About Unicorns And Related Things

Monday morning brings with it a post laying out the new ‘strangeness’ in the universe of the Indian unicorns by my former boss, Haresh Chawla. Some of the points, especially the one on doing due diligence, are ones that have bothered me for a while. I mean, even as an outsider, without access to the P&L statements of the companies it is not too difficult to mock up a hypothetical model of the business the investors are putting money into. So, why is it that the landscape seems to be littered with what seems to be strange moves by all parts of the ecosystem, unicorn or otherwise?

Be warned, what is to follow is a mix of personal experience, anecdotal information and lots of conjecture.

The crux of my argument is based on the factors that play an important role in the India story.


This is the ability of a team, enabled with capital, to execute a product/platform. It means that things work as advertised, as a norm. Whatever does not work is quickly fixed and the state of the system is such that edge-cases are minimal.

In some markets, this ability is determined by the team’s chops at quickly setting up a product operations, in other markets, it means primarily how enabled is the team towards closing key alliances, leads and relationships. In India this factor is particularly important because who you know can make a significant difference in being able to close a deal than the outright finesse of the product of the state of the finances of the start-up.

Market Size Validation

The truly gifted salesman can sell an ice cream to an Eskimo, but not even the most gifted salesman cannot build a big business selling ice creams to Eskimos. Every early-stage business and market makes assumptions about the size of the market it is selling to. The gap between starting a business and the business hitting escape velocity is often marked by the time spent in validating the market size and the long-term margins that can be accrued in selling to that market.

Market Growth Potential

Some markets start small, but given the right conditions, it can grow into substantial ones. A classic case of this is mobiles in India. 15-years-ago, this is a market that barely existed. Today, it is a multi-billion dollar industry. Given the right conditions, can a market grow like this?

Path To Opening Up Market

A market that is large enough or one that has enough potential to grow a lot alone does not mean that you can open up that market. Some will require a lot of capital to acquire users (deep discounting and CoD that did this for Indian e-commerce), others will require regulatory roadblocks to be lifted. There are various paths to getting this done, some are feasible, others are not.

Ease Of Access To Capital

Every business needs money to run and most early stage businesses will always spend more than what they earn. Which means that they need money in the bank to cover for expenses till the tide turns and they can turn at least cashflow positive. Easy access to capital means a lot of undeserving ideas/companies will also get funded, but a lack of it means a lot of good ideas/companies will never get funded.

Operational Efficiency

Operational metrics is key to measuring the health of a company. A company that does not manage to make at least a couple of operational metrics more efficient as the years go by is a big stonking red flag that everyone needs to take notice of.  If you keep needing more and more to do less and less and at some stage the ability to acquire the more is going to run out.

Capital Efficiency

This one is self-explanatory and the classic “how much do you make on your dollar?” question.

Exits, M&A

Investors and founders (especially the former), need an eventual big payday for all the risk and effort they have put into the start-up. A healthy ecosystem needs a regular supply of exits (through IPOs, M&A) for the payoff and also to correct over-leveraged players. Not all exits are of the sexy kind, where founders and investors make lots of money. But even fire sales are necessary to let the early risk takers cap losses. An ecosystem where exits are far and few in-between will struggle to sustain itself in the long run.

The Indian ecosystem, seen through the prism of the above factors, has gone through two cycles so far. For the sake of convenience I will ignore the smaller cycles (the 2008 meltdown, for instance).

 The First Stage (1997 – 2005)

  • Execution was terrible
  • Market size unknown
  • Market growth abysmal
  • Path to opening up market unknown
  • Lack of easy growth capital
  • Operationally inefficient
  • Capital inefficient
  • Unit Economics Is Bad
  • Very few exits, M&A

The Second Stage (2005 – 2015)

  • Execution has improved significantly
  • Market size has been validated
  • Market growth has picked up
  • Path to opening up market is known
  • Plenty of easy growth capital
  • Operational inefficiencies have skyrocketed
  • Capital inefficiency has skyrocketed
  • Unit economics has worsened
  • Exits and M&A has picked up

The key to unlocking the value in the Indian ecosystem is to get all the points to go green. We have improved significantly in execution, validating the size of the market and figuring out how to open up that market. But the two key factors — of improving operational and capital efficiency — are key to the long term well-being of the ecosystem and we are far from being able to crack open those two fronts. It is imperative that we figure out how to do that in the next stage at least.

Through 2015, I had the opportunity to see up close some of the e-commerce operations struggle with extreme inefficiencies. These operations can easily improve margins significantly if they can reduce inefficiencies. But that is easier said than done.

Some of the reasons behind the inefficiencies:

A System That Monetizes Inefficiency

Our famous ‘jugaad’ system ensures that people who can navigate around that can quickly acquire wealth and a significant number of people benefit from the existence of that inefficiency. A component of an ecosystem that brings itself into play in the ecosystem because of its complexity will always strive to increase the complexity in the system as a matter of survival.

Most of the e-commerce companies deal with problems on a daily basis that are in place because of this inefficiency. We have varying tax codes, local laws and levies. Till we get in place an administration that has the political willpower to remove these inefficiencies, it is anyone’s guess when that point in time will arrive when the people who benefit most from the inefficiency will stand to benefit more from an efficient and predictable system.

No Standardization

You would assume that after so many years into the e-commerce revolution in India, there would be a standardized framework of addressing pin codes in India. The funny fact is that there is not one. There are numerous ways of doing this and some of the courier companies even make up their own pin codes. Even where the pin codes are the same, the areas they consider under coverage of a pin code can vary from company to company. There is no standardization on buckets of weights or measurements either.

All this leads to an environment where an apple is not the same apple for everyone. An apple can be various kinds of apples and each shipment of apple takes a conversation with all stakeholders which results in disagreements, disputes etc.

No Experience In Large Scale Retail

The scale of e-commerce possible in India requires prior experience at the scale of what retail is like in North America, where it has been refined to a fine art with decades of experience driving logistics, pricing and marketing. The largest Indian operation on that front, which comes closest is a Big Bazaar, which is tiny compared to the large American retailing operations.

The lack of this experience has resulted in a bonanza for the same sellers across the platforms, while for the customers there is not much in terms of differentiation other than price. Our discounting is also not well thought through, because we don’t understand discounting as well as we should.

All this results in the current strangeness of the Indian unicorn ecosystem. From the investor side, most of the money being put into the market is just what the investors have to put in during each round to stay in the game. There is little to guide them, even in these times, to show what is possibly a good bet. The market is such that someone can easily outspend the top player into a position of dominance as there are really no moats that cannot be overcome with money.

This also leads to the overemphasis on founding teams than pure product in India. A good team in India that can move the wheels faster is always likely to win more than a great product with an inexperienced/not-so-well-connected team.