Archive for April, 2010

Next frontiers in Online Travel

Online travel market has been one of the most exciting ones over past few years from a growth standpoint. Starting with IRCTC, and then followed up by Online travel agents (OTAs), this category has seen a decisive shift online. Amongst other things, it has also helped bring a large base of shoppers online, and demonstrated the viability of the “assisted ecommerce” model in India through retail points.

As a category becomes large, specialized plays become feasible – focus on specific products, business models, customer segments or experiences can create a second tier of businesses that can create and realize value. In my view, online travel is reaching that stage. Following are some of the opportunities that we are seeing in the market and in many of these, entrepreneurs have started to build new businesses.

  • Product centric online properties: Be it bus ticketing or hotel bookings, India still does not have large swathes of inventory available electronically. New startups are working to bring this inventory online. Typically, this involved automating the inventory management of primary suppliers (bus operators and hotels) as well, unless the startup works on allocation basis. The key risks in this area include scale questions with regards to online adoption, and ability to amortize customer acquisition costs over few products. However, global success stories exist, and if successful, these businesses would be ripe acquisition candidates by large OTAs. In some cases, such startups are taking a character of GDSs, and the margin concerns might be more acute there.
  • Metasearch is becoming a reality – once you have multiple supplier websites and OTAs, the customer wants to be able to search across those and find the best deal. Again, a globally proven model, the key risk here is perhaps the ability of these businesses to compete with relatively large marketing spends of OTAs, since the central promise of both remains “cheapest fares”.
  • Experience driven sites – such as content sites and travel planning sites. Timing and business model risks are the most significant here, though with the right consumer driven model, it could be a very valuable play over time.
  • New segments – Corporate travel and B2B businesses are coming up to service different segments of the market, other than the consumer segment that has been most focused on so far. This space has the potential to get crowded quickly, given that most OTAs are also servicing these segments in part. Intimate understanding on unique needs to these segments (such as expense management) and ability to cater them well lead to success here. Similarly products focused on travel suppliers themselves, such as revenue optimization or cross-sales enablers could be interesting opportunities.

Travel is the biggest and one of the fastest segments to take off on the Internet. Entrepreneurs and investors are now looking for niche opportunities that can scale over time. Would love to get your views on what plays you find most interesting and scalable.

crossposted here.

Incubators – hot or not?

WSJ India Chief Mentor has an interesting article on incubators being an important engine of growth of entrepreneurship. It is an interesting observation, and makes me think about what will make these successful.

Incubators have been known before to have an adverse selection problem. Simply stated, if an entrepreneur has an option to either get cash investment or incubator support, what are they likely to choose. Incubator “money” is likely to be at a far higher cost than investment, and hence unlikely to attract the best ideas/teams.

There are a few things that can still offer an interesting opportunity for incubators:

  • Lower cost in startup phase: Web 2.0 has reduced the cost of internet startups in the west. If incubators can help achieve more with lesser money, or entrepreneurs can achieve more “under the radar” (with much less money than is typically supported through angels/VCs), they might be better off on a net basis being with an incubator. In a market like India, it remains to be demonstrated how much can be achieved (without compromising value) with 5 lakhs of cash.
  • Dramatic shortage of cash investments: If the ecosystem is too weak to support the top tier ideas/teams, than incubators may land up getting some of those as well. I do not believe that is the case in India though – the key gap might be in offering the adequate investor diversity, and in that scenario the screening skills of incubators become critical. From what I have seen of some of these incubators, that is not necessarily the strongest point in their favor.
  • Value beyond: In my mind, this is the most important element if an incubator has to succeed on a sustained basis. It has to provide value beyond money. That could be access to highly capable technical/scientific personnel (think IITs, or in a mature model, Israel). Or perhaps market access through a corporate incubator. I have heard claims that networking between incubator participants itself could be a key value, but am not sure of that one. Access to high quality mentorship at early stages – would the best teams get access to this anyway?
  • Own the idea factory: If ideas are generated in the incubator itself (such as a company, or a university setting, though in India most university incubators are tapping outside ideas) then the adverse selection issue might be avoided.

I would love to get thoughts on the merits of such an initiative. One can justify the government programs as a developmental initiative, but I would ask the question if they should operate as independent selection entities, or double down to increase probability of success of companies that have gone through a high quality selection process. Another key success factor will be the length of time for which an incubator supports the company – if business building is taking a few years, can an incubator effectively influence the outcome through a 3-6 month involvement? An interesting article here which outlines some similar thoughts.

Angel Funding Framework – some additional viewpoints

There is general consensus that entrepreneurship is on the rise in India, even though it is one of the most difficult propositions. Compared to their counterparts in other regions in the world, Indian entrepreneurs face more challenges that are ingrained in the social and economic conditions that are unique to India. One of the big challenges is the lack of availability of early stage funding from angel investor groups.

Several reasons have been given for why it is the way it is – lack of capital, lack of quality ventures etc. But in my opinion, the absence of a sound angel investment framework/structure relevant for Indian conditions might be the underlying problem. I say that for two reasons. One, there has been a shift in investor mindset across venture stages. VCs have moved up and very few play in seed stage funding and angel investor groups of yesterday are the new seed investors. Hence, angel investing frameworks of the past might not be relevant for the increased size and scope of investments required for today. Two, the range of angel investments being made today is very broad, between 10 lacs to 2 crores. The investment economics and risks are totally different at the two ends and I am not sure if the existing framework is scalable across the entire range. Traditional terms like investment multiple in equity ownership etc, that work in the west, will have to be adapted.

I had a few thoughts that I wanted to share with the group here and get feedback. First of all, the range of early stage investment (10 lacs to 2 crores) is too broad and needs to be broken down. A clear distinction between very early stage bootstrapping and angel group funding is required. Capital requirements under, say ‘x’ lacs should be done through boot strapping with friends and family and funding requirements above ‘x’ from angel groups (I personally think ‘x’ should be 40-50 lacs, but I am curious to hear other opinions). I think this is necessary because, only then the effort and cost associated with raising capital through angel groups would be justified along with return expectations for the angels themselves. Angels would also draw comfort from the fact that the entrepreneur has persevered to get the company off to a decent start before seeking funding and this reduces investment risk.

Second, the funding framework needs to change to address typical concerns that potential angel investors have. In my opinion, Alok’s framework which includes convertible debt instruments is a great starting point and could be a win-win. Ventures that need and are looking to raise a reasonable amount of seed capital (> 50 lacs) will be amenable to the debt terms in the framework, while the angel group ponies up a larger investment, but gets better terms on the deal at a lower risk. I think this could be a model that could attract more high net worth individuals to become angel investors and potentially increase investment size as well. Entrepreneurs will benefit from availability of increased capital and bigger funding size.

I understand that the above model still does not address the capital needs of entrepreneurs who need 10 lacs or so to get their company of the ground. But I am hoping that over time as the angel investing becomes attractive and the angel community grows, it would encourage a new breed of angels to take a higher risk in investing in “idea stage” companies with lesser capital. Comments and critiques are welcome.