- Kaushik Gala

Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.




Technology Venture Investors in Pune


Technology Entrepreneurship in India - Teams

Entrepreneurial traits

Picking cofounders


Technology Entrepreneurship in India - Generating Revenue

Is your business model well-defined?

Your industry's value chain

What is your value proposition?

Which distribution channels will you use?

Who will drive business development?


Technology Entrepreneurship in India - Raising Capital

Venture capital & venture capitalists (VCs)

Corporate venture capital

Angels & angel networks in India

Government support for Indian startups

Proof-of-concept funding

Do you need a business plan?

How much money should you raise?

Startup valuation

Pitching to investors

Figure out the term sheet

Negotiating with investors

Due diligence - A necessary evil

Time to sign the investment agreements


Equities, ETFs, F&O

› Oct 2011: Equity Risk Premium for India

› Jun 2011: Investing in Indian equities


Technology Enterprises in India

› Nov 2010: Technology investment in India - WATER

› Aug 2010: Technology enterprises in India - 3 avatars


Risk Capital for MSMEs

› Mar 2010: Risk mitigation for investors in MSMEs

› Mar 2010: Why don't (Indian) MSMEs get risk capital?

› Feb 2010: Angel investing - Will it work for Indian MSMEs?

› Feb 2010: What's so special about innovative MSMEs?

› Feb 2010: Where do Indian/NRI (V)HNIs invest?

› Feb 2010: Funding options for innovative MSMEs in India

› Jan 2010: Innovative MSMEs in India

What's so special about innovative MSMEs?

(Last revised 20-Feb-2010, Send comments to

Assuming that there are enough (tens of thousands) innovative, investment-worth MSMEs in India, how can we rapidly identify them? To some extent, this means finding the 'best' entrepreneurs since many of these MSMEs are driven by individual efforts. This begs the question - what makes an excellent entrepreneur, and a promising (investible) MSME?

There are numerous theories and opinions on what makes entrepreneurs entrepreneurial. And on how new businesses get formed, how they grow, why they fail or succeed. One of the most prominent researchers in this area is Amar Bhide, a Columbia professor.

In his book - The Origin & Evolution of New Businesses - he talks about a 3D framework: the 'investment-uncertainty-profit' diagram. He then maps MSMEs vs. VC-backed startups vs. large corporations on this diagram. Put simply, most MSMEs seek to take advantage of high uncertainty, but have to manage with low investments and hence potentially low profits (eg. Restaurants). VC-backed startups can afford larger investments, but need to pursue mid/high profit markets only (eg. Biotech startups). Corporations prefer least uncertainty but can pursue large profits (eg. Reliance, Airtel).

Given my focus on risk capital for innovative MSMEs, the first category (low investment, high uncertainty, low profit) is the best fit. Bhide looks at how some of the companies in this category go on to become 'promising' startups with high growth & RoI. The key difference between a marginal MSME (eg. laundry service) and a promising, high-growth MSME is the effective use of uncertainty. Not risk, mind you, but uncertainty. These are situations where market conditions are uncertain (think software in 1980s) and where the individual entrepreneur's personal abilities play a large role.

Some common characteristics of such abilities are:

  • Opportunistic adaption (a good example is Richard Branson)
  • Use of persuasion & risk-sharing to make up for lack of resources
  • Entrepreneurs' background (middle-class background, moderate educational qualifications)
  • Tolerance for ambiguity
  • Open-mindedness
  • 'Heads I win, tails I don't lose much'

[Tangent: It is amazing how similar some of these traits - especially the last three - are to those of successful market traders.]

Bhide emphasizes the difference between risk & uncertainty. In fact, entrepreneurs who can tolerate high uncertainty may or may not tolerate high risk. Those who can do both usually end up running hugely successful companies that were built from scratch (eg. Walmart) vs. those that were VC-funded.

One big issue is that most of this is based on a study of US (eg. Inc. 500) companies. Bhide did study how Indian MSMEs differ from their US counterparts. His research on Bangalore MSMEs (here & here) show that:

  • Government policies (taxes, infrastructure, labor laws, etc.) have a big negative impact
  • Indian MSMEs are quite inefficient in usage of initial capital, revenue per employee, etc.
  • Indian MSMEs are more likely to compete head-on with large companies
  • Indian MSMEs rarely used equity financing for start-up or growth capital
  • Indian MSMEs tend to make (vs. buy), integrate vertically or diversify too often, ...

On a somewhat related note, I came across a book - Startup Nation - that talks about the innovation & entrepreneural successes in Israel. While a lot of it is about Israel's unique history, geography, military structure, immigration, wars, etc., there are a few concepts relevant to promising entrepreneurs/MSMEs.

  • Resource constraints (how lack of resources forces adaptation/innovation)
  • Attitude towards failure
  • Emphasis on improvisation & judgement over processes & discipline ('rosh gadol')
  • Assertive, gutsy attitude ('chutzpah')
  • Value of debriefing (= mistakes made, lessons learnt)
  • Operating at the edge of chaos (aka fluidity)
  • Get things done (be a 'bitzu'ist')
  • Persistence - no matter what ('davka')
  • Contradictory traits: individualistic but nurturing, being small but aiming big, ...

A third theoretical framework of entrepreneurs comes via Khosla Ventures' collection of articles: 'What makes entrepreneurs entrepreneurial?'. The best entrepreneurs apparently use 'effectual reasoning' (effectual = inverse of causal). This is where the entrepreneur looks at the resources/means he or she has available and considers various startup possibilities using those resources. Success depends on imagination, spontaneity, risk-taking, and salesmanship (vs. planning, foresight, capital, market research, ...). To sum it up in one line - as Alan Kay did - "The best way to predict the future is to invent it".

Granted, most of the above are subjective, touchy-feely traits. But it's worth looking for heuristics to help quickly identify investment-worthy MSMEs. Specifically, the idea is to remove two sets of MSMEs from the pool:

1) Marginal MSMEs with limited growth opportunities and limited room for uncertainty/improvisation (~ 98% of MSMEs)

2) MSMEs that have the potential to be VC-funded (~ 0.001% of MSMEs)

Why #2? For several reasons. MSMEs with proprietary technology/IP, skilled team with high opportunity costs, and a potentially large market will gravitate to angels/VCs. A business model targeted to 'promising MSMEs' - as Bhide describes them - will be ill suited to VC-fundable startups. Moreover, issues of follow on financing, dilution, founder vesting, exit options, target markets, etc. are quite different in the two cases.

In fact it's not enough to simply look at traits that distinguish promising MSMEs. Let us also understand why some of these promising MSMEs tend to grow & prosper in the long term (10-20 yrs), while others do quite well in the short-term yet don't survive. [In nerd speak, think of this as going from 'local maxima' to 'global maxima'.]

The problem with this is that by definition, the success factors for promising MSMEs are quite different from those of VC-backed startups or large corporations. Trying to find cases where both/all exist is not a good approach. Instead, a focus on quickly identifying (and funding) promising MSMEs and then monitoring them to find those that may make the 'leap' is a better approach.

The 'leap' usually involves a shift from opportunism to strategy & planning, from ad-hoc decisions to processes, and from low investments to moderate investments of capital. That said, it is surprising that even here, the personality of the entrepreneurial team plays a much larger role than expected.

This is where things like ambition, willingness to take large risks, learning capacity, etc. come in. Of course, such people are rare, and more importantly, the risks associated with investment in such ventures are higher. To me, this is akin to looking for VC-fundable startups. If you get it right, the payoffs are astronomical, but the expected outcome for any given VC investment is low and the range of returns is very high.

Others factors that may help find promising MSMEs:

  • Business model is transactional (vs. relational/repeat sales), thereby less need for trust/reputation
  • Technology lowers capital requirements, blurs perception of MSME vs. Corporation
  • Corporate beliefs: skepticism towards diversification, reengineering/downsizing, consolidation, recession!

If all of this seems too theoretical and irrelevant to (tech) startups, do watch David Hansson's talk - Unlearn Your MBA - before you pass judgment.