Indian market still not mature enough for B2B startups: Kris Gopalakrishnan, Axilor Ventures

Infosys co-founder Kris Gopalakrishnan has immersed himself in India’s startup ecosystem since leaving the country’s second largest software services firm about five years ago. He now runs  Axilor Ventures, an early stage investment firm and startup accelerator, with fellow Infosys founder SD Shibulal apart from investing in startups in his personal capacity through his family office.

In an interview with TechCircle in Bengaluru, Gopalakrishnan spoke about some of the unique challenges that startups from smaller cities come up against, why B2B (business-to-business) startups find it tougher to attract venture capital and systemic challenges that need to be addressed overall for India to truly harness the potential of startups led innovation.

Edited excerpts:

You’ve been involved with the startup ecosystem for five years. What needs to improve or change?

It (the ecosystem) is maturing with a lot more companies reaching the Series A and B stages. From Axilor itself this year, we will have six to eight companies raising Series A rounds and beyond. I see good companies emerging in both applications of technology and deep technology. The quality of startups and founders has also been improving, sure signs of a maturing ecosystem. 

But, all of this is true only for the top two or three metros. Even when I compare Hyderabad or Chennai with Bengaluru, the latter is significantly better. This is partly due to government support and enthusiasm. With the Telangana government actively supporting the startup ecosystem, we will see things improving there. In Chennai, a few people have taken a personal interest in the startup ecosystem.

While it is often bottom-ups, government support amplifies it. In Karnataka, they not just supported startups in Bengaluru, but across the state in Mysuru, Mangaluru and Hubli-Dharwad. You see reasonably good startups emerging from these smaller cities. In fact, I was pleasantly surprised to see an active startup ecosystem in Coimbatore with even a mentoring ecosystem.

Apart from government support, what other factors that are holding startups back in Tier II and III cities? 

If you look at where a lot of the startups in Bengaluru were founded, many of them actually originated in Hyderabad, Chennai or smaller cities. But then they all inevitably had to move to Bengaluru. The primary driver was talent shortage. To access talent in cutting edge technologies such as AI (artificial intelligence), robotics and EV (electric vehicles), the place to come to is Bengaluru. 

One-third of India's technology talent is concentrated in one city. That talent is augmented by the high-end training and experience they gain at large multinational firms. This talent is available for startups in the city, who don't have the money to impart that level of training. That ecosystem is missing in smaller cities.

What’s your advice to startups from these cities? Is relocating to a Tier I city their best option?

There are two types of startups. We tend to talk only about the ones that raise institutional funding. Those can scale up exponentially. There are many startups that remain in the category of SMEs (small and medium enterprises). They don't qualify for institutional funding and 90% of startups in the country are in this category. They need to aim at being profitable. 

The venture capital funded startups are the ones that cluster around Bengaluru and the NCR region. So I tell startups in smaller cities to focus on profitability and become self-sufficient. They will reach a certain size and hit a growth wall. Only when they think about expanding beyond the  local market should they think about moving to the Tier I cities. The larger cities are also open to new ideas and experiments and hence offer a better chance at success, especially for consumer facing startups.

Do you think there is enough institutional capital in the market for startups across stages?

Over the last couple of years, a lot of venture capital funds have been raised and these funds have an 8-10 year investment and exit cycle. Theoretically speaking, we will see a trough in five years from now. The first movers in technologies such as AI or blockchain will get funding whereas subsequent startups will struggle unless there is a strong differentiator.

Why don’t B2B startups get to the Series B or later stages as often as B2C (business-to-consumer) startups?

In B2B, there is a challenge as such startups tend to look at the global market because the Indian market is not mature enough to buy from small companies. They don't mind buying from an IBM or a Microsoft. So these startups are forced to go global early in their evolution. 

As for SMEs, they don't have the wherewithal to invest or work with technology suppliers. That has been a structural market issue for the SME sector itself. You need to be part of a larger company's supply chain or vendor network to get customers. To get your product accepted and proven takes time, effort and money. OEMs need to put in extra effort to bring in a new supplier and when things go smoothly, most of them don't want to disturb it. The sales cycles are long because the product needs to be implemented and proven in a supply chain network that in itself is hard to break into.

So do B2B startups necessarily have to break into the US market to succeed?

Yes! Maybe they can look at Southeast Asia before they go to the US. Southeast Asia because the markets are similar, closer and high growth with a lower cost to penetrate the market as compared with Western markets. Going from a developing country to a developed country is always tough because the expenses in the US are six to eight times higher. 

The success rate will be usually 50%, so you double that, which is 12-16 times higher, which is tough for a startup. Therefore, typically you need to look for a US-based fund to back you, who can help you with mentoring and local US network. That will help them to get the right talent and access to the market. I think there are a good number of them doing it and will be successful.

The large multinationals these days have a joint go-to-market strategy with B2B startups. How much does that help?

They are all doing their bit. But a large part of encouraging this is because these startups are leveraging these multinationals platforms. Once they see these startups succeeding, they will acquire these firms. If they don't see these startups succeeding, they don't lose anything. This is a market scouting programme for acquisitions and there is nothing wrong with it being so. Ultimately, the startups have to have control over their go to market strategy. You cannot outsource that. You can be part of a sales channel but you have to drive it. Only a few startups can find big success in doing so.