(Successful consumer Internet companies often start with dominating what looks like a niche market, but then expand their market repeatedly. For successful Indian startups, this often happens much sooner in the lifecycle than say Silicon Valley startups. How should founders and investors use this to inform their decisions?)
Take a look at the list of startups that are closing angel financing on the leading fundraising platforms this month, and chances are, that many would appear to be focused on rather niche markets. Are we reaching a point where a bulk of the mobile and Internet value creation is done, and only small problems are left for companies to solve? Are startup teams thinking big enough?
Flipkart CEO Sachin Bansal recently had an engaging Twitter conversation with several early stage investors and startup enthusiasts revisiting the classic debate of whether investors prioritize founding team or the idea in their funding decisions. The overwhelming investor response was that they bet on the team first and foremost.
The two observations above are linked. Successful startup teams start with a great idea in a market segment that may initially look small, but then build upon initial traction to either significantly expand the market or catapult into broader adjacent market segments. That is why investors say they look first for team quality (along with size of the broader market), and also the reason why a handful of the niche-sounding angel funded startups may turn into unicorns a few years from now.
Many Indian consumer Internet startups that are reaching superlative scale and valuation numbers today started by addressing niche markets at their early stages.
Take Zomato for instance. If you looked at them in 2011, it would have been very hard to envision the scale that the market is expecting them to reach now. At the time, the company primarily monetized by tapping into the Indian restaurant brand advertising market. This market is tiny, and almost none of it was online at that time. If you used reasonably liberal extrapolation, the total available revenues in five years would top out at perhaps $20-25M. The company has, via the ingenuity and drive of its founding team, continually expanded its market by growing its core offering, entering new geographies and bolting on new business models.
A recent post by Todd Francis (“What Billion dollar companies look like at Series A”) touches upon this ability of high performance founding teams to expand the market:
“However, successful companies often start with executing very well on an initial concept that is the beginning to a much bigger offering.”
In India, this market expansion often happens much sooner in the lifecycle of companies than it does in say US (or China). That’s what we have found over the past several years looking at various investment themes across US, China, Europe and India. Many market segments in India could be relatively thin due to low monetization levels, but that hasn’t prevented the best entrepreneurs from building companies of massive scale. This is one of the key reasons you see disproportionate amounts of investment going behind stellar teams which at present may operate a business that does not appear to justify reported valuation levels.
The tech industry, unlike say the airline or telecom industries (which also deliver services to consumers/businesses), allows platform businesses to leverage their customer bases, data and market knowledge to expand into adjacent segments rapidly, and to disrupt status quo dramatically. Tech companies can create new experiences, use cases and price points which can alter market size significantly. Benchmark’s Bill Gurley has written an insightful post on how Uber has expanded its market size well beyond what conventional wisdom would have entailed.
Here are some ways successful Indian startups have been expanding their markets beyond their initial niche:
- Expand into adjacent verticals, and verticalize offerings. Flipkart at Series A was a tiny online book-seller. Many other vertical-focused eCommerce sites were funded in the same general timeframe, but Flipkart rapidly built on an early lead and expanded systematically into many other large eCommerce verticals. Similarly, Ola is beginning to leverage its market position in the taxi/transportation vertical to enter various other logistics/delivery verticals (e.g. food, grocery deliveries), which would help it grow into its heightened expectation and valuation levels. Quikr in an example of a successful internet company that is expanding by driving deeper into its verticals of focus.
- Expand into adjacent market segments. Some successful startups use their expertise, data and customer base to offer a different type of product that builds upon their position and enhances customer stickiness, revenue per customer and sales ROI. Vizury, which started off with an ad retargeting product, has expanded its product portfolio to include various big data and marketing-tech offerings that it sells to its marquee client base. Netmagic added cloud offerings and managed services to its solid datacenter business, which helped it get to a substantive sale to NTT in 2012. Snapdeal, one of the leading online marketplaces, started off as a card-based couponing play, and expanded or morphed its model several times before getting to its current broad marketplace model.
- Expand geographic footprint. Companies such as Vizury, Zomato and InMobi expanded into multiple other countries very early in their evolution, and are creating a global or transcontinental footprint with products that would have appeared to have a relatively small addressable market in India. These companies built strong products in India and ventured out into distant markets at a time when there were few successful precedents. These days we see geographic expansion highlighted as a key growth lever in many pitch decks, especially those for B2B product companies. Expanding into foreign countries for early startups is never easy, but there is often great value in doing things that are not easy.
- Expand business model. Many companies start with a business model that suggests a moderately sized market, but later tag on deeper monetization models e.g. JustDial and Zomato, which initially focused on listings/lead generation models, are actively moving into transactional local commerce models
- Use low margin consumer aggregation products to get into more attractive segments. PayTM (which recently raised $575M) and FreeCharge (recently acquired by Snapdeal) both used low margin mobile recharge models to rapidly aggregate massive bases of transacting customers, and are now beginning to funnel these consumers into marketplaces for a wider range of products. In the process, they sidestepped competition from the leading eCommerce marketplaces, which had a significant head start at the time these two started
- Integrate vertically: Many eCommerce platforms including FashionAndYou, Healthkart, Myntra, UrbanLadder and others have focused extensively on private labels and vertical integration in order to drive higher margins than the base e-retailing business. eCommerce marketplaces building their own logistics networks is another example.
- External Investments and Corporate Development: This classic growth tool was nascent in the Indian startup/Internet ecosystem till about a year back (except perhaps Info Edge, which has used this tool well for almost a decade). This is starting to change rapidly with Flipkart, Snapdeal, and Amazon building out significant capabilities for minority investments and acquisitions that will help them expand their markets further. We are now starting to see smaller companies leverage corporate development/M&A successfully in India, and are likely to see much more activity on this front.
The above list has an obvious selection bias. It only lists a handful of companies that succeeded in expanding/reinventing their markets, but there are of course hundreds of other funded startups that failed to do so.
So if you are an entrepreneur starting off with a new venture, how to do you decide whether your idea, which may appear niche, is worth pursuing?
Or if you are a tech investor, how do you take a call when it may seem that most early startups you look at are operating in small market segments?
Here are some thoughts:
- Team, team, team. Clichéd but true. The above list is a testament to why angel/venture investing is first and foremost about team. Great teams can expand their business well beyond the initial idea or model. In addition, the ability to raise future financing rounds of increasing size has now presented itself as a core requirement of any team looking to drive towards a large outcome. Unfortunately, the above abilities are nearly impossible for investors to predict based solely on the team’s resumes or institutions they attended. These are also often hard to evaluate based on an initial meeting. It takes a several meetings, some smart background work and/or observing over a period of time to see evidence of the persistence, drive, ingenuity, single-mindedness, passion, resilience and leadership skills needed to continually expand the pie. 10x founders leave their fingerprints in various aspects of the business, and smart investors learn to pick those up.
- Keep an eye on new disruptive technologies, and how your venture/investment may be able to harness those to ride a massive upcoming wave. Internet of Things, Wearables, Drones, 3D Printing, Autonomous Driving Cars, Deep Analytics, VR/AR and AI will provide today’s early stage ventures with powerful catalysts to explode their market, just like mobile, social, local and cloud did for many of today’s unicorns
- Founders must define their target market more broadly for the medium and longer term. If you are an entrepreneur, lay out a plan, perhaps a decision tree of segments/models you could eventually expand into and disrupt. This will not only help in your conversations with potential recruits and investors, but also serve you and your employees as a guiding light at various points in the journey. Your eventual path will almost certainly look different from your initial plan or decision tree, but a well-thought plan will help immeasurably. Similarly, investors sizing an addressable market must look for and understand large adjacent markets that the team, if successful, could address. Build out your outcome scenarios layering in different levels of success with addressing these adjacent segments
- On the flipside, management teams and investors should keep in mind that many existing consumer Internet leaders or startups can and will enter your space, since they will also look to expand their And the massive amounts of funding that is going into leading Indian consumer Internet companies will only accelerate their expansion into adjacent segments. Have a plan to deal with this. Identify the moat you are building, and build it fast.
- Investors must think critically, maintain high risk appetite and create a broad, balanced portfolio. While a few select teams will expand markets, ride new S-curves and create massive value, a vast majority will spend their time tackling the base market, and may stumble along the way. Out of ten very high caliber teams in ten large markets ready for disruption, you may only get one outsized outcome if you are fortunate. That’s the law on which venture investing works. In the new world of massive private funding rounds, this dynamic will only accentuate further. Be prepared.
Comments and feedback are welcome.
(Anupam is a VC investing in mobile, internet & technology businesses in India and the US since 2007. Companies linked to are NGP portfolio companies. Data and facts cited are based on public sources. Views are personal.)