points. He was not willing to risk his reputation by trying to convince customers to buy this service. His concern was what if the company couldnt deliver? He was used to selling a service that existing for years at his previous job and had good foot soldiers below him to execute. He was basically managing a set of strong resources earlier where the brand was the calling card and not himself to open customer doors. Needless to say, this person soon parted ways with the startup.

Moral of the story - Look Beyond the Resume! Spend a lot of time "understanding" the person being hired. Remember some of the best entrepreneurs in the world didnt go to college and didn't work at blue chip companies either.

Venture Capital - a largely misunderstood term in India

Have idea? Will seek venture capital. This seems to be the mindset of many Indian entrepreneurs seeking venture capital in India today. Over the last few years, we have seen plans from entrepreneurs looking to start a restaurant, a coaching class, a web 2.0 project, a power plant, a budget hotel, a boating company, a travel agency, a pre school, a real estate brokerage, a jewellery shop, a nursing home, a dental clinic, etc. Many of these ideas can translate into successful businesses. However, they may not be suitable for venture capital.

What many entrepreneurs haven't understood is that Venture Capital is also a business at the end of the day. Venture Capital funds have a responsibility to its investors to maximize the returns on capital invested. The investors in the venture capital fund have chosen to invest in this asset class vis-a-vis other asset classes like public stocks, later stage private equity, with the expectation that it is a high risk righ reward asset class. Given the inordinate risk that a venture capital fund takes when backing an entrepreneur with a new idea, it is only fair that the fund expects a disproportionate return on that investment. Chances are that several of the investments may not yield the returns expected, so therefore it is even more important to be disciplined about the return expectation as the investments that do provide the expected returns need to make up for the ones that don't in order to be able to generate expected high returns for the investors on this high risk asset class.

Therefore when a venture capital fund evaluates a new business idea, it is looking for the possibilty of a "super normal" return. Many businesses don't pass that filter as they are typical linear growth cash generating businesses that most entrepreneurs think of. And therefore they have to turn down an investment proposal of an entrepreneur who has a perfectly viable business plan.

As an ex-entrepreneur, I empathise with these entrepreneurs as they have entrepreneurial dreams and are seeking start up capital to get their venture off the ground. What India needs is more angel/seed investors that are investing their own monies and are willing to help these entrepreneurs get started without the expectation of a super normal return. Typically in India, a family member or relative would provide the start up capital to another member in the family to start a business. What is important that is that start up capital is available beyond the family so that first generation entrepreneurs who could otherwise not dream of starting a company can now do so with this seed investment available.
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