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Want to build a high-growth enterprise that will create a lot of value?

Author: Arvin Babu
Partner, Greylock Advisors India.
Want to build a high-growth enterprise that will create a lot  of
value? -By-Arvin Babu
Good margins and good growth create great value. Sectors growing faster than GDP and attracting capital include traditional sectors such as infrastructure, real estate, manufacturing, and those that result from increased expectations and desires for higher quality services: think healthcare, financial services, education and public services.

Technology plays a crucial role in delivering services from these sectors in a cost effective manner to the majority of the population. For the past 44 years, Greylock has in turn served as a catalyst for businesses to deliver this crucial technology. Most of Greylock’s colleagues are former entrepreneurs or senior executives in leading technology companies who can relate first-hand to an entrepreneur’s journey.

What do VC’s look for in an opportunity?

Venture capitalists look for a business’s ability to scale non-linearly with cost: that is, revenue has the potential to grow much faster than expenses. Of course, the challenge is to know and recognize attributes that contribute to non-linear growth. As a result, Greylock focuses on evaluating a company’s barriers to entry—technology, market position, etc.—that would provide enough runway for scaling the business before competitors can materialize.

What is an example of an opportunity that has built-in barriers to entry?

One area that poses barriers for global players is found in local markets. Pure-play global technology companies such as Microsoft, Google, Cisco, and Yahoo! dominate their respective categories in India precisely because there are few barriers to entry. India’s largest indigenous internet portal, Rediff, has annualized revenue of ~$30 million—a drop in the bucket.

However, other areas pose considerable challenges for global players. For example, although India’s Airtel has average revenues per user (ARPU) of roughly $6.00 compared to AT&T’s ARPU of $60.00, Airtel’s margins are better. In this case, AT&T cannot match Airtel’s cost structure and obsessive focus on maintaining the lowest cost per transaction. This combination of healthy margins, location-induced cost advantage, and phenomenal growth is creating tremendous value.

Likewise, services relating to financial inclusion, delivery of quality, affordable healthcare to the majority of the population, extension of education to the nooks and crannies of the country all stand to create market barriers and, consequently, great value.

What are some global opportunities that can be leveraged by Indian companies?

With India’s IT/ITeS revenue reaching $50B a year, an amazing talent pool has emerged that understands the core business processes underlying the next generation application services. Also, as many of the services oriented leaders move away from the time and material model toward a “solution as a service” model, the creation of SaaS, IaaS and cloud-based services companies will accelerate. Even traditional BPO firms that are focused on lower margin opportunities stand to gain if they leverage their understanding of business practices to deliver their solutions as a service.

What is the ideal startup ecosystem?

An ideal startup ecosystem would include local customers, financing, access to technology, talent and exit opportunities! While it will take some time before a Silicon Valley can emerge, one can exploit local advantages, including the ability for a company to grow profitably, creating barriers based on cost structure, etc to compensate for the absence of all attributes found in a mature ecosystem.

What’s required for success?

It is quite challenging to predict the future for large corporations, let alone for startups! India as a market is underpenetrated for many of the basic services in the financial, healthcare, education and public services sectors. Any company, startup or not, that strives for great customer satisfaction and best cost in providing the service has a great opportunity to be an independent public company.

And finally, an idea without execution is a mere hallucination. Execute like there’s no tomorrow!

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Reader's comments(2)
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