Category Archives: Angel investing

The “two speed” state of Indian market adoption

I have been watching / following 7 startups (3 in eCommerce, 2 in SaaS and 2 in consumer Internet) that target the Indian market over the last 14-18 months. All the entrepreneurs approached me with an intent to get seed funding so I had a chance to go over their traction, progress and future projections.

I have formulated a theory of market adoption of products / high technology products in India which I have tested with these and other companies and also with several venture investors.

For background please read “Diffusion of innovations” by Everett Rogers and Crossing the chasm by Geoffrey Moore. Don’t worry, I have only linked to their Wikipedia page, so it wont cost you anything.

Diffusion of innovations

At the top of the consumption (and monthly income) pyramid in India are what economists and marketing people call the SEC A and B class who have enough disposable income to spend on innovative new products. For the purposes of this blog post I am going to use 10 Mill (SEC A) + 20 Million (SEC B) households as the target.

The Innovators (less than 1 % of the population or 12 Million individuals) in India (entrepreneurs mostly) who conceive and develop these products for the Indian market and the early adopters (less than 5% of population or approx 60 Million individuals) together make up the entire “early adopter” category. Unfortunately less than 30% of them have both the interest, and the desire to be early adopters of technology.

Indian markets do not follow traditional diffusion characteristics when first innovators buy, then early adopters, then the early majority, and then the late majority and finally the laggards.

My theory on how diffusion of innovations works in the Indian context is as follows.

In India there are only 2 market adopters – those that are early and those that are not.

Abhijeet calls it the “low hanging fruit” and then everyone else.

So lets look at the implications of this observation / theory.

So what does that mean for entrepreneurs?

You will see a “headfake” of adoption and then a taper off.

E.g. The B2B SaaS company will quickly (within 3-6 months) get 10+ customers and over 30 in the pipeline, only to find the next 50 and the next 100 or the next 1000 are either non-existent or will come in 3-6 years.

E.g. The eCommerce company will see 1 -3 Million “registered” users and 1000’s of transactions within 12 months and find that the next 1000, 5000 and 10,000 transactions take 4-5 times as long.

E.g. You will see an initial 20,000 users for your mobile application for social TV extremely quick (within 3-6 months) and the next 50,000 or 100,000 take you the next 3-6 years.

I have seen these numbers play out again and again to know there are exceptions but those are rare.

These numbers are also dramatically different than those of companies targeting US or other markets.

When should you (as the entrepreneur) raise money?

You should raise it at the peak of inflated expectations. I.e. After you have some traction, which the investors think will be long lasting, steady and rapid. You will get the best valuation for the company at that time. Once your investor has some “skin in the game”, they are in to get their money back and then some, so they will do all it takes to make you successful.


Trough of disillusionment

What does this mean for investors?

The best time to invest is either very early (starting to build a company, idea and team stage) OR at the trough of disillusionment stage.

If they are early, you will get the bump from the initial adoption, so the value of the company increases many fold before the next round (which you should help the company raise at the peak of inflated expectations.

If you are post the trough, then you benefit from a growth stage.

What makes you go over the trough to the slope of enlightenment?

In my experience:


Nothing else.

You may think I am being facetious, but I am serious.

This may be a cultural thing, but in India, over time if you have the ability, patience and willingness to survive, you will reach the plateau of productivity.

Anecdotal evidence over several sales transactions also suggests to me that once people in India see you around for 2-3 years, they think “Okay, this company / person is for real. We should give her / the product a shot”.

Big thanks to Abhijeet and Shekhar for helping me with their data points to reinforce my theory.

The default option for entrepreneurs should be to not raise money

There’s a very interesting piece by Felix Salmon on Wired that has some very interesting nuggets and takeaways for entrepreneurs. I am highlighting the most important parts, but the entire article is worth a read.

This goes back to my original thesis that the entrepreneurs should bootstrap as much as possible because only 16% of companies in the Inc. 500 list from 1997 – 2007 actually raised VC money (read the Wired piece). Rest were self funded. Out side of technology that number is lower.

Going public might be good for a company’s investors and employees, but it is usually bad for the company itself. It forces CEOs to focus on short-term stock fluctuations at the expense of long-term growth. It wrests control from the founders and gives it to thousands of faceless shareholders.

To put it another way, the VC model is based on creating wealth for investors, not on building successful businesses.

(2011) Last year 429 VC-backed companies were acquired, while 52 went public

In 2009 Paul Kedrosky, a Kauffman Foundation senior fellow and venture capitalist, looked at the Inc. 500 list of the fastest-growing companies in the US for every year between 1997 and 2007—a period that includes the VC boom of 1999-2000. He found about 900 companies in all, of which only 16 percent had VC backing.


5 traits of a great angel investor

Over a startup event Bangalore a few weeks ago, I had the chance to talk to over 50 budding entrepreneurs about the seed funding scenario in India. It is well known that there is a lot more demand for investments at the seed stage than there is supply. The number of angel investors in India is estimated around 500 (informal estimate) and the number of active investors is less than 50. The number of new technology companies alone in India (software & services) total over 500 every year. I have personally talked to several high net-worth individuals (HNI) about looking at investing in new entrepreneurs and believe it will be only a matter of time (2-4 years) before investing at the seed stage becomes more prevalent.

The top 3 reasons for not investing, I hear from most HNI is the lack of exits, better or equal returns at lower risk with other asset classes or their desire to “invest in their own business than someone else’s”.

What will increase the number of angel investors in India is simple – more people making big money (I can easily see another 15-20 employees of Flipkart, Snapdeal and InMobi becoming angel investors in 2-3 years) and specifically more entrepreneurs themselves having exists.

So if you are a HNI and are looking to help young entrepreneurs become successful, what else would make you an ideal angel investor that entrepreneurs seek out for money?

  1. Relevant experience and knowledge of the space that entrepreneurs are looking to build companies in. This is the biggest value add you can provide, more than the money. If you have built a company in the same space, the value that you bring to the table is a lot more than any “dumb” money. In fact one could argue that your experiences are nearly worth twice the money you put into the startup.
  2. Network and connections. Great angel investors don’t just write a check and disappear. Once you put your money in, there’s a responsibility to commit to the success of the company. The bevy of lawyers, accountants, bankers, marketers and other connections you have made in your career are worth their weight in gold. That’s an amazingly attractive incentive for any entrepreneur to rather take money from you than other investors.
  3. Willingness to learn as much as you are willing to teach. Being an angel investor is more a lesson in learning than in teaching. I am pleasantly surprised with the insights I hear on hiring techniques, investor / board management and online marketing from young startup founders.
  4. Ability to provide time and empathy during the tough times. Every startup goes through a sine-curve of emotions. In fact if you have been an entrepreneur you know the experience well. Besides requiring a flash report on sales, hiring plan, product strategy and other company related metrics, the angel investor has to be available to his entrepreneurs. This does not mean having to spend 10 hours a week on the startup, but being available for that call or having a cup of coffee with the entrepreneur when you have a moment helps go a long way.
  5. Long range thinking. Angel investing is certainly not for the faint of heart. Market timing rarely works so most good investors I know invest the same amount every year for 5-10 years before they are able to spot patterns and obtain exits. The thrills of helping young entrepreneurs succeed though, more than makes up for the short term uncertainty.