By Tarun Sharma, Director, New Enterprise Associates
One of the world’s largest and most active venture capital firms, NEA has developed deep domain expertise and insight into the industries of focus.
The key investment opportunities that we believe will emerge in 2015 (and beyond) germinate from two strong trends we are currently witnessing in India.
Firstly, e-Commerce (and m-Commerce) are successfully changing customers buying behavior and enabling consumption of products and services previously inaccessible to various consumer segments, either due to availability or pricing.
Secondly, enterprises in India, irrespective of size and scale, are moving towards adopting best-in-breed technologies globally, incorporating SMAC (Social, Mobility, Analytics and Cloud) capabilities into their solutions. Ability to rapidly leverage technology will be the key differentiator in terms of customer engagement and/or productivity enhancements and determine market leadership over the next decade.
Based on these trends, we believe the following opportunities will attract a disproportionate share of investments going forward:
Vertical e-Commerce Players: With the winners in horizontal/multi-category e-Commerce pretty much declared, the battle will shift to verticals such as furniture, groceries, baby care, healthcare, beauty, jewellery and many more. Apparel and fashion is a very large category so sub-categories should emerge such as innerwear, footwear, accessories and more. The categories with established leadership and high product level margins (such as baby care, jewellery, furniture and healthcare) are likely to attract more capital. We believe that scaled up market leaders in verticals benefit from virtuous growth cycles enabling a faster path to profitability. Firstly, their revenue per customer increases driven by greater frequency and order sizes; coupled with higher product margins (due to improved procurement power and/or growing private label contribution to overall revenue pie) these companies expand their profit margins enabling a higher investment in marketing. The market leaders are also able to generate higher returns from their marketing investments driven by higher organic traffic (more than 50 percent of total traffic) and increasing conversion rates (north of 2-3 percent in India) hence, creating a virtuous growth cycle. NEA’s belief in vertical e-Commerce opportunities is reflected in our investment in FirstCry.com, a category leader in the mother and baby care segment.
Online Brands: The Indian market has traditionally been an unbranded market – for instance, only approximately 20 percent of the apparel sales happen in the branded category. However, it is rapidly transitioning to a branded market and we believe e-Commerce will accelerate this trend. If the e-Commerce market expands from $3 billion currently to $40 billion by 2020 as is projected, several new brands will be created online across categories. Investments will be funneled into companies that see themselves as a brand, and have business strategies that are closely aligned with this objective in terms of market positioning and brand differentiation. Low hanging fruit are categories where brand stickiness is significant, such as beauty, wellness, baby care, innerwear and more.
Enablers for e-Commerce Ecosystem: Other than payments and logistics services, which have already seen PE/VC funding and M&A interest, new enabling services will become relevant for the next phase of e-Commerce growth in India. There are two strong trends we see becoming prevalent viz – pressure on e-Commerce players to be sharper in customer targeting and acquisition and customers creating more and more ‘data footprints’ as their transaction history increases. This creates opportunities for services such as customer analytics, marketing performance optimization, UI/UX optimization.
Industry Vertical-Oriented SaaS Plays: As Indian companies adopt new technologies, investment opportunities emerge in companies that have either developed in-house technology capabilities to create differentiation in their industry segments or SaaS companies catering to specific industry verticals. Significant efficiency-unlocking potential exists in industries that are fragmented (such as hospitality, restaurants) or have a large ‘feet on street’ operation (such as Realty broking, Pharma marketing, financial product distribution) or sectors that have historically had low tech usage (such as education, healthcare services). However, these solutions need to be developed as a scalable and automated platform, to enable an ‘India SMB market pricing’ and remove people intensity in terms of deploying a solution, scaling up usage and supporting it. NEA has invested in early stage tech companies in this space such as IndiaHomes (realty-tech), MEdRc (ed-tech for medical education), Reznext (SaaS solution catering to hotel industry).
Overall, we believe this is an exciting phase for tech entrepreneurship in India, and as VC investors we are quite enthusiastic about the quality of teams and ideas that we see emerging from our entrepreneurial ecosystem.
Suggestions for Start-up Entrepreneur
As investors, we have the benefit of an outside-in view of a company. Based on our perspective and investing experience, we believe the following actions go a long way in preserving and enhancing long-term value for any start-up.
Practice Active Communication: Keeping lines of communication active between all key stakeholders (board, employees, investors and clients) should be top priority for all entrepreneurs. This enables you to be the first one to deliver bad news and also receive it. More importantly, the bridge of trust that this builds with your stakeholders is beyond measure. This skill of effectively communicating is important at an early stage of the company, but will be critical when the company grows bigger, so you should start cultivating this skill as early as possible.
Treat Cash Like Oxygen: This is an obvious one, but it’s amazing how often entrepreneurs lose sight of this. Keep a very close eye on cash, don’t assume the big client payment will come on time, or the bank will disburse loan on schedule, or equity funding will close as on target. Always keep a plan B ready, reach out to board and advisors when you see the risks increasing, so you give them adequate time to explore solutions for you.
Engage With the Investor Community Continuously: Many entrepreneurs feel that any equity funding is one time effort of getting a banker/advisor, meeting funds, creating collateral and closing the deal (hopefully). When the company is young, you need to continuously meet various funds, share your vision, seek feedback and strive to build relationships. Investor community is close knit, so one never knows which relationship will click and the market intelligence from these engagements may provide some insights too.
Invest in Investor Selection: Finally, when you want to get an institutional investor on board, come to NEA! More seriously, having an investor is a 3-5 year partnership so invest time in getting to know the firm and the people. Speak to existing CEOs in the firm’s portfolio; learn about the investor’s approach to partnering with portfolio companies especially with respect to supporting the company in later rounds with follow on funding and engagement at board level. It’s important to find the right partner, and not just the right valuation.