Tuesday, June 28, 2011

Indian VCs are Dumb. Really?

Indian VCs are dumb f**ks. They do not have the balls or the brains to invest in Indian startups which can become the next Google, Facebook or Twitter !! If I can get a rupee for every time I hear these sentiments I will be reasonably rich soon.

The argument goes that VCs and Angels in US have invested in such start-ups even while revenue models have not been obvious. Fair. VCs in US invested in anything that had a 'dot' in a dot-com during the boom as well!!! What happened to all those companies?? This does not showcase that American VCs have bigger balls or better brains. It only tells that the supply and demand (of surplus funds) in that part of the economy (for that period of time) is different. India is NOT America or Israel or Bangladesh or Taiwan or China or...

Economy across countries differ. Heck, Economy in the same country across timelines differ!! Its not the same USA that it is now when it was 6years back. Reflect on the spectacular failures the so called awesome investors in USA has caused through prescient acquisition of sub-prime mortgages inflating the markets. The world economy nearly crashed.

Money is only a very small part of the equation of why a Google or a Facebook is what it is. If money and smart entrepreneurs alone can have spectacular home runs, then the world will be a different place. How about luck? Does that play a part? We hear about these start-ups only because they are successful. What about all of the ones which got funded in US by the US investors (which had super awesome teams) and failed? Should we really have such retro-rational arguments on successful businesses which is across a geography and from a different time?

What if Google had messed it up? Huh? Would you blame the VC then or the Entrepreneur?

IMO The most important aspect for any start-up to 'survive' is finding traction with early adopters in the right markets. And subsequently for a start-up to 'succeed' they need to cross the chasm to find early majority.

Finding early adopters and early majority is NOT a function of getting funded. A market has many constraints ranging from economics, culture, social-influences, demographics, psychographics, clusters, niches, segments, categories, attribute ownership etc. The Diffusion of innovation and business is completely different for every possible combination of the above dynamics. The rate of acceptance or adoption of a 'utility' differ significantly for these combinations across industry verticals.

Among the stated dynamics, culture and social-influences play a priority. Tangential to this debate let us ask the hard questions first. Why do Indians throw garbage on the roadside? Why do we spit on the walls? Why do we pee outside on the wall of the public toilets? Why do we kill baby girls? (I know you may be nodding your head in disbelief how these questions slipped by in this article!!) Well I will say that you just missed the clue train then.

How many of you have used a really good hyper-local news and deal app that a good friend of mine has built? How many of you have participated in making it viral? How about a great crowd-sourced testing platform from India that another good friend has built? How about a really cool platform for secondary markets for used-items? How about a book and content publishing platform? You would know the names only if you are early adopters. And hell NO, early adopters are NOT marketed to. There is no marketing budgets for early adopters (Not even in your beloved USofA. There were no marketing budgets for the big three sexy companies you quote in the debates as well).

I do not have anything against US VCs nor am I in bed with the Indian VCs. I feel all VCs are opportunists. They are all the same. They have to make money for their LPs. Yes some are smart others are not. The point is, it is not specific to any geography or time or color of the skin or the size of their you know what.

Indian start-ups fail or succeed because of Indians. Period. (I am an Indian entrepreneur in India building a India specific platform for Indian markets).

I know most of you will not like this post and you will have intelligent arguments supporting your claim. I also know that if you get funded when you do not understand market economics, then, not only will you NOT give us a winning sixer, but you will also mess the case for the other deserving ones. Think through that, Arighty? Peace...

Saturday, June 25, 2011

Principles of Failure

Of course you have a great idea. Sure you are a visionary. No question you have battled hard to be where you are. So was Van Gogh or Nikola Tesla.

Did you get rejected by your Customer? Market or your Investor? Hmmm, they must be dumb then, no? Customers are not able to identify the latent problem that is lurking? How lame. Markets do not understand the utility you provide? How immature. Investors do not comprehend the scale you shall bring? How myopic. Sounds familiar? (Note the saracasm, please)

You may strongly believe all of the above as true !! That is besides the point for this post.

Rejections are inevitable. I am not an expert, but Economics (Macro or Micro) is the study of scarcity (due to existence of scarcity) isn't it?

Very broadly stated:
- Customers cannot buy from everyone.
- Markets cannot always accommodate everything having a utility (due to alternatives and irrationality that is pervasive)
- Investors cannot invest in every great idea.

Also, markets and economies are not equal across geographies (and even across time) so basing your rationality across markets or across time may not help.

Some of the good leaders I have studied or have had pleasure to work with, have one strong trait in common: They demonstrate tremendous maturity in handling rejections.

As an entrepreneur, nothing is more handy a tool than managing failures and rejections. This helps in conserving entrepreneurial-energy and dip back into the pool of irrational exuberance or optimism as some call.

Neither Van Gogh nor Tesla gave up in the face of failures to the end (They were in love with what they did). Yes its unfortunate that they are posthumously famous. Its (grossly) unfortunate 5 billion of the worlds population (across geographies, not that it matters) could not identify with them in their time.

Aside, principally though, your ability to resolve forward in the face of rejections has a higher probability of positive impact on your eco-system, than your human instinct to share experiences by considering your markets, customers or investors as lame (even if they happen to be lame) and giving up. [If your failures have had a impact or a burn-out due to which you cannot move forward, then that's a different matter which is valid.]

Also, consider the fact that maybe, (just a little maybe) that the markets, customers and investors are probably not that lame. Then, isn't it important to avoid the rut of ignorance (arrogance?) not seeing holes in your own proposition?

Does handling rejections teach you to sharpen your tool better? What is your opinion?

Wednesday, June 22, 2011

What is your Story?

First, check this video out :

You had no clue what he was singing right? (Unless of course you are a Korean or understand the language). Did the song still move you? I bet it did.

If you had just jumped right into the song sans the story, would it have moved you enough? captured the same interest? Maybe... But the song within the context of the story is a sure shot winner.

Lesson? A good story which people can 'emote' with, almost always sets a strong context for any performance. Be it a talent show, brand, product or a start-up. It does not have to be a sad story. It does not have to be a powerful story either. What a story does is establish trust right from the word go. Empathy is the shortest route to trust.

Isn't 'Trust' the most important faculty when you social-proof? It seems to be the strongest bond that carries people, product, brand and companies through rough weather.

Stories about people who built the product, the journey, country of origin, culture, happy moments shared, rough moments endured, individual or group struggles and victories are all seemingly the levers that can be very humbly sprinkled into the context. Being honest and sincere about it will surely set the tone, intonation, cadence and the 'pitch' right.

It helps to be inclusive. Involve your customers into the story. Make them part of your story, their struggles, their victories, their pains and joys told from the perspective of your brand.

This is what the Experience Economy should be all about. Isn't it?

What's your opinion?

Friday, June 03, 2011

Value Erosion - Prisoner's Dilemma & Defections

My previous blog did evoke some interesting conversations on pros-cons on the Group Buying models. Mostly the argument for Pro group buying almost always veered towards group buying being a great model for service which has high-fixed cost and excess capacity. The examples almost always ended with Travel (Airline) and Hotel Industry and extrapolating that to SMBs!

To recap: High-Fixed cost services which has excess capacity (after recovering its fixed cost) tends to gain from every $ they earn for the same session (Airplane, Yoga Studio etc..) as the cost of acquisition is not significant there after. The Key here is "post fixed cost recovery" and "same session". This is a very Rational Viewpoint. The flipside is, behavioral economics, human beings and market dynamics are not Rational!

Lets take a Yoga Studio as in one of the examples. If the fixed costs were $2000 (lets say) per month (Lets call this a monthly session) and you have enough students who have already covered your cost. Now every additional student (assuming you have excess capacity) you add to the same session should be profitable for the Yoga instructor correct? Rationally Correct.

The challenge with this debate is exactly what the "all customer defects" scenario as per the Prisoner's dilemma presents. When the initial paying customers gets a wind of what you do to fill the remaining capacity of the Studio, they start defecting to wait for that Deal... and this catches on (is catching on). Airline and similar (Hotel) industry is only very few industry which can afford to operate in this model as people are 'pressed' to fly and cannot always wait for a deal. For everything else (which is not pressing), they will wait for a deal. This is already happening in the SMB markets in volumes as we speak. Regular paying customers are defecting to wait for deals. Also, they would now not mind to switch loyalty off the Merchants if someone else gives a deal.

We must exercise caution while extrapolating such models to SMBs right off. Unlike airline industry, the 'long tail' of similar merchants (Yoga, Cafe, Saloon...) is relatively much voluminous in a given city than a consolidated few flight schedules between two cities across airline players. which means, there will mostly always be a deal for me to defect.

When most customer's defect, then, the prisoner's dilemma feeds on itself to erode value out of the system. Talk to the SMBs to feel their pain and validate this.

A key metric on the current deal-seekers for Merchants now includes in excess of 50% (median) and as high as 90% in some formats of "existing" customers biting the deal! Did you add additional footfalls then? or are you defecting your current paying customers?

When most of them defect, the SMB will now be fully dependent on the likes of Groupon for filling seats to recover their high-fixed cost. Great if you are Groupon, Living Social, Google Offers..., Epic win if you are a Consumer, Sucks if you are a SMB. You know what SMBs will do if this happens right? (and what will be left of the business model.)

Bottom-line: The current avatar of group buying is just not a proven model yet and needs to focus on a whole lot of market dynamics to assure a equilibrium before we can claim that it works.

Thursday, June 02, 2011

Group Value, Where Art Thou?

There are exciting theories and debates on group buying, thanks to the promised land prescribed by Groupon who made Group buying the current rock-star of the fledgling US markets (post, recent down-turns that is). (Is it adding to inflation or aiding? Hmmm, tangentially different debate.) With today's S-1 filing, the heat (usually which allows a hot air balloon to raise) seems to be turned on. Don't get me wrong. Hot air balloons are the greatest invention which allowed mankind to fly. Just that its not a preferred mode of transport since the Heidenburg disaster. So is Group buying a proven model yet?

Quick recap: Retailers usually break down their sales life cycle largely into Acquisition, Retention and Servicing. The budgets for ATL (Above the line), deep-discounts and loss-leader line of products typically falls in the Acquisition cycles. The loyalty and BTL (Below the line) promotions fall into the Retention bucket. Upgrades and up-sell falls into the Servicing bucket. Smart Retailers do not aggregate a single promotional budget to track their consumer micro-segments. Instead, they spend their research and sampling $$ on new customers, marketing $$ on Silver profiles, retention $$ on Gold profiles and the Service $$ on Platinum profiles. Not all these budgets are equal. Most important of all, The ROI of each of these spends are significantly different for each micro-segment. Also, retailers trade-up during boom cycles and trade-down during bust-cycles (So the budget varies).

Where does group-buying fall into? Clearly the Acquisition bucket (which is NOT a capex spend but a marketing cost). The Acquisition is the big funnel that marketers fill in order to convert the footfalls towards the Retention bucket. One must make sure that they fill quality leads which aids in healthy conversion helping them move the leads to the Retention bucket. What are quality leads? Are consistent deal-seekers quality leads? Are Bargain hunters quality leads? Is the cumulative conversion index per consumption-segment positive? These are some of the questions which a optimized, organized retailer such as GAP, Walmart etc. asks. Are these measures different for a SMB retailer? I would argue that they are even more applicable for a SMB...

When does one deep-discount? typically, when you have end-of-line sale, surplus capacity whose account has gone into sunken cost, poor-utilization rates (Ex: Hotel Rooms), Expiring shelf-life, to clear product line whose GMROII is not positive, Projected increase in policy costs (Taxation changes on holding inventory), or adding large sampling to acquire new customer base for virgin markets or virgin products. (I may have missed few others for sake of brevity). Most of the above is a provisional measure for retailers who are operating in a larger scale of economy. What are the premise for SMBs then? In my umpteen conversations with the SMBs, deep-discounting occurs primarily to add leads to their funnel in the hope that the consumer shall experience the "Unique product offering, Service and Ambiance" which is a differentiation for the SMB to exist. Now this sounds like a virgin offering. So it clearly is for "Sampling" then for the SMBs.

Now, the Cost of Consumer Acquisition (CCA) should be paying off on the long run through two different measures that adds up.
1) NPV or the Net Present Value of the Consumer.
2) LTV or the Life Time Value of the Consumer.

The NPV for virgin footfalls does not exist. Which leaves the LTV. This materializes only after the conversion. Remember that the CCA of 'N' who are added to the funnel is used in determining the 'M' conversions and their LTV. Meaning the CCA cost of adding 100 virgin footfalls must be offset by the LTV of the 5 who gets converted (5% as a example).

The CCA and LTV are very segment specific (Beauty & Massage parlours, Small Eateries & Restaurants, Boutique Hotels, Convenience Stores etc..). The conversions are also segment specific. Not only are they segment specific, the country of operation, the consumer behavioral context, culture and current economy makes a huge difference in any of these measures.

As an example: A country like USA where people leave a tip in the Restaurant on the original price of the meal-offer (Not on the group-discounted price) makes a significantly large difference in the operating cost for the Vendor as against in India where people usually do not like to leave tips or have a standard 5 Rupee coin for whatever the ware maybe.

Also the LTV is a layered value derived based on effective frequency of visit. Meaning, How many of them visited 1 time, 2 times etc... and the relative spend thereafter. Also, there is a break even frequency at the same cost before a positive value can be derived (Here is a simplified calculator)

Not all SMBs are also geared to service a peak footfall that occurs during this group-buying frenzy, which results in diluted service/offering. This hampers the conversions badly. Most of the SMBs are not seeing a conversion above 3% (median) of the footfall. I have been following rants about SMBs saying that they shall never go back for Group-buying again . I have also heard rave reviews about some Up-sale (NOT conversion) during such frenzy, especially in the Beauty Segment (people walk in for 500 RS worth of ware but spend 10K), These guys love the group-buying models... besides, there has been theories that deal-seeking bargain-hunters are never loyal (There are stats to prove this)... All of this has to play out towards a equilibrium in the long run.

The point is: Group-buying in its current avatar (Independent of what ever the top-line suggests for Groupon) is not YET a proven model for SMBs. It cannot address the economy of scale challenges of the big retailers either. So where does it fit as a positive operational model? I am not saying that this will fail. Its just that there is a lot more nuance and context specific treatment that is required to make this a classic. I am sure the markets will figure it out eventually...

For now, how many of you are standing in the line for the Groupon IPO? Make sure you do not sell your house as of yet to invest :)