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Sunday, November 4

Thinking Big but not like that !

Before reading my post, read this post about the problem of Indian Entrepreneurs not thinking big enough. There was a followup post on the same blog that countered some of those point.

It was during undergrad days that I heard this argument for the first time. The biggest problem with people pitching their business plans in competitions, according to one of the judges, was that they were not asking for enough money ! It sounded quite counterintuitive to my middle class trained mind. My instincts told me to borrow as little as possible and to bootstrap as much as possible, the old Indian way of doing business as somebody later put it.

But I was naive back then, didn't understand the importance of capital, didn't understand the central premise of running a successful company in a capitalist setting i.e. growth ! Year after year, every year, growth in terms of bottom line, revenue, profits ! Because although we start out with customers, with efforts to solve a problem they are facing, we end up running the show for investors and for share holders who want return on the money they have invested. VCs want a return of 10-20 times in a framework of 3-5 years, so they want entrepreneurs to focus on big market opportunities, billion $ markets and they want companies to dominate those markets. I have no issues with dominating the markets, I have no issues with 10-20 times the returns. I have problem with the way market size is estimated and profits are measured!

A market essentially breaks down into two components. Number of customers and how much each customer is willing to pay for your product. Now Indian market is very price sensitive, something that I admire. Everything should be priced for what it is worth, it may be costly but it should be worth it. It should not be costly because it can be, something known as "charging a premium" in business terms. Another problem is that Indian market is highly fragmented. Uniform means of accessing the market are virtually non existent in most of the industries. The great enabler Internet reaches a small minority of the country. Mobiles a little more. Organized retail will perhaps reach to slightly more in few years. So the easily accessible part of the market remains small.

Faced with such conditions, what should a new company do? It is difficult, unless you are operating at the scale of Reliance or Bharti, to reach out to a large population. At the same time, the small part of the population you can reach easily, is also the most wealthy, those who are learning the first lessons of consumerism, those who can and will spend. So to get a big market size, you charge premium. And that is the trend we see. Start looking at the burgeoning startup space in India and you will see tons of startups for people who can access Internet, who are urban. Some of the startups are selling something, others are hoping to get enough ad revenue.

On the other hand, it is only the big players that are expanding into the markets beyond that. Organized retail, printing, telecom are the spaces left for giants. What effect will that have on our own home grown entrepreneurs, those who are called unorganized sector is a post for another day. But in my mind this is a very clear dividing line currently. We may talk of inclusive development and bring down the fruits of free economy to everybody but the real promise of a free economy, entrepreneurism that will be primary driver of that aim, is being held back by the old notions of big markets and big profits. The article I linked above says,

Ask: what does it take to dominate the market opportunity? Capital availability is the easy part. The hard part is building out the product/service, hiring globally scalable talent, and penetrating global markets. Capital will make this happen in large part. And the ability to think big (obviously backed by a clear focus and execution plan) will make the capital happen!

I think capital availability is easy for those who are playing by your rules, to those who are going after markets that promise Billions and double digit growths. And if such a market is not available in India, we can always go global. But what about the huge but highly fragmented market that remains untapped within our own country? We can always offer medical tourism when our own citizens will not get medical health. We can do cheap printing for other markets when thousands in our own country go without books to read. And this is because markets are defined by purchasing power and not by need.

Let me take a example. Consider the blind people in India, around 10 million of them. They are probably quite a fringe part of the so called market. There is no dearth of opportunities for those who want to make something to specifically target them but first there are only 10 million of them and second, not a whole lot of them can afford to pay a premium and so market opportunity in traditional terms remains small. Will there be capital available for those who want to entertain this part of the market or must they forever be served by NGOs and CSR initiatives?

And this is what my gripe is with this concept of thinking big. I think it is very limiting to think big if that must only be in terms of money. I love big opportunities but they can be big in n number of ways, in impact, in terms of serving a part that will forever remain neglected otherwise or in terms of the problem they are trying to handle. They may need more than 3-5 years, they may not grow as fast. Read this excellent Nobel prize acceptance speech by Mohammad Yunus, specially the section on Free Market Economy where he describes the Grameen Bank's social business.

Fortunately, as always, we have people already working on this. The second article linked above talks about SKS Microfinance, something which has received VC funding actually. Another one is Eko. And I am sure there are many more which I have simply not heard of. So while social networks, video sharing may be nice and 'big' , unfortunately they will not bring in the real fruits of this free economy. For that we will need to plant new trees instead of just aiming for tree tops.

3 comments:

Dispersion said...

Nice post. I am tech entrepreneur, and I feel restricted by lack of infrastructure and big-player-domination to realize the real big market in India. To play a safe, relatively easy bet I am left with no options but to think of educated urbane crowd as by customer.
The fragmented market which you nicely pointed at, is in fact so much diverse ( in language, values, culture , needs etc) that hitting scale is a farfetched dream for some. Only the educated urban class offers a uniform market with similar aspirations, lifestyle and maybe expenses. So, its not a choices by will, I would say rather the only option.

lalit

Diwaker said...

I get an "Account suspended" on that web site (pluggd.in) :-(

abhaya said...

Diwaker: Oops ! Looks like he didn't pay the bill on time :-). I am sure he will be back.

Lalit: Thanks for stopping by. I know that options are few when starting out but we can at least try and keep our vision right and look out for opportunities. Good luck with your projects !