Myth and Realities of Being an Entrepreneur in India

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Myths and Realities of Being an Entrepreneur in IndiaPublished : July 15, 2010 in India Knowledge@Wharton

Despite the recent economic downturn, entrepreneurship is alive andwell in India. New entrepreneurs have succeeded in many recenthigh-growth industries such as civil aviation, retail trade and IT services.Their success blasts the myth that family-managed business houses withconnections have an edge in access to capital, although scaling updistribution remains a challenge for startups. Venture capitalists investedin Indian businesses dependent on the Internet are disenchanted, butother vast markets beckon. Those were the takeaways from a paneldiscussion on entrepreneurship at the 14th Wharton India EconomicForum in Philadelphia that took place in March.

The panel of mostly first-generation entrepreneurs was divided in

perceptions of the obstacles and opportunities entrepreneurs face inIndia. Kartik Hosanagar, the panel's moderator and a Wharton professorof operations and information management, asked the panelists to focus first on the challengesentrepreneurs face in India. He wanted to save the positive aspects for later, so that aspiring entrepreneursin the audience would stay sufficiently enthused, he said.

Getting Your Wares to Customers

In his own experience as an entrepreneur, Hosanagar found distribution to be the biggest obstacle in India.Yodle, an internet marketing company he cofounded in 2005, provides lead generation services for smallbusinesses, drawing them away from the yellow pages. The New York City-based firm consideredentering the Indian market and decided against it. "Internet penetration is not high and replicating thebusiness in India would be a challenge," he said.

Startups scale faster in the U.S. with higher Internet and credit card penetration, and with better shippinginfrastructure to access markets beyond, said Hosanagar. "The self-evident thing about India is [that]distribution is hard," said Samir Patil, founder and CEO of ACK Media in Mumbai. The firm bought acontrolling stake in Indian comic series "Amar Chitra Katha and Tinkle" from India Book House in 2007and is redefining them for new markets in gaming, animation and character development. If he were tooperate his firm in the U.S., he would have focused on developing its content base, he said. But India callsfor "forward integration" and he is considering setting up the firm's own distribution network with kiosksand stores, he added.

Distribution was a challenge also for Vin Bhat, cofounder and CEO of Saavn, a New York City-baseddigital distributor and marketer of Bollywood and South Asian entertainment. The firm has aligned withTime Warner, Cox, Hulu, iTunes and Verizon, among others, in its network. "Internet penetration is low

and broadband penetration is six million homes in India," said Bhat. He faced challenges in not justreaching Indian consumers, but also in terms of their appetite for his product. Online video and radioservices like Hulu and Pandora don't exist in India, he said.

But Bhat found a way out: "We counterbalance that by taking a more global view," he noted. So Saavntakes popular Indian fare like Bollywood films, cricket and religious content to the global markets, andhas a strong presence in the U.S., Canada, the U.K. and South Africa. It also has a small presence in India."The reason is to be there once the market turns."

Sudhir Syal, a producer of a show on entrepreneurship called "Starting Up" on ET Now, an Indiantelevision channel, recalled his experience at Sulekha.com, an Internet portal for classified

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advertisements. "In the U.S. to book an ad, you log on and punch in your credit card details -- there is nosales force at all," he said. "In India, there is a sales force that only exists" because customers comepersonally to offices to buy advertising space. That increases distribution, employee and infrastructurecosts "and makes it extremely difficult for an entrepreneur to grow," he added.

Syal spotted opportunities in the high penetration of mobile phones in India enabling customers to makepayments through their hand-held devices. "But we have a long way to go there," he said. As things stand,the market for providers dependent on online purchases is small, he continued. The market is smaller thanone might imagine "if you look at overlapping sets ... of people who have credit cards, want to make

online purchases and have a broadband connection."

Low Internet penetration in India has also disenchanted many western venture capital funds investing inIndia, said Hosanagar. However, Internet penetration is overstated as a prerequisite for doing business inIndia, according to Amar Goel, founder and CEO of Mumbai-based Komli Media, a digital advertisingand technology firm that enables marketers to reach and acquire audiences. "India is a trillion dollareconomy and the Internet may be US$2 billion, so you have US$998 billion other dollars that are in othersectors," he said. He talked of a restaurant club that recently opened in Mumbai and is "bigger than anyInternet company in India" with sales of between US$20 million and US$30 million. "The needs thatIndia has are far more basic than just focusing on the Internet and ecommerce," he added.

Venture Capital Falls in Step

Hosanagar pointed to concerns among some venture capital firms about inadequate returns on their Indianinvestments. "Many of the VCs that came into India earlier were probably not that focused, at least in theretail space," said Sanjay Kapoor, managing director of Genesis Colors, an upscale fashion retailer withbrands including Satya Paul and Deepika Gehani; it also has a joint venture with British luxury goodsretailer Burberry's to open stores in India and has venture capital backers including Sequoia Capital ofMenlo Park and Henderson Equity Partners of London.

"The venture capital firms made some fairly large investments [in India] when everybody was scaling topline (sales) growth without understanding the bottom line (profits)," Kapoor said. "And some of thenumbers just fell down." Syal said VCs like Sequoia Capital that have invested in India for many yearshave "done quite well." Also, he said "most of the exits (for venture capital firms) have come from theservices sector... so perhaps the opportunity lies in services." Many western VC firms have also learnedthat it doesn't help to impose their business models on the Indian market "where you have to go house to

house to collect your money," he said of retail businesses. "Venture capitalists [in India] also don't want totake on too much risk," added Bhat.

Kapoor said he found that fashion retail is a "fairly simple" business. "It's not rocket science." He said thatunlike many others that focused on India's middle class population of 300 million to 400 million, his firmnarrowed down on the top 2% to 5 % in India. "That is 20 million to 50 million people, which is still avery large number," he said, adding that his challenge was reducing to reaching out to that smallerpopulation with mostly direct marketing. "It's really an execution game," adding that he focused on bothtop line and bottom line.

The Family Factor

Access to capital and the right connections are big hurdles for startups in India, said Anjan Malik, founderand director of eClerx, a knowledge process outsourcing firm in Mumbai with U.S. and U.K. offices that

provides financial and marketing support services. Established, family-owned businesses have an edge inregulated industries with their connections in government and the capital markets, he noted.

India's IT services industry has led the country's growth since the 1990s precisely because it was largelyfree of government regulation and did not need too much capital, Malik said. "In the businesses that needexternal capital, you are competing with guys who are very well entrenched, have access to capital,connections. In the industries where you do well, you don't have such a need for capital, or some of thathas changed with deregulation."

Entrepreneurship in India has lower entry barriers than in many other countries, even if having the rightconnections and Internet penetration are hurdles, according to Patil. "The best thing about being an


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entrepreneur is that relative to other economies, almost everything is fair game," he said. "You can followyour passion rather than the market," he added, explaining that one might, for example, start a restaurantin Goa with few obstacles. "We get caught up in issues like scale and the Internet and VCs, but why doesevery model have to have an exit?" he asked. "Whether you have scale or not is a question, but you canmake it viable."

Perceptions about a culture of entrepreneurship in India are often wrong, said an audience member. "Indiais budding with entrepreneurship. Entrepreneurship is in India's DNA."

Entrepreneurship's Cultural Bottlenecks

That may be so, said Goel, but pointed out that he comes up against cultural barriers when he goescampus recruiting. Students in U.S. university campuses say, "It's cool to work at a startup," he said, butnot so in India. "In India I have spent hours with many smart kids who say they have to check with theirparents," Goel said. "Some of them say, 'My dad says I won't get married if I work at a startup becausethe bride's family will say he works at a little company. Why can't he work at Infosys or Microsoft?'" Goeldescribed those mindsets as "a real issue... there is little entrepreneurship by choice."

Malik felt aspiring entrepreneurs groomed in business schools may also suffer from a certain bias."People come to entrepreneurship classes and want to know the secret of success, but the truth of it is,there isn't one," he said. "Some of us that have gone to the right academic institutions have perhapsbecome more risk averse. How to be a successful entrepreneur could be answered much more simply by

the guy who is understanding and supplying basic demand. If you want to be an entrepreneur you have tobe a sales guy. It doesn't [require] you to go to a Wharton or a Harvard to be that guy."

Bhat said family-owned business houses "already have an existing ecosystem that is constantly startingnew businesses, making acquisitions." But Patil felt the successes of family-run businesses in India arevastly overstated. "Take the industries that have been successful and have transformed in the last 10 or 15years in India -- airlines, retail, technology, televisions or CDs," he said. "The biggest players were notfamily-owned businesses. Newcomers came in like Jet Airways [founded by Naresh Goyal]. Even inretail, Kishore Biyani [founder of India's Future Group] is not a family owned conglomerate." In theonline world, too, most successful Indian businesses are not family owned, he pointed out.

Making Friends with Government

Dealing with the government and regulation is still an issue, according to Malik. "The more successful

business people like Naresh Goyal are fantastic at managing government. That is a very different skillset," he said. Goel, however, disagreed that family connections and the ability to deal with the governmentare critical for all Indian entrepreneurs. "You create the network you need as you go in whether you are inIndia or the U.S.," he said, adding that he has "never met with a government official." All the same,cultivating relationships with the government is not unique to India. "Which large corporation in the U.S.does not have contacts with senators or other politicians?" he asked.

Malik disagreed. He said that although his firm eClerx is in an unregulated business, the reality isdifferent. "We are supposedly untouched by government, but it is amazing how quickly you get touchedby government." Fifty-seven government departments regulate his business, he added.

Malik noted that he encounters government regulation when trying to buy land for expanding operations,offering an example: A "letter of possession" is essential to start operations in one of the government-run

"special economic zones" set up to promote high tech industries. "It makes the difference betweenwhether you are able to start in six weeks versus 12 months," he said. Goel countered that possessionletters are required "because may be you want to get real estate from the government at a better price....You could go to the market and pay 20% more, and cut down on the time."

"Even when you get away from the government, you have to deal with local issues like local landlords,the bandhs [activist-organized shutdowns] and strikes," Malik continued. "It's become better but youknow they exist and you should be aware of it." Goel stood his ground, saying that India was "muchmaligned" for the hurdles entrepreneurs face. "The biggest bribe we have paid is Rs 3,000 -- or US$65 --for an Internet connection, to the local MTNL company [state-owned phone and Internet servicesprovider], so it doesn't scare me," he said.


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What Works, What Doesn't

All things considered, Hosanagar wanted to know which business models work and the ones that don't inIndia.

Bhat said the present time is "way too early in India" for his digital media firm. "The online advertisingmarket in India is US$150 million versus US$25 billion in the U.S.," he explained, but neverthelesswanted a presence in that market to be ready when it develops. Patil said he sees opportunities in the

educational sector for his business of taking classic Indian comics based on folk tales to digital andanimation formats. But he wants to stick to services and avoid products or rely purely on online channels."I'd be skeptical of any Internet-alone opportunities; also, products are inherently harder to sell thanservices in India," he said. He found services an easier market to enter, especially for startups, "becausecash flow problems are fewer, you get your money upfront and you have a direct relationship with thecustomer."

Kapoor did not want to single out any business sector as good or bad, and is resolutely focused on theIndian market for his fashion venture. "It's about how you execute your business, what your vision is andthe team you put together," he said. His business model rests on a simple craving he has spotted: "Peoplewant to look good, feel good ... and are spending money."

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Myth and Realities of Being an Entrepreneur in India