Why The Y Combinator Model Does Not Work In India

Y Combinator exists in an entirely different environment from what we have in India. For any healthy VC/seed/angel funded start-up ecosystem to exist, it requires two things as must-haves. The first is the existence of reasonably sized exits at regular intervals via the IPO route or through the M&A route. The second is the existence of large enough markets to support at least two to three profitable players in any domain.

YC exists in an environment where the two conditions are well satisfied, leading to a situation where there is a considerable premium on a quicker access to funds (for the start-ups) and good talent/concepts (for the investors) where there is often an excess in supply on both sides of the table. India, on the other hand, has a real shortage on both fronts – good start-ups and good investors.

The main problem is that the Indian market for digital goods and services is tiny. In a non-existent market, neither product finesse nor pricing can make much of a difference. There is barely enough size in the digital domain to sustain large profitable companies. At best we see companies that are small and profitable or one market leader who is struggling to grow in its domain or diversify out of it.

In such a situation you can't get into the early-stage/start-up investment scene armed only with effort on your side. For the fight in underdeveloped markets the right gun is money and you need plenty of it. If you walk into it with effort and connections as the only weapons you won't go anywhere. Sustaining a first-mover disadvantage is a costly exercise in greenfield areas. If you don't have the money to sustain your portfolio companies, the effort alone won't save it. It is a finite non-scaleable factor.

In trying to sustain the number of portfolio companies mostly through effort than funding, the incubators/seed/angel investors won't be able to give the companies the time/effort required to grown them. Thus they actually reduce the ability/probability of the portfolio companies to succeed.

At the current market size I don't see the possibility of any of the smaller-scale funds being able to do a great deal of good. Their possible exits are so small that I can't imagine too many LPs being happy with the rate of return the GPs can bring to the table. If you invest in the region of ~10 lakh per company, the domain that you are investing into is also likely to be very small. Since we don't have well developed markets, it is not possible to start small into a big product.

That said, the parties who can play big in this – the VCs – are also increasingly moving away from their traditional roles and behaving more like PE funds. This is understandable since there are not enough big success stories in the market that can come close to the kind of rate of returns required by the VCs, thus they wind up investing in established companies than early stage companies or start-ups.

This is, obviously, not a healthy state of affairs. In fact it is quite regressive and it does not bode well for the country as a whole. Everyone can see the untapped opportunity, but the overall direction we are headed in is making it extremely unlikely that we will ever tap into it.

46 thoughts on “Why The Y Combinator Model Does Not Work In India”

  1. Pingback: Quora
  2. The real opportunity is for a startup to focus on global markets – not Indian markets are their target.  The “world is flat” context doesn’t only apply in the service context in one direction but in the product context in the other.

    1. As an ideal, this is true and good, but in reality, can you see an Amazon.com being seeded out of India and then getting to be #1 in the US market? Not asserting, but asking out of curiosity.

    2. I’m with @codelust:disqus — great ideal, but very difficult to execute. Speaking of YCombinator and Silicon Valley startups, see Airbnb for a great current example.

  3. is the nut of this, that there is a small indian market for digital goods?

    long-term, i see the y-combinator mindset as being destructive to the social good … too many frivolous “innovations” and vc’s chasing the home run … ok, going for six.

    what the y-combinator model would be really good for is non-digital startups, of which the world needs millions. 

    look at it this way .. when the world runs out of petrol, there will still be bullock carts. we need y-combinators for essential sustainable human scale things, not for the get-rich quick and big vc mentality that is soon to be seen as the heart of the coming collapse of the western model of doing business.

    imo. 🙂

      1. You cannot pursue profits *AND* be detrimental to social good.  It is impossible.  The only way to make a profit is to benefit society. 

        The contrary idea is socialist and anti-human.

        No matter what you’re selling, if the buyers are consenting, then you’re doing social good.   The ones who do social damage are the ones who use violence to force people to buy things (eg: governments & taxes) which is why government generally does a very poor job. 

        Any business that is profitable is improving people’s lives… if not, they wouldn’t be profitable!

        YC’s problem is in part that they aren’t finding companies attempting to be profitable.

        But it is anti-human to judge that something isn’t providing “social good”…. this is a socialist concept and meaningless.

        1. “The only way to make a profit is to benefit society.”

          This is quite untrue; it only works this way if you imagine a world where all purchasers understand completely what they are buying — both current value, and long-term ramifications — and are able to rationally decide to puchase (or not) based on that knowledge.

          Even if marketing were completely honest and actually attempted to explain what a product actually did, they still aren’t guaranteed to know that, for example, their product will be found to be highly carcinogenic a decade down the road.

          Don’t you think the makers of thalidomide made a profit?

          1. Nonsense.  Perfect knowledge is impossible.  You presume that you know better whether people should buy something or not.  You presume that if a product as a defect it can’t be a net positive to the world.

            The alternative, of course, is that some dictator like yourself determines who gets to buy what and who doesn’t.

            This is tyranny.  It is demonstrable that the citizens of the US which were relatively more free, had a higher growth in standard of living than the citizens in the USSR where the government had complete control to “ensure” everyone benefited society.

            This is basic economics.

            That you think differently is because you’ve been indoctrinated by socialists.

        2. I’m with @c37be280726545405a583da60a2b63c9:disqus on this one — how was Lehman Brothers doing social good in the early 21st century with credit swaps and CDOs? How has Philip Morris ever done social good?

      2. New “for-profit philanthropy” organization types are growing in the U.S. Google is a leader in the area. Profit and social good/philanthropy/altruism/charity don’t have to be mutually exclusive, indeed, and new non-profit legal statuses are being created to encourage development of these kinds of orgs in the U.S. I hope we see more of this.

  4. I strongly agree with you. But the fact is India has a great market. If some one out there creates a product just for Indians instead of Globe there is high chances of success, India holds 1/6 population of the world. Most of the startups here try to imitate famous startups from Western Countries. They don’t understand simple thing that its solution for Western Countries whose culture is far more different than India. If we create startup which solves problems which Indians are facing. Then why not even Y Combinatore model also will work in India. We are some what following what US is doing,  (as  @twitter-71748904:disqus said)  following the hype.

    Some 6 months ago I wrote a blog similar to such issues – http://dewbot.blogspot.com/2011/01/startups-bollywood-and-indian-society.html

  5. India follows the “Sheep Herd” mentality. 
    The whole country’s economy is based on people getting into “Profitable” domains mostly following the success of a pioneer in the field. 
    The most recent example of this ideology is the “Business Process Outsourcing” industry. 
    New BPO units are propping up here and there at a dime a dozen leading to a quality deterioration in the final deliverable. 
    This process will continue till a saturation level is reached and then they will wait till another “Killer” domain picks up momentum. 
    Till then India will be in a so called “Calm Period” where nothing great and major takes place.

    1. BPOs were very much a service offering that leveraged cheaper costs. That kind of advantage does not last for too long and is not very relevant to the YC model.

  6. In my opinion majority of the indian startups are formed with idea of making it big and hence often imitating successful western implementations. Due to this often the  current market assessment w.r.t to India is overlooked and thus a higher failure rate.   
    Unfortunately the current indian startup scenario is what US was in the 90’s.
    So definitely the YC model which depends on the two must have’s won’t work right now in India. But given a few years it can if we all take a few notes from US startup history model.

    1. as someone who lived in the US in the 1990s and was at one of the ground zero’s for the dot.com boom (MIT), I can tell you India is nothing like the US in the 1990s, India is way behind that
      but that’s not the point, that was a snapshot in time and it does not make sense to compare one period of time in one country to another point of time in another country because it misses the fact that countries can leapfrog in terms of technology (look at telephony both landline and mobile in India) and it misses macroeconomic circumstances (India is burdened with infrastructure issues, food inflation, and energy prices) that are different than what other countries faced at different period of time

  7. Shyam, you’re basically saying here that a small amount of cash would NOT go a long way in India, because:

    – the market is small
    – there are no quick exits. 

    I think what we need to see is WHY the ycombinator model works:

    – hackers build at low cost. because they are the visionaries, designers, creators, sellers
    – hackers work hard
    – hackers are smart

    A lot of ‘hackers’ in India have applied their aptitude/skills/grit to not-completely-online opportunities, and have succeeded. For ‘hackers’ who want to stick to pure-online opportunities, as someone pointed out, the world is indeed flat.

    1. Hey Niraj,

      I’m not questioning the hardworking ethics here, nor the smartness. If you don’t have a large-enough market, you won’t scale unless you spend money and a lot of it.

      It is not a blanket rule. Grexit may break this, much on the lines of a Zoho, but not every product is a Grexit or a Zoho suite. Some of the products have a very local use case. Imagine trying to sell Flipkart in the US, while they are based in India. You can’t do that without money and lots of it.

      1. Flipkart is not a pure digital business, but in a space with a large Market and big exit opportunities. All such businesses will benefit from a yc model. Pure digital goods businesses compete globally and hence need more cash to reach out to the world, while sitting in India.

  8. YCombinator exists in a market with a lot of dumb money sloshing around, because the US government is printing money like crazy.   Just like the housing boom, in the early days of these market distortions, it looks like easy money– or bad models look successful.   YC funds what Arrington called “dipshit” companies.  None of them will be around in 10 years, and none of them are trying to do something real.

    India is a real country with a real economy and needs real companies.   Real companies take a completely different focus and require a completely different method to build and launch.  India could maybe use something that replicates the social aspect of YC — much like the Chilean experiment– but the right solution for india will, of course, be indian!

    1. we should be less worried about creating the google and more interested in seeing the next GE, or P&G, or Toyota
      we tend to focus too much on tech and not enough on creating world caliber companies in retail, manufacturing, services, healthcare, mining, energy, etc

  9. Why is startup => digital goods a given? There’s surely enough markets in India that can be addressed using tech, and a YC here should help focus on making that work. It’ll likely not be “whats worked there”.

  10. Shyam a good article and requires further investigation and discussion.

    Has India matured itself to get on to next level? where by history and out of necessity india was dependant on US or UK for Software services and jobs but now you are seeing a necessity coming to India to create its own version of Innovation labs.
    I guess India needs a unique approach and also different ways of working, can imbibe some of the learnings from the west and try to adapt.Got to take it slow, create the culture of say ycombinator or tech stars i.e not over hype it but try to get the buy in from Young Grads who are coming out of college and create some awesome companies 🙂

  11. This is exactly the situation that we are seeing in South Africa. Out of our top 4 VC’s, all are looking at some sort of seed capital arm or PE fund. This is not the ideal situation for obvious reasons such as poor LP returns and complicated Due Diligence for the entrepreneurs. We are looking to remedy this issue by trying to stimulate seed capital and Angel networks. There is also the like of the Google Umbono project which look at supporting concept stage entrepreneurs to try to increase quality deal flow. 

  12. Disagree at some level, as there are many Indian VCs like Accel, Sequoia, IDG etc who are trying to bet $200K – $500K in early stage companies (co-investment model with Angel Investors)

    Also funds like ours – Blume Ventures along with others are creating a new category of super angel funds in India where we go a co-investment route and invest anything between $50K – $250K in tech focussed early stage companies.

    If you look at recent deals in the VC space in India, probably some of them don’t make the public eye – there are many sub $500K deals. Would be happy to change people’s perspective on the Indian Start-Up Scene.

    In fact the IIMA incubation cell might have 2-3 from 20 investments raise the second round of funding from Angels/VCs thus slowly by surely proving the YC model successful.

  13. 1. To build a sustainable incubator/accelerator, it needs to generate $ flows (in terms of exit or other ‘creative’ ways – i won’t tell you how 🙂 )
    2. You need to generate quality deals (applications): For that, you need a really influential chap (like PG) as the Founder of the Incubator
    3. You need to back the startup with follow-on funds (INR 10L is good, but you need to put INR 50L in 4 months time)
    4. Show Exits or cash-flow (help the startups with BD and solid CFO skills)
    5. Stop taking random equity, most of the incubators kill the next rounds of private funds to flow-in to the startup. 
    6. It’s easy to ‘start’ a company as well as an incubator. It’s hard … to make $
    7. Do not copy YC. Build a new/better model for India
    8. Hate mails: welcome

  14. Disagree at many levels with this article which is made to sound like a well accepted predicament rather an inference. Who told you about such terms like “good investors” and “good startups”? Please get in touch with ycombinator driven company to look at their term sheets. You will realize that they craft their finance almost like a debt. In other words they are not betting their money based on liquidation events. They are investing in the ecosystem itself. 

    Deal flow is an interesting phenomenon in Silicon Valley. I will not play the expert here. But I am knee deep in this space and can tell you more than often innovation plays a secondary role in this fray.

    Please investigate Ycombinator like business model before you can make predictions. Provide empirical data to support your inference.

  15. India’s market for digital goods doesn’t need to be big — digital companies are by nature open to consumption by anyone with an internet connection.

    Too, M&A’s and IPO’s take place across borders. Non-US companies list on the NYSE all the time.

Comments are closed.