As I look for seed investment opportunities I have narrowed my focus to critical mass plays ( Rs 500 per year from a million user type plays) that could potentially provide 400 crore exits in 4-7 years.
As the Indian economy expands some wealth creation has to come from companies that are just starting and my guess is that there will be atleast a hundred such 400 crore + companies in the next 7 years.
One of the key things I look for in entrepreneurs is the ability to accept “delayed gratification” and the ability to deploy capital efficiently. In an Indian context “delayed gratification” could mean taking a CTC of Rs 20000 a month while your peers get say Rs80000 per month. Sometimes the delayed gratification can take very long and it may never happen.
Like someone said you cannot have a baby in one month by getting nine women pregnant.
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Hmm. I’m not sure that the numbers pan out. Rs. 500 per year for a million users is about 50 crores of revenue, and I’m assuming net margins will be about 10 percent, that’s about 5 crores. A 5 crore profit will net you between 50 and 150 crore of valuation, unless you’re a naukri and the time for that is either now or like in the iodex ad, chhole gechche.
Also Rs. 500 per year is Rs. 40 per month which is a nice to have but transaction costs at this point are too high for this kind of price point. (You’ll end up paying about Rs. 7 for a credit card transaction)
Let me think of a more realistic figure (to me): I would say Rs. 100 per month or Rs. 1000 per year, and about a million paying customers. That’s about 10 crore of inward cash flow per month, and probably profits of 12-20 cr. per year. This can give you a valuation of 400 cr. or more, and I hope such companies will choose the IPO route because the stock market really needs the breadth.
What kind of businesses are poised to go down this route? I have an idea in the financial markets space, for india, which I’m loath to talk about right now, but I think I can get to both Rs. 100 a month and a million paying customers in five years. This space is underserved right now not because of the lack of information – but because of too much information and too little technology.
Delayed gratification is a given – in fact, after five years even if you don’t succeed as an entrepreneur, you will command high salaries because you now have the experience your peers do not. And you have a contact base and platform that will serve you well no matter what you do.
Absolutely – “delayed gratification” is the key when it comes to any Internet play at this moment. As far as Internet is concerned, I think we are in the stage as US was back in 1995. The player that adapts well to the sensibilities of the Indian markets will emerge as the Yahoo and the Google of India. The beauty is that the market is so huge, global strategy may not be even required to get that valuation. I personally think ecommerce is one of the areas that will surely produce one of these.
mr sanjay i am totally agree with your views, you know mr sanjay in india mostly ninety percent people discourage everyone , every idea, every project thats why the india is so much behind, before any new business or idea takes place , or before financial arrrangements takes place a bag full of discouragement come on way. this is the reason why so many ideas get strucked. i dont know y people never see the examples available to them every where, for example yahoo.com, why it was started, two friends started it for storing their personal data, now every thing is history, how anyone can say that a project or idea is not going to work. i request every one not discourage directly on any idea, we dont know when and how one idea can become a reality a big company. mr sanjay i want to have some discussion about this king of idea, you can mail me at instantmarketing@yahoo.com or call me at 9985834154.
Krish,
Thanks for your comments. Let me try and clarify what I think.
The venture will require one or more additional rounds of funding before it could exit at such a high valuation. At each stage of funding if the capital is used efficiently to reach the next stage then a big company can be built from very modest beginnings.
There is lot of early stage and growth capital available so that is not a problem.
As for wafer thin margins I do not think that is necessarily true. Once network effects kick in these companies have pricing power and are tough to dislodge.
While the telecom companies may moan about TRAI and roaming, the market believes that they will do well going forward ( see Bharati stock).
Naukri in India commanded excellent valuations in its IPO. The US has many companies. PayPal, eBay, Skype, google, you tube, my space, facebook, net flix etc. etc. China has quite a few, Baidu, Alibaba( Tao Bao), Shanda, Sohu, Sina etc.
My contention is that India will also have many such plays though I believe that simple cloning will not work. The succesful plays will need to adapt to the way Indian consumers and small business think. In the travel space in India you have many players Make my trip, Travel Guru, Yatra, Cleartrip, Flight raja. Will one or more of these become big or will a new entrant beat them all. The other interesting aspect to think about is global vision. In the case of PayPal right from the start the thinking was global though the initial implementation was US only. India could be the lab for a global play emerging out of India. Now that would be neat and if over the next seven years I could be associated with even one such play I would consider myself very fortunate.
Interesting numbers. Often heard here too.
One question though. When the customer base is expected to be as vast as a million people, wouldn’t the total cost of operations be equally high…? It will need more manpower, 24 x 7 service, large infrastructure, online and offline delivery capabilities etc. Since larger public interest is involved ( 1 million users ) Regulators may also step in soon and it means incidental costs + bother – effectively means significant scaling costs and it sure will need much more than “seed stage capital” ( unless seed stage means $ 10 M ).
Such a business clearly would yield wafer thin margins. Further addition to customer base is also not easy if it’s directly linked to active internet / broadband penetration.
Mobile telephony was the only exception – even there ARPUs are declining below Rs.250/- and VAS is not picking up as expected – Now TRAI wants roaming charges to be drastically slashed ! [ Hutch Essar valuation is an aberration where cost of acquisition of a customer at $ 1000 per customer is at an unrealistically high – clearly a bidding frenzy ! ]
Would it not portend a difficult exit owing to lower buyer enthusiasm ….?