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The importance of differentiation

Sandeep Murthy
17th November 2020

Given the various inefficiencies that exist in India there is an opportunity for businesses to address customer needs through a range from pure tech models to tech enabled models where they own the creation of the product but use technology in aspects of either production, distribution or customer acquisition.

In his book - AI Superpowers, Kai-Fu Lee says that American entrepreneurs are missionaries (trying to create the most elegant, unique solution to a problem). He says Chinese entrepreneurs are mercenaries (ready to do whatever, to whoever, to win). I tried to figure out what Indian entrepreneurs were and unfortunately it  seems like “publicity seekers” (vying for the largest, next financing) is the answer. This is not a sustainable approach to building businesses or a venture ecosystem. In the backdrop of the pandemic and Chinese app bans, the rush to create models that are opportunistically driven by what investors want vs. what the customer needs has further accentuated this issue. We need investors and entrepreneurs to focus on long term sustainable product differentiation and unit economics. We need to step away from media headlines on financings and understand the unique aspects of the Indian market and build products and business models that address real customer needs.

Given the various inefficiencies that exist in India there is an opportunity for businesses to address customer needs through a range from pure tech models to tech enabled models where they own the creation of the product but use technology in aspects of either production, distribution or customer acquisition. Pure tech models allow for exponential scalability, but they can also be easily replicated. Knowing which of the number of copycats in a given space will win at an early stage is nearly impossible. When investing in pure tech businesses it is essential to work with a founder who has a deep customer insight and an ability to move quickly to cost effectively scale a platform that is delivering a unique product proposition. Our investments in Droom and Embibe were made on the back of specific, unique customer insights that translated into products that in turn allowed those businesses to grow rapidly in a cost effective manner.

Tech enabled businesses are burdened with the need to manufacture products. This requirement creates a constraint that often means that these businesses scale in a linear manner rather than an exponential manner. However, the complexity involved in manufacturing and the implementation of technology ensures both a long term sustainable product differentiation as well month on month growth rates that are often triple what their traditional competitors experienced at a similar size. These businesses operate in  markets that are well defined. This ensures that there is an existing customer demand for these products / services and the use of technology ensures that these businesses are able to perform better on financial metrics than their traditional competitors. Businesses like Rebel, Melorra and Dunzo use technology to make existing use cases better and run more efficiently than their old world counterparts. In the case of Rebel, technology ensures that wastage at a Rebel kitchen is close to 1% vs industry average of 9%, this creates a benefit on working capital and margins. Technology at Melorra allows us to run a no inventory, negative working capital jewellery business. Melorra has the added advantage that its no inventory model allows it to scale exponentially like a pure tech business while capturing higher margins than many pure tech businesses.

We have mix of pure tech and tech enabled companies in our portfolio. The pandemic has forced people to stay home and as a result pure tech businesses have seen tremendous growth and received a lot of investor attention. There seems to be a belief that real venture investing should focus just on the exponential growth opportunities provided for in these pure technology businesses. The reality is venture investing is all about finding consumer pain points and building businesses that have the ability to rapidly grow earnings over a sustained period of time. These opportunities can be found across markets with a range of business models. Pure tech or tech enabled is relevant only in finding the best way to address the customer need. It is essential is to have deep customer insight that can be translated into sustainable product differentiation.

 

 

 

 

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