500 Startups partner, Pankaj Jain, spoke with Growth Kung Fu about the criteria for a 500 Startups founder, what he’s looking for in the next batch of 500 Startups startups as well as the “WhatsApp-ification” of India.

Transcript of the Interview

So, I hope you could just indulge us for a minute and for the sake of our listeners, what is 500 Startups and how did you first get involved?

Pankaj: Sure, so 500 Startups we are a seed program and also an early stage investor. So, we run a program in California which is our seed program, it’s a form of program where companies come, spend four months and really focus on early aspects of growth and then we also run a digital – it used to be called distordojo, now it’s called our series A program and that’s for companies that are pretty much series A ready and they need a little bit of help on the growth side.

So, they come and we run these programs in different parts of the world; London, LA and these companies – we started helping these companies with growth and metrics and get them to a series A. We also invest in many companies outside these programs around the world. I don’t know what the latest count is, but last I checked we were a little bit over 1600 companies across the globe and I think, roughly 60 percent of those were non-oriented program investments.

So, a considerable number and I joined 500 about, a little over four years ago, in October of 2012. I was running Startup Week in India and in 2011 and I saw 500 Startups trying for their first gig so I reached out and started helping them with organising connecting with various parts of India and a little more than a year later they asked me to come on board because they wanted to start investing with me.

Speaking of the Indian startup space so you first came into the country in 2007, 500 startups came in 2012, both of these first-time efforts weren’t successful. So, in what ways has the Indian startup space changed in 2016 from 2007 and 2012?

Pankaj: Yeah, a lot happens in 10 years. Yeah, in 2007 there wasn’t really any ecosystem to speak of. In 2007, you know nobody was really looking at startups the way people are looking at them today and the same was true for entrepreneurs as well as investors as well as just the overall society.

Back then, most of these were doing more private equity type of deals, hospital chains, restaurants, things like that and tech really hadn’t taken off at that point and amongst the general population there was really no understanding of what a startup was or what professional entrepreneurship is.

So, you know there was a group of people in various cities that were starting to come together and form a community and it really kind of started with Bar Camp back in 2006-2007 and it grew from there into many stages and many of these stages were event-driven and I think a lot of the investors also started seeing potential opportunities that were not working order. That they were more tech focussed and ecommerce was the first wave of that.

So, a lot of the ecommerce companies like Flipkart, like Snap Deal received their first cheques between 2006 and 2010 and that was kind of the first wave of this move towards tech based startups by VCs. By 2011, you started seeing the ecommerce boom really take shape and that spurred a lot of interest from other folks first in ecommerce and then into other areas and of course because of information being far more readily available, more Indians got online. They started reading Tech Launch and started reading, you know VC blogs like Fred Wilson’s blog or Brad Polk’s blog.

So, a lot of the information started coalescing in a way that both investors and entrepreneurs started seeing opportunities in the tech space and how that could really solve very Indian problems. So, by 2012 the ecosystem had moved significantly from where it was in 2007-2008. I don’t know exactly how many companies got funded in 2012 but it was a significant amount and I think if I remember correctly, 2012 is also the first-time Flip Cart raised a substantial amount of money and that really kicked things into high gear where Indian investors and entrepreneurs started seeing that there was a lot of foreign capital available for the right companies.

So, that’s really what set off these two. I think early 2012 is when phase two kind of kicked off, 2013-2014 saw a massive drop in funding, a lot of investors were sitting on the side-lines and a lot of founders weren’t really sure how the companies were going to pull through that environment and a lot of it was driven purely by the election.

By 2014, once the election in India was done there was a lot of capital that was sitting around and needed to be deployed. So, that set off what might be wave three of the current ecosystem where a massive amount of money got flooded into the market both domestically and internationally and that created a lot of entrepreneurs with a lot of new opportunities and in my opinion, a lot of horrible ideas got money when they shouldn’t have, kind of.

What are you thinking of when you say that?

Pankaj: Well, I’ve been pretty vocal about it before so a lot of the food delivery companies, grocery delivery companies you know those are things that in my opinion didn’t make any sense. Those things that didn’t really solve problems for most Indians, you know they were nice to have, sure if I was still living in the day, yeah I would probably use one of those apps but my wife wouldn’t even though she’s technically fairly savvy.

She would order groceries the way she always has. She would call up the local grocer and tell them to bring over whatever she wanted and if you brought over something that wasn’t fresh or wasn’t good, she’d tell them to go replace it and he’d replace it, right so that is one area. The other area is Logistics, logistics I think a lot of people jumped into logistics because you know it was sexy and people started seeing Uber and a lot of the companies in the US contracting and raising lots of money.

So, a lot of people tried jumping into logistics in India. Again, I think there was the same problem, I think they approached from a tech perspective rather than an operations perspective. So, you know those are two areas I didn’t invest in because one, I didn’t understand how these businesses could be sustainable. It wasn’t really me being brilliant and saying, no these are stupid. It was me saying: I don’t understand, right? And until I understand I’m not ready to take a bet on these things. I don’t think there was a tell that said: Oh, we shouldn’t get involved in this stuff. Other than, you start seeing people with no experience in those industries jumping in and saying: hey, tech is going to solve everything.

Right, so in Asia and in India in particular labour is very cheap. Because of that, there is this unspoken trap of hiring labour for a problem instead of engineering yourself out of it and thereby strengthening the opposition in the market. What can an Indian organization start to do not to fall into this trap?

Pankaj: If you think about it historically, it makes sense, right. Why do capital expenditure from a business’ perspective? Why spend significant amount of money/revenue on computers and software when I can just hire people to do the job and they’ll cost like a fraction of that. So, I think speed wasn’t as important 10-15-20 years ago, right? Cost was more important. Today, cost is still important but you know India has been growing very well for the last decade and a lot of people have made a lot of money and got very rich and a lot of businesses are doing very well.

So, there’s more disposable income both with businesses and with individuals. So, the other thing that has also, at least on a business side, a small business side has driven things is that a lot of the family owned businesses decades ago were really worried about survival and over time as they made money you started seeing a lot of their children go to the West and get educated and many of them would stay in the US for a couple of years, work on Wall Street, Silicon Valley, advertising whatever and then they come back to India or Asia and get back into their family businesses. And they say: “Wow, this is too arcane, I don’t want to be pushing people all the time and why do I need a file, I’m not used to this. I’m used to opening up a computer on my phone and getting all the information I need about my business and more about the job I do.

So, I think that has started driving the mind set change in India specifically among a lot of young, educated Indians returning to India after five-ten years in the US or the UK or Singapore or Australia. And now saying: Look, I’m used to technology, I’m comfortable with technology, it makes me more efficient, it means I don’t have to spend 13-14 hours a day at the office, I can spend five hours a day at the office and spend three hours a day somewhere else still engaged with work but also have more time for my family.

So, that’s driven a lot of it. The cost of technology has come down significantly and there’s been a slow, but gradual shift to bring a lot of consumer based technology into small-medium enterprise and if you look at what that means. It’s called the WhatsApp-ification of small-medium business in India.

The number of merchants that you’ll come across that are talking to their customers and basically putting their inventory online. It’s all in your WhatsApp. None of them know how to use other stuff but they all know how to use WhatsApp. So, they’re buying cheaper smartphones, they’re able to get a smartphone for less than 50 dollars but they’re also willing to spend over a 1000 dollars on a smartphone.

So, you have the whole arsenal of people that are spending money on these devices. They are all using WhatsApp at the very least. They’re taking pictures of their inventory, they’re sharing their customers, they’re communicating with their customers over WhatsApp and WhatsApp is leading to the next phase, where it’s like: “Wow, I just took 3,000 pictures and shared them with all of my customers and different customers, why can’t I have all 3,000 pictures available to share with all of my customers if I want?”

Right? So, they’re starting to think about this in a different way now. Things that for us might seem normal, are for instance: “Ok, here’s an online catalogue, go nuts, we’ll take a look at it.” So, I think that’s driving a lot of the shift to technology and the other thing is competition. Competition has just been increasing consistently so people need to move faster and they’re starting to realise that moving faster is more important than saving money because if I move quicker and I’m more efficient, I can make more money.

So, it’s less of saving, it’s more about making more. So, I think these are the things that have been driving technology forward. It may not be the pace that people would like but it’s significantly further ahead than it was 10 years ago, when I landed in India and if I talk to people that are not in the tech industry and most of my family and some friends are not in the tech industry, for them this is all like: “Wow, I can carry a cell phone and just share stuff with my customers from around the world”. And to them, this is amazing, you could have done this before also but you had to use email on a computer. So, this shift that WhatsApp has created is really going to drive a lot of that

What comes to mind, Pankaj, is whether this us also true for tier two and tier three cities actually. We’ve spoken to some founders who have this banging product but for whom penetration into the new frontier into tier two and tier three cities is tricky. What’s your advice to some of those guys?

Pankaj: So, I think two-tier tier three cities are still very hard to penetrate and no one has really figured out how to penetrate those cities. I think mobile networks in some cases in some cities are better than they are in Bangalore or Mumbai. I mean, I’ve had horrible experiences in all three of these nature metros where I was in Mumbai in early 2015 and I just turned my phone off and left it in the hotel room because I couldn’t make phone calls, I couldn’t respond to these calls, I couldn’t use data for days. So, I was like, why am I carrying this around, just leave it.

And I’ve been to smaller towns where 3G data is not bad. I think the real factor has been, not necessarily the infrastructure in two-tier tier three cities and digital infrastructure but more cost, right? Like, the cost of data is still fairly high in India and most people are still price sensitive in India, especially in two-tier tier three cities.

So, for somebody to just spend 20 or 30 dollars a month on data, it has to have a massive amount of value for them. For some time now telecom started getting smart about this and they started offering weekend packs and light packs where you can buy usage to WhatsApp every night for less than a dollar. Or a weekend pass for like five dollars with unlimited internet access or up to a few Mb or something, that’s changed rapidly in the last six months.

Reliance has been working on the Geo-platform and they announced and have done their launch a couple of months ago, I think it was September and what they have done is now what they’ve said is: “Now, everyone’s going to get 4G data.” I think the average is somewhere between 10 and 25 Mbs speed even to tier two and tier threecities. All calls are free nationwide, no roaming and it’s going to cost you 50 rubes for a gigabyte of data. 50 rupees for a gigabyte of data is less than a dollar, it’s like 75 cents for a gigabyte of data.

That’s going to change how people not only think about the internet but use the internet because right now, sure you can get it from Airtell and Vodafone, good luck streaming anything off of that, you know you’re never going to watch a video. It’s unbearable.

I guess the big question Pankaj is, how do you manage to capitalise on that data? How do you manage to capitalise at a startup within this situation?

Pankaj: So, you know a lot of the challenges startups have is desirability and people just don’t know that their app or product exists because they’re not online and you know, WhatsApp has solved that to some degree, at least as far as communication goes so people are sharing with each other on WhatsApp. So, starting to solve that desirability problem for people that are not online 24/7 like us, right?

So, a lot of the things that founders thought about are going to change, so tier two and tier three cities, high billboards, putting up physical advertisements, buying an ad in the local newspaper, vernacular newspaper that’s going to be, it’s still going to be important because that’s how people are going to know you exist. Having a presence there, India is still a very personable country, right? When you need to sell something to somebody, you got to go to that somebody’s office like five times and three out of those five times, you’re not even going to talk about business, you’re just going to drink tea and you’re going to talk about other things.

Yeah, you know and in small towns, it’s even more so, like Indians have a lot of time on their hands and also the founder of Free Charge, he put it nicely, in the US we suffer from time deficit. We don’t have enough time in the day whereas India has tier three cities more so. So, you need personal interaction, you need to put people on the ground to go and meet with these people, to talk to these people, that’s how they get comfortable with who you are and what your business is.

So, in tier two and tier three cities all those things are still going to be important and in fact, increase the costs of running that startup, right? So, some folks, some startups have tried interesting things, where they’ve gone out and said: “Ok, there’s a university in this tier two city let’s go and spend some time with the university and create university ambassadors, right?” And that university Ambassador will kind of spread the word amongst the university and that will hopefully start spreading among the rest of the city as well.

For our listeners, I gather that you are a regular subscriber to our show and enjoy the stories we publish, Pankaj came to us today by a recommendation by our friends at VeniVidiVici, which means I came, I saw, I ventured. A podcast administered by our friend Nipun Gupta where he uncovers stories from investors in the United States and India. Nipun lives in San Francisco and advises many startups on cyber security and general growth strategy and the link to the VeniVidiVici podcast is available in our show notes and if you’re interested in knowing about investing and investors, VeniVidiVici is the podcast for you.

So, Pankaj for some of your listeners out there who are dying to apply for 500 startups, what are you looking for in your next batch of startups?

Pankaj: I think the most important thing I look for in founders is that they are thinking about a problem and more importantly thinking about a problem that has not been solved yet and I’ve said this for years and I still really believe this.  When you walk out of your hotel room or your office or your home in India, there’s about a million problems staring you in the face all around you. The problem is that most of us, when we live there, we become oblivious to those things, we block them out and that doesn’t mean those problems are going to go away, those problems are still going to be there. If you can find solutions to those problems and really build on those solutions, that’s where the opportunity is. It’s not building an AI chat box for ecommerce, that for me doesn’t excite me in the least.

You know, I met somebody who was building a solution for water notification. So, most people don’t realise this but you only get in most metropolitan areas of India, you only get four hours of running water per day, two hours in the morning, two hours in the evening. And it’s usually from a specific time to a specific time but like most things in India, time is a very stretchable phenomenon, right? And just because you’re supposed to get water at 4pm, doesn’t mean you’ll actually get it. 

Well, how about for people who are living in poor neighbourhoods, out working they can’t be home at a certain time to wait for water so they can fill up their water tanks for drinking and cleaning their clothes and bathing and everything else. What if they got an SMS alert that said: “Hey, this is the time water’s going to be available.” And that was because there were sensors placed in the water distribution system, right? That’s a real problem that people will pay small amounts on a regular basis for because it solves a really important need for that.

There’s another company that I met that looked at garbage collection in India, which is still a major problem. Well, how do we take these problems and combine them and start collecting garbage in a way that makes economic sense and deliver it to bio-diesel plants that are going to pay for it? So, you can sell garbage to bio-diesel plants that aren’t getting enough raw material to power their plants and you can help the pollution problems across the country. These are real issues that Indians have to deal with on a day-to-day basis. So, I think the biggest opportunities to come are solving real Indian problems that are also transportable to South-East Asia to Africa and most of Asia.

So, those are the things that I think are exciting and these could be anything from education to health, digital health, micro-finance, garbage collection, water distribution, data analytics. You know, most of these places especially we got tier two, tier three cities in India and I’m sure many other parts of Asia and Africa, there’s not a lot of data. At least not structured data in any sense, so no one’s really able to make informed decisions about anything so if you can collect that data in a cost-effective way and you can make that data usable and you can make data-driven decisions, I think that’s good for everyone also.

 I think there’s a lot of interesting opportunities but at the core, it’s about solving real day-to-day problems. Don’t try and solve first world problems for somebody sitting in New York or San Francisco. Go solve a problem for somebody who lives and breathes Delhi’s air on a daily basis.

So, what makes up a successful 500 startup founder?

Pankaj: I think that’s pretty much the same everywhere. It’s not a 500 founder versus anybody else but I think being bold and being humble is really important not just for successful founders but also for investors. I think recognising opportunities early, taking chances when you see those opportunities but also being able to learn and grow consistently is important.

Running a two man startup out of your bedroom is very different from running a company with 5,000 employees, right? So, can you grow into that? At every stage, you’re going to feel like: “Oh, I made it!” Right? But then you have to stop and think and say: “Wait, there’s a long way still to go, how am I going to grow into this.” Recognising that you constantly need to be learning and constantly be talking to other people and developing mentors, right? For each stage that you’re going to get into is also important? Getting people that can help you personally and guide you into that is very useful.