Business Models

Indian venture capital 2.0

Sandeep Murthy
6th September 2017

Yes Bank interviews Sandeep Murthy about how the Indian entrepreneural system is evolving and what founders should be thinking about.

Lightbox has been a major investor in the global consumer tech industry, making the right decisions with several investments to position yourself as a market leader. What are the key aspects you look for when investing in these startups?

Unbridled passion matched with a deep understanding of the consumer that allows them to see a gap that few others see. I look for founders that observe the world differently and have an optimistic craziness that makes them want to risk everything based on an insight to create something very different and very ambitious.

What are the key learning’s you would like to share with upcoming startups, who are embarking on this entrepreneurial journey considering that survival rate is low. 

Focus on making your product difficult to replicate. This is the “magic” that is not easy for someone else to copy or spend their way into. 

Know what you don’t know. This is a big part of ensuring that you are focusing your energy in the right place.

Take the long view. You’re building this for the next 30, 50 or 100 years. Things will blow up everyday. There will be a crisis everyday. But don’t let that de ne your way of working and living. You can’t control everything all the time. Be prepared, imagine the outcomes but understand that things won’t always go the way you planned.

Look at failure differently. Learn quickly and move on. The entire ethos of entrepreneurship is experiment, fail, learn, repeat. Failure is inevitable when you stick yourself out there. The thing though is how you deal with it. We all know that failure is the best learning experience and all that kind of stuff, but the reality is when you have failed, the last thing you are thinking about is learning. The opportunity to learn is fantastic, but at that point the only thing you can think about is “how the hell did I let this happen, I can’t believe how I didn’t see this coming, I should have done this or that” and the worst of all “maybe all those people who said I was crazy for trying this were right”. Having failed, and failed big when I was young, I can safely say I wasted a lot of time in that world of anguish... that being said, after a few months of that, I did reflect on things and did take away learnings that have been invaluable.

In our fast paced world, the speed at which you can move through the cycles makes all of the difference. I am all for failing and learning, but the key is to get over the failure, learn from it and move forward - FAST.

As of late Lightbox has raised $54 mn, expanding your existing fund of 8-10 portfolio companies. Do you believe it is imperative to be hands on with your portfolio companies, as opposed to spreading yourself too thin?

We are not money managers. It’s not about writing a big cheque. We often say we’re building, not betting. It best describes our concentrated approach to investing. We love dreaming big and then committing wholeheartedly to make that version of the world a reality. While all of that sounds great, the reality is that we love to get our hands dirty and deal with difficult day-to-day situations. Sometimes, we get so involved in the operations of our portfolio companies that we are in a role reporting to the CEO and we’re absolutely up for that. We’re in this to build great businesses and have no issues about which seat we need to sit in to make that happen.

One of the companies we recently invested in has great product instinct, but the team is just learning how to run a business. So the real priority to back the investment is to get operating expertise in there. We’ve put financial systems in place. That’s building. Identifying the needs, helping to hire, creating priorities. If you do that right upfront, it sets the DNA right.

But then we’ve also had times that we have sat down in our company’s offices for a week to figure out what is not working. Helping the team understand how to optimize their marketing spend. Or what their gross margin should be and what they are spending.

We get that the adventure can be lonely and want to be the first call our founders make when they’re in trouble. It’s only because we know their businesses inside out that we can understand the challenges as opportunities and can actually be helpful. That depth of engagement is only possible with a handful of teams.

The next step for Lightbox is to invest in vertically integrated businesses, do you believe these businesses to provide the next wave of growth in India? Do you believe that vertically integrated Indian Consumer-Tech organizations will catapult India as an innovation hub globally?

That’s actually been the theme for the last few investments we’ve made. India is at a very unique point in its growth story. As the fastest growing big economy in the world, there are multiple changes in parallel at play here. A highly fragmented offline retail industry, rapidly increasing Internet penetration, rising per capita incomes and new consumer aspirations.

I joke that India is inefficiency at scale but I am only half joking. We are 94% fragmented and do not seem to be getting organized offline
in a hurry. Distribution in India looks very different than it does in most markets. This is primarily due to rapid urbanization, absurdly high real estate prices and difficult infrastructure that doesn’t let malls address the growing wants of the country. A by-product of this extreme fragmentation is that we have fewer large-scale brands. The largest food brand in the country is Dominos — demonstrating the massive fragmentation that exists in the Indian food market. Today, according to our records, Behrouz is the biggest biryani brand by sales across India. Less than two years and without a single restaurant! That’s the magnitude of the opportunity.

Brands built directly on tech enabled platforms are creating the first organized channel of real scale. That access to large groups of consumers permits them to be among the first companies in India to create truly national scale consumer brands. A nice example is Melorra, the jewelry brand in our portfolio, which has seen a disproportionately large number of customers from the North East and Kashmir.

The opportunity in India is so much larger than just creating online distribution pipes. It’s to own the entire chain from manufacturer to consumer under one brand. This is not just taking full responsibility for the product, but also taking the product experience to the next level. Vertically integrated businesses have the ability to change the fundamental cost structure (for example, by using internet based business models like subscription) to make things more affordable to more people. If you can make it here, you make it anywhere.

If you can work out how to provide a game changing experience at a good price, you’ve got a formula you can take anywhere in the world.

What new innovations do you think are going to change the world we live in? Considering these innovations how would Lightbox position its investments strategy for future?

Our portfolio companies keep our fingers on the pulse! Integrating tech innovation deep into their business model often makes their product cheaper, faster or better. Melorra’s jewellery catalogue for instance is made entirely from 3D renderings which changes the entire business to a zero inventory model. I am amazed and learning a lot from how Embibe is using AI to change the learning experience. The other day, Jaydeep (CEO at Faasos) was talking about integrating blockchain into the Faasos app. Tech innovations are par for the startup course.

But perhaps more interesting are business model innovations that leverage tech especially in industries that haven’t changed in a long
time or that are particularly inefficient. This was an investment strategy that we’ve backed into. I remember distinctly prior to our investment
in Furlenco how we began to see the logic in applying a Netfix style recurring revenue model to a space like furniture that is unaffordable
to most people in India. Then we saw how a Warby Parker approach to food allowed Faasos to make great food brands on the internet. It’s not a rule but to a large extent, this shapes our investment focus.

Through technological advancements there has been increased focus on inclusion and sustainable development; do you think there are any new technologies that could transform the entire Indian ecosystem, enabling India to reach an equitable ecosystem?

That’s got to be the hope. The tech story has always been an access story.

With 1.12BN people signed up for Aadhar, we’re beginning to see the foundation for what’s to come and how we’re leapfrogging. We’re talking about perhaps owning the most advanced social security system in the world.

On the back of a tech patform, marketplaces allow the small guy to dream big by creating tools that make them trustworthy and build their reputations with new audiences. We’re seeing evidence of this in Amazon and Shopclues as well as Droom.

The best thing about technology today is that is has changed the power dynamic between consumer and company. The Indian consumer has choice and plays a bigger role in determining which kinds of businesses win, which companies and technologies they want to stand up for, how we want society to evolve and progress.

The current regime has focused on catapulting entrepreneurs throughout India. As a leading entrepreneur, do you envision any policy changes that will enable India to become the leader in Entrepreneurial space?

Entrepreneurship, as investors think about it, is about driving tangible gains in productivity that have a measurable impact on GDP. This,
in turn, improves people’s lives, which is ultimately the goal of both government and entrepreneurs. A McKinsey study called attention to a concept called the Empowerment Line, which focuses on access to eight basic human needs that contribute to a minimum acceptable standard of living: food, energy, housing, drinking water, sanitation, health care, education and social security. There are 680 million Indians living below this line and it will require $69 billion (4% of GDP) to elevate them above this line. While we consider subsidies and government spending to improve people’s lives, technology and entrepreneurship can have a multiplier effect in improving productivity and facilitating required incremental GDP growth. Entrepreneurship is all about creating amazing, impactful businesses. However, as every entrepreneur knows, success only comes after numerous attempts and countless failures. We need a system that makes it easy for an entrepreneur to experiment, fail and learn.

As the new government executes its “make in India” policy, it would be beneficial if it could take into account how to enable failure. With the cost of technology declining, and the pace of innovation increasing and spreading globally at a more rapid rate, the process of setting up
a company—and more importantly, shutting it down —needs to be easy. Entrepreneurs need to focus their initial capital and energy on their product and market t. Easy access to capital for early-stage ideas can go a long way towards enabling entrepreneurs and investors to take quick, inexpensive risks that may deliver huge gains. These risks need to be taken knowing that the administrative costs of failure will not be significant. Reassessing the angel tax, the idea of convertible notes, bridge nancing and director’s liabilities in these early-stage opportunities can have significant impact.