Hari Menon believes in second chances. In 1999, Menon and three others launched Fabmart, India’s first online departmental store. Those were the days of dotcom boom. Headlines were easy to get, as was funding. If only the same thing could be said of business, he recalls.
Fabmart underwent a raft of changes – from a music e-tailer to a full-fledged e-tailer. It switched to online only to embrace the offline format. In 2006, he cashed out selling the company to the AV Birla Group.
Fast forward to today and Menon, 50, and team are at it again. Two months ago, they launched http://www.bigbasket.com, an online retailer in Bangalore. This time, business has got the wind in its back.
“We get 200-250 orders a day. A decade back it took over 18 months to reach that figure,” says Menon. No doubt, he is wiser from the earlier attempt. But he is also backed by a network of former colleagues willing to work for his startup. Crucially, there is the comforting presence of an angel investor in K Ganesh (of TutorVista fame) who is willing to provide the seed capital and mentoring. Menon hopes it will break even in three years, half the time it took last time.
For Menon, it is a replay of sorts. But the world of startups in India may be opening a new chapter this time. For long, India had great entrepreneurs but not great startups. The eco-system – investors, mentors, angel investors and smart talent – that seeded and nourished startups was simply missing.
Now, a decade after the dotcom bust, when the private equity (PE) party is turning sour, things may be falling in place. “For startups, India is at a mini-inflection point,” says Sanjeev Aggarwal, co-founder, Helion Advisors, a venture capital (VC) fund.
Numbers back this up. The year 2011 saw close to 200 deals in early stage startups, this was the highest in the past 10 years. The last decade had seen PE funds – focused on more mature companies – hogging the limelight. While early-stage investors – seed funds – were totally missing and VC funds were too small.
Ernst & Young data on deals shows that in 2010, venture funds contributed 15% in volume terms and 5% in value terms (PE plus early stage funding). In 2011, early-stage funding comprised 35% in volume and 10% in value terms.
Sandeep Singhal of Nexus VP says funds available with VCs (pre-revenue stage investments) have almost trebled between 2006 and 2012. “While the number of venture funds remains almost constant most of us have been able to raise our second funds,” he says. That’s a big contrast to PE firms – most are struggling to raise funds.
For some there is a sense of deja vu. Investors remember the dotcom boom and bust a decade back. Agarwal recalls the rush – from investors, entrepreneurs and even executives, who quit their jobs to join the dotcoms. “The biggest culprits were investors like me who invested in startups without vetting their quality well,” says Helion’s Aggarwal.
But this time it’s different, he says. With 100 million internet users, 14 million broadband connections and 800 million mobile customers – including 3G-enabled ones – business, customers, revenues and profits are all real today. Indians, particularly the young, are less skittish about shopping online. E-commerce in India is poised to touch $200 billion by 2020 from $10 billion in 2011, says Technopak Advisors, a consultancy.
Menon says what took him 18 months to achieve in terms of per day order during the dotcom boom has today happened in just two months.
More importantly, this boom is not just about dotcoms. It is a diversified lot with many brick-mortar startups like Jaldhara Technologies (provides waste water management solutions), CleanMax Enviro Energy Solutions (power generation startup).
Mentors – that’s the other big difference. That’s what makes Silicon Valley a hotbed for startups. That’s what was missing in India. But things are changing. Over the past few years, many angel investors have come up – Mumbai Angel, Indian Angel, Chennai Angel networks etc. These are groups of seasoned entrepreneurs who have money, experience and are willing to spare some time to mentor and seed young startups.
“In India we had PEs and a few VC funds. Below that, we had nothing. We were the first ones to launch,” says Mahesh Murthy, founder of Bangalore-based Seedfund.
TutorVista’s Ganesh is a good example. Last summer, Vidya Nataraj, daughter of the promoters of the Landmark book store, came to him toying with the idea of selling jewellery online. Ganesh played the devil’s advocate and gave her a list of 10 reasons why the venture would not work. She returned a month later after fine-tuning the plan.
He helped her put together a team. He helped rope in a tech specialist who came on board as a co-founder. Soon, they raised $5 million from VC fund Accel Partners. “Having a reputed angel investor on board helps raise capital and attract talent for startups,” says Ganesh.
Every Sunday, these days, Ganesh spends half a day advising budding entrepreneurs. He also ends up investing in a few. He is currently an angel investor in five startups. And he is part of a growing tribe.
VC vs PE
All this is happening when PEs are struggling in India. After the dotcom bust, VC funds almost vanished and it was PE funds that became the poster boys of India growth story. Almost all big global PE funds made a beeline to the country.
But many are struggling now. Many deals have gone sour – Kidswear retailer Lilliput is an example. Entry valuations for PE picks were high as most deals happened during the boom days of 2006-08. And now even the exit route looks problematic because the IPO route is almost blocked by a volatile stock market. “For private equity, India will be perhaps the worst performing market in the world,” says Ajay Relan, founder of CX Partners, a private equity firm.
Expectedly, the attention is now shifting to early-stage investments. Seed capital investors are right now willing to forget that such enterprises require higher level of engagement and holds higher failure rates because of the better returns that startups are promising. Many fund-of-funds that were earlier totally focused on PE are also now willing to put money in early-stage startups. Morgan Creek recently allocated funds to Kae Capital for investment in startups. Others are considering similar options.
The rise in investor interest mirrors well the entrepreneurial talent that is entering the fray. Scores of successful executives are quitting cushy jobs to turn entrepreneurs. CleanMax Enviro Energy Solutions, for example, was founded by a former McKinsey partner Kuldeep Jain last year.
There are two factors driving this trend. One, fatter pay packets in corporate India allows executives to build a financial cushion and plunge into entrepreneurship. Secondly, most have working spouses whose incomes fund the expenses of households, offsetting the risks.
There are plenty of role models too. Successful entrepreneurs like Makemytrip’s Deep Kalra have made it big in a short span. Makemytrip started in 2000 and is today worth $800 million-plus. One of every eight air tickets booked in the country is via Makemytrip.
“Startups and entrepreneurship have become cool. Indians are not afraid to say I tried a startup and failed. That stigma is gone,” says Kalra. Startups hitting the jackpot are also a big attraction. Netmagic, an IT infrastructure management company, recently sold out to Japan’s NTT for `900 crore plus. Seven-year-old TutorVista was sold to Pearson Group for Rs 577 crore last year.
Small wonder then that startups attract talent, including IIT graduates. “Indian startups are able to attract even global talent,” says Alok Mittal of Canaan Partners, a VC fund.
In talent acquisition, angel investors play matchmaker. They often get requests from senior executives of established companies looking to do a stint in startups. Mittal recently helped a senior executive from Publicis group land a job with Motorexchange.in.
Not everyone is betting that the party will last for long. Murthy of Seedfund is one of the cynics. He says things will take a turn for the worse in the next six months. Some experts say it is the herd mentality that is pushing investors to startups.
With loads of money, few good deals and e-commerce startups being the flavour of the season, the deal valuations are surging to unrealistic levels. It sounds familiar. Murthy says in the frenzy, investors are not realising that early-stage funding is messy.
“Managing 25-year-old entrepreneurs is not an easy thing.” Is he right? Or have VCs and seed funds and 20-something entrepreneurs have got something right this time? Sometime this year, we should begin to get an answer.
Madhuri Jadhav 45, head, clinic operations, Karmic Life Sciences
Last month, I did what I hadn’t done in 20 years of my worklife. After a long stint with Sanofi Aventis and Vanthys Pharma (a JV between Eli Lilly and Jubiliant Life) I joined a start-up Karmic Life Sciences (a clinical research firm). I had been there, done that, so I was looking for new excitement. Few things attracted me to a start-up.
In an established firm, processes are set but in a startup everything had to be done from scratch. In an MNC, its the head office that shapes the template, subsidiaries mostly execute. At a startup everything had to be done here. Startups are small and fairly nimble hence one can make a bigger difference. Lastly, I was at a stage in life and career where I could take risks and get creative satisfaction.
Harshad Bastikar 52, founder, Jaldhara Technologies
I had had everything going for me – a comfortable job at Thermax, in an area (of protecting environment) I felt passionate about. But the challenge and excitement was missing in my life. So in 2008, I quit my job to seed my Jaldhara Tech – it hopes to change the way the world treats its waste water. I first fine-tuned my business plan and product strategy over 18 months, with my savings providing a financial cushion before launching it in 2010.
At first, I felt it was all wrong with the economic slowdown woes. But soon, the orders started coming in. Two of my ex-colleagues were my first hires, now we have 26-people. We got a $2-million funding from Nexus VP. We offer a compelling business proposition – in a conventional processing plant it costs Rs 10-14 to process 1 m cube of waste water.
Our products helps cut the cost to Rs 5-7. In an established firm – trying new things is difficult and takes time unlike a startup. We have 25-plus customers with presence in top five cities. We do have plans to go global.