Devangshu Dutta
January 15, 2016
Retailers seem to be fighting a losing battle against the growth of ecommerce, and it is only the nature of the shopping activity, especially for fashion – interactive, social, and immersive as it is – that has kept many retailers relevant and in business.
However, the defensive stance is changing, and now they’re using technology to get the customers back into the store. Forward-thinking retailers are reimagining trial rooms, stores, business processes and entire business models. It’s not a physical versus virtual approach but an approach that integrates both sides. The idea is to create a more immersive experience than pure digital retail can be, using some of the same tools as ecommerce.
It is important to remember that the whole retail environment is a “suggestive” environment. Due to cost and other operational factors most retailers are ill-equipped to provide appropriate levels of excitement, suggestion and support during the browsing and buying process.
For many, the simplest move could be screens serving up their catalogue to customers within the store. For instance, US department store chain Kohl’s has initiated connected fitting rooms that identify products the customer is carrying, and bring up not only those items onscreen, but additional colours and sizes that are available. If the customer wants an alternative, a message goes to a sales associate who can fetch the requested option. Macy’s and Bloomingdales are using tablets in the trial rooms, while Nordstrom, Neiman Marcus and Rebecca Minkoff are attempting to boost their fashion sales using magic mirrors to provide similar enablement. These devices and the processes empower and involve the customer far more, while leaving store staff free for other activities.
A step up, Puma is using “virtual trials” for its apparel products by having a customer take images of herself in specific positions, and then mapping styles on their own images to visualise how they might look. While this needs more work and investment, this is still only a more developed product browser technique from the customer’s point-of-view.
The next level, augmented reality trials and virtual fit, are significantly more sophisticated at creating simulations of a selected garment image draping and falling on the customer’s body even as he or she moves normally. Imaging and texturing of the simulated garments is technically challenging and expensive, repeated for each new style and option. The imaging also needs to mimic the “wearer’s” movements. Nevertheless, retailers such as Polo Ralph Lauren are finding it worth their while to investigate these new technologies, as these reintroduce the much needed “theatre” that are integral to a successful retailer.
For the customer virtualisation expands the number of items “taken” into the trial room, and creates more convenient product discovery. More products can be seen in the same shopping time, and sharing of images and videos with friends and family, engages them in the shopping process as well.
For retailers, the benefits multiply. Inventory can be optimised, and there is reduced handling and shrinkage. Even without sales associates, it is feasible to prompt for alternatives and related products, improving conversion and transaction values, reducing space and costs of physical trial rooms, and increasing the number of customers serviced especially at peak traffic times.
A phenomenal advantage is the data captured that is relevant while the customer is in the store, but which can be linked to future promotions. Valuable intelligence, such as what is being tried and for how long, can help the retailer to quickly gauge demand patterns, and adjust pricing and promotions. Normally retailers only capture sales transactions (post-fact), and miss out the rich information on in-store behaviour that etailers do collect and analyse.
However, massive hurdles to virtualisation remain, including data input accuracy, product accuracy, and the technical capabilities of the tech solution adopted. A bigger concern is whether technology is intuitive and seamless, or whether it gets in the way of the shopping experience. Further, consumers do have privacy concerns about the images and other data collected.
Its important to remind ourselves that, on its own, technology is just a novelty – huge transformation of business processes, organisational capabilities and behaviours must happen as well.
That is perhaps the biggest mountain to climb.
Devangshu Dutta
January 24, 2014
[This article appeared in the February 2014 print issue of Retailer, under the headline “Implications of the Tata-Tesco JV“]
India is a civilisation that has borne fruit from thousands of year of international cultural exchange, commerce and investment flowing both inwards and out. It is also one that has suffered from military and as well as economic colonisation over the millennia.
For those reasons, foreign investment into the country is bound to have both vociferous opponents as well as staunch supporters, and this debate is possibly most polarised in the retail sector that touches every Indian’s life daily. Over the last few decades, foreign investment into the retail sector has seen flip-flops from successive governments and political parties across the spectrum, being allowed until the late 1990s, then blocked (by Congress-led UPA), then selectively allowed (by BJP-led NDA, and later by Congress-led UPA). And more recently, with pressures, protests and influences from all sides 2011, 2012 and 2013 have certainly been on/off years during the UPA’s second successive term.
In this time Zara’s joint-venture, set up in 2010, has turned out be one of the most successful and profitable in India. More recently, Ikea announced a €1.5 billion plan for the country, followed by H&M’s US$ 115 million proposal, while Marks & Spencer identified India as its second largest potential market outside the UK. However in October 2013, the world’s largest retailer Wal-Mart decided to call off its joint venture amid investigations of its executives having supported or indulged in corruption and accusations that it had violated foreign investment norms. It decided to acquire Bharti’s stake in the cash-and-carry JV and announced that it would not invest in Bharti’s retail business.
It was soon after, as if to compensate for Wal-Mart’s blow, that India’s Tata Group and British retailer Tesco announced that they would be creating a formal joint venture in India, with Tesco investing US$ 110 million. The Congress-led government went on to quickly approve the proposal, as if to visibly shake off accusations of “policy paralysis”.
Tesco’s investment doesn’t look like much for a country the size of India, especially in the context of Ikea’s ambitious proposal or H&M’s fashion retail business that is possibly less complex than Tesco’s multi-product multi-brand format. However, let’s keep in mind that Tesco is facing tough trading conditions in Europe, took a global write-down of US$3.5 billion last year including its exit from the US market, and merged its Chinese business with retail giant China Resources Enterprise to become a minority partner. In view of all that and the unpredictability of Indian politics, US$ 110 million looks like a reasonable if not disruptive commitment. It also does somewhat limit the downside risk for Tesco if the environment turns FDI-unfriendly after the general elections.
Whenever Tesco expanded into new markets, it has tried to adopt a localised or partner-led approach. In India, since 2007, Tesco has had an arrangement to provide support to Tata’s food and general merchandise retail business. The intent underlying the partnership was clearly to look at a joint retail business when allowed by regulations and not just at back-end operations. The existing structure has provided Tesco with an opportunity to learn about the Indian market and operating environment first-hand while working closely with Tata’s retail team. Tata, in turn, has drawn upon Tesco considerable expertise of operating retail businesses in both developed and emerging markets. At the very least, the FDI inflow from Tesco will deepen this arrangement further, benefiting both partners further.
But there are the inevitable twists in the tale. While the Tesco proposal was in the works, the new Aam Aadmi Party formed a government in surprise victory in Delhi state and announced that it would not allow foreign owned retail businesses in the state of Delhi. This strikes off one of the most lucrative metropolitan markets from the geographic target list at least in the short term. (The central government has pushed back saying that while retail is a state-subject, the decision to allow FDI by the previous Congress government cannot be reversed at will by the current AAP government, but the debate goes on.) BJP-led and BJP ally-led state governments have also indicated their unwillingness to allow foreign retailers into their markets.
So should we even attempt to forecast what Tesco and Tata could do in this environment? I would rather not pre-empt and second-guess the future plans of business executives who are trying to read the intent of politicians who are focussed on elections 4 months in the future! However, whatever the plans, the retailers must comply with the regulations such as they are now and utilise the opportunities that exist. So it is likely that the following scenario will play out.
Tata and Tesco have said that the proposed joint-venture looks at “building on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka”. These are both states where Trent has multiple locations, so a certain critical mass is available. Since current government policy requires the investment to be directed at creating fresh capacity, new stores would also be opened in these states, though the expansion plans look modest, with 3-5 new stores every financial year.
But with the 50 percent investment in back-end also being a regulatory requirement, new procurement, processing and logistics infrastructure which could service stores within these states as well as in other states are is likely to be built. Tesco’s wholesale subsidiary currently supplies merchandise to Star Bazaar stores across states – this relationship is likely to continue as some of Tata’s stores are in states that are not within the FDI ambit. The product mix proposed includes vegetables, fruits, meat, fish, dairy products, tea, coffee, liquor, textiles, footwear, furniture, electronics, jewellery and books.
The norms earlier required FDI proposals to ensure that 30 per cent of product sourcing would be domestic, from small-midsized enterprises. However, in August 2013, the government relaxed this requirement to be applied only at the beginning of the joint-venture operations, and that this requirement would not include fruits and vegetables, an area where Tesco has focussed significant energy. So the immediate focus would be on meeting the domestic sourcing requirements in other categories, and creating a viable business model and scale through an appropriate product mix.
The partners are likely to continue working on improving the performance of the existing Star Bazaar stores which are 40,000-80,000 sq ft in size. However, Tata has also launched a new convenience store format, Star Daily sized at about 2,000 sq ft focussed on fresh foods, groceries and essential items. Retailers with foreign investment are now also permitted to open stores in cities with populations under one million from which they had been prohibited previously, so the new small format can provide significant expansion opportunities and more volume for the back-end operations to reach critical mass quicker.
Would there be a change of name on the store fascia? Unlikely, since Tesco has been operating stores under other brands as well in markets outside the UK and a “Tesco” name appearing on the fascia may not significantly change the consumer’s perception of the store. Other than in lifestyle categories or overtly brand-driven products (such as fashion), most Indian consumers focus on utility, quality, local relevance and price as significantly more important purchase drivers than an international name. In fact, a trusted Indian name like Tata carries as much weight or more weight in many categories than an international brand would. So the stores may carry a joint by-line, but the focus is likely to remain on the existing brand names.
And what of several other retailers who are interested in the Indian market? Will they draw inspiration from Tesco and take their plunge into the market, urged on by the outgoing government eager to demonstrate results during its final months?
Wal-Mart, for one, seems to have returned to the table, having set up a new subsidiary, perhaps preparing the ground for a retail launch with another partner. A European retailer, remaining nameless for now, is being mentioned as being the next proposal in the FDI pipeline.
However, it is likely that most will remain in the wait-and-watch mode until the outcome of the national elections is clear. The real issue is not the regulations themselves as much as the unpredictability of the regulatory environment. Policies are being made, turned around, and twisted over in the name of politics, without a clear thought given to the real impact on the country, the economy and the industry of either the original policy formulation or its reversal.
Until that dust settles down, we should expect no dramatic changes in the near term, no sudden rushes into the market. But then, we could be wrong – policy and politics have taken unexpected twists earlier, and could do so again!
Devangshu Dutta
October 9, 2013
[This article appeared in Daily News & Analysis (DNA) on 10 October 2013, under the headline “Without Wal-Mart, can Bharti play it alone?”]
A year ago, Wal-Mart had called Bharti its natural retail partner in India. But today the companies have jointly and publicly changed their relationship statuses to “single”, calling off the 6-year old marriage. Bharti will buy out or retire Wal-Mart’s debentures in the 200+ store Easyday retail business, while Wal-Mart in turn will acquire Bharti’s stake in the 20-outlet Bestprice cash-and-carry business.
By some estimates, the split was imminent for perhaps a year or longer, as the pressure rose for the two companies due to multiple factors. Several regulatory changes governing foreign investment in the Indian retail sector made it difficult for Wal-Mart to acquire a stake in the existing retail business that the two partners had set up. Anti-corruption investigations in Wal-Mart’s India business (in addition to Mexico, China and Brazil), as well as questions around the legality of US$ 100 million worth of quasi-equity compulsorily convertible debentures issued to Wal-Mart at a time FDI was not allowed in multi-brand retail businesses brought down even more external scrutiny upon the joint business. And finally, pressure against foreign investment in multi-brand retail of basic goods such as food and grocery, continued to exist not just amongst opposition parties but also parties within the ruling coalition and individuals in the government.
The split means that Wal-Mart can now overtly take complete ownership of the Bestprice business, and drive it as it sees fit. The fragmented retail market and the myriad small businesses in India do potentially provide a large customer base for the cash-and-carry business if Wal-Mart chooses to be more aggressive. However, that may not happen immediately. The business has been coasting for over a year without new openings that were already planned and significant personnel changes have happened from the seniormost levels down. Wal-Mart’s investigations of corruption allegations continue and before committing more resources it will definitely want to strengthen systems so as to not be in violation of Indian and US laws.
On the other hand, if it wishes to now enter the retail business, Wal-Mart would also have to look for a new Indian partner to set up new retail stores in a separate company. Retail is capital-hungry so Wal-Mart would need a cash-rich partner who can accept a junior position in the venture in which Wal-Mart would clearly be the driver financially, strategically and operationally.
At this time Wal-Mart seems to have decided to take a step back and evaluate what the Indian market means to it right now and in the future, what sort of investment – both in financial and management terms – it demands, and what returns the investment will bring. It remains to be seen whether it will choose to grow aggressively, coast up incrementally or, in fact, take the next exit out of the market as it has done in some other countries earlier.
And what of Bharti? Will it be able sustain the retail play without Wal-Mart’s close operational guidance and financial participation, or will it choose sell the Easyday operation to another domestic investor? On its part Bharti has stated an ongoing commitment to the business, and has also hired the former CEO of the joint venture, Raj Jain, as a Group Advisor. A 200-plus store chain is sizeable and credible in India’s fragmented food and grocery market, and is seen by the group as “a strong platform to significantly grow the business”.
However, Bharti’s core telecom business is also capital-intensive and highly competitive, and it will be difficult at this time to sustain high-paced growth in another cash-hungry, thin-margin business such as grocery retail. For now the Group’s best bet would possibly be to consolidate operations, unearth more margin opportunities and take a call at a more opportune time whether to further invest in growth or to treat retail as a non-core business and exit it.
Creating a substantial, profitable retail business is a long-term play in any part of the world. In India, as retailers are discovering, it takes just that extra dose of patience.
Devangshu Dutta
July 30, 2012
(Published in “BusinessWorld SME Handbook 2012-13”, released on Oct. 29, 2012 in New Delhi, and “Indian Management”, the journal of the All India Management Association in January 2013, published by Business Standard.)
There are parallels between Christmas and the growth of modern retail. At Christmas much of the attention is fixed on Santa Claus, while the elves labouring away behind the scenes barely get any air-time. So also in the retail business, the focus very much is on the retailer; the bigger the better.
The Indian retail sector’s sales are estimated at about Rs. 26 lakh crores. Of this, more than 80% of the product requirements are estimated to be met by small or mid-sized businesses. We don’t usually think about these myriad manufacturing and trading companies that make up the retailer’s supply chain. Large branded suppliers – multinational or domestic corporate groups – are still able to make their presence known, but most others remain largely invisible. Many of these fall not just into the small-medium enterprise (SME) classification, but in micro-enterprises, even cottage-scale. Not only do the large retailers source from SMEs directly, those small suppliers in turn work with other upstream SME manufacturers.
Chicken or Egg?
Most of us are inclined to view the growth of modern retail as a precursor to the growth of the SME sector. Actually the reverse is equally true, perhaps even more so. Without a robust base of suppliers having taken the initial risk of setting up better-organised manufacturing facilities and supply chains, modern retailers would not be able to set up their businesses in the first place. We may view modern retailers as the catalyst for this development; however, they are first beneficiaries of SMEs, and only after they achieve critical mass can they catalyse further SME growth.
For instance, through the 1950s and 1960s, as the American and western European economies grew with the baby boom, it was the growth of manufacturing entities and brands – most of them SMEs – that led the charge. As these SMEs consolidated their growth, modern retail chains actually rode upon this. Subsequently, of course, retail chains have put most of their suppliers in the shade in terms of overall size and profitability. Japan in the 1960s and 1970s, Taiwan and Korea during the 1970s and 1980s, and China during the 1990s and 2000s also saw similar manufacturing-led prosperity and consumption, although their growth was driven initially by exports to the west.
In India, too, the tremendous social and economic changes in the last two decades have encouraged a resurgence of the entrepreneurial spirit. The consumer sector is specifically attractive to entrepreneurs as something that is tangible, provides visibility of the business fairly quickly and can be communicated and positioned well within the entrepreneur’s family and social circle, an important driver.
The Rationale for Supporting SMEs
We tend to ignore the fact that India has a workforce estimated at over 750 million, and which is growing annually by 9-10 million. Most of these people will not be employed by the government, or in large organisations or in the much-feted service sector. Allowing for a declining active employment in agriculture, it is manufacturing, trading and retail by small businesses that is needed to keep the economic engine running.
It is also important to remember that growth of SMEs raises prosperity rather more equitably than other sectors. Widespread growing incomes lead to growth in consumption, supporting retail growth, which in turn can feed back into further growth of SMEs. There are enough significant examples of such economic growth worldwide, whether we look at economies such as Western Europe and Japan recovering from the ravages of war, or at the Asian tigers, China and others emerging countries who’s GDPs are not overly dependent on extractive natural resources.
Innovation is another reason to nurture SMEs. Consumer needs are changing more rapidly than ever before in India’s history, with rising incomes, and evolution of life styles and social structures. Small companies are better at foreseeing or at least reacting to rapid changes. Large companies compete on the basis of their sheer scale and aim to maximise returns from every investment made, but small businesses have no choice but to be innovative in some way simply to enter the market or to stay in business. Experimentation with products, business models, service level and commercial practices is what SMEs thrive on. Differentiation is what makes small suppliers attractive to retailers. With the technology and tools available today, we should expect ever increasing amount of innovation to emerge from small rather than large companies in the consumer sector.
Small suppliers also provide diversification of supply risk for individual retailers, as well as for the market overall. Concentrating on a few large sources has, time and again, proven to be a risky approach, whether it is due to the balance of power tilting unduly towards a specific supplier, or simply the risk of product not being available in case the dominant large supplier’s business is affected. A mix of small suppliers is more like a supporting cushion – a bean bag, if you like – which can be adapted and moulded more easily to changing customer needs.
The Role of Modern Retail
There are three areas in which modern retail can be a significantly more important partner for SMEs than traditional channels.
Firstly, modern retail stores are possibly the most effective route to launch new products, or even entirely new categories. As a platform they offer a more consolidated and effective way to reach a new product to consumers, and to gain visibility and acceptability quicker.
As a follow-on to this, due to their innate need to scale-up successful initiatives, a product and or a service proven in one store or region would typically get included in buying plans for the retailer’s stores across the country. This provides a quicker and more efficient scaling up opportunity than the small brand or supplier trying to reach myriad stores across the country on its own.
Third, whether it is quintessentially Indian brands such as Fabindia, or Indian products through international brands and retailers such as Monsoon, Gap, Mothercare, Ikea, Marks & Spencer, these are but a few examples of the access route for small Indian companies to major world markets. In fact, B. Narayanaswamy suggested in an article titled “Opportunity Lost is Gone for Good” (July 2012), that the Indian government should negotiate hard with retailers interested in investing in India to open supply opportunities to the retailers’ businesses globally, rather than putting minimum sourcing requirements for the small Indian business alone which only act more as a constraint than an enabler. The government has, in the past, used such opportunities to allow investment in the consumer sector while enlarging the playing field for Indian businesses – Pepsi is a case in point.
For some companies, modern retail is in fact a launch pad for wider ambitions, as they evolve into building brands themselves. Mrs. Bector’s has grown from a contract supplier to the likes of McDonald’s to launching its branded products not only in India but also in international markets targeting Indian expatriates. Genesis Colors went from being a Satya Paul licensee for ties to being the owner of the brand, and then further to being a partner for many internationally established premium and luxury brands who want to be part of the India growth story. Others become growth vehicles for larger businesses after being acquired by them, such as ColorPlus by Raymond, Fun Foods by Dr. Oetker (Germany) or Anchor by Panasonic (Japan).
Making Business Easier
India is one of the few countries to have a Ministry dedicated to SMEs. However, India’s SME sector is very far from competing effectively with SMEs in other countries.
The German Mittelstand employs more than 70% of Germany’s workforce and is acknowledged to be at the leading edge of technology and efficient business management. Other western European countries such as the UK and Italy also have vibrant SME sectors. All these countries have not only been competitive globally as exporters, but have also co-opted into the growth of industries elsewhere including the BRICs.
Three enormous obstacles stand in the way of the growth of India’s SMEs, as a huge amount of entrepreneurial energy is wasted tackling these areas. The government certainly has a large role to play in all, but one of these is also the responsibility of large corporate groups.
The lack of adequate infrastructure is arguably the most recognised obstacle, followed by compliances that can hold SME operations hostage under outdated laws, many of which have not been reviewed since India had an Empress! Entrepreneurs and businesses lose millions of manhours annually managing these two areas.
However, the one area in which not just the government but large retailers can play a role is in ensuring that SMEs are funded adequately. Bank sources in the form of term loans and working capital limits is only the start. The rest comprises of actual cash flow, much of which are limited by the long credit period demanded by retailers. Payment can stretch as far as 6-8 months, and include sale-or-return terms which squarely place the burden of funding the retailer’s business on the SME supplier. Unless we can mandate better payment practices, the boom of retail giants will be created using millions of dead or barely alive SMEs as building blocks. And what we don’t realise is that the retailers’ own health is also at stake, because lazy payment terms create a maze of poor practices, from product planning at head office all the way to the retail store. For instance, products that will not sell get stocked for short-term margin through placement fees, and block shelf-space and cash flow that affects other suppliers. Promptness of payment to SMEs must become a metric to measure the health of retail companies – after all, what gets measured gets tackled. And for the proponents of “Corporate Social Responsibility” – what better way to promote CSR and wide-ranging economic well-being than by ensuring the the smaller businesses in the ecosystem are not starved of the funds that are rightfully theirs!
SMEs are not just the foundation, but also the beams and pillars on which the glass and steel cathedrals of modern retail are built, and a vital indicator of the economy’s overall health. The sector needs to be tended to proactively and holistically, both by government and by large businesses, as an investment in India’s economic future. Perhaps we will even create some world-beating companies along the way.
Devangshu Dutta
February 26, 2012
(Published in the March 2012 of Images Retail, this is a compilation of Devangshu Dutta’s responses to questions put to him by the magazine’s editor on the subject of funding in the retail sector in India.)
India is one of the largest markets that promises a sustained consumer-led growth in the foreseeable future, due to the shift from a fragmented retail ecosystem to a more modern and consolidated industry.
Modernisation and consolidation will happen not only in front-end (retail) operations, but also in the supply chain of both products as well as tertiary suppliers such as equipment and service providers. Well-informed investors are looking at the entire ecosystem rather than only funding the front-end of the retail business.
The biggest challenge for private equity and venture funds looking to invest in the Indian retail sector is finding business models that are logically scalable within a four-to-five years time frame and allow the investor a decent exit. Due to the nature of the most funds and how they are structured, a seven-to-eight year term is the maximum time a fund would be involved with an investee company and it is difficult to find an investor with a longer-term horizon.
On the other side, this can also prove to be a challenge for the investee company: some of them may feel unduly pressured to grow faster than the natural pace of their business and could make strategic and operational decisions that are destructive to the business. As consumer incomes move up and the environment becomes more conducive, the life cycle to building a retail business becomes shorter. For instance, 20 years ago it would have taken over 10 years for a business to cross Rs. 100 crore (INR 1 billion). Today, with the right mix, it would take much less time. However, building a business that is both large and profitable (hence sustainable) still takes a significant amount of time.
Venture equity is suitable for businesses that can grow and add value inorganically, either in intellectual property-driven businesses such as technology companies and brands that can provide higher margin returns on a given equity base, or by selling the business further to investors who think they can derive even more value from it in future.
Retailing, on the other hand, is inherently an organic growth business, and the most suitable sources of funding for organically grown business are internal accruals and debt. However, the rapid economic growth in the last 15 years has created an opportunity for large businesses to emerge inorganically. Good examples of this are the large corporate groups that have entered retailing. Looking at them, one could be seduced into thinking that the environment and the business have changed significantly such that other professionally created businesses could be easily launched, venture-funded, and grown to exit. My take on this: If you can create a fund whose life is 20 years or more rather than the typical 10 years, there is a better likelihood of making it work.
Of course, bank debt is not easy for an entrepreneur either – Indian banks have become more progressive, but the norms are still relatively stringent. Unless the space is bought, the retail business has few significant-value fixed assets, and bank loans are limited for businesses that cannot offer much collateral.
Each stage of the retailer’s growth needs a judicious mix between own capital, supplier credit, bank loans and external investors’ equity. The last one evolves from friends and family at the inception, to angel and venture investment during growth to, eventually, public equity, if all goes well. Each of these sources of funding come with their own expectations on returns and disclosure, so an entrepreneur needs to balance these based on his own comfort levels. One of the most important characteristics for most institutional investors is that the business seeking funding should have a broad and deep management and executive team, rather than being over-dependent on the founder-entrepreneurs. There needs to be a demonstrated track record of growth that has been delivered by this team, and a clear future direction to sustain and grow the business.
It is a curious cycle: structured, process-oriented and systematic businesses that are not dependent on one person (the founder) are more likely to attract outside money, and outside money coming in puts more pressure to create transparency and broadening responsibility with which many entrepreneurs are uncomfortable. Most of them start their own businesses so that they do not have to report to someone else, but the moment there is external money involved, you realise that you are answerable to someone else. This is often a tough call for an entrepreneur – not just in India, but worldwide – a traditional, patriarchal and feudal mind set will just not work with external investors involved, especially in today’s environment where information and opinions flow more freely than ever before.
One of the most common mistakes Indian retailers make while trying to get funding is over-estimating the market demand. The second is underestimating the complexity (and costs) involved in starting and growing the business to profitability. Once you have put a business plan out there, it not only becomes a hook for your prestige, but valuation norms are also driven by the figures that have been agreed upon. This can cause business decisions that look productive in the short term – such as adding stores to grow sales immediately – but are harmful in the long run, such as adding stores in locations that are not sustainable. We have seen such decisions being made in the last five to six years, and investors as well as bankers are more wary today while evaluating businesses to fund.
A key thing to remember is: no matter how badly you want the money, it is not just about the money. From an entrepreneur’s perspective, who provides the money can be even more important than how much and how quickly the money comes in. For example, a particular investor could bring in a business perspective and relationships that are directly relevant to the entrepreneur’s business, which can add value well beyond the money that flows in. Commonality of objectives and a shared view of the time frames involved are also important, so that business decisions have the full support of the investor.
Timing is important: If you get an investor in too early, you may be losing on the valuation and selling out too much of the business to one investor. However, holding out for the ‘ideal’ benchmark valuation is possibly worse, because there is also a cost to the time and opportunity lost in getting the required funds. If I were to focus on one piece of advice to an entrepreneur looking to raise funding from a VC, it would be this: don’t try to extract what you think is your complete lifetime’s worth from the first investor deal that you sign. If the business is successful, and the first investors are happy with their returns, they and others are likely to come back to you in far greater numbers, offering much higher valuations.
Later-stage retailers still have avenues to raise debt and private and public equity, whereas start-ups and early stage businesses that can add significant entrepreneurial colour into the business are the ones that are struggling to get funded.
In many countries early stage seed, angel and venture investments are provided incentives in terms of tax structures – this is something that the venture community in India has been lobbying for with the government, and if provided, could improve the ‘investibility’ of early stage retail businesses.
[Readers may also find it useful to go through the brief presentation on Slideshare: “What does it take to create a fundable venture?”
