“Entrepreneurs are addicted to other people’s money, or OPM,” sounds like a succinct description of the state of the e-commerce industry in India. The pun on ‘opium’ is clearly intended. It comes from K. Vaitheeswaran, the man who pioneered retail e-commerce in India with Fabmart in the late 1990s. He recently spoke to The Hindu to promote his book, “Failing to Succeed”, that takes us through his successes and later travails in building the predecessor to today’s e-commerce giants in India.
The book has an equal mix of stomach-clutching thrills and disappointments that an entrepreneur faces, cloaked with gentle humour. In it, the author has been brutally honest – about himself, his ventures and the ecosystem. It contrasts starkly with today’s corporate world whose PR machinery helps gloss over failure and highlight the rosy parts. A great read for those aspiring to start up, and a must read for entrepreneurs who feel things are not going according to plan. Excerpts from the interview:
“For many entrepreneurs, fund raising is like a drug. They get addicted to it. They get money, and then want to raise more money. How do you do that? By spending what you have very quickly. So, you are raising the bar on just raising more and more money.”
‘Need patient capital’
The other bane of the industry is lack of ‘patient’ capital, according to him.
“Indian entrepreneurs need capital but also patience. Foreign capital is impatient.” Most investment funds come seeking returns in a 4-7 year time frame from the time the fund commences. “So, if they invest in your firm in their third year, an exit is staring at you in the face.”
As investors are in a hurry to see returns, they tend to look for scale quickly – which means availability of more funds for expansion. “The entrepreneur is glad to see so much money. But once invested, there is a hustle for returns as well.” Quick returns, he said, may not be practical in all cases.
Fabmart, later rebranded as Fabmall and then Indiaplaza, folded up in 2013, after a 14-year roller coaster ride. Asked what disappointed him the most, he said, “I don’t have a problem with the business closing down. That’s the nature of the beast. In a start-up, you may not get the financial outcome you want.”
But there is bitterness about the way the company failed, he said. “Others, who were also equally accountable, in the company should have owned up to the responsibility. There were a series of incidents that led to this ending. Having to see the collapse of a business I had built for 14 years, customer by customer, in this manner is what leaves me pained and bitter.”
So what did happen? “What happened to me is surreal – can’t believe it happened. People who had invested in the company and who were in the board of directors should have shouldered equal responsibility when the company was going down,” he said.
He insisted that “we weren’t out-competed, but were undeniably out-funded.”
‘Pedigree investing’
“The Indian start-up ecosystem is like a caste system — it’s hard to break in.” Mr. Vaitheeswaran is an engineering graduate from the Government College of Engineering in Tirunelveli and did not go to an IIT or an IIM. “Investors indulge in pedigree investing, that’s not a great idea. You can’t assume that all the smartness in India is confined to two or three institutions.”
Get out of pedigree investing, he exhorted investors. “To do that, investors must spend time and effort and potentially pick winners at the start of the race. Obviously, those who come out of premier institutions are smart. But there are smart people outside those walls too.”
What should e-commerce start-ups focus on? In the book, Mr. Vaitheeswaran says, that Gross Merchandise Value (GMV) is an overrated metric and that it does not mean anything. In his own business, he had focussed on making each transaction with a buyer profitable. He preferred to focus on metrics such as customer acquisition and customer retention costs. Deep discounting models work only when the concept of ‘LMS’ works.
In the interview, he said, “The Last Man Standing, or LMS model, is outstanding, but will work only if there is no other competitor left in the market. But in reality, there is always someone left standing in the market. Indian unicorns have a hard problem to win – foreign competitors have more money, bigger brands and they execute better. It’s a mug’s game.”
For someone who pioneered the concept of Cash on Delivery in India, he has had to withdraw the facility both times he tried introducing the concept. “Cash on delivery is a strain on the business. It also shows a lack of trust from the customer.” In the book, he argues that paying online is far more convenient and that CoD looks smart only as long as there is unlimited funding.
‘Permanent damage’
More money going into unicorns that want to outfund others, could lead to funding drying for truly deserving ventures, he said. “They may not get funding because a large part of the ecosystem will pay for the follies and fallacies of a few. That’s when the bad news will hit us. Worse, we may not even hear about them since they are unknown people – they may just collapse and fall by the wayside.
“It will cause permanent long-term damage to India’s start up story. I don’t want that to happen.”
What questions would he ask of a unicorn, as an investor? “You have already raised several billion dollars. At 10% of this fund raise, I want to see evidence of sustainability. Show me a path where you will definitely make money.”
“If someone shows me a 17-year path to profitability, I wouldn’t fund it. No one knows what will happen three years from now!”
Is he itching to start-up all over again? “Writing a book is no different from a start up – you need time, discipline and effort. Sure – it does not require a co-founder or the money. Yes, I have done another start up – this book is my biggest start up!”
Does he see warning signals in the ecosystem now? “One thing that all start ups will realise is rarely do things go according to plan. In such a scenario, the investors, entrepreneurs, board of directors, founders, management – they all must read from the same page. Whatever the page says, they must all be fine with that.
“When things go wrong, I find that they are all reading from different books, forget the same page! They may not agree, they may debate and argue but should finally agree on one plan of action.”
