Sunday, May 9, 2010

From Start-up to Maturity: Indian Entrepreneurial Challenge

Indian psyche is unique in that it follows an icon as much as it chooses independence. Indian corporate saga is an equally unique amalgam of followership and independence. The growth of Indian enterprise is founded on an entrepreneurial rush into an activity that is opened up. The evolution of industrial structure in India is based on a continuous expansion in the number of firms in the fray rather than a structural consolidation at any point of time. The Indian corporate sector therefore faces a challenge as firms struggle to transform themselves from start-up stage to maturity state, some passing successfully through a growth phase, and some failing to. The challenge if left unaddressed could affect entrepreneurial development, and eventually the competitiveness of the Indian corporate sector.

The Indian industrial evolution

The Indian industrial start-up model, as elsewhere, was fuelled by entrepreneurial energy. Even when India was under foreign occupation, in the 1800s and the early 1900s, Indian industrial start-ups were established by the Tatas and Birlas, with their enterprises becoming large industrial groups over the years. Post-independence, successive government policies enabled and encouraged establishment of scores of cottage and small scale enterprises in India. Some of these served larger firms as suppliers and vendors of materials and components while several other start-ups sought a direct go-to-market strategy, with varying degrees of success.

An introverted India, even post-independence in 1947, rarely encouraged free entry and exit, expansion of scale and induction of technology in its industrial and economic policies. As a result, companies stagnated and became less competitive, relative to global trends. At the same time, licensing regulations inhibited global corporations from entering into or expanding in India. On a helpful side, process patent policies (as in some other countries) ensured freedom for domestic companies to reverse-engineer global products for Indian markets. The Indian automobile and pharmaceutical industries became, for example, the epitome of low-scale, domestic-oriented direct to market fragmented industrial structures of the 1960s and 1970s.

There emerged a new Indian entrepreneurial wave from the 1970s (Ambani founded Reliance, for example). Technology induction and assimilation blazed new paths from the 1980s (Indo-Japanese automobile collaborations such as Maruti-Suzuki). Entrepreneurs and corporations were rid of controls, and certain industries started becoming global leaders in certain sectors from the 1990s (TCS and Infosys, in Information Technology). Increasing confidence in Indian competencies and policies from the 2000s and post-patent harmonization assurances led to great global interest in India with a better awareness of the competitiveness of Indian enterprise. Simultaneously, Indian industrial groups and larger Indian companies became globally aggressive, entering overseas markets (directly and through partnerships), acquiring overseas units and marquee brands.

The Indian start-up model

From a protected, regulated domestic regime, the industrial paradigm in India evolved into a liberalized, competitive globalized regime in the 2000s. The models that helped Indian start-ups to enter and stay fixed in scale and scope are becoming less tenable. The Indian start-ups are today verily at cross roads, with choices between smug stagnation and tough transformation. Yet, the continued proliferation of owner-managed companies and small scale enterprises with dated technologies indicates that a new start-up model is yet to emerge.

The Indian start-up model is highly domestic market oriented and self-reliance inspired. While start-up firms would not be averse to being suppliers to larger firms, especially in sectors such as engineering and automobile, the overwhelming preference seems to be on direct go-to-market strategies. This enables firms have a quick market-oriented entry in any industrial segment but also limits the ability of entrepreneurs to create stable, growth or niche models that could be more vibrant technologically and commercially in the long term.

The missing dimensions in the Indian start-up scenario relate to inadequate access to technology, insufficient financial resources and overwhelming reluctance to consolidate. The first two factors dictate the pace with which a start-up in India is able to navigate to, and through, the growth phase while the last factor dictates the ability of a start-up firm to stay on course in the growth phase or navigate the maturity phase. Typically, a start-up in India would have the capability to move from a USD 1 million to USD 100 million annual sales but lack the capability to move beyond without dedicated efforts to manage the three dimensions of technology, finance and ownership.

An examination of the Western and Japanese models of start-up could provide guidance for new development models relevant for Indian start-ups.

The Western and Japanese start-up models

The Western and Japanese start-up models are typically based on pioneering pieces of technology or market creation. While it may be tempting to relate this to the fact that all modern technologies emanated in the West (largely USA or Europe) or in Japan it is the start-up intent that made the difference. Entrepreneurs with truly ground-breaking products in the West or in Japan or Korea went on to make their start-ups into mega global enterprises. However, there are certain typical nuances of technology-led start-up development that are different.

Not all techno-entrepreneurs in the West were or are keen to build their start-up enterprises into mega enterprises. Entrepreneurs in the West see creation of commercial value (for themselves) more important than either reaching the market or expanding the scale of the enterprise. Entrepreneurs see technology as a concept to be commercially proved at their hands rather than converted into commercial saleable products in their hands. Entrepreneurs benefit from an equity environment that provides multiple-series funding. Finally, entrepreneurs are willing to monetize their technologies and firms to generate surpluses for new endeavors. Ownership and management are treated as very important in the start-up phase but are considered expendable for leading into the growth and maturity phases.

The techno-entrepreneurs in Japan are different. They tend to innovate for larger industrial firms or trading groups and in the process help create multi-level business arrangements. The start-ups set up by the techno-entrepreneurs typically grow with the larger firms and groups, and become global enterprises in their own right. The entrepreneurs are typically attached to their technologies and family presence but are also able to evolve to the higher levels due to the synergistic relationships. Typically, the larger firms in Japan respect the origins and independence of the smaller suppliers and desist from the Western temptation of acquiring promising technologies and firms. Instead, the accent is on letting the smaller start-ups grow into mature, innovative enterprises.

A hybrid model for Indian start-ups

Given the constraints the Indian start-ups face in accessing technology, finance and markets, and the attachment of the entrepreneurs to continued ownership of the firms they founded, a hybrid model is relevant for Indian start-ups. Assuming that a base level of promoter and external funding is arranged, typically, start-ups fall into one of the three categories: those that make better use of available technology, those that make their operations more competitive and those that access certain market segments more creatively. Needless to say, firms which achieve a virtuous combination of technological innovation, operational efficiency and market penetration would be in a position to drive into a growth phase on their own. The hybrid model would be relevant to start-ups having competencies in one of the three dimensions.

Firms which are technologically innovative need to aim at achieving the earliest proof of concept, following which they should be prepared to license or sell the technology to larger firms which can take the product to the market. This phenomenon is widely prevalent in the West, especially in technology and biopharmaceutical fields, and needs to be adapted to the Indian situation. Firms which have pieces of market would do well by either taking in products from other start-ups or providing market access to larger firms. Firms which are operationally efficient must focus on gaining market access in partnership with larger firms having Indian and global market presence. This could enable a longer independent functioning to such firms, enabling growth journey on their own.

The hybrid model for Indian start-ups thus envisages growth through inorganic relationships across fragments of value chain rather than through organic end-to-end value chain. Many Indian start-ups in India have evolved into mid-sized firms through such relationships. Still some decisions have to be customized: for example, the scale and scope of such relationships, whether such relationships would need to be limited period relationships or permanent relationships, and whether the end game is surplus generation through value monetization and exit as per the Western model or lifetime domain commitment.

Founder-Manager transformational issues

Part of the evolutionary response would emerge from how the founders of the Indian start-ups manage the entry, growth and maturity phases of an enterprise. Entrepreneurial firms tend to be typically founder managed. Investors gain confidence with the founder being in total control of the enterprise while the employees get inspired by the leadership of their founder. As enterprises move into growth phases, investors need to let go of their control on the founders, and the founders need to let go of the control on their enterprises. As an enterprise becomes larger it needs to organize itself into organizational and business units that can be driven by independent managers to generate greater value.

While no professional manager can bring the passion and feel of a founder-leader to an enterprise, start-ups need to find ways and means of institutionalizing the entrepreneurial passion and feel through diversified professionalization. Indian start-ups which moved into the big league have done so not only on the basis of technology-efficiency-market grid but also due to organizational development. Serial entrepreneurship could well help Indian entrepreneurs to continue to feel their passion with newer enterprises while helping their earlier enterprises move on their own steam.

The suggested organizational model is based on the unique Indian psyche that complies as much as it commands; that follows as much as it leads; and that is as much professional as it is entrepreneurial. Compensating any limitations it has, the Indian employee base is driven by a deep sense of loyalty and frugality that can be leveraged by placing capable people in commanding positions. The success of large Indian private and public sector corporations is related to the diversified ownership model that is extended to individual organizational units of an enterprise.

Science and finance for start-up transformation

Start-ups need access to science and technology. Indian entrepreneurs are adept at adapting technology, enhancing efficiency and perching their firms on market niches. They are, however, diffident in taking science and technology from Indian research laboratories. For example, there are over 40 specialized laboratories under the umbrella of the Council for Scientific and Industrial Research (CSIR) as one of the largest publicly funded research network in the world. In addition, institutes of higher learning such as Indian Institutes of Technology and Indian Institute of Science have cutting edge researchers. These competencies can be leveraged to establish new drivers of growth through win-win commercial arrangements. Indian start-ups can place a just small proportion of the risk on using and developing indigenous science and technology to secure cost-effective business development. There is a great potential for Indian science and technology that is waiting to be captured.

Western and Japanese angel investors and private equity funds can achieve substantial returns by considering multi-phase investments in Indian start-ups that could transform themselves into future growth engines by utilizing India specific science and technology. There is tremendous potential that is untapped in social and industrial infrastructure, as well as rural and urban development. A comparative inventory of small enterprises in US, Europe and Japan with those existing in India will indicate the enormous possibilities.

Central and State Governments in India have traditionally supported start-ups by policy measures. Newer and more creative measures are required. Encouragement of single person companies, creation of financial exchanges exclusively for start-ups, channeling of a certain proportion of CSIR research effort for small enterprises, creation of start-up finance divisions in all banks and financial institutions, exemption of small enterprise promotion and management from complex legal hurdles and encouragement of mentoring of start-ups by working executives, all of these supported by governmental policies, could add up to a great entrepreneurial start-up movement in India.

Posted by Dr CB Rao on May 9, 2010

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