Start-ups In India Must Tackle Hidden Costs
It has now been more than three years since Canvera has taken off and we have evolved into a 500-strong team across eight offices. Needless to say, it has been a phenomenal journey and we have catered to thousands of professional photographers (and by extension, hundreds of thousands of consumers) all over the country.
In fact, itâs perhaps the most suitable time to start a business in India â growing domestic consumption, investment in infrastructure and other beneficial initiatives will help you out. There is just so much to be done for India, to make the transition from an emerging economy to a developed economy. And I am frequently asked about some of our learning throughout this period. So, in this post, I am going to share the key issues regarding the costs of getting a start-up off the ground in India.
When I look back at some things we got right and the mistakes we made, one very early decision stands out as being crucial. After our study of the Indian photography landscape, Peeyush and I concluded that we should either raise $1.5 million in our first round of funding or not do the business.
We came to this conclusion by modelling the business operations to get to the next meaningful milestone and realising what all we would have to build in order to get there. We were extremely lucky that Josh Bornstein of Footprint Ventures (what were you thinking, Josh?) bought this argument and then Mohanjit Jolly of DFJ (and you too, sir!) followed suit. Our first round of funding, our seed round, ended up being a $2 million round. Yes, $2 million! I donât know of too many cases where this has happened.
And that was, indeed, critical for our present traction. The Silicon Valley-type early-stage investing requires raising a little bit of capital, building prototypes, getting some early customers and then going for an institutional round. There are a lot of infrastructure-related issues which are implicitly taken for granted in developed markets to make this possible. But in my opinion, there arenât enough examples in an emerging market like India. I have come to realise how expensive India is for early-stage investing for PRODUCT companies (I think slightly different rules apply to services companies).
So, here is the bottom line. What makes early-stage investments expensive in India for product companies is the inability to buy products, services and infrastructure on a purely variable cost basis and at reliable quality levels, in order to do micro-experiments in business development. And to visualise this difference between developed and emerging markets, look at this graph (this is, of course, an oversimplification but good enough for the point I am trying to make).
Simply put, it says that even before you get started, you have to invest a lot in building out the companyâs operating eco-system. Let me illustrate it with some examples that we have seen at Canvera.
Power Boost: Canvera owns some expensive, high-end digital printers but in order to keep them running, we had to buy one of the most expensive UPS units available in the world. We bought it because the most attractive feature of this UPS unit is that it âcleans upâ the poor quality of electricity for these high-end printers. Without this device, the electricity would have damaged the printers. In addition, we had to put in place a DG backup as well. This is the fixed cost of electricity, even before we got started.
Credit Infrastructure & Law Enforcement: Canvera has eight offices and for each of them, we had to make significant deposits with the respective landlord. And the primary reason for doing this? At a basic level, a landlord canât rely on either a credit system or the law enforcement units to enforce the contract, in case of issues. So, the person protects himself upfront. This is capital locked up which could have gone into product development.
Collection Complexities: With only 20-25 million credit cards in circulation (and no growth in the numbers), India is primarily a cash economy even now. But more than that, even consumers donât trust electronic payments. The net result for a company like Canvera is that we have had to develop our own collections network through a combination of on-the-ground sales, regional offices, relationships with banks & payment gateways, custom software development and custom processes for reconciling payments. It has now been three years (and counting) on this effort and while this has been critical for the growth of the company, we still donât have the scale, cost and reliability of a payment gateway that an early-stage company in developed economies can simply plug into (Square has further lowered the entry barrier for small businesses and is growing at a phenomenal rate). I view all these as capital and effort which did not go into core product R&D.
Hiring Hassles: In one of the largest groups in the company, our average hiring ratio is 30:1. We work with a number of staffing companies, but the poor quality of resume-screening, misaligned interests, fraud in application forms and so on forces us to hire a set of screeners who pre-qualify candidates and then we put them through vigorous, time-consuming interviews. Once candidates join us, we put them through training and even after all that, we end up letting go a number of people. This is all significant upfront cost, both in dollars and in opportunity, which I would rather not pay.
No Access To Affordable Debt: In most cases, banks in India are averse to giving debt/credit even for equipment financing where collateral is available. Instead, they typically require 3-year operating history & profitability. We were fortunate that most of the equipment we needed came from HP and we were able to get financing from HP Financial Services. But compared to the terms a company with venture funding can get for equipment financing in the USA, our terms were much worse â much higher down payment and very high interest rates. Of course, it was better for us to take the financing than not, but a lot of start-ups I know in India are forced to pay full price upfront. And that is a very poor use of capital.
There are many such examples. On the one hand, there is no question about the long-term prospects of the Indian economy and the excitement of being a part of the transition â from an emerging to a developed economy. At the same time, I would encourage entrepreneurs (and investors) to carefully consider some of these issues when deciding a funding and execution strategy for their particular businesses.
In my opinion, there are many meaty problems to be solved in India, but a lot of them may need home-grown thinking. If you are an early-stage entrepreneur facing this dilemma about the quantum of money you require early on to develop a business in India, give Josh/Mohanjit a call â they understand these issues very well.