Myths and Realities of Being an Entrepreneur in India: India Knowledge@Wharton

(http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4499)

Myths and Realities of Being an Entrepreneur in India

Published : July 15, 2010 in India Knowledge@Wharton

Despite the recent economic downturn, entrepreneurship is alive and

well in India. New entrepreneurs have succeeded in many recent
high-growth industries such as civil aviation, retail trade and IT services.
Their success blasts the myth that family-managed business houses with
connections have an edge in access to capital, although scaling up
distribution remains a challenge for startups. Venture capitalists invested
in Indian businesses dependent on the Internet are disenchanted, but
other vast markets beckon. Those were the takeaways from a panel
discussion on entrepreneurship at the 14th Wharton India Economic
Forum in Philadelphia that took place in March.
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India. Kartik Hosanagar, the panel's moderator and a Wharton professor

of operations and information management, asked the panelists to focus first on the challenges
entrepreneurs face in India. He wanted to save the positive aspects for later, so that aspiring entrepreneurs
in 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 small
businesses, drawing them away from the yellow pages. The New York City-based firm considered
entering the Indian market and decided against it. "Internet penetration is not high and replicating the
business 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 shipping
infrastructure 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 a
controlling stake in Indian comic series "Amar Chitra Katha and Tinkle" from India Book House in 2007
and is redefining them for new markets in gaming, animation and character development. If he were to
operate his firm in the U.S., he would have focused on developing its content base, he said. But India calls
for "forward integration" and he is considering setting up the firm's own distribution network with kiosks
and stores, he added.
Distribution was a challenge also for Vin Bhat, cofounder and CEO of Saavn, a New York City-based
digital distributor and marketer of Bollywood and South Asian entertainment. The firm has aligned with
Time 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 just
reaching Indian consumers, but also in terms of their appetite for his product. Online video and radio
services 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 Saavn
takes popular Indian fare like Bollywood films, cricket and religious content to the global markets, and
has 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 Indian
television 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 no
sales force at all," he said. "In India, there is a sales force that only exists" because customers come
personally to offices to buy advertising space. That increases distribution, employee and infrastructure
costs "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 make
payments 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 than
one 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 in
India, said Hosanagar. However, Internet penetration is overstated as a prerequisite for doing business in
India, according to Amar Goel, founder and CEO of Mumbai-based Komli Media, a digital advertising
and technology firm that enables marketers to reach and acquire audiences. "India is a trillion dollar
economy and the Internet may be US$2 billion, so you have US$998 billion other dollars that are in other
sectors," he said. He talked of a restaurant club that recently opened in Mumbai and is "bigger than any
Internet company in India" with sales of between US$20 million and US$30 million. "The needs that
India 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 Indian
investments. "Many of the VCs that came into India earlier were probably not that focused, at least in the
retail space," said Sanjay Kapoor, managing director of Genesis Colors, an upscale fashion retailer with
brands including Satya Paul and Deepika Gehani; it also has a joint venture with British luxury goods
retailer Burberry's to open stores in India and has venture capital backers including Sequoia Capital of
Menlo Park and Henderson Equity Partners of London.
"The venture capital firms made some fairly large investments [in India] when everybody was scaling top
line (sales) growth without understanding the bottom line (profits)," Kapoor said. "And some of the
numbers just fell down." Syal said VCs like Sequoia Capital that have invested in India for many years
have "done quite well." Also, he said "most of the exits (for venture capital firms) have come from the
services sector... so perhaps the opportunity lies in services." Many western VC firms have also learned
that 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 to
take 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 that
unlike many others that focused on India's middle class population of 300 million to 400 million, his firm
narrowed down on the top 2% to 5 % in India. "That is 20 million to 50 million people, which is still a
very large number," he said, adding that his challenge was reducing to reaching out to that smaller
population with mostly direct marketing. "It's really an execution game," adding that he focused on both
top line and bottom line.
The Family Factor
Access to capital and the right connections are big hurdles for startups in India, said Anjan Malik, founder
and 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 in
regulated 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 largely
free of government regulation and did not need too much capital, Malik said. "In the businesses that need
external 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 that
has changed with deregulation."
Entrepreneurship in India has lower entry barriers than in many other countries, even if having the right
connections 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 follow
your passion rather than the market," he added, explaining that one might, for example, start a restaurant
in Goa with few obstacles. "We get caught up in issues like scale and the Internet and VCs, but why does
every model have to have an exit?" he asked. "Whether you have scale or not is a question, but you can
make it viable."
Perceptions about a culture of entrepreneurship in India are often wrong, said an audience member. "India
is 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 goes
campus recruiting. Students in U.S. university campuses say, "It's cool to work at a startup," he said, but
not so in India. "In India I have spent hours with many smart kids who say they have to check with their
parents," Goel said. "Some of them say, 'My dad says I won't get married if I work at a startup because
the bride's family will say he works at a little company. Why can't he work at Infosys or Microsoft?'" Goel
described 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 perhaps
become 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 to
be 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 starting
new businesses, making acquisitions." But Patil felt the successes of family-run businesses in India are
vastly overstated. "Take the industries that have been successful and have transformed in the last 10 or 15
years in India -- airlines, retail, technology, televisions or CDs," he said. "The biggest players were not
family-owned businesses. Newcomers came in like Jet Airways [founded by Naresh Goyal]. Even in
retail, Kishore Biyani [founder of India's Future Group] is not a family owned conglomerate." In the
online 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 skill
set," he said. Goel, however, disagreed that family connections and the ability to deal with the government
are critical for all Indian entrepreneurs. "You create the network you need as you go in whether you are in
India 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 is
different. "We are supposedly untouched by government, but it is amazing how quickly you get touched
by 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 between
whether you are able to start in six weeks versus 12 months," he said. Goel countered that possession
letters 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 you
know they exist and you should be aware of it." Goel stood his ground, saying that India was "much
maligned" 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 services
provider], 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 in
India.
Bhat said the present time is "way too early in India" for his digital media firm. "The online advertising
market in India is US$150 million versus US$25 billion in the U.S.," he explained, but nevertheless
wanted 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 and
animation 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 than
services in India," he said. He found services an easier market to enter, especially for startups, "because
cash flow problems are fewer, you get your money upfront and you have a direct relationship with the
customer."
Kapoor did not want to single out any business sector as good or bad, and is resolutely focused on the
Indian market for his fashion venture. "It's about how you execute your business, what your vision is and
the team you put together," he said. His business model rests on a simple craving he has spotted: "People
want to look good, feel good ... and are spending money."

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