“My belief says that we can absorb more startup funding in India”,- Alok Mittal, MD, Canaan India

Alok Mittal, MD Canaan India

With a broad range of hands-on experience founding, funding and supporting early-stage technology companies, Alok Mittal joined Canaan India in March 2006.  Prior to joining Canaan, Alok co-founded, which was acquired by Alok is also a co-founder of Indian Angel Network and sits on the board of TiE (The Indus Entrepreneurs).  Iamwire interacted with Alok on his views on the current investment scenario in India, their investments in Naaptol and a host of other topics. Here is the excerpt of the interaction. 

Being an entrepreneur yourself, do you think it is difficult to start a business in India?

When people use the term difficulty of starting a business, often it is mainly the administrative part of it. So while it is important to make those processes as simple as possible, it is still something that entrepreneurs are dealing with and getting done. I did my start-up in 1999 and between ‘99 and 2012 we have come a long way, lot of things have improved and will continue to improve over the next 10 years. But is it enough to be happy about? No.

Personally my belief says that we can absorb more startup funding in India.  I am pretty encouraged by the progress we have done in last 5 years or so, I think a fair bit has been accomplished. This is not to say we could not have done more but coming from the environment where you had literally zero VC funding available; last year we did about a billion dollar in investment.

Last 18 months have been great for emergence of angel capital, seedfunds and incubators.  I see a lot of people with 20-30 years of experience leave their job and do startups.  I did not see that in late 90’s and now I am meeting lot of people who want to do that. So I think the talent pool has been enhanced.  I think it is a great time for entrepreneurs to get into their startups, get senior people onboard to create an environment where you can have discussions and keep enhancing. One has to be patient; one has to have the right mindset and right value system to build a great company.

Talking about the online retail do you think there is some sort of skepticism developed in VC’s about putting money in the market?

No I think there is still a lot of excitement over online retail.  I think there are a couple of things that people are cautious about; one is capital efficiencies of these business and where the amount of capital required for these business will come from, some of these businesses might need 50-100 million dollar or more of investment and second I think we are more interested to invest in differentiated business as many of these look like replicas of each other. So those are the couple of things we are watching out but overall consumers are buying over net and that represents a big opportunity going forward.

There are two parts to what you’ve said; one is capital efficiency and other is the entrepreneurs. Do you think that entrepreneurs are not capable enough to understand and drive capital efficiency?

No! It’s really the function of the business model. There is one business model in ecommerce which is to stock a lot of inventory of what you want to sell online and start selling it and provide initial value to customers through discounting and the other is to operate through direct vendors of the product. Both these methods apply pressure on how much capital is required so I don’t think it is lack of capability on part of entrepreneurs to be more capital efficient but it is the choice of the business model. Now Entrepreneurs are experimenting with an alternate business model which requires less amount of capital overtime.

So what you have to say about the startups which are getting funded over an idea and then diversifying the portfolio after the funding.

Normally startups get funded over an idea and they try and execute that idea. Now if for any reason the company realizes the idea is not what they had thought it was in terms of either scale or profitability of business model then they would try and experiment few more things and try to get to an alternate hopefully adjacent idea. And typically that happens a lot in early stage companies so companies will start off with one thought and realize that there are some natural constraints, barriers on that business, and they would try to execute it differently and try to make that work. But it’s not a common practice that company will get money and then try to broaden their service.

Talking about Naaptol’s  journey from an affiliate- to- naaptol club and now a Hindi Movie channel. What are your ideas about that?

Naaptol has always; ok not always but at this point continues to be a multichannel e-retailer; now store will not get built overnight but over a period of time, so our transition from being a pure print offer company to print online and TV driven company was something that was core to the investees of the company when we invested in it close to 2 years back. So it’s not that I started with something and today I am doing something completely different. In their case they have found enough flex to do what they were planning to do and diversifying the channels of customer acquisition for them. The movie channel that we have launched is also a Teleshopping channel, it all depends on what we may call it, but it is a channel, the core purpose of it is to sell through TV.

So it makes us very curious about the idea of starting with a movie channel, which first has to compete for TRP and involves product commerce. Is it a viable model? And why Homeshop and Star didn’t come up with it?

I am not claiming that everything we do will work, we will see. But the idea is that we want to have a Teleshopping channel out there and we don’t believe customers are going to tune into the channel 24 hours a day to buy, so we will need additional content and movies and music are proven content to build on in the broadcasting industry space. There are two models in this industry, one is infomercial model and one is the 24 hours channel model. Homeshop and Star CJ started as of 24hours shopping channel.  We are starting off with a channel that has different balance of content vs. commerce but we will tune that as we go along, if we need to go to a 24 hours channel we will increase commerce and decrease content and if it the other way around we will do that.

So does it reflect the lack of trust in natural model of ecommerce of selling through online

No! See what happens in a business such as naaptol is that we land up going deeper into Tier 3-Tier 4 cities relative to pure ecommerce businesses and we can get value in building that capability. But that’s not just the media capability that we can deliver to those geographies, we need to understand what people in those towns and cities want, so the way which we want to differentiate ourselves is a) to be multichannel b) to be relevant to a larger pool of customers which we cannot be by just being online; thus our foray into print and TV business as opposed to just the catalogue business. Our proposition is not that you can find whatever you want by logging on to our channel or reading our print ads, these are basically a very different positioning than Flipkart and for that positioning we think that these media works well. If we are trying to do a catalogue business these media would not work, as I can’t showcase 10 thousand products on TV which I can really do well online.

Diversifying to a TV channel, how much of a cost pressure is that on a business? Does it take your profitability probably 4-5 years more down the line, how does it affect your business?

4-5 years is a long time, launching a TV channel that becomes successful takes investment and we have gone down that path only after making sure that the company has enough capital to execute that. To us and our brothers in the VC industry the question most often asked is not how much investment does it take or does it delay our profitability, but how much value does it create, what is the risk? And does the company have the capacity to take that risk and on all those dimensions we felt confident on going down that direction. We will see how it comes out

What do you have to say about the malpractices adopted by the Entrepreneurs and how it affects the VC’s and their investments?

Are entrepreneurs building not just business but high quality business? I think in every market you will see a broad spectrum of such cases. It is the responsibility of the stakeholders of the company including the board of the company. Certainly investors have some degree of influence in that to make sure that sustainable high quality business are being formed as that’s the only way consumers will like your business , they will come back again to buy from you and so on.

Talking about start-ups, what are the metrics you evaluate in a startup at different stages in online retail?

At the very early stage if someone comes for funding, the team will be a key element, what is the business model they are going after and does that offer the capability to be capital efficient/depreciated.

Is it a large enough niche? Market size is a construct. So when you get to the Series A stage where you have done some bit of execution then we look for evidence of each like the team looked good on paper but did they execute really well. Are they able to sell? Are transactions happening? What are they paying for those transactions?

At series B you get into more details, understanding that the first transaction is not going to make you money but are your customers coming back to you? Do your customers believe that you are differentiated or not? Are the customers coming directly to your website or most of the traffic is still coming through search engine?

So those metrics evolve as we go from one stage to another.  And we gradually shift from demonstration of concept to generate revenue to demo of act.

So what about Canaan’s vision for India?

We are a global Venture fund and invest in India through the common fund. The reason we do that is a) we believe in India from an entrepreneurs stand point, the ecosystem maturity is nowhere close to what you would find in the US or in Israel but we think that the market opportunity is there, we think smart entrepreneurs are there, we see the ecosystem maturity is improving day by day.

Second belief is that technology innovation will be globally connected, so this one fund structure allows us to make relationships and connect entrepreneurs across geographies and not just see India as a closed market. So when we invest in companies in Internet, Outsourcing, we are getting lot of learning both back and forth.

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