Nitin Seth

Keynote address at the Start-Up Conclave, IIM Lucknow NOIDA Campus, July 8, 2017

It is fantastic to see IIM Lucknow organising this Start-Up conclave. It is very timely. Last 3-4 years have seen a startup revolution in India. We have seen a number of Unicorns (companies with >$1 bn valuations) and a real spurt in the startup activity. “Startup India” is a big focus for Prime Minister Modi and the present government. While there is much to celebrate and hope for from the startup ecosystem in India, there is long way to go to translate the undeniable potential of the startup ecosystem into real impact for the economy and country at large.

In this speech, I will briefly touch upon the progress start-up ecosystem has made in India over the past 3-4 years, it’s current status/challenges through some numbers, and then focus on 5 key action areas for entrepreneurs to further raise the impact of the startup ecosystem.

Startup phenomenon has gone mainstream in India over the past 3-4 years

Entrepreneurship has caught the imagination of this generation. There are lot of positive movements that have helped the startup phenomenon go mainstream in India:

1. Significant increase in the number of startups – both those starting out and those getting funded. India now has the 3rd largest startup ecosystem in the world (after the US and the UK)
2. Younger entrepreneurs – lot more risk-taking. Not uncommon now to see school going teenagers launching their own startups (Read my speech at National School Entrepreneurship competition, Your time is now!! – 8 mantras for young entrepreneurs)
3. Ambitions are higher – many startups have global ambitions even at early stages
4. Availability of risk capital – both early and later stages
5. Development of supportive ecosystem – mentors, incubators, angel networks, government initiatives on “StartUp India” (Read, Developing the entrepreneurial ecosystem in India)

Indian startup ecosystem has grown rapidly but still has a long way to go

Size and impact of the startup ecosystem has increased rapidly but it has a long way to go in both scale and effectiveness to be sustainable and to have meaningful impact for the country. Some numbers and comparisons are very instructive:

• India has between 5-10,000 startups while US has over 100,000
• Mortality rate of Startups in India is very high. Consensus estimate is 90%+. By some accounts it is as high as 97%
• Few really scale up – India has less than 10 Unicorns, US has over 100
• Capital inefficient models – investment of over $15 bn has gone into Indian Ecommerce to produce Annual GMV of <$15 bn!!
• Revenue or Valuation per employee is much lower for Indian startups vs. Western startups even for similar models, even when both are competing in the same market (such as India). Indian entreprepreneurs are not yet trained to think lean
• Returns for Investors are very low. Very few Venture Capital funds have been able to meet the hurdle rate of return, let alone deliver promised returns on actual (cash) returns to their investors (limited partners)
• In 2017, India ranked 69 out of 137 countries in the Global Entrepreneurship Index (though up 29 places from 2016). Predictably, most developed countries have higher institutional factor score w.r.t individual factors score, while it is opposite for India. However, India also ranks fairly low on “startup skills” – 92 out of 137 countries

Clearly, it is not just about doing a startup. It is about developing a strong customer proposition that helps it survive, to scale up and build a sustainable business model, and to return good returns for the investors. Unless we solve the problems of high mortality, limited scale-up and poor returns, Indian startup ecosystem would remain fragile, more hype than substance. It is imperative that entrepreneurs, investors, government and other players take a number of steps to build a more sustainable startup ecosystem. In the next section, I will suggest some actions that entrepreneurs can take.

What Indian entrepreneurs need to do better

Indian entrepreneurs need to make at least 5 key shifts to address the challenges we just discussed and to raise the impact of the startup ecosystem in India to the next level:

1. From “Me Too” to focus on Innovation. There is a lot of entrepreneurial activity but lot of it is “Me Too”. Till recently, we had a deluge of Consumer Internet startups spurred by the success of the likes of Flipkart, Snapdeal and Paytm. More recently there are many startups coming up in AI, Machine Learning and IoT – it seems everybody is building a Chat Bot nowadays!!  Most ideas tend to be copycat and that too clone of Western models, and follow the prevailing wave. This is one of the reasons why mortality rate for startups in India is so high. If your idea and business model is just a me-too chances of success are low.Innovation is the foundation of a start-up, the key value an entrepreneur brings. To drive innovation, intimate understanding of customer pain points is the key. So, do deep research and understand your customers deeply. This will not happen sitting in a room. So, go out and have a range of life experiences. Most powerful innovation often comes from connecting the dots across different experiences. This was the unique strength of the great Steve Jobs. He was able to connect the dots across his many life experiences and passions to create many market defining innovations (iPod was a celebrated example where his passion for music, technology and design all came together) (Read, Lessons from Steve Jobs incredible life story).Moreover, the challenges of India are unique. It is a low income economy with huge infrastructure bottlenecks. The customer pain points are totally different from the West and thus require deep customer understanding and India-specific innovation. One of the reason for Flipkart’s initial success was its focus on India specific innovations (e.g., Cash-on-Delivery, 30-day returns, focus on Mobile exclusives). This shift from copy cat models to India specific innovation is perhaps the biggest opportunity for startups in India.
2. Building deep tech capabilities. Technology disruption is perhaps the biggest Mega Trend of our generation and one that is the main driver of creating opportunities for startups. The velocity of technology change and the consequent business disruption we are witnessing is perhaps unprecedented in human history. Mobile, Ecommerce, Cloud, Big Data have changed consumer behaviors and business models dramatically and yet these trends are barely 15 years old. We are now into a next phase with Artificial Intelligence, Machine Learning, Blockchain and Internet of Things dominating. Technology change is a great equalizer. Big companies don’t have an advantage at leveraging technology change, often they are at a disadvantage. Smart entrepreneurs are best placed to experiment and leverage new technology.However, technology leverage by entrepreneurs in India is often shallow. It is typically based on their own understanding of a technology trend, which might be superficial rather than something that is cutting edge. Moreover, we do not have a deep tech ecosystem in India. While we have a large IT services industry and a lot of software developers in India, I see a dearth of deep product-tech talent. As a result we see little technology led innovation and even fewer product-tech startups.To develop strong technology depth we will need to build strong links and crossover opportunities between the academia and the industry. Universities like Berkeley and their collaboration with R&D hubs like Xerox and Bell labs played a key role in development of Silicon Valley as the Technology innovation mecca of the world. We need to develop similar institutions but that will take time. Best alternative for entrepreneurs in the short-medium term is deep research on technology trends. The current information age and cross-flow of the Indian diaspora based in Silicon Valley and elsewhere can facilitate this learning process.
3. From obsession with funding to building hi-quality business models. Our entrepreneurs are very focused on funding and rightly so. It is critical that you secure adequate funding sooner than later for your venture. Lack of funding is the factor that can take you to failure immediately and irreversibly. Moreover, the questioning you face in the process also helps you sharpen your idea, improving your chances of success. However, while funding is critical, an obsession just with funding can be fatal. I want to call out 4 significant negative outcomes of this obsession with funding:
   1. I see too many entrepreneurs who are putting most of their energies in the next round of funding rather than solving for customer pain points and building a proper business model. Hi-quality business models take thought, effort and time to build. Put your energies there. No amount of funding can paper over a poor business model. Many startups often chase growth (and more funding) to grow out of structural Unit Economics problems, which is a futile effort.
   2. Another  challenge is raising too much capital. Frugality is the cornerstone of innovation. Too much capital can give you momentary high but can often kill hunger and innovation. I have seen startups whose core dna was frugal innovation. However, post funding were not able to generate innovation despite pouring in millions into misconceived innovation efforts
   3. Too much capital can lead to lazy business models that bleed too much money and will never scale up. I have seen many startups who have built a lot of fat in their operations (e.g., multiple layers, redundancy, lack of cost control, leakages). It is not just about capital inefficiency, fat hampers speed & quality of execution and makes it very difficult to scale up operations.
   4. Even more fundamental problem with funding is that startups can get seduced by valuations and get caught in a vicious cycle. With funding come investors and their expectations. Investors have expectations of exit and rightfully so. Problem is that the time horizon of investors is often different from time required to build a proper business especially in a tough market like India. Therefore, instead of building a proper business, you end up chasing fast growth to achieve higher valuations for the next exit. Consequences of this approach are, you never build a sustainable business model, you burn a lot of cash, and are always dependent on next round of external funding. You are playing the “Greater Fool theory”, where you are looking to shore up valuations and sell your stake to the next investor. This is a dangerous game and one that is difficult to sustain. This is perhaps the most fundamental problem that many ‘supposedly’ successful startups face today in India.
4. From the “star founder” to building hi-quality teams. Startups are understandably about the founder. Entrepreneur’s vision, passion and resilience are key to a venture’s success. However, an inexperienced but overconfident entrepreneur can also be a big problem (perhaps even fatal) for a startup’s future!!We are in an increasingly complex environment where it is almost impossible for any individual, however talented, to have all the skills required to build a successful business on his own. Therefore, it is very important for an entrepreneur to build an effective team. While building a team we often seek people like us (I did that when I built my venture ActiveKarma, all 3 of us from IIT Delhi!!). While it is critical that you work with people who have similar values, it is important that from a skills perspective you bring together people who have complementary skills. Most successful partnerships have been of leaders who had such complementary skills. For example, Bill Gates – Paul Allen at Microsoft, Steve Jobs – Steve Wozniak at Apple, Larry Page – Sergey Brin at Google, and nearer home, the team of Infosys founders.Startups that have scaled up might need to bring senior professionals from outside. To integrate them and make them successful takes time and effort. You have to set realistic expectations and give time for the professional to settle into the team and the organisation. Moreover, these senior professionals might be coming from diverse backgrounds. Therefore, it becomes very important to have a common purpose and strong culture that will bind these disparate individuals together. This process of building a team of senior professionals is a big test for the founders. Sometimes they might need to re-evaluate and step back from their own role as the CEO/CXO. This “letting go” can be a very hard thing to do.
5. Ensuring the right values and ethics to build a lasting institution. Many of our entrepreneurs are in a mad rush to scale up their ventures and indeed the speed of actions that most startups have is a big virtue in today’s fast-paced business environment (Read, Winning in the VUCA World – key principles and transformation priorities for enterprises). However, Rome was not built in a day. It takes time and thought to build a lasting institution. For that it is necessary to have the right foundation of values and ethics, and build a strong culture. Unfortunately I see some founders cutting corners on this front. Issues range from unacceptable inter-personal behaviors to lax regulatory compliance and dodgy financial practices. If the organisation is not built with the right values and ethics, it will not last. It might shine like a meteor but also collapse quickly like a House of Cards. The recent struggles of Uber is a good reminder of how quickly a star can fall. Indian entrepreneurs would do well to learn from the recent examples.

Technology disruption and growth of the Startup ecosystem are among the biggest opportunities for India. They can help India leapfrog and achieve discontinuous growth. There is much to celebrate in the progress of the Indian entrepreneurs and startup ecosystem over the past few years. However, there is still long way to go to turn the undeniable potential into real impact, hype into substance. I hope the 5 shifts that I have suggested help the entrepreneurs to raise the bar for the startup ecosystem in India.

We need startups that are solving uniquely Indian problems, are innovative, at the cutting edge of technology, are building for the long-term and have a solid foundation of values and ethics. Such startups will stand the best chance of building sustainable business models and delivering long-term success for themselves and their investors. I am hopeful we will see such a generation emerge soon in the Indian startup ecosystem.

All the best!!