An evening with Mr Ninad Karpe

On Friday, June 4, we had a very interesting session by Mr Ninad Karpe, Venture Capitalist, Partner in 100X, former CEO of Aptech and Managing Director of CA India. Mr Karpe has also recently published a well-received book, Bond to Baba. This book provides useful lessons for business leaders, managers, students and anyone interested in the practical application of strategy. Mr Karpe thought deeply and took 7 years to write this very insightful book of 120 pages. Case studies in the book include the James Bond character, Formula 1, Alexander the great and Baba Ramdev.

The session was moderated by our R Prasad and Sudhakar Rao.

Introduction

Mr. Karpe started off on a very positive note about the start up environment in India. This year alone, we have seen 14 unicorns emerging and by the end of the year we may see 32. Consider that till last year, we had a total of only 35 unicorns. So, it does seem that the startup environment in India is gaining traction.

Much of Mr. Karpe’s session emphasized one key point. Startups are designed to scale up. VCs are primarily interested in startups for their potential to scale. So, if a startup does not have the potential to scale, VC funding will be hard to come by. On the other hand, if there is scaling potential, it will be easy to get funding.

A business can do well and be profitable but without scaling. But it does not become a startup. There are many family businesses which do not really grow much. Each generation acts as a trustee and hands it over to the next generation. Mr. Karpe used the term lifestyle to describe such businesses and differentiate them from startups, which take the risks necessary to grow rapidly.

Some striking examples

Mr. Karpe gave various examples of businesses which scaled up, leveraging a simple but powerful idea.

Dollar Shave Club

Mark Levine and Michael Dubin got the idea of delivering high quality shaving blades to customers at very affordable rates, month after month and year after year on a subscription basis. The company raised four rounds of VC funding. In 5 years, from 2011 to 2016, the business scaled up rapidly. On July 19, 2016, Dollar Shave Club was acquired by Unilever for a reported $1 billion in cash. See in the video below, how Levine makes his elevator pitch:
https://www.youtube.com/watch?v=ZUG9qYTJMsI

Casper

Another example is Casper, which has positioned itself as America’s No. 1 mattress. There is no need for customers to tax themselves trying to select a mattress. (There is a confusing array of choices.) Casper comes packed in a box and all that the customers have to is to open the book and start using the mattress.

Under Armour

Under Armour was set up in September 1996 by Kevin Plank, a then 24-year-old former captain of the University of Maryland football team. The problem to be solved: sweaty undershirts of athletes who had to carry several undershirts for each game. Plank himself got tired of having to change out of the sweat-soaked T-shirts worn under his jersey. However, he noticed that his compression shorts worn during practice stayed dry. This inspired him to make a T-shirt using a special fabric. After graduating, Plank developed his first prototype of the shirt, which he gave to his Maryland teammates who had gone on to play in the NFL. Plank soon perfected the design and UnderArmour rapidly notched up a billion dollar in revenues.

What kind of startups are likely to get funding from VCs?

To get the attention of VCs, a startup needs to have an inspiring mission, a clearly articulated Value proposition and an impactful elevator pitch. While taking a funding decision, VCs look at the market size, the addressable opportunity and positioning/segmentation. The key questions they ask are: What is the competition? Does the startup have a moat? The moat could be in the form of a better process, a direct-to-consumer channel, logistics or customer service. Which geographic or customer segment is the startup targeting? Is the segment large enough? How is the execution going to be? The execution and go to market strategy of the startup must be better than that of the established players.

Making a pitch

A good product is not sufficient. A pitch is also important. As the famous comedian Papa CJ has mentioned, people are not good at telling their story. Founders must address key questions in their pitch: What is the problem? How am I going to solve it? Start up founders have to be making a pitch all the time to their neighbors, family and partners.

When startup founders make a statement, the VC immediately thinks: So, what? If the answer does not come quickly in the pitch, the idea may be rejected. Consider one entrepreneur who started off her pitch to Mr. Karpe with the statement: I want to solve all the problems of the world through technology. That statement did not really impress Mr. Karpe. He thought: So, what? The next statement was: I want to save the planet for the next generation. Again Mr. Karpe thought: So, what? Then came the statement, which clinched the funding: We will build palm sized solar panels with the functionality of a large panel.

Due diligence

VCs check the following:

Team: Preferably, there should be more than one founder, with complimentary skills.

Market: How big is the market? Is the product only for India or is it targeting the global market? A large market is needed for scaling up.

Business model: VCs carefully assess the strength of the business model.

What makes a good business model today? The pandemic has created a brave new world. The business world has changed forever. It would be safe to say that due to the pandemic, consumption at home has gone up massively. So direct to home and direct to customer models have gained traction. All companies today want to “own” the consumer. Subscription models have clicked in many parts of the word but are yet to take off in a big way in India.

The subscription model is waiting to succeed in India. Asset light models are more likely to succeed. They need less capital and so can leverage their capital much more. Similarly, low human touch enabled by bots and other kinds of automation will enable scalability. Linear models where headcount increases proportionately with revenues are not so scalable.

Unfair advantage: What kind of an advantage does the start up have over competition?

Potential for 20X returns: This is what ultimately attracts VCs for the risk they take. They want 20X returns over a period of 5-7 years.

VCs also try to figure out how much capital will be needed for scaling, how the value will be created and how the exit might happen. The journey of a startup is about wealth creation and not income generation. Profits may not come for a long time.

A world flush with capital

Unlike in the past, when ideas used to chase capital, capital is chasing ideas today. So, if we have an idea that looks scalable, we should just get going. Ideas are fragile. When we have an idea, we should discuss with someone and try to build an MVP. We must then think of scale. Funding is available today for startups with the promise of scaling up. Today, it is possible to start a business without having anything in our pockets. This is unlike the past where one had to belong to a family of means to take a shot at entrepreneurship.

Q&A session

The Q&A session was ably moderated by R Prasad and Sudhakar Rao.

The motivation of a start up

As Mr. Karpe mentioned in his presentation, it is a journey of wealth and not income. A start up founder must have a dream and must realize that it will take time to achieve the dream. Some examples of dreams: Can we change the way people pay? Can we come up with a better distribution model? Can we come up with a better assessment tool for examinations? Can we use AI to grade open ended questions? The idea need not be very complicated. For example, one startup has obtained funding from Mr. Karpe with the idea of selling Kerala banana chips all over the country using Amazon and competing with Lays in the stores.

Skills/behaviors

The core attitude needed in a startup founder is a strong desire to scale up. To take an analogy from cricket, the startup founders should be attacking and not defensive batsmen. Along with risk taking, resilience and perseverance are also important. Technology has become central to business. All businesses today are tech businesses. Services are offered on top of a technology stack. So, if the founders have a technology background, it helps. At least, one of the founders should have a tech background.

When will we produce a truly global start up?

Already, India produces the largest number of startups after the US and China. India is catching up fast. Our domestic market is huge. That is probably why there is no compulsion for our startups to go global. But many young Indian entrepreneurs are already thinking of global scale. The next Google may very well come from India.

From idea to execution

Mr. Karpe’s advice: Think of how the idea will scale. Only then it makes sense to seek funding. Discuss with mentors and friends. Build an MVP and validate the idea. Think of marketing. Approach VCs for funding. Once the funds are tied up, try to scale up rapidly. The skills required of founders depend on the stage of the venture. At the very early stages, it is about developing the idea. Then it is about building the prototype. Subsequently, it is about raising funds. Then it is about scaling up.

On building the team

It is not easy to get the right talent with the right mindset. Working in a startup is very different from working in an established company. But these days, we are well networked through various social media platforms. So, if we try, we can certainly succeed in attracting good people.

On the future of family businesses

In the long run, if they have to survive, family businesses will have to embrace technology wholeheartedly rather than using it in a corner of the business. These businesses should think seriously how they can use technology to solve their problems be it revenue generation or improving customer satisfaction.

On funding

Typically, funds are used to develop technology or acquire customers or attract talent. Startups have to indicate to VCs how they will use the funds raised. They must stick to this plan and consult the VC in case of any change in plan.

Mr. Karpe added that equity funding is the most expensive type of funding. Before raising equity, other options should be explored. These include central and state government funds, Atal incubation centers, etc. Government assistance can come in various forms. For example, some governments place big orders and thereby support the startups.

The timing would vary from case to case. Sometimes, the founders can try a bootstrap approach (self-funding) first. When that source is exhausted, they can approach a VC. In some cases, the business can reach a certain scale before approaching VCs. If the founders do not have any funds at all, VCs can be approached much earlier in the lifecycle. There are VCs like 100X available to fund such ventures.

Mr. Karpe invests only in early-stage write ups so that returns of 20X can be generated. This means that the start up must approach the VC at the right time.

On an average it takes 65 meetings to tie up VC funding. So, perseverance is important.

Exit route

All startup founders do not sell out. Quite a few (like Zomato) make IPOs and continue to grow and flourish.

Educational technology startups

We have some of the most valued EdTech startups in the world. In educational technology, India has a natural advantage because of the breadth and depth of problems that can be solved using technology. The education sector in India has been a laggard in the use of technology, as compared to say banking. After the pandemic, we will move towards a hybrid model. Classroom learning alone will not address all the needs of the country. Technology will have to play a greater role.

On the role of AI

AI is a horizontal technology that has applications across sectors. Many startups are leveraging AI to build innovative business models. One of the startups funded by Mr. Karpe, Vitra uses AI to translate Video into 51 languages in 5 minutes.

On mentors

Startups need mentors. Finding a good mentor is not easy. The mentor must be someone who can add value and also has the time. Mentors must be fully engaged in the business to make a meaningful impact. Bschool students can leverage their professors’ expertise.

On the role of universities

They have a stellar role to play. Universities are the laboratories of ideas. In the US, many ventures start in universities. Professors can do a lot to encourage students and nurture their ideas. Courses, incubation centers, lectures by successful entrepreneurs can strengthen the startup ecosystem. R Prasad added that the aim of the ICFAI online MBA program is to recognize the individual aspirations of students and customize the learning as much as possible. Through the course, students are encouraged to view the conceptual frameworks with the lens of a startup.

Concluding notes

A very insightful session indeed by one of the country’s leading VCs. Mr. Karpe is a soft-spoken man of few words but whenever he speaks, there is high impact. In a short period of time, he covered a lot of ground and demystified various aspects of VC funding. More importantly, he generated a lot of optimism among the audience that the startup culture in the country is vibrant and will continue to be so in the years ahead.

We thank Dr. Vedpuriswar for bringing out the highlights in the form of this note