The Challenge with Indian Ecommerce

I recently read a nice article my Mukund on why a typical sales person in India gains little or no respect? He talks about how India has historically been a supply constraint economy - having more demand than supply. A boom for most businesses, thus you did not need sales people to sell you products. Things changed in some sectors post liberalization or these sectors saw an increased competition. Typically, these sectors became heavy ad spenders today (Telecom, Mobiles, Soaps, Shampoos). Even then, some of these sectors rely more on marketing than sales to sell their stuff. So the sales person skill set was never much in demand.

Notice how the situation has changed with coming of Indian ecommerce. Most Indian ecommerce sells non-digital products or services which are already available in an offline world. So an ecommerce portal selling shoe or books has its biggest competition with an offline equivalent. Thus there are more suppliers (or retailers) competing to sell same product to the same consumer. And there comes the challenge - figuring out how to get demand in an economical way. Supply has outgrown demand.

I believe that if you try to open another book or shoe selling site today, you wouldn't have any major problem tying up with their suppliers. But question is, would you be able to generate enough demand and repeat visits in a way that will beat the existing players. So if you are starting an ecommerce website today, my advice is to figure out a way to solve the demand problem. Judging the growth of a website purely by the number of brands it represents therefore does not reflect a complete picture. If you take a deeper look, you will find examples of websites which focused too much on building supply hoping the demand would get sorted on its own but that didn't really happen.

But how would you be able to get demand before securing supply (chicken & egg)? Well, supply should normally proceed demand but one can at least have a model for customer acquisition other than buying traffic from FB & Google. Because if that's the only way, then logically you should work with someone who has deeper pockets as the economics of customer monetization are not going to make sense unless you achieve scale. You will rarely break-even on first transaction and will have to sell more to same guy in the coming months. In case he forgets you and you've to bring him back using another ad, then you are not doing it right. Also, if you are in a category like tickets, consumers may not be loyal to your brand but to your prices. So as long as they find another competitor selling something cheaper, then are likely to jump ship.

So remember as someone rightly said -

"It is easier than ever to start something small and harder than ever to build something big"

Ecommerce Hiearchy of Leads

If you havent already read about Maslow hiearchy of needs, I suggest you go and read about it. It talks about basic needs of human beings and what motivates and incentivizes people to do certain things more than others. It provides interesting ideas for managing people in your teams. Since the time he wrote, many other similar theories have been written, but most of them have been adaptations of this basic idea. 


I recently attended a conference where the speaker, who was Professor from Boston university, was talking about incentives and highlighted a very interesting parallel with science. He pointed that for those of us who have studied basic science (physics) would know that heat is lowest common denominator (something that is most abundantly available) of energy. All other forms of energy ultimately disipate as heat if they cannot be converted to anything else. And so he said, just like heat is for energy (the lowest common denominator), money is for incentives. 


If you cannot motivate people on any other higher levels, you motivate them by money. So its is not always the best form of motivation, but something that works with most people. Most great personalities are always driven by a higher source of motivation than just money.


This prompted me to translate it into something more closer to what I do - internet e-commerce. Buying ads from Google and Facebook gives you a sureshot way (or at least pretty good way assuming you have decent conversion page) of buying leads. It is like money (or heat) and acts like lowest common denominator of buying traffic. Because just like no great man has only been motivated & driven by money alone, no great internet business has solely been built on buying internet traffic [yes i don't think highly of the groupon model but then maybe in a perfect world without any competition, they probably wouldn't have to do so much advertising and could have spread just by word of mouth] 


So what if we extend this theory a little further and think of all the ways one can use to bring traffic to their website and form a similar triangle in internet space for bringing traffic to ones website. For lack of better word, lets call it the Ecommerce Hierarchy of Leads Triangle.

Brand Recall - This is the space where the giants operate. Google, Facebook are clear winners. Most people (like me) now do not search for books on Google but directly go to Amazon. As Reid Hoffman says, there are 7 plus/minus 2 websites that any internet user can usually remember. If you operate here, you have a very clear advantage. Other examples can include newspaper sites, airline and movie bookings etc.

Referrals - The best referrals are ones without incentive. But you can incentivize these as well. For example Paypal, Dropbox n others pay you (and joinee) bonus credits or space for referrals. This has been a major way for their spread. Nowadays this also includes social media chatter (Twitter, FB etc).

SEO - Spend money once and enjoy a more or less perpetual source of traffic. As long as your website is generating good quality content, certain amount of genuine backlinks are guaranteed and this is likely to give top search rankings.

Email Newsletters - Easier way to bring back existing users to the website but you'll gave to pay monthly subscription to business (like Mailchimp or Get Response) for every subscriber.

PR - Some businesses such as Apple generate large amount of Press which provides them a higher brand recall amongst users. You can also engineer it by planting more stories. More likely to work if you are a big business otherwise most media houses won't really give you a prime spot for long

PPC - Easiest way to generate traffic for your website. It can also be a great way to make money in a direct response business if your acquisition cost is clearly lower than price of first product. Many million dollar businesses have been created of this approach (Mind Valley) and many million dollar businesses have been busted also of this approach (acquiring expensive users hoping they would come back and pay because of customer lifetime value).  

Raising Angel Investing in India

[Disclaimer - To make this post more credible, I would like you to believe that I have successfully raised an angel round but so far it hasn't happened. In my defense, it's only been two weeks since I have started and so I bit of an amateur myself. Nonetheless, since there are so few accounts, I think I should share my learnings]


Raising angel money is tough. Even though e-commerce is supposed to be a hot sector, the ecosystem around equity investing is growing and VCs have no shortage of funds, but sadly none of these things change the ground reality. Entrepreneurs still have tough time convincing angels and raising their first round in our country.


1. Oh angels, why don't you blog?


So how do you find angels? Well there are not many angels active in our country. Of the few who are active are difficult to find and the ones that are easily traceable are usually bombarded with large number of requests (good and bad) so they have fairly tight doors (usually need references). For whatever reasons, most angels do not maintain an active online presence in India and are therefore so difficult to find. There is little information to guide founders as they struggle to find the right investor. Even though there may be no shortage of HNI's but many of those do not understand the complexities of an ecommerce business model and hence cannot be considered to be good angels.
[On a side note, one of the reasons why most great startups originate in silicon valley is because of a fairly evolved ecosystem of mentors and easy access to risk capital]


2. Where are the successful entrepreneurs?


Angel investing is tough, risky and probably not as glamorous as VC or PE. A lot of hard work and sweat goes on to make a startup ready for an angel or VC round. Even then majority of investments do not turn out to be a success. The best of investors fail more than they succeed. This probably might be one of the reasons why its not written much about in popular media. Specially in a country like ours where many consider failure as a social stigma and it is still difficult to accept. More startup launches are reported than failures all over the world but perhaps this ratio is particularly skewed in our country.
The best learning therefore comes from entrepreneurs who've gone through similar experiences in their recent past. So startup forums and conferences are sometimes good to attend. It helps you connect with new people and allows you to extend your network of wisdom and share your learnings.


3. Still searching for your rich uncle?


They say the best way to raise early money is through family, friends and fools. As long as you can convince one of these guys to become the lead investor, the others are easy to follow. So why not take some from your cash rich uncle or family business friend? By all means you should explore that option and there are founders who have also made it work but its still a risky bet. What are the chances of them understanding the risks and returns of your business model (if one exists at the time you raise money)? Even if you think they do, your relations can go sour pretty quickly if things are not going according to schedule. You may find the next trench of money not hitting your bank account. In an ideal world, you want someone who can bring in more to the table than just money in your business. So keep all those factors in mind.


4. How much to raise?


This is probably a most difficult and important question to answer. If you ask too much, the chances of getting it reduce exponentially with your ticket size. If you ask too less, you may not be able to meet the milestone required to meet the next round of funding. Even if you do, you may discover VCs now want you to achieve more than what you initially thought - expand to one more city, add more category, increase number of transactions, prove more traction etc.


5. Do we need a buffer?


Unless you can see the future, you definitely should keep a buffer. But a buffer is not required in all cost projections. Certain costs are trivial (such as office rents, equipment etc) and do not require a buffer. Depending on your nature of business, there will be some critical components in your costs (such as marketing costs, employee costs etc) that are more sensitive to working or not working of your business. You must raise more than your projections (say 20%) on these cost heads. I think most investors understand it as long as you can talk about your assumptions.


6. Scalability & Defensibility


Things that every investor will ask you about your business model. Some will buy your arguments, other won't. But it is important keep taking their feedback at end of every call and refining your answers before the next investor. Because at the end of the day these are subjective arguments and different people (even investors) will have different takes on feasibility of your model.


7. Are we too small?


Here's the advise a successful entrepreneur turned angel gave me and the one what I'd like to believe.
You're never too small for an angel round. Some entrepreneurs raise angel money on presentations and even before they start. You can only be too big for an angel round but never too small for it.
Although it sounds very encouraging, I've also spoken to angels who've said quite the opposite - you are too small at the moment and need more traction before we can look at your business. I guess what they are trying to say is that they are not very sure of success of your business or the time you've taken to achieve that success. They may need to see more virality or kick ass recommendations that can comfort them beyond doubt (or at least reduce their doubt) that investing in your business is good bet for them.


8. Finding a lead investor


Most angels I spoke to say they invest in groups with other well known angels. That reduces their risk and increases the number of people in your network. It is difficult to find an investment where only 1 or 2 major players own the entire investment. So in a way, your search for an angel investor actually boils down to finding the first lead angel, who will say that I'm willing to put my personal money into your venture and will then probably help you connect with other players with solid backing.
Nothing works in your pitch as a simple statement that says that you already have access to some committed capital from another well known angel (and not your uncle) and are looking for some more money to complete the round.


9. What else makes it easy?


Certain additional factors (apart from traction) give more comfort to an angel and increase your likelihood of investing. So if it makes sense for your business, get them in place.
- Do you have a co-founder or strong full time dedicated team in place?
- Do you have a strong technical or operational background and if possible a good college degree?
- How strong are your communication and selling skills?
- Did you have a venture before this one? (even if earlier one didn't work, its fine. Shows that you're long term player and committed to making it work someday)
- Are you in the same city as the lead investor? (some investors prefer it, makes management easy)
- How much cash you've burned till date? (this can work both ways, if you've burned 10 lakhs of your own and are asking for another 50, it becomes sligh easy sell but on the other hand if you've burned too much and still only got this far, this can be a negative point as well)
- How much time you've spent on reaching this particular amount of traction? (usually startups older than 2-3 years might have tougher times)


10. Do startup revenues and projections matter?


Fortunately not so much in silicon valley but unfortunately more so in India. It is difficult to convince angels to invest money purely on account of traction you have or will achieve by end of year 1. Not having a strong business model or revenue making stream is not likely to motivate them much. Other operational metrics LTVC (lifetime value of customer), number of users base, repeat transaction rate, virality etc also play an important role but nothing works as good as strong revenues in initial months.


Finally, remember it's not about convincing naysayers, it's about finding believers!
Angel investing is in a way more about selling a vision and your team. It should ideally be less about projections and having a perfect business model in place. If you have right ingredients and overall direction, you will figure out things along the way.
Therefore knocking on more doors in this case might be better than sticking to a few ones. Because not all angels will buy your story. They will have questions which you won't have convincing answers. But there may be some angels who will get excited about the overall opportunity. So you need to talk to more and more people. However, if initial signals are giving you a common feedback, then it might be better to take a pause, fill those gaps and then approach the new ones.


Here's a inspiring short inspiring short article on how Linked in went through raising its Series A.
http://bit.ly/mPRgX0


Good luck!

What an MBA doesn't teach you about Startups?

I have a T-shirt which says, "Trust me, I have an M.B.A". And if I could add anything to that, it would be that it is from a good institute. Now why would I do that? Because in many ways you feel proud to be associated with a good school, to be one among many high performing individuals and also the confidence that comes along thinking you've studied the very best of management education. Education that mostly involved reading Harvard case studies of world renowned companies, their difficult times, their turn around stories, their successes and failures, analyzing and cracking financial numbers and things like that. If you are able to analyse a case well, it gives you a confidence that you are better prepared for similar difficult challenges in your life ahead.


But there are two important fallacies with that approach


1. Situations rarely repeat themselves in exactly the same manner and in the same circumstances or context. There are a hundred other factors that go without getting captured or analyzed in typical case studies. So you will never be fully sure if the situation is exactly similar. Even if it is, there are chances you might have forgotten about the case you read in your MBA class. This is not to say that cases have no relevance in your learning,  they broaden your scope of thinking and improve learning, but real life understanding of situation is not as easy. 


2. The second most fundamental flaw in cases, and this only applies to an entrepreneur or start-up guy, is that almost all cases teach you to handle complex situations in large, multi-national companies. Situations that become complex because of the scale of the business and operations, amount of resources and money involvement. And as well as you know, this is rarely the case in a start-up. It is more likely to help you if you are working in a management consulting firm. Perhaps that is one reason why these firms insist on picking people with good grades (at least in India).


So if an MBA mind is prepared to handle complex situations, why is that you can't apply these to a start-up? Because at the end of the day, business is all about solving simple problems in life. Think of it, why would anyone pay you for a product or service if you were not solving their basic pain point? (Nobody pays you to over complicate things in their life). Even large companies solve simple problems, its just that their scale makes their operations complex and when big money and resources are involved, you want to be triply sure of analyzing all angles to make sure you aren't making a mistake. A start-up, on the contrary, requires a rather different approach. It requires you to act quickly, make mistakes, learn from them and then move forward. If you are stuck analyzing things, you're probably not acting soon enough. 

If you aren't ashamed of your first product, you shipped too late

Reid Hoffman 

Don't worry, be crappy

Guy Kawasaki 

By all means, I don't think we should be aiming to build a crappy product, its just that you should not be aiming for perfection and complete feature product or service in first go. You should try to capture some early adopters with a crappy product, then iterate to build upon it.


So for all the MBA education has given you, you are probably not fully prepared to be in a start-up. The challenge therefore sometimes becomes more about unlearning than learning new things. 

The illiterate of the twenty-first century will not be those who cannot read and write, but those who cannot learn, unlearn and relearn.

Alvin Toffler

In a time of drastic change, it is the unlearners who inherit the future. The learned find themselves equipped to live in a world that no longer exists

Eric Hoffer

Well this is not to say, your education doesn't help and that you shouldn't be thinking anything at all. It does prepare you to handle a lot of challenges in an early stage company - negotiation skills, marketing concepts, operations management, some elements of strategy and importantly organizational behavior, which is often a little underrated. But sometimes, it's good to let go, not let that MBA mind of yours think too much and just act because you may be surprised at what may be there to offer.

Addressing the Middle Man Problem

If your startup is like mine, which involves a large amount of offline sales and on ground personnel, chances are you are familiar with this problem. In early stages of startup, no one really knows you so there are always more questions and apprehensions about your product and much lesser conversions. Many of us live by the simple rule of cold calling prospective clients because no matter how well connected you may be, they can be only so many warm introductions that you can get.

So even though the success rate of cold calling is less, one cannot live without them. Over time, I've realized that it is not only about having a great product or a good sales pitch, its also about many other important factors that determine whether a prospect will convert or not.

One of the difficult problems in cold calling is about meeting the right person. There are gatekeepers to all big branded organizations, people who sit between you and the decision maker, who in turn will take a final decision of whether to come along with you or not. And no matter how hard you try to avoid these gatekeepers, in order to be successful, you will have to navigate through them. 

I would say that's convincing the gatekeepers is still not that big of a problem, after all you beleive you have a great product and so it shouldn't be tough for you to convince this person as well. And let us for the sake of argument go with this thinking that you were indeed able to get him interested in your product or service. Half a battle won. Good, but now what? The second half of the battle is about convincing him to act on your proposal and this is where the real problem comes. So even though theoratically it may sound trivial - why wouldn't a guy act if he is already interested in your product? And I've learned it the hard way that this is often not the case. 

Why this happens may vary from case to case but there can be few broad reasons: 

1 - Maybe he is insecure about taking a new proposal forward for the fear of failure if it doesn't go well with higher management. 

2 - They can be a motivational or incentivization problem - why should he really care about pushing for something new, what's in it for him anyways? Why take all the risk for nothing?

3 - There can also be a time or priority problem - he may have other important things on his plate and so may take his own sweet time to get things done.

Tackling the fear of failure can be addressed by using the power of social proof - Telling him that your product or service is already being used by thousands of people and taking a few big client names is likely to convince to reduce his psychological cost. Essentially you are telling him if he takes it forward, the the chances him being considered an idiot are less but he is more likely to be a become a hero of sorts. Ofcourse it is not easy to produce proof when you have none, specially in the initial stages so cracking first few customers becomes even more important.

In order to sidestep the incentivization problem, you can market the product as a benefit which solves his personal pain and not neccesarily the pain of his organization. Simply stated, if your product helps him save his personal time, money or achieve his targets, then he is are more likely to act. But its not always an easy thing to do because you may have developed your product keeping in mind the pain point of organization as a whole or people higher up the hiearchy so satisfying this middle guy may become a problem. 

To address the priority issue, which is albeit a more generic one and can even apply to non-middle men (how do you motivate guys to act?), I came across this really interesting article from an entrepreneur turned VC guy (must read) about what he points out as three most important steps in sales. 

Step 1 - Convincing the prospect that he really has a need for a product like yours

Step 2 - That he should really only be buying your product and not others since you are the best 

Step 3 - That he should really be acting now and not later because otherwise the opportunity might be lost

It is the 3rd step that is most difficult to answer and which really separates a good sales pitch from the rest. So its about classfying customers into separate buckets and focusing on those whose buying cycle matches your selling cycle. One can also try to create some kind of artificial scarcity (act now or opportunity will be gone) and that's how most Apparel Sales work (Diwali special, Christmas special). These specials force you to act because you know that the opporunity is limited. 

Addressing some of these problems is necessary to create a long term success for your startup.

Creating or Capturing Value?

When you think of great internet startups that have changed people's lives, you're bound to think of Google and Facebook. These websites have become the most visited websites in the world, thanks to the enormous amounts of benefits these provide, each in their own special way.

But what really makes these startups so great, different and insanely successful than many others that crop up in the technology space? Of the many reasons that have been analysed by people studying and writing about them, there's one often ignored aspect which relates to capturing value at the right time.

We know startups are about creating value (benefits), more and more value and tonnes of value. But when does one really capture a part of the value that you're creating? Capturing value is important because at some point you've to make money or otherwise you wouldn't be surviving for long.

If you've seen the movie Social Network, you'll know how Eduardo Saverin wanted to make money early on from Facebook by placing ads on its platform. And if you've read about Google, you'll know how hard Page and Sergey were pressed by their investors to generate some revenue for their search startup. In both cases, it was becoming difficult for these people (investors) to digest that they were not making any money even though there website was being visited and used by millions of people every week. Think about it, wouldn't any normal human being want to make some money when you know that millions are using and benefiting from your service?

And that's an important and understated reason that sets these founders apart from many others. They were not tempted by the bait of the reward early on and stuck to their vision, which may look easier in hindsight but is actually is not an easy thing to do.

The critical question then is how long, cash flows permitting, should you be willing to wait? Or better still are you willing to believe in what they believed, which is that no matter how but you will be able to find a way to capture value. The important thing early on is not to worry about capturing more but creating more of it and enlarging the pie.

Three Essential Steps

Having studied at a premier b-school, it is easy to notice how many people admire entrepreneurship and those who commit themselves to it. It is however tough to say what part of it do they admire the most – the inherent risks that you take, the guts of leaving a cozy job and doing something of your own, trying to do something more meaningful in life, the opportunity to make lots of money, the freedom and calling your own shots part of it or the loving what you do part of it. There are also those who admire what you do because they can’t do something similar. Bit ironic, isn’t it? Why can’t we as a country produce lot more entrepreneurs than those admiring them? I think we need to understand the biggest stumbling block. In my view, there are three main stages to entrepreneurship:

Step 1 – This is where you come up with a good business model. Well not that what you come up with is going to remain the same, most ideas evolve with time, still it is imperative that you have something good to start with. It’s important to make something work on paper before you can make it work on ground. Even though this is not an easy step, it is not the one where most people stumble.

Step 2 – In my view, this is the most critical stage which filters most people. This is where we you actually take the first step towards starting something of your own. It involves talking to your family, may involve quitting or not taking a job, letting go of your financial freedom and getting into the frame of mind of becoming an entrepreneur. And certain things make this crossing this stage even more difficult – for instance the more time you’ve spent in your current job the more difficult it becomes to let it go. Or to some extent even doing an MBA makes you over think about the competitive advantage of your idea, replicability of the model and its long term sustenance. It gives many people a lot of valid and invalid reasons to justify not going ahead and staying in comfort of their present life. And as they say - If you were to wait for all lights to turn green before you leave your home, well then you may never be able to leave home.

Step 3 – Unlike the previous step where it depends entirely up to you to go ahead or convince your family, this step depends very little on you. This is where you actually make the business model work (execution). Now any business involves dealing with people, making a product or service which people will use and hence in that process develops many external dependencies. There are also environmental factors, government regulations, economy etc that can play a critical role. This is usually a longest step and one that requires patience because there is limited amount of things you can do yourself. The rest depends on business externalities. But what is most important is that you keep evolving and self correcting your business, learning new things and hope to be at right place at right time!