Indian Firms Must Take on Foreign Rivals, Not Seek Govt Protection

Innovate. Then you won’t need to ask for government protection, Ronnie Screwvala advises young entrepreneurs.

I have been recently reading with some amusement, intrigue and a sense of reflection this totally new chant of regulatory protectionism taken up by some first-generation entrepreneurs. These entrepreneurs have built a lot of their cache and personal brands on the basis of funding they have raised and, along the way, built a company and been ‘market-makers’.

But the question facing them is not how much money you can raise but how strong was the foundation you built, and what it takes to build a sustainable business for the long-term. So, we are hearing pleas for protectionist barriers to keep global companies out of India! This is the time for long-term organisation and team-building. This is the time to think in terms of scale – something most entrepreneurs in India don't always get.

This is the time to accept that it was tough for you to be the ‘market-maker’ all alone but now, competitors can help grow the market exponentially both for them and for you.

India is a mass market and a price-sensitive one, too. So, seeking regulations to create shields is not good for your company, the consumer or our country.

I’d like to make it clear I am no fan of Western companies that eye developing markets with their one-size-fits-all approach. Most of them fail because of that and those that finally succeed do so after some bitter learning experiences and high costs. But India does not want to be a restrictive market. In fact, our mindset has to be that we will succeed in spite of global competition and even take the battle to their home ground.

Yes, I can stop and wonder if Alibaba, Baidu or Tencent would reach the scale they have without the tacit founder-government understanding to keep Western companies out of China. Or to at the least ensure they never make money there. But that does not mean we need to be inspired by the Chinese model.

Our market will need vast investments. That will come from Indian and global funding, as well as by taking a strategic look at the local market. But all this should come along with a strong call for localisation and most importantly, with great management teams.

Spending Time Versus Spending Money

My sense is that all of us as first-generation entrepreneurs have focused too much on building companies on large fund raises; creating consumer bases on marketing spends that no return on investment (RoI) can ever justify; and not felt the need to take our time to build companies with strong foundations.

Instead, there’s the constant fear of missing the bus and positioning growth for the sake of growth, just to justify the next level of pleasing investors and raising funds.

Where we should be focusing on is innovation and creating strong technology of our own, and taking our time to build businesses with strong foundations. 

The same global companies have done just that in their home markets, and that’s why we are feeling the heat. Now it is true that a company like Ola had built a comparatively strong tech platform. But for them to build a world-class platform may have taken a thousand engineers. Whereas Uber has already done that in their home base, and so they may need just fifty more engineers to cater to the Indian market.

Now that's where the hard call comes in for us as entrepreneurs.

• Do we spend the money we have worked hard to raise on low-RoI marketing and discounting?

Or

• Should we sacrifice some elements of the meteoric growth we think we need, and direct it towards innovation and technology; on understanding the consumer, not ‘buying’ him?

Great companies take time to build, so take a long-term view to build real value. At the core is the resolve of the founder to not be in the rat race of growth to raise more capital, which then creates more pressure for growth... and the cycle continues.

Think long-term, innovate, invest. If you do this, you will not need to worry about, or ask for, any protection. In fact, be the right role models for the new startup generation in India.

Many Successes To Emulate

Let's take a look around us, at the many sectors in India where local companies have stayed ahead and grown – along with global businesses – to spur consumption. They have done this by offering their products or services at the right price points relevant for the Indian market. Let's face the fact that we are not a market of 1.3 billion at one price point, and will not be so for another three decades.

Only with huge scaling that will spur consumption, with open doors and competition, will we be able to create price-points and common markets for at least half the 1.3 billion Indians. And we are all a long way from that. We need to grow, not think of building walls! On a lighter note, some of the most developed markets are now thinking of building walls!

• I don't see our colleagues in the telecom sector screaming for protection from global companies. They have prevailed and done better than their foreign rivals.
• Don't hear that clarion call in the auto sector either; many of our Indian car and bike companies have in fact gone global.
• The same goes for information technology, where I don't see Infosys, Wipro or TCS crying for protection from an IBM or Accenture. All because they created long-term sustainable businesses models.

In media and entertainment – where I spent a decade and a half – we have had a Zee TV. In spite of global competition and players with even deeper pockets – and in some ways they could be called ‘market-spoilers ‘– companies like Zee with vision, and more importantly grit, have created formidable businesses.

I challenge any of these global media companies to beat the track record of companies like Zee. The latter have always maintained better return on capital employed (ROCE) ratios than any of their competitors. Even now, they would rank No 1 on ROCE, whereas the multi-national corporations squandered billions before they figured out their models.

So take a cue from these companies – their obvious need for international capital, while also building sustainable business models for the future. Not with protection and regulation, but by being smarter, wiser, more frugal; most importantly, being quintessentially local.

Thomas Friedman would need to re-look at his book and thesis that The World Is Flat. There is now empirical evidence that each country is getting prouder of its local culture, strengths, identity and market. And all this began long before Brexit and an American president come to power on the plank that the world is (NOT) flat.

When I was younger, I heard foreign channels call the US President “the leader of the free world”. I did not think much about it then. Of late, with the world having changed so much, I feel infuriated to hear this presumptive statement. After all, India is a free country in this free world. We don't see a president of another country as our leader. But then, that is just media rhetoric, which has not changed for decades now. The same media could not read the signs of change in their own countries.

Protect Your Equity

Coming back to first-generation entrepreneurs who feel the sudden need for regulations to protect them, when they spent the better part of the last many years raising millions of funding from those very same markets. I have two points to make to them:

No. 1: I am amazed as to how fast today's entrepreneurs feel fine with such rapid dilution of their shareholding.

Equity is by far the most valuable asset you have when you’re building your company. Yet, I see it having the least value.

These same entrepreneurs set out to make tons of sacrifices, take untold risks, face multiple failures before they tasted success – only so they can feel, "I am working for myself." But in the shortest period of your business cycle, you have dropped to less than 10 percent ownership of your company. What then have you really proved?

Yes, I know many will say, “Do you want to be a big fish in a small pond, or a small fish in a big pond?” I'm sorry, that analogy is wrong, and if you’re using it, you’re only fooling yourself. Of course, as a first-gen entrepreneur you will need to dilute your shareholding. But is your business model really just about your expertise at raising unlimited sums of money, and not about building a sustainable business?

No. 2: Even worse is something we don't see presently, but may come to realise soon:

• Take it that you are down to owning 10% or less of your company.
• You raised millions (in some cases billions) at valuations that protect the incoming investors of the value they came in at.
• You are last in line if the value drops from the last or highest round.

You know what? It may, it could, it will...

Now comes the final test in the circle of life. You finally unlock value/sell your company/list it. All investors first need to be protected for their original value. The chances of you getting zero – and I mean ZERO – for your 10 percent is highly probable if the value of your company now is lower than your highest-fund-raise-value.

How does that work? You sweat and start. You then raise capital and get to be poster-boy based mostly on the funds you have raised. Now, after the full circle of creating value for your company... you land back at zero.

Growth (Not) Above All Else

I know the criticism to what I said would be, “That’s fine to say, but we need the money to grow.” That in the first two rounds itself, investors want 30-40 percent, and then our shareholding just gets even more diluted. In reply to this, I have two points to make.

First, it comes back to what I said earlier. What kind of business and company are you building – is it rooted in innovation, based on your own technology, and needs the time it needs to build? Or is it all about growth, marketing spends, and winning customers with discounts? If the latter is true, you are stuck in some sort of rut, and you may face the eventuality we spoke of earlier. Even if your business does great, you too create wealth – but one-tenth of what you could have.

Second, even if we see the need to raise money for growth, we cannot go with the view that most investors have. Take the money while the going is good, does not work.

Excess money corrupts, encourages slack and wasteful costs, and gives us a sense of power to spend without really thinking harder.

Yes, it's a tough one again. We could find ourselves in reserve mode in our gas tank if we have not just kept raising unplanned levels of funding that we did not have a real plan on how to spend anyway.

But then that’s why you’re an entrepreneur in the first place. To be in those hard places, and think much more efficiently about using capital. To be much more long-term about business.

Well, it's not fun being at the top, it's a lonely place and not always rewarding. And as I firmly believe, all glory is fleeting, anyway.

India Is Not China

We don't want to be a China. Let's stay competitive. Let's think big. Let’s innovate and build strong teams and technology. Let’s take our time to build strong companies. Think long-term and not protectionist. Let's be clear that we can be better than anyone in the world, and that we are proud of being the largest democracy in the world.

Ronnie Screwvala is a first generation entrepreneur and the founder of venture capital firm Unilazer Ventures. He was the founder and CEO of UTV Group.

(This article was first published on BloombergQuint. The views expressed are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.)