1. What exactly are you looking for?

• We find that this is often the most pressing question when an organization is so large and distributed. Some of our partners, like P&G and Mars, have a briefing system whereby each business unit submits areas they are interested in and how exactly they want to tackle it. Other partners hold quarterly C-Level meetings where they identify the weaknesses of the business and how startups could potentially solve that. Startups do not operate like corporations; they have short lifelines and time cannot be wasted with a corporation that is unsure of their needs.

2. Which business units (BU) need to get involved/what is my buy in needed?*

• Knowing prior which business units need to get involved streamlines the pilot-process after successful meetings with a startup. We recommend you create “sprints for innovation”, focusing on a specific pinging point in collaboration with a specific business unit. This way the innovation team and the BU can source collaboratively, rather than blindsiding the other in siloed efforts.

3. Does the startup need personably identifiable information and/or payments in anyway?

• Compliance teams are generally very strict on technology in this space. Understanding at a high level what the parameters of the compliance teams’ diligence solves a bunch of later problems.

4. How quick will my time be and do I need to shorten various documentation?

• A 50+ page Master Services Agreement is not something a startup can easily digest. Shortening the vendor diligence and keeping documentation light yet thorough ensures a valuable relationship.

5. What is our pilot process?

• Laying out the parameters of a pilot clearly to a startup makes sure all resources are available from day one. Some of our partners have a zero-pay pilot process, where they do not pay for a pilot and only test for 2 weeks to determine if it is something to deploy in a larger fashion.

6. Does it actually integrate? Every start up says they do.

• Startups often say they integrate with existing enterprise infrastructure yet at time of implementation a whole host of problems can occur. An understanding of how custom your ERP or CRM or other enterprise infrastructure is like can save a lot of time at deployment.

7. What is our post-pilot strategy? Map it out.

• Enterprise startups know all too well of POC Hell. It’s a time corporations decide to test out a startup’s technology but have no clear post-pilot strategy. Certain corporations are even known by startups for actively testing new technology but never deploying fully. You don’t want to be on this blacklist not only for a negative reputation but also for stagnating on innovation. A clear direction for post-pilot needs to come from the C-level and executed via various business units; innovation teams need buy-in and teamwork for effectiveness.

TLDR: Communicate with business units on actual needs, collaborate in targeted efforts, have a clear post-pilot strategy. Also, transparency and quickness is the name of the game!

The next day the four of us cramped into a small taxi and took our humble chariot to the address on the coupon. Our taxi driver dropped us off at the location, a shanty airplane hangar that had a bunch of holes all throughout its aluminum panels. Nothing says safe like an airplane hangar that just recently had a shootout. Inside is this small, all-white propeller plane with what seemed to be Maverick and Goose from Top Gun hanging out outside. Turns out the boys were our pilots and there was no reason to be afraid, they have “years of experience”.

At this point in the story, you’re probably wondering why we didn’t pay attention to all the red flags: ghetto hangar, young pilots, small plane. No worries, we all noticed but the deal was no refunds and wasting money is not in the Parakkattu ethos. We hopped in and figured nothing could go wrong.

About 15 minutes into flight, my brother and mom are in deep sleep, like deep REM cycle, sheep jumping over a fence kind. While they are unconscious, the rest of us feel some slight turbulence, initially dismissing it. Then the plane starts shaking quite erratically to the left and right. At this point, I’m starting to get scared and looking at my dad, who seems to oddly be enjoying it. Before I can confront this odd behavior, the plane drops what felt like a few hundred feet. Everyone on the flight gasps and Maverick gives us all a thumbs up, without saying another word. Then the plane drops again, this time far longer. At this point, I’m breathing heavily, perspiring, and thinking about how this is how it all ends. I look to my dad for some comfort and he immediately perceives my distress. He holds my hand tightly and stares seriously at me for a few seconds before his face becomes soft. “Dad, we’re going to die!” I finally blurt out. He laughs, looks away briefly, and then with a renewed focus, he says in a commanding voice “Kevin mon (son), scared people always die.” There it is folks. That’s the fatherly life advice you need at that exact moment. Rephrased it’s “Son, I know you’re scared of death; don’t worry, the plane may or may not crash but your scared ass will probably die anyway.”

It’s been almost 10 years since this moment but the advice never left my memory. My dad and I didn’t always have the best relationship growing up to say the least. Yet as much as I try to forget certain memories, it always creeps up. For instance, the last few weeks at work were increasingly stressful with a bunch of projects due combined with some untimely yet mandatory international travel. It was a lonely experience to the point where I certainly fantasized a few times about quitting it all. These are the times my critical father comes to memory. His voice oddly keeps me focused, demanding the highest quality work in the least amount of time. The world didn’t end and I frankly worked less, accepting a lack of control on certain matters. Life will always be stressful and tough; the anxiety of what-if will ruin everything in its path. Sometimes you just let go and let the universe decide. I don’t say this enough but thank you dad for making me realize that many years later.

The Nehru Legacy: State-Owned Enterprises

When India received its independence from Great Britain in 1947, the country was primarily agricultural focused with a weak industrial base. Poverty and sickness ran rampant and the population was largely illiterate[5]. In hopes of making India an industrial powerhouse, Jawaharlal Nehru, the nation’s first prime minister, began a tradition of five year plans (FYPs) to organize and facilitate India’s growth. Amongst the first FYPs, were a call by the Nehru administration for a system of State-Owned Enterprises (SOEs), which gave the Indian government primary control of a variety of industries. The Nehru administration modeled its economic policy after seeing the rise of the Soviet Union and the rapid growth of China, two countries that considered public ownership of major corporations a foundation of economic policy. However, the Indian economic policy differed in that Indian SOEs was meant as a catalyst for a mixed economy; SOEs would be in support industries, like energy and road-building, to provide the infrastructure for privately-owned businesses to operate. Anemic growth roughly below 5% during these years spurred the Indian government to further take over industries, such as social services, transport, communication, textiles, and others.

While the use of SOEs did jumpstart heavy industry, it proved to be counterintuitive: the rampant use of SOEs formed monopolies that made it difficult for privately owned enterprises to compete against. In Figure 1 on the next page, SOEs in all the major industries controlled typically over 30% of that industry’s GDP contribution until the early 2000s. Supporters of SOEs argue that they serve as the superstructure of the Indian economy, providing much needed services at an affordable price to all of India’s citizens[6]. Critics argue that SOEs and Nehru’s “License Raj”, an elaborate system of licenses and red tape required to run a business in the country between 1940 and 1990[7], was the primary cause of near tepid growth during this era. Further evidence suggests that the License Raj and its complexity led to a rise in corruption and widespread inefficiency as budding businesses look to penetrate the closed-off Indian economy. To put the License Raj into context, Narayana Murthy of Infosys Technologies, a business technology consulting company, said that during this era to receive the license to import one computer worth $1500, it would take anywhere from 12 to 24 months and about 50 visits to the nation’s capital, Delhi[8]

The controlled economy approach ultimately doomed Indians to a sluggish rate of growth of 1.3% per capita and year between 1950 and 1990[9]. By 1991, a crisis emerged as the Indian government was near bankruptcy for the 5th time. Facing a slew of balance of payments problems and increasing deficit, the Indian government was force to pledge 67 tons of national gold reserves as collateral for an emergency $2.2 billion loan from the International Monetary Fund[10]. Seeing government as an impediment to India’s growth potential, then finance minister Dr. Manmohan Singh initiated a broad set of measures to encourage private enterprises and move India to a more market-oriented generation. This historic economic policy would pave the way for India as it known today, growth on average of about 7% per year and an economy that is nearly quadrupled in size since 1991[11].

Narendra Modi

Indians of the modern era are hardly cheering. In 2013, GDP had slowed to below 5 percent while inflation rocketed into double digits[12]. Corruption runs rampant in all level of government and existing infrastructure, including roads and adequate electricity supply, crumble[13]. Discontent with the situation, the Indian people elected Narendra Modi in 2014 as Prime Minister, the highest position within Indian Parliament. A leader of the Bharatiya Janata Party (BJP), Modi was the Chief Minister of Gujarat from 2001 to 2014. Under his leadership in Gujarat, the Indian state’s GDP grew by 10% a year and the state’s economy nearly tripled, faster than India as a whole[14]. Modi touted such accomplishments and campaigned on a platform promising to modernize the Indian economy, lessen the existing red tape, and spur job growth[15].

Since his election, Prime Minister Modi has had a mixed record in accomplishing such goals. He has been able to deregulate diesel prices[16], make strides with further reforming the inefficient License Raj[17], and increase Foreign Direct Investment (FDI) in railway infrastructure and the defense sector to record levels[18]. He strives to make India a manufacturing mecca, with his “Make in India” program and has attracted $400 billion-plus worth of overseas investment commitments[19]. At the same time, he has been unable to make major changes to the nation’s land purchasing policies and has repeatedly faced stiff opposition to a good and services tax that hopes to create a single market among India’s 1.3 billion people. His government has maintained a retroactive tax policy called the Minimum Alternative Tax (MAT), “which officials say leads to a 20 percent levy on capital gains by foreign funds”[20]. Currently, there is $6.5 billion requested by the tax authorities[21], a dissuading policy for any potentially interested multinational corporations. Despite the limitations of the MAT tax on capital gains, foreign direct investment (FDI) is surpassing past generations. In fact, gross FDI inflows from August 2014 to November 2015 amounted to $62.6 billion, 31% higher than $47.6 billion in the preceding 15 months (Figure 2)[22]. A sizeable amount of this FDI is estimated to have gone to the manufacturing sector, within consumer packaging goods and food others, among others. The other larger portion is coming from private equity and venture capital investment firms, who seek to capitalize on India’s explosive growth and pro-business government.

Venture Capital and Private Equity

Unlike other money managers, venture capital and private equity investors allocate capital into privately-owned businesses typically in exchange for a percentage of equity ownership. Both firms ideally “exit” the investment, or make their capital gains, either through an initial public offering, where shares are sold to the public or through a merger/acquisition (M&A), where the investor’s ownership is bought by the acquiring party. Venture Capital firms (VCs) are types of private equity firms but VCs focus on early stage firms while more established and mature companies are typically invested by private equity funds. In markets where public offerings are not as prevalent as mature markets, private investors rely largely on M&A activity, which has grown 6.1% year on year in Q3 2015 for India[23]. Moreover, private investors in India are not similar to US investors, where “private equity historically has been known for loading up companies with debt and re-engineering them finally”. Rather, Indian PE investors are focused “all about growth” says Amit Dixit, co-head of Blackstone’s Indian private equity operations[24].

Given the increase in M&A activity, India’s population size of an estimated 1.3 billion people, and a rising middle class, private equity firms are increasingly focusing on consumer technology companies. The consumer technology sectors includes multiple segments such as e-commerce, social media services, as well as smart access and fitness devices. This sector also comprises of enablers of such services, “which aid the functioning of a part (or parts) of the operating model; examples include providers of payment media, e/m-advertisers, application developers, analytics services and logistics and delivery services.” [25] The rapid investment in this particular sector is largely fueled by the continued rise of Internet penetration. Specifically, mobile Internet is driving a significant portion of this continued growth as more and more companies rely on the growing Indian telecommunications network. With mobile usage increasing and the popularity of the smartphone, application development is also witnessing high growth. This belief in the sector’s potential has led to PE and VC investments contributing approximately 31% to overall deal value and accounting for approximately 35% of overall deal volume in this sector[26].

However, as more and more investment companies funnel cash into the consumer technology sector, some are worried of inflated company valuations. For example, large consumer technology companies, including Flipkart, Snapdeal, and Housing.com have raised multiple rounds of funding and saw a steep surge in valuation. Most notably, Flipkart saw its valuation increase by more than fivefold in 2014, from $2 billion in May to $11 billion in December. While 80% of PE funds surveyed in the cited Bain Report believed that the consumer technology sector valuations are currently high, many believe these valuations are expected to rise given the high growth trajectory of the sector as a whole. High valuations limit the number of acquirers who can afford to acquire the company. Should the company decide to go public, the share price could vastly be reduced as the public market scrutinizes the company. In both situations, the private equity investor, who invested at a high valuation, is bound for meager or non-existent returns. Moreover, as the company-at-large begins to fail, employees are laid off and news of financial troubles reverberates throughout the sector, sometimes leading to a surge of disinvestment in the sector as a whole.

A potential cause for high valuations may also be due to inexperienced investors who value Indian consumer technology companies similar to those in mature markets or even other emerging markets like China. There a few factors a potential investor must think about before valuing an Indian consumer technology company including:

1. Lack of Credit Card Penetration — According to Anu Hariharan, a partner within the deal and research team at Andreessen Horowitz, a venture capital firm, credit card penetration within India is around a dismal 2% of the population[27]. This poses a major challenge for multinational e-commerce companies who rely on credit card transactions as the major form of payment.

2. Cash on Delivery Payment — Given that most individuals do not own a credit card, Indian e-commerce companies like Flipkart have adopted a cash-on-delivery model whereby consumers pay the delivery person for the goods purchased. This adds another layer to an already complex Indian e-commerce supply chain, as companies operating in this space have to regulate the collection and proper handling of cash transactions. This factor is a large differentiator between Indian e-commerce and Chinese e-commerce, whereby the latter has seen a surge in mobile credit card payment, primarily through the Chinese messaging service WeChat. [28]

3. Logistics Infrastructure — From chaos on local roads due to lack of appreciation for traffic laws to dismal rail and waterway infrastructure, India has a major logistics problem[29]. This poses challenges for an e-commerce company that does not have reliable go-to brands for local shipping such as UPS and USPS found in the United States. Many e-commerce companies have a shipping web, comprised of a mix of air travel, interstate travel, and local couriers.

4. Minimum Alternative Tax (MAT) — As mentioned earlier, foreign multinational companies must be aware that all capital gains made by such companies face a 20% levy.

5. Corruption — A recent Economist poll found that 96% of Indians said corruption was holding India back with 92% believing corruption has gotten worse in the last five years[30]. Corruption is both implicitly related to consumer technology companies, whereby improper government dealings leads to cash meant for infrastructure being pocketed and explicitly, where packages undergoing inter-state travel face unnecessary scrutiny. Foreign investors may not understand the prevalence of corruption in inhibiting the growth of consumer technology, blindly investing based on a huge total addressable market and increased Internet penetration. However, without sound government policies, the economy will always suffer.

6. Emerging Markets Have Lower Capital Market Appetite — India saw only 10 companies go public in fiscal year 2013 raising, raising roughly $1B. Compared to the 220 IPOs raising $55B in US in calendar year 2013, this is paltry. These markets will need to develop for IPOs to be seen as a viable exit path.

While investing in Indian consumer technology holds it strong advantages, potential foreign investors should most likely partner with Indian nationals, who have a better understanding of the local economy’s challenges. This in itself may fuel further corruption as it is easier for an investor to partner with a politician and be allowed to break laws rather than change the rules entirely. However, an investor who seeks for both greater financial reward and further business opportunities should opt to change the existing laws in India to make it an anti-corrupt nation whereby consumers feel comfortable adopting credit cards and purchasing goods online.

Impact Investing

Though not heavily covered in mainstream media, impact investing has surged in India for the past decade. Impact investments are investments made into companies and organizations “with the intention to generate social and environmental impact alongside a financial return”[31]. From a paltry $1.17mm in investments in 2000 to $250mm per annum since 2011, impact investments are taking a total $1.6 billion spread over 220 enterprises[32]. While this is only a fraction of total FDI, impact investing is crucial for India where an estimated 73% of Figure 3: the 300 million households live in villages, often without access to the basic amenities of a modern industrial society. Foreign venture capital funds with this investment thesis largely focus on providing fundamental services: banking, electricity, healthcare, and others. For example, Khosla Impact, the impact investing arm of Vinod Khosla’s venture capital firm is invested in a company called EyeNetra, which provides an add-on (Figure 3) to mobile devices to perform vision tests, bringing the services of an ophthalmologist to local communities. Companies with such a purpose are the key to raising Indians out of poverty. While consumer technology and the rapid rise of India’s middle class are notable, there needs to be more focus on India’s rural areas. Arguably, this is the area with the most growth opportunity when looking at India as an investment opportunity. In a world where there are millions of people who do not have access to basic electricity and clean water, an investor who understands the local landscape can have sizeable financial gains while still providing a social purpose.

However, while impact investing holds arguably the largest financial gains out of all potential investment opportunities, it is one of most challenging investment styles. In addition to the challenges potential consumer technology investors must consider, a potential impact investor must also consider:

1. Longer Investment Timeline — Companies that operate with a social purpose typically need to build an entire supportive ecosystem of infrastructure to develop and grow[33]. Investors will have a strong advantage if they themselves are former entrepreneurs who have operated in the same environment as they will understand best practices to shorten this timeline.

2. Exits by Shareholders Are Not Necessarily Great for Impact Investors — In the large commercial investing world, a shareholder’s exit is seen as a sign that a company is able to self-sustain. However, in a tumultuous market like India, where the goal is to build sustainable businesses, exits by shareholders can be disastrous for a company.

3. Holding Company Structures — Given the challenges of an exit, an investor may seek to receive long-term dividends in the form of a management fee from an invested company. This provides the investor with a sustainable return that he/she can return to limited partners.

Given these challenges, only a small subset of foreign investors are both capable and willing to spend time investing in Indian social purpose driven companies.

Conclusion

A prospective investor in India must not be blinded by the growth rates and fanfare over the Indian economy; one who thrives in this landscape has expert knowledge of the local infrastructure and government. Investors who feel they match such a description should strongly consider the impact market as a viable opportunity. With 70% of Indians living in rural communities, there needs to be an emphasis on this segment on the economy. One who invests in such regions needs to be patient and creative; impact investing is not for those who seek to be uninvolved.

As a nation, India still has a long way to reach a level of economic maturity. The Indian government should increase the pace and scope of economic liberalization, further opening Indian markets to foreign investment.[34] In addition, there needs to be a focus on developing infrastructure, including rails, highways, and maritime transport. Mobility at this scale can only be made possible by the steadfast cooperation of the Indian government in conjunction with local municipalities. A system of checks and balances needs to be further enforced, eliminating corruption and criminalizing those that seek to bend the law for personal gain. Furthermore, the Indian multinationals and foreign investors should see the Indian impact market as a viable business opportunity. A growth in this area will only lead to a better, more prosperous nation. India is a land with a rich heritage and profound culture; improvements in the political climate and investor sentiment can undoubtedly make India a leading nation of tomorrow.

Sources