Despite the recent economic downturn, entrepreneurship is alive and well in India. New entrepreneurs have succeeded in many recent high-growth industries such as civil aviation, retail trade and IT services. Their success blasts the myth that family-managed business houses with connections have an edge in access to capital, although scaling up distribution remains a challenge for startups. Venture capitalists invested in Indian businesses dependent on the Internet are disenchanted, but other vast markets beckon. Those were the takeaways from a panel discussion on entrepreneurship at the 14th Wharton India Economic Forum in Philadelphia that took place in March 2010.

The panel of mostly first-generation entrepreneurs was divided in perceptions of the obstacles and opportunities entrepreneurs face in India. Kartik Hosanagar, the panel’s moderator and a Wharton professor of operations and information management, asked the panelists to focus first on the challenges entrepreneurs face in India. He wanted to save the positive aspects for later, so that aspiring entrepreneurs in the audience would stay sufficiently enthused, he said.

Getting Your Wares to Customers

In his own experience as an entrepreneur, Hosanagar found distribution to be the biggest obstacle in India. Yodle, an Internet marketing company he cofounded in 2005, provides lead generation services for small businesses, drawing them away from the yellow pages. The New York City-based firm considered entering the Indian market and decided against it. “Internet penetration is not high and replicating the business in India would be a challenge,” he said.

Startups scale faster in the U.S. with higher Internet and credit card penetration, and with better shipping infrastructure to access markets beyond, said Hosanagar. “The self-evident thing about India is [that] distribution is hard,” said Samir Patil, founder and CEO of ACK Media in Mumbai. The firm bought a controlling stake in Indian comic series “Amar Chitra Katha and Tinkle” from India Book House in 2007 and is redefining them for new markets in gaming, animation and character development. If he were to operate his firm in the U.S., he would have focused on developing its content base, he said. But India calls for “forward integration” and he is considering setting up the firm’s own distribution network with kiosks and stores, he added.

Distribution was a challenge also for Vin Bhat, cofounder and CEO of Saavn, a New York City-based digital distributor and marketer of Bollywood and South Asian entertainment. The firm has aligned with Time Warner, Cox, Hulu, iTunes and Verizon, among others, in its network. “Internet penetration is low and broadband penetration is six million homes in India,” said Bhat. He faced challenges not just in trying to reach Indian consumers, but also in terms of their appetite for his product. Online video and radio services like Hulu and Pandora don’t exist in India, he said.

Yet Bhat found a way out: “We counterbalance that by taking a more global view,” he noted. So Saavn takes popular Indian fare like Bollywood films, cricket and religious content to the global markets, and has a strong presence in the U.S., Canada, the U.K. and South Africa. It also has a small presence in India. “The reason is to be there once the market turns.”

Low Internet penetration in India has also disenchanted many Western venture capital funds investing in India, said Hosanagar. However, Internet penetration is overstated as a prerequisite for doing business in India, according to Amar Goel, founder and CEO of Mumbai-based Komli Media, a digital advertising and technology firm that enables marketers to reach and acquire audiences. “India is a trillion dollar economy and the Internet may be US$2 billion, so you have US$998 billion other dollars that are in other sectors,” he said. He talked of a restaurant club that recently opened in Mumbai and is “bigger than any Internet company in India” with sales of between US$20 million and US$30 million. “The needs that India has are far more basic than just focusing on the Internet and ecommerce.”

Venture Capital Falls in Step

Hosanagar pointed to concerns among some venture capital firms about inadequate returns on their Indian investments. “Many of the VCs that came into India earlier were probably not that focused, at least in the retail space,” said Sanjay Kapoor, managing director of Genesis Colors, an upscale fashion retailer with brands that include Satya Paul and Deepika Gehani; it also has a joint venture with British luxury goods retailer Burberry’s to open stores in India and has such venture capital backers as Sequoia Capital of Menlo Park and Henderson Equity Partners of London.

“The venture capital firms made some fairly large investments [in India] when everybody was scaling top line (sales) growth without understanding the bottom line (profits),” Kapoor said. “And some of the numbers just fell down.” According to Sudhir Syal — a producer of a show on entrepreneurship called “Starting Up” on ET Now, an Indian television channel — VCs like Sequoia Capital that have invested in India for many years have “done quite well.” Also, he said “most of the exits [for venture capital firms] have come from the services sector… so perhaps the opportunity lies in services.” In addition, many western VC firms have learned that it doesn’t help to impose their business models on the Indian market “where you have to go house to house to collect your money,” he said of retail businesses. “Venture capitalists [in India] also don’t want to take on too much risk,” added Bhat.

The Family Factor

Entrepreneurship in India has lower entry barriers than in many other countries, even if having the right connections and Internet penetration are hurdles, according to Patil. “The best thing about being an entrepreneur is that relative to other economies, almost everything is fair game,” he said. “You can follow your passion rather than the market,” he added, explaining that one might, for example, start a restaurant in Goa with few obstacles. “We get caught up in issues like scale and the Internet and VCs, but why does every model have to have an exit?” he asked. “Whether you have scale or not is a question, but you can make it viable.”

Perceptions about a culture of entrepreneurship in India are often wrong, said an audience member. “India is budding with entrepreneurship. Entrepreneurship is in India’s DNA.”

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