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Startuppable Markets

[Guest post by Abhijeet Vijayakar]

What environmental factors are necessary for startups to flourish?

This question has been examined by several authors, and most have come to the conclusion that a place that looks a lot like Silicon Valley is the natural answer. In other words, take a couple of technologically sophisticated cities such as San Francisco and San Jose, a high-quality university such as Stanford, mix with a generous dollop of military funding, and startups will emerge spontaneously.

startuppable-markets

(I define a startup as a small company that has the potential to grow explosively rather than incrementally. Every small company is not a startup.)

While this answer is true, I think it focuses on only one aspect of a developing startups, the supply side. In other words, the question is generally posed as trying to find the most nurturing environment to generate startups, while assuming that the environment to consume the product of those startups (the demand side) already exists.

Is this always true? It would seem that the organizations best equipped to meet the needs of the market are large companies that can invest significant resources in market research and product development. And indeed, in most parts of the world this is the case.

Specifically in India, large companies like the Tata and Reliance groups are still the dominant Indian players for most products, from “old school” products like salt to Internet properties like blogging sites. There are few Indian companies that have emerged from the ground up to become big on the strength of their products in the domestic market.

So, what about the demand side? What are the characteristics of startup-friendly markets – markets in which startups can successfully compete with much larger players?

I can think of at least three characteristics:

  1. The markets must be large, or growing rapidly on a moderately large base. Targeting a $5 million market growing at 100% will mean that your startup will have to wait for over 4 years to be in a viable $100 million market. By then, your company is likely to be dead.
  2. The markets must be new, or at least changing rapidly. If this were not so, large incumbents would already have completely satisfied the market, leaving no space for new companies to come in. In developed countries, there are not many startups in the grocery store industry for this reason.
  3. It must be possible to create the products that the market needs with small amounts of capital and high leverage. A low level of capital is typically necessary since startups have only a limited amount of money to prove themselves – usually much less than large companies – before dying. High leverage is the same as low marginal cost — once the product is created, there must be hardly any incremental cost in creating thousands or millions of the same item. Software products are the classic example of low-capital, high-leverage products, and so most startups (not all, but the majority) produce software.

There won’t be many startups in the nuclear power plant industry because of the low capital requirement. Similarly, a single hairstylist won’t be able to create a startup because of the high leverage requirement, no matter how distinctive his style, unless he is able to cheaply pass on the essentials of his style to other apprentices.

One of the reasons in which restaurants like McDonald’s were different from those who came before them is because they were able to distil the essence of their product into an easily replicable (and hence leverageable) process.

How do Indian markets fare on these parameters? Are they startup-friendly?

The good news is that the Indian market for many products is large, and getting larger rapidly as the country becomes richer. As many people have remarked, the threshold of $1000 per capita GDP, which is roughly where India is right now, marks the “take-off point” for consumer spending.

Around this level, a large section of the population has their basic needs taken care of and has disposable income for other products. These markets also change rapidly as new consumers with new preferences enter the “consuming class”. So the first two factors certainly hold for India.

I think it’s the third factor that makes the Indian market challenging for startups. The products that Indians consume, by and large, are not startup-friendly. The market for soaps, TVs and motorcycles is growing rapidly, but these are not products that startups can cheaply make.

Similarly, the markets for plumbing or electrician services are also likely to be growing rapidly (hard data for this is difficult to find), but these are not high-leverage products.

So until Indian consumers evolve to a point where they consume low-capital-cost, high-leverage products (broadly, software) in large quantities, startups will have a hard time succeeding in the Indian market.

Till this happens, it probably does make sense for venture capital firms to behave like private equity investors, and be a source of equity capital for medium sized, non-technology companies.

Although the leverage in these “brick and mortar” sectors is much lower than in technology – indicating that Indian VCs will almost never match the percentage returns of their non-Indian counterparts – the sheer size of those markets makes them attractive to be in.

When will India become a large market for startup-friendly products?

I believe in the very near future. India’s GDP today is roughly where China’s was in 2000, and China in this decade has witnessed a huge increase in both the number of Internet users, and the technology services they consume. Shanda, Baidu, and Tencent are only some of this decade’s success stories in that country.

As the Indian market rapidly turns “startupabble”, their Indian versions are not far away.

[Abhijeet Vijayakar is the founder of Nunook Interactive Pvt Ltd, a game startup in Mumbai and Chennai. Nunook is currently developing BrainNook (http://www.brainnook.com), India’s first online, educational virtual world for kids, parents and teachers. In a previous life, Abhijeet developed 3D graphics engines (and games) at Electronic Arts in the San Francisco Bay Area. He is surprised that sushi is not more popular in India.]

About Arun Prabhudesai

Arun Prabhudesai is founder / chief editor at trak.in. He jumped the Entrepreneurship bandwagon in early 2008 after a long 13 year stint in I.T Industry. You can follow him on twitter @trakin and Facebook. Arun’s Google+ Profile

5 comments

  1. actually disagree with the assessment that the demand side for technology startups is not there. In my mind, this assessment is narrow minded. I think the opportunities are there, but unique to India. By comparing to make products coming out of Silicon valley it is overlooking these unique opportunities, like micro-finance, mobile services and services that benefit poor farmers and other entrepreneurs. If they think plumbing and electrical services are going to grow, then think what services these guys would need to make their businesses better. Do they need websites to promote their plumbing business?

  2. Nice article Abhi. I tend to agree with you that scalebility (as I prefer to call it over high leverage) is the key for a startup to flourish. Which makes IT startups (particularly those relying on the internet) a natural choice for VC/PEs to invest in. We had reached a point in 2007 where any business demonstrating scalability via the internet was getting funded – viability notwithstanding! On the other hand I think investors didn’t fully gain from TV in India – which has more penetration but limited in application – I don’t want to get into an IPTV debate here though. BTW, Indians like their food (over)cooked – which explains the lack of popularity of the Japanese favourite. The second reason I believe is that Indians are, by their very nature, non-experimental in food – which is why they carry their food everywhere like the Chinese – no matter which part of the world you are in, you will always find an Indian and Chinese food joint.

  3. @gopinath sir as usual, a great thought and something which did cross my mind sometime. But, i think VC’s are equally good in spotting oppurtunities which are not purely IT.Infact education albeit the e-learning sector has seen grt participation from the VC fraternity.TutorVista got a big funding recently, then FIIT JEE,Career launcher all have VC’s backing them. As for the brick and mortar system, visibilty and growth predicition is difficult to gauge.Without metrics in place, it becomes rather difficult to bet on a comapny.Gone are the days when only a biz plan would do.new ventures need to slug it out to make their presence felt and attract a lot of media attention.Only then the VC’s take notice. My 2 cents:)

  4. Gopinath Mavinkurve

    Nice post! Now i know why when one refers to “startups” we only is talking about some IT venture – never a brick-and-mortar business; why “technology” invariably refers to Information Technology and not any other technology. I wonder whether markets and venture capitalists should continue to limit themselves to ‘startups’ limited by definition or should venture capitalism should expand to encompass all other businesses in all categories including education? Its like trying to spot the genius in an infant in the pram. What do you think?

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