EXPLORE THE EMERGING OPPORTUNITIES OF A EMERGING SECTOR
Kerala has done business the golden age-old way of hardworking, being frugal, controlling costs, saving economy than a spending economy, withstanding uncertainties of market fluctuations and building on their natural wealth of spices, rubber, coir, gold jewellery, ayurveda and tourism. Only handful of businesses in each category have withstood the test of time and become epic business empires spread across multiple countries and become power houses of the God’s own country.
Understanding the macro business scenario in Kerala:
If we closely observe, we cannot deny the fact that the growth of business houses like Muthoot, Synthite, Eastern, Alappatt,Kalyan, Somatheeram, Pattara constructions have taken almost 2-3 decades to cross the first 1000 Cr. And another decade to scale up to multiple of 10,000 Cr plus in market capitalization over 3 generations through hard work, history and heritage. This golden generation of first-time entrepreneurs had time in their favor to patiently build, thrive and pursue profits to grow organically. We admire, salute and respect their tenacious pursuit. Now given the advancement in technology innovation, mobility of resources, speed at which the macro market is moving, the younger generation entrepreneurs do not have the luxury of time of 3-4 decades to build a successful billion dollar business. In today’s generation, we have 7-8 years to make an impact and build it big.Kerala’s net state domestic product (NSDP) was at US$ 65 billion in 2015- 16 growing at a CAGR of impressive 9.9% compared to the India’s national average of 7.7%. Kerala contributes 65% market share in the export of Rubber, 95% Spice, and 33% of FDI inflow from NRI remittances. Caution is this macro business environments and business groups are widely subjected to market fluctuations of political, currency fluctuation overall slowdown in global markets are unpredictable and uncontrollable to a certain extent. If history is any indication, market vulnerability and volatility fuels innovation and new business models aiding to new generation of companies, jobs and wealth in the economy.
Why startups are exploding all over the country?
India’ is pegging an impressive growth rate of 7.7%, a highest and impressive rate for the first time, our aspirations, our technology prowess in Communications, Information & Technology, Nuclear, Space, Aviation industry sectors are on par with the leading economies. Our working class of 600 million Indians whose earnings-spending capacity and assets contribute to trillions of dollars of economy presents a huge domestic market to address. Transforming traditional business from offline to the Internet has unlocked huge potential to create billions of dollars. It’s worthy to note, India has surpassed the U.S.A. in number of internet users at 277 Million Internet Users as of June 2016 online growth rate of 33% adding roughly about 20 Million every quarter.The developed nations United States, United Kingdom, Japan and China have been proactively investing in and cashing in our growing younger demography, for increase in income and spending capacities. Major US corporates like Amazon, CISCO, GE, Intel are spending close to multi billion dollars in India just on advertising. A favorable business environment right now is a gold mine that paves a way for fresh business ideas to cherish, and new thinking to evolve and shape up new wealth generating companies. Hence we are witnessing the explosive growth of startups from all over the country,which has impacted the local spending economy by creating around 8 billion dollar valuation startups home-grown in India.A key contributing factor is to be noted that access, availability and infusion of foreign funds at early stages of venture making has changed how startups gets built, valued and distributed. The last 8 years of home grown successful innovations have produced amazing technology companies like Inmobi, Paytm, Ola, Flipkart, Snapdeal, Big Basket, Fresh Desk, Bluestone, Urban Ladder, Paper boat, Oyo rooms, which combined has created a valuation of multiple billion dollars putting India on Top 5 startup destination in the world only second to U.S. and China in dollar value.
This should be noted that billion dollars for building and innovating Indian companies started in the last decade and are majorly funded by foreign capital. Thus Indian talents are making cutting edge global companies whose 70-80% of equity is owned by foreign players. Surely dearth of domestic capital is not only the reason behind, but it’s a matter of not foreseeing an investment opportunity in startups as a lucrative high-risk and high-return emerging asset. The last decade have seen missed investments from Indian domestic capital funders and now we are slowly waking up to a late realization that the opportunity is passing by. But luckily for Kerala as a state, we do not have to look far from home for high potential growth startups, because after five years of successful entrepreneurship campaigns from the state, we are truly at a cusp of the younger generation who is starting to invent new technology and business models, and unlocking wealth from the community.As an entrepreneur old or new, we always have to observe the market closely, identify and ride on the opportunities present. We should start re-thinking our perspective towards startups as an emerging class, so the overall startup ecosystem support network and domestic capital available to fund them will explode, creating an inclusive and win-win factor for everyone participating.
Let’s do the quick comparison Math of investing in public traded stock or mutual fund Vs investing in a startup!
For calculation purposes, let us consider investing INR 30, 00,000 on an ABC stock traded at INR 300 per Share in 10,000 plus Cr market capitalization and holding it for 5 years with a promise of return of 30% year on year. At the end of 5 years when you sell, at a higher stock price which has multiplied 3x times, and withstood market fluctuations, your return on Investment of INR 30 Lakhs, will be INR 38, 28,844, net profit of INR 8, 28,844 as taxable income using the formula,[accumulated Investment returned = Principal Inv. * (1+IRR)^N] .Now consider investing the same INR 30 Lakhs in a dynamic entrepreneur run startup (we don’t recommend idea startups), a potential startup who had figured their product market fit with little revenue traction, in their 2nd year of operations with huge market potential, looking to raise a seed round of 1 Crore at a valuation of INR 3 Crore. Your Investment of INR 30Lakhs will get you stock worth about 8.5 – 9% approximately. If the startup is a product differentiator or better distributor in their huge market space, then we can expect a growth of 2.5-3X times year on year growth, for stellar product startups the multiples are 5-8X at best. If they are indeed a high growth startup, then will end up raising two more bridge rounds of investment before they can raise a big Series A of 5 Million USD or more. If you decide to sell your stock at the end of 5 years, your stock is worth INR 1.4 Crore as multiple X times, giving you a profit of INR 1.1 Crore which is a 3.5x return, 270% greater than the investment you could have made in a mutual fund or a traded stock.Compare the math yourself, investing in an early startup of high growth potential is absolutely the best way if you are actively investing and if you have the know-how. In the game of the early investing in startups, you ideally would want to be the first money on the table as a Seed or Bridge round before major Series A round comes in. Even if not don’t end up being billions dollars, even if they produce moderate returns of multiple millions dollars, as an investor, you will still be cashing in 5X-10X multiple depending on the startup you had invested.
A Fundcloud Initiative
CEO’s and managing directors of large business houses are often taxed to run their own operations, we don’t expect them to do the field work of identifying and diligence on the potential startups.
Text: Thenmozhi Shanmugam Photos: Jinson Abraham