START-UP INC: Coming of age

My ex-boss John Chambers (former executive chairman and CEO of CISCO) once said every company will become a technology company eventually as no business in this world can be successful without adopting the technology. 

I take that insight to categorise startups in three broad classes; startups that use technology to create efficiency and better customer experience, startups that apply technology to create new use cases and startups that create new technology to address a new market or an existing market differently.

Broadly, the unique application of technology and the creation of new technology is what I call “Tech”. By that definition Tech or Deep-tech is not a startup segment but merely a characterisation of what they do to create value. Thus, Tech or Deep-tech can apply to all vertical segments of startup activity including e-commerce, fintech, food-tech, industrial, agri-tech, supply-chain and others. While there has been an unprecedented rise in funding in so-called Tech or Deep-tech startups backed by a new age venture capitalists (VCs), much still needs to be done to complete a startup’s journey from ideation to market scale.

I am listing below five key trends that will shape the start-up industry, and therefore the asset class.

Emergence of new generation “product” VCs

Previously, we had two types of VCs – consumer internet VCs and B2B or enterprise VCs. Most of the major dry powder was in the hands of the consumer VC, some of whom aspired to become a B2B VC but lacked the insight, knowledge and the risk appetite to do so. What we have observed over last 30 months is the emergence of half a dozen or so VCs willing to call themselves product VCs with a singular focus on intellectual property right (IPR) led innovation. These are mostly second-generation VC partners, entrepreneurs or corporate honchos, who clearly have the knowledge, operational strength, and business network to be a true partner in the product startup’s path to success. They have the ability to define the right set of metrics and measure them diligently rather than harping on a number of subscribers, gross merchandise value (GMV) or unit economics. They are rightfully called our new ‘specialist VCs’.

Corporates will graduate from running accelerators to corporate venture capital (CVC) programme

On the last count, there were about a couple of dozens of corporate accelerators announced by both global MNC’s India backend and Indian firms. These programmes are a great initiative with about half of them in the B2B or product space. They are very early stage initiatives that primarily help corporates learn about what’s out there as an idea, shape the thinking and provide a platform for their employees a taste of mentorship. This, however, is a slow long-drawn process. In today’s world of digitisation, corporates need to capture innovation and harvest them quickly from startups, where the idea is well evolved and prototype developed. A co-creation roadmap can be executed. A CVC programme can be defined and structured to achieve these objectives. It is unfortunate that not many Indian powerhouses have a CVC programme and probably miss the point that they need to impact themselves with a market disruption enabled by a startup to learn, adapt and accelerate their digitisation and customer experience goals. This will change in the next few years as corporates bring immense value to product startups through their CVC programs even as they themselves benefit from it.

Coming of age of a well-oiled product innovation ecosystem

We all know the seed and pre-series A stage is an important phase in a startup’s formative existence. The challenges pertaining to the access to seed or pre-series A capital have somewhat been mitigated by several angel investors coming from product background and are part of the angel networks. The accelerator and incubators are also complemented by the startup mission run by several state governments. From my personal experience of working with them, I have found them to be extremely effective and professional. The role and importance of the central government’s startup mission – a Fund of Funds for Startups that has a product and technology focus – also cannot be undermined. Interestingly, some of our local specialist VCs have them as their limited partner (LP). At least a dozen startups in Tech or Deep-tech have come up and scaled primarily due to government projects like Smart cities, Digital India, Digital Payment or Pre Payment instrument (PPI) and others. Conclusively, we can say that the conjoint product innovation eco-system has finally come together, albeit in its early avatar.

Interplay of mobility, AI and IoT will continue to be innovation domain

When it comes to innovation, India will follow a pattern similar to its global peers. However, the emphasis may be on the interplay rather than breakaway research in any of them. It’s also important to note that product and technology are not geography-specific. It is, therefore, imperative that product startups in India aim to create a unique intellectual property portfolio, preferably global patents, and eventually create global proof points through customer validation in the European or the North American markets. No doubt, it is expensive to sustain an international operation but that’s where a specialist VC or a CVC partnership may come handy. On the business model side, there are the three Ss – software, services and subscription – for which India’s time has arrived, India for India and India for the world.

Countering challenge of product startup funding 

Although leading indicators are favourable and ecosystem – though not fully evolved – is effective with a huge validation of domestic demand, the journey of the platform, product or tech startups is expected to be a little bumpy. One imminent challenge is the paucity of product VCs in the growth stage. As of now, most of the specialist VCs are small funds. Most of the startups being funded by them are expected to come up for growth stage fundraising sooner than later. The size of this round of fundings is expected to be bigger by the sheer nature of product business. Hopefully, the traditional consumer internet VCs would find this as a good opportunity to diversify their portfolio and be eager to participate as some of the risks would have been mitigated by then. If this does not happen then there could be a huge vacuum in the funding continuum, creating disappointment to founders and VCs that have backed them. This will be a huge setup for the cause of Deep-tech startups in our country. 

ROAD AHEAD

• Deep-tech is not a start-up segment but merely a characterisation of what they do to create value 
   
• However, much still needs to be done to complete a start-up’s journey from ideation to market scale

The writer drives corporate strategy at Tejas Networks, is also associated with E&Y Lead advisory