The problem of “marketing spend” with Indian technology startups

I have a question which I am trying to get answers for from multiple people, but I am not sure I have the answer yet.

The average US technology startup raises a seed round of about $150K which lasts them 12-18 months. Most Indian startups look to raise a seed round of $250K which lasts them 12 months or less. Why is that?

Let me give you more clarity on both numbers.

The average YC company gets $25K from YC and a no cap convertible for another $125K. Most (>39% in the latest batch apparently) raise money before 18 months of graduating from YC, but many still have the money last 18 months. The average company has 2-3 people in 12-18 months until they have product-market-fit in the US.

The average Indian company gets by further along by bootstrapping and is not much further along (in terms of product-market fit) than the US counterpart. They raise $250K (per pocha below) $200K (1 CR) and that money they claim will last them 12 months. The average Indian product startup has 6-10 people in 12 months.

The money that’s spent is primarily on acquiring customers and payroll.

Even though we have more people in the Indian product startup, we have more-or-less the same payroll costs.

But most startup plans (business plan or execution plan) I see keep aside 40% of their raised capital for “marketing” costs. For customer acquisition – SEO, events, or “viral campaigns”, etc.

So here’s my hypothesis:

1. We need more money because paying customers are *much* harder to get in India than US. Most US startups spend ZERO in marketing (out of pocket costs) for the first 18-36 months from my personal experience.

2. We need more people because most of our startup founders are “generalists” not “specialist and generalists” who cant really code or run a digital marketing campaign or close a sale. They have to “hire” a CTO, CMO and Sales head to do that.

3. We need more money because cost of doing business in India is a lot more than US.

I dont know the answers, but I am very curious what entrepreneurs in India think is the reason product startups need almost twice as much money which lasts 2/3 as less than US counterparts.

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27 thoughts on “The problem of “marketing spend” with Indian technology startups”

  1. Dont really agree on point 3 of high cost of running biz in India.

    My 2 cents – 200k makes a crore in INR (not sure why you saying 250k) & a crore in INR is a good number to have. Guess most of the early stage biz plans are created with the number to start with & putting evrything else in place from there.

  2. Clearly. It is risk-averse nature of Indian Businesses which are not open to change. Essentially, when a start-up goes about sales of a new idea or product, it is much harder to get to the closure than in US where overall work environment is challenging. In US, i have noticed a clear fear of being ‘Left Behind’ if you don’t accept the change. This fear is not there yet in most of India.

    During Hireplug sales, we got max. customers from Bangalore because here people are open to new ideas and much closer to US dynamics of looking a sales guy as a partner in change.

  3. My opinion, Marketing spend is more in Indian start ups as discoverability mechanisms are not yet mature. Start ups are mainstream in US. Mainstream media in India doesn’t cover start ups too much and acceptance is also low. The chance of a US startup getting known to the general public is much higher than an Indian startup.
    Also, the support functions of a startup are also more developed in the US. Setting up a payment gateway, taking care of taxes, registering your company etc are more straightforward whereas in India they are more like full time jobs that have to be done by dedicated people.

  4. Mukund,
    Two possible reasons:
    1) In India, the bar for securing financing of any kind is generally much higher than it is in the US – you are expected to have a team, product in production and even revenues. So, at the time of the funding, these companies are likely to be much further along in the startup lifecycle in terms of team size and other associated expenses relative to the “two guys and an idea” type of team that go into YC.
    2) Also, taking the numbers for YC as being representative of the entire US scene is probably not right – while YC-incubated startups might indeed raise just the $150k that you have mentioned (which would be sufficient for the above-mentioned two guys and an idea type of thing), most other startups tend to raise closer to $500-600k (at least from the anecdotal evidence that I know of and from a cursory look at marketplaces like AngelList).
    Just my 2 c.
    Cheers,
    Sumanth

    1. Quite possible that non-YC companies also follow the Ramen-profitability model but my point was that the ones amongst these who do manage to raise funding raise a lot more than $150k.

      That said, just read about an Indian company that just raised $3.2 million as a seed round without a product in the market, so who knows how each individual case pans out?!

    2. General seed funding number i have observed on TC is around $500k.
      Also, the seed valuations are in the range $3 mn to $7mn and they invest based on team and market. i am talking about the median and not the average case.

      i agree $150k is not equivalent to 10L but $30k is to 10L here. the extra 100k comes from Yuri Milner. Vindo Khosla could do something like this but i guess he doesn’t believe in India. He pitched that if you’ve something interesting come to valley at last product conclave!

  5. Perhaps, since we have less specialists and not every startup has them as founders, the demand-supply problem at a unit level, has to be resolved with money? There’s also a trend I notice when talking to the first set of ‘joiner’s which goes like “If you are raising money, why not pay near-market salary” (Pay me 12 Lakhs and equity, because my EMIs are as dear to me as the idea of joining a startup)

  6. Mukund,

    Congrats for starting off a very relevant conversation.

    I see the ‘high’ spend in marketing and customer acquisition as a consequence. Many startups do not have clarity on their target audience or have too wide a segment. They therefore try and create awareness in a larger market than they possibly need or can handle and that costs money, in fact, tonnes of it. I want to share a live example.

    I have personally seen a start-up in Chennai with a personal finance software product, come out with quarter page ads in The Hindu, TOI (and what else I don’t know!!) to offer a free Trial CD. It costs a bomb to advertise in The Hindu, as you might know. They probably got many requests and perhaps dispatched several too but I understand that their conversion was abysmally low. Almost at the same time, I used to advertise for my Personal Finance Software Product branded “Enrich” in a tamil magazine called Nanayam Vikatan which cost me Rs.8 k per insert and I would to get MANY ORDERS with PAYMENTS in response.

    There could be another reason for such reckless ‘marketing spend’ which is our relationship with OPM (Other People’s Money). Most startups would not blow their personal funds with such gay abandon. Fiduciary responsibility is perhaps missing.

  7. I would second Sumanth’s observation.

    Plus, one more thing: US startups have the luxury of operating in a fairly homogeneous, well developed , HUGE market – as well as much higher ‘early adopter’ population – that is the continental USA and they usually don’t bother about targeting elsewhere giving them awesome focus and speed. Within US, they tend to be quite focussed – rightly so – on a small locality and a particular customer segment to start with.

    In India, the above approach doesn’t work due to fewer early adopters ( businesses or individual buyers). So, they try to target multiple segments, losing focus and diluted efforts spread across.

    Those that have global products ( eg. targeting US market further) from India, struggle due to gap in cultural understanding , costs of having US sales/marketing folks on board etc.

    If two start-ups having same technology and talent, but one from India and another from US; you know who will win. The world is not flat as many people fantasize/advertise. It’s not due to lack of right talent in India, for sure. ” It’s the market stupid”

  8. There is big gap betweeen Seed funding and Series A. I think start ups and seed investors lose focus on the product in order to get ready for the A round. Series A rounds needs sizeable revenue and a good user base.

  9. Exactly to the point.

    I will start with my company example(Typical Indian Startup),What we did with our seed fund.

    1.We are 8 CoFounders!!!!,I dont think any Indian startup,recently started have this many founders.And raised about 75lakh as seed round.

    2.We are confused between Services or Product.But ultimately we wanted to be a Product Company.But one thing was sure,we seriously wanted to make money anything come in our way.

    3.Plenty of business models,plenty of plans,plenty of charts for revenue model….Argg…nothing worked out!!!.We trying almost all business plans,failed in each.

    4.Hired employees vigorously when we were at our company 1year celeberation we had allmost 30 Employees,and 3 Offices…what more need to burn out your seed fund money.

    5.In 8 founders,3 are from marketing background(Zero Technical Knowledge) ,4 are from technical company and myself was studying Engineering that time.One guy was beeing CTO and is continuing to be.So you can guess the team perfomance(Good for nothing!!!)

    6.Attrition rate was like hell,all most all talented employees from this 30 people started to resigning.Seed fund allmost finished within 1year,salary is delayed,we were at the peak of problems

    7.Anyways we are survived all these,after 3years our employee strength was 12(We fired others)…

    Moral of the story

    1.Please try to understand your business model,Service or Product.

    2.Dont hire any single guy more than you need,Scaling of the business doesnt mean that hiring more no of employees!!!.

    3.Try study whether your product or service fit for the industry.

    4.Try not to delay salary,some times employees may even slap the CEO.

    5.If you are running Software company,then your business is software.So in between dont sell tea packets

    Anyways we survived all those,We created world best Educational Related product,Plenty of customers,couple of millions dollars as revenue……What ever still we are believing that we can really avoid those problems.

    *Forgive if any grammatical or spelling mistakes .

  10. Thank you for the great post Mukund.

    My 2 cents..

    1. $150K seems low for a US tech startup to last 12-18 months. It seems the rule of thumb is $10,000 per team member per month. For a team of 4 (2 coders, 1 designer, 1 product manager) that would translate to $40,000K/ month

    2. US Angels, Seed and Early stage investors expect a startup to go through 3 stages, Building the Product, Building Usage, Building Business. The cost of marketing kicks in for a US startup on in the 2nd and 3rd stages. Indian Seed and Early stage investors expect startups to get traction and perhaps revenue in the product building stage. Startups have to start spending early to get traction.

    http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

    3. 380 YC companies seem to have raised much more.. $ 1 Billion in all and even if we take the top 5 out of the list the other 375 have raised $625 Million. http://techcrunch.com/2012/07/25/paul-graham-y-combinator-companies-have-raised-over-1-billion/

    3.1.
    For example, 2011 Summer YC Graduate company Everyme raised $1.5 million pre- launch in October 2011 http://techcrunch.com/2011/10/18/andreessen-horowitz-crunchfund-tencent-back-intelligent-social-address-book-everyme/
    and the next round of $2.5 million in August 2012. http://techcrunch.com/2012/08/31/everyme-tencent/
    They were a 6 people team and it seems they used most of the funds to acquire the 200K + users in 2011- 2012.

  11. I dont have an answer to your question – but as someone who is currently trying to raise seed money, i constantly hear that my marketing budget is way too low. Now i probably know why i hear that.

  12. Could it because startup’s in US raise their first round at an earlier stage of their startup life cycle as compared to Indian startups? i.e. Startups in US are raising their $150k – $200k to build their product and meanwhile find product market fit. Whereas startups in India are expected to have a working prototype, and have some paying customers even before they raise a seed round. So effectively the money they raise is spent on adding more resources and go-to-market activities, which could be lot more expensive than just building a product. It also explains why more money is allocated towards marketing spend. My 2¢.

  13. Mukund, do you have evidence that Indian startups actually spend money that fast? Or is it based on their projections?

    Perhaps they take into account that it will take 6m to raise the 200K [how long does it take in the valley?], and they will make it last for 18-24m anyway, but need to say 200K in 12m because thats what investors are looking for?

    I know in my prev startups that the money went a long way. But say that to investors and they think you’re ‘too slow growing’.

    So pump things up to 200K in 12m, and show a higher ramp up, and get investors interested.

  14. Will talk about my startup HashCube. Our runway with seed money is 24 months and not 12 months. I also disagree with point 2. We have 8 engineers – some of these engineers handle marketing, some of them run analytics. I can’t talk about other startups – but we don’t resemble the indian startup example. Our engineer who runs marketing does a much better job that what a marketing firm would do for us.

  15. Great post, Mohan. Another insight that other commentators just haven’t seen.

    Having lived in both the Valley and India’s entrepreneurial scene, I think there’s two things colliding here:

    1) US startups raise seed round earlier in life cycle, before MVP, before launch. Indian startups do it after launch, after paying customers. Easy to see why they try to raise more.

    2) True, that marketing costs are higher in India, where free/viral marketing doesn’t work to get a large enough early adopter base. But still does not matter as much as point 1.

    Major conclusion is this: Indian startups are stuck in a bad spot, where getting users costs more per user/customer than the US, but each user/customer is worth less. Just compare average cart size of Flipkart to Amazon, or CPMs for ads in India vs US. On a monetary level, users in India are worth a fraction of their counterparts, but Indian startups are paying well above what US startups do to acquire them. Does it make sense?

    I don’t know the complete answer, but one thing that is cear is that a media model in India does not work (i.e. a startup that’s trying to get “eyeballs” and monetize with advertising). Getting users costs too much, each eyeball not worth enough. I don’t know how any of those budding social networks/app makers looking at the Indian market can get themselves out of that one

  16. I know that in India, getting a seed fund with a product idea which is not market ready and already having paid customer is very difficult. Also, Indian customers are not ready to pay. Even big corporate clients tend to be free loader. We have a product company and many smaller companies in US are willing to pay full price for the value that we bring in. With our “EEE” (Easter Economy Rate), with same quality and same product support, we hardly have customers we can count on fingers. Even very big corporate tend to expect a favor (free product) to honor us a privilege to get ‘associated’ with the name!

    Other things that is rightly pointed out is the acquisition cost/customer. Now blaming Indian market is one part of it. Rather try to think back why it is so high? Is it socio-economic culture in India a bottle neck? In a lot of sense, according to me, it is! With the assumption, that most of us are talking about technology start-up, most people are still OK to adapt to a bad product over spending a bit for a better product. Though things will be changing but still few more years! Expecting similar or even half as much cost on customer acquisition in India is far from true. Any expecting Indian customers to pay nearly equal to what US customers pay is something I don’t expect happening any time soon. We may have millions of mobile phones and millions computers, but what is the average – recurring expense for these technology in India in terms of data-plan, internet and paid apps/software? Can we push that envelope?

    Another thing that I have seen very common in Indian market is that ‘meeting’ some one personally has such a high impact on sales compared to US. Video chat, phone call, emails, video demos does not work as well to kick start the process. To meet remote and far ‘prospective’ clients to just introduce yourself and your product compounds the time-cost factor too!

    1. @Ritesh, Absolutely agree on the ‘willingness to pay’ and ‘meeting-in-person’ to close sales in India. In our experience, for Indian market the most effective way reach out is to in person meetings and that is very expensive especially if your prospect base is across the country.

  17. Mukund,
    Great conversation kicked off here – reminds me of the Zen koan (or maybe Upanishadic story), where the core premise itself is questioned. Before asking these questions – are the assertions you’ve made especially in the Indian context true from primarily software/web/IT startups? I’m assume this model does not apply to F&B, power electronics, ticketing or other “atom-based” businesses (as opposed to the bit-based IT/software). Now for the questions:

    a] The assertion “Most Indian startups look to raise a seed round of $250K which lasts them 12 months or less. Why is that?” – is this even true? Most angel rounds seem less than this nearer $100-120K. And is this because of the reason @sumanth speaks of – that it takes more energy here

    b] Isn’t it counter-intuitive that early stage companies, especially if they are software or SaaS based would at all require “serious” marketing dollars – as customer acquisition and product/market fit stage folks are probably (or hopefully) doing guerrilla marketing – or has that gone out of vogue?

    c] I suspect the biggest reason folks go for the Rs. 1Crore /250K$ seems to be that we dilute anyway the same amount so might as well take more? Of course having taken for this reason, there’s some backfitting to “marketing” dollars

    d] In another aside, most YC companies seem hardly tech (sure they involve software & coders) but usually seem to be solving some lifestyle problem — and most real tech firms in the Indian context (power electronics, embedded systems, healthcare, alt energy) seem to either struggle for even the angel/friends+family let alone a seed/series A

    e] also the recent read (in a mailer from IAN) that I saw that they did 38 deals (so far) — likely as much as you and Ashok Vittal alone have done — I wonder how much of this conversation itself is about a very small group of startups and therefore how meaningful any comparisons to YC cohorts

    Keep the flame burning!

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