India Is Not China, Let’s Stay Competitive

I have been recently reading with some amusement, intrigue and a sense of reflection of this totally new chant of regulatory protectionism amongst some first generation entrepreneurs - who have built a lot of their cache and personal brand on the quantum of funding they have raised and along the way also created a business and been a market maker.

But when the burden switches from how much money you can raise to how strong was the foundation you built, and what it takes to build a sustainable business for the long term... why start a rhetoric of asking for protectionist barriers to keep global companies out of India! This is the time for long term organization and team building; this is the time to think scale - something most entrepreneurs in India don't always get.

India is a mass market and a price sensitive market and looking at regulation to create boundaries is not good for your company, the consumer or our country.

Now, just to be clear I am no fan of western companies looking at developing markets in the 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 change has to be that we succeed in spite of global competition and 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 at the least ensure they never make money there. But that does not mean we need to be inspired by that Chinese model.

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 building 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 market, 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 local market.

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

• Spend the money we have worked hard to raise and having diluted us to insignificant levels, on low RoI marketing and discounting?

Or

• Should we sacrifice some element 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, 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 circle goes on.

Many Successes To Emulate

Let's take a look around us, across the many sectors in India where local companies have stayed ahead and grown along with global businesses to spur consumption. They have done this at right price-points relevant for the Indian market. Let's also 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. And we are all a long away 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 telecom screaming for protection from global companies. They have prevailed and done even better.
• Don't see that clarion call in the auto sector, here many of our Indian car and bike companies have in fact gone global.
• Same in information technology, where I don't see Infosys, Wipro or TCS crying for protection from an IBM or Accenture. All because they grew long term sustainable businesses models.

Closer home 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 way could be called market spoilers - companies like Zee with the vision and more so the grit, have created formidable businesses. Even though they compete with global majors, I challenge any one of those global media companies to beat the track record of Zee. They have always maintained a better return on capital employed (ROCE) ratios than any of their competitors. Even now, they would rank #1 on ROCE, whereas the multi-national corporations have squandered billions before they figured their model.

So take a leaf out of some of these companies - their obvious need for international capital, and yet their balance to build sustainable business models of the future. Not with protection and regulation, but by being smarter, wiser, more frugal; most importantly, being quintessentially local.

When I was younger, I heard foreign channels call the U.S. 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 any president of another country as our leader. But then that is 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 to get 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:

One: I am amazed as to how fast today's entrepreneurs feel fine with such rapid dilution of their shareholding.

These same entrepreneurs set out to make a ton of sacrifices, take on untold risks, face multiple failures before they taste 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 you will need to dilute. But is your business model such that at the core it's really your expertise to raise unlimited sums of money, and not building a sustainable business?

Two: 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 it just gets more dilutive. To this, I would have two submissions.

First, it comes back to what I said earlier. What kind of business and company are you building - if it's not deep in innovation, strong on your own technology, and needs the time it needs to build? Is it all about growth, marketing spends, and customers at discount? Then 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.

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.

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. Lets take our time to build strong companies. Think long term and not protectionist. Let's be clear that we can be better than any in the world, and that we are proud of being the largest democracy in the free 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.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.