Last month I had the pleasure of chaperoning the "J" in DFJ, Steve Jurvetson, around India. This was his first trip to India, and even though we were in three fender benders in three days (in three different cities with three different types of vehicles a 2 wheeler, an autorickshaw and a tempo), Steve took it all in stride and was more interested in taking photos of the drama around various mishaps than be worried about the condition of the car or our safety. In any case, during the course of the five-city, five-day whirlwind tour, one of the more interesting events was a CEO summit where about a dozen of our India portfolio CEOs gathered for a night of straight talk and sharing the good, the bad and the ugly.
What became completely clear during that five hour thoroughly enjoyable interaction was how difficult it is to start and scale a startup, especially in India. That session was a trigger for me to put this piece together. I have stitched together actual situations that have arisen within just the DFJ portfolio, and collectively are a pretty good proxy for what makes building businesses in India extremely non-trivial. My guess is that all of my brethren in the VC industry will have very similar stories to tell. Here is a list of top few "what the fudge factor" moments that startup CEOs had to deal with:
Ghost employees: one of our companies had one of the regional managers siphoning cash using "ghost" employees. In other words, his family members were being listed as employees but didn't actually work for the company. As soon as that was discovered, obviously the manager was booted out. The challenge was that most of the ghost employees were among the least paid in a fairly large company, which had grown in size, so the fact that there wasn't a meaningful cash impact made it more tricky than usual to determine the scam. Lesson learned: Do a headcount audit via a surprise visit and conduct a head-count to make sure the above doesn't happen.
When the cops show up unannounced: Well, another company had a raid by the local cops claiming that one of the employees was a murder suspect. Yes, you heard it right. Well, it turns out the employee had bought a second-hand phone that belonged to a murder victim. The matter was put to rest after a short investigation, but since the 2nd best selling phone in the country is a "second hand Nokia", this situation may not be as strange or as anomalous as you might imagine. Lesson learned: I guess each company now needs to do not only a background check on the prospective employee, but also on the gadgets that he/she might be carrying.
Ahh the corruption, but with a twist: Given the changing scam headlines on a daily basis, I don't need to give any gyan on the level or corruption or impropriety that exists in India. But there was one particular incident that really grabbed my attention. One of our companies kept getting a call from a retired IAS officer harassing the ceo to allow him to visit the company's facility. The ceo figured out that the IAS officer was an employee of a competitor. After refusing multiple times, the ceo then received a call from some "additional, somewhat additional, pseudo additional secretary, principal secretary or undersecretary" at the state level threatening to revoke certain licenses and permits if the ceo did not give access to the competitors' spy. This is insane, but the ceo actually had no choice but to finally give in. The IAS officer came, saw the facilities and left. The reality is that there is nothing even remotely proprietary that he gleaned from his forced visit, but the point that was driven home for me was how corruption continues to hurt businesses, especially small ones in completely unexpected ways. Lesson learned: Not sure. Perhaps fight the system harder, and make sure that as an entrepreneur you find a clean bureaucrat high enough in the organization to care and be able to make a difference.
Reality-TV show material: Well, this one is as entertaining as it is bizarre. A sales manager (male) for one of our companies in Delhi ended up eloping with another sales executive (female) from Kolkata. Much to the company ceo's surprise, the girls parents came with local cops to the Delhi office and threatened the branch employees unless they divulged the whereabouts of the couple. The reality was that no one in the office actually knew, but this love triangle of sorts created a total mess for both Delhi and Kolkata offices for over a week. With a very young workforce, I also imagine that these sorts of situations are more common than we may think, but the cross-India elope was different, to say the least. Lesson learned: Have employees sign a no-eloping policy.
Contract, what contract?: Know thy customer is the mantra that entrepreneurs and MBAs alike have drilled into their heads. But India presents a different set of challenges to the extremely "high expectation" customer. For example, the concept of subscription is a foreign one in India. Let's take Seventymm for example, which is another one of DFJ's portfolio companies, and is the Bollywood entertainment/DVD rental business. The irony with 70mm and many other companies that require physical delivery of products is that typically the person who is the physical interface of the company to the customer (the delivery boy in 70mm's case) is usually one of the least paid employees in the company, yet has to represent the customer service centric DNA that startups often embrace. There have been situations where the delivery boy would go on a scooter to a subscriber to get the monthly subscription payment (since cash is still the primary payment mechanism in India), only to be told by the lady of the house (in a couple of cases, with a shoe in her hand) that she is not going to pay since she was on vacation last month and did not actually watch a movie. The fact that a subscription contract was signed is secondary. BTW, this concept just as easily extends to corporate partners and customers as well. Lesson learned: Go with an annual or a multi-year subscription.
When the sales guys need bodyguards: a salesperson for one of the companies actually got locked up for a day by a customer when the customer did not receive the product in 48 hours from the time the order was placed. The delay was something completely out of the company's control, since they relied on a courier service to deliver to this tier 3 town, and had clearly indicated in their communication to the customer that the delivery could take 3-4 days, rather than the typical 48 hours which is the usual delivery time to a tier 1 metro. Another customer threatened to take the salesperson's (different salesperson) motorcycle if the product did not arrive in time.
Regulatory unpredictability: One of the toughest challenges in India is the constantly changing regulatory environment, irrespective of which sector you may be in. I will highlight a couple of recent regulations which can have devastating impact on entire industries, but I am not sure if the regulators thoroughly either understand or analyze the potentially unintended consequences. One recent regulation has to do with the ban on businesses or service providers to be able to send SMS's to those who are on the DND list. In principle, I have absolutely no issues with it, given that I hate spam (telephonic, sms or otherwise). But there are companies, like mginger in DFJ's case, where consumers actually "opt in" to receive promotional/coupon sms's. Such is the case in many other businesses also. But in this case, even though the consumer has opted in (in other words, has clearly given the permission to mginger), as long as he/she is on the DND list, mginger cannot sms them. As a result, many companies, including Facebook, and several retailers are now asking their users to remove themselves from the DND directory, resulting a completely opposite effect than the regulation actually intended. Another example or unintentional consequence is the mandate of using a One Time Password (OTP) for every mobile/remote transaction. Rather than removing friction, RBI has thrown molasses on the road having a potentially devastating impact on mobile commerce as a whole. Lesson learned: expect the unexpected, and hope to be nimble enough to deal with the "flying regulatory spanners".
The list could go on and on, but the idea was to provide a glimpse of what startups in India have to deal with on a day to day basis, in addition to the usual challenges of fund raising, hiring/retaining, worrying about the competition, business model refinement etc etc. The above examples are often difficult for investors in the US or Europe to grasp or even comprehend. But the age old saying, "that which does not kill you, makes you stronger" clearly applies to businesses in India. Entrepreneurs here do expect the unexpected, and are not as phased by the above as investors often are. My appreciation for entrepreneurs here has been elevated in the three years that I have been on the ground in India, and my belief that "if you can create a successful business in India, you can do virtually anywhere in the world" has never been more strongly cemented.