The Challenge Of The Small Indian Business

Over the last decade the Indian economy has completely opened up and barriers to trade have been almost completely eliminated. This has resulted in a tremendous increase in the standard of living of the average Indian. The productivity of the Indian economy has improved as well. The casualty in the process has been the Indian small business.

India is a land of entrepreneurs. It has the highest number of entrepreneurs in the world. Every industry and every business has too many entrepreneurs and too much competition. As the Indian economy has opened up and grown, the factors that enable a business to succeed have undergone a radical transformation.

Access to talent has become the primary challenge of the small business. The most talented individuals in India are exposed to global opportunities and choose to work for the most professionally run and globally minded organizations. The small business owner is unable to attract these individuals even if he or she is willing to pay top dollar in terms of compensation.

Access to capital. As the scale of operations has changed, the ability to raise both debt and equity has become important. For a small business owner leveraging his or her limited equity to raise debt, the size of the equity base itself becomes a limiting factor. Equity funding providers including private equity funds and capital markets are willing to fund only the most aggressive and most visionary companies and entrepreneurs. The small business owner is typically happy with maintaining the status quo and is typically neither a visionary nor aggressive.

Management capability and bandwidth. Most small businesses are one-person shows and every area of the business is directly run or managed by the owner entrepreneur. As the market grows both in size and geography, the small business owner finds himself or herself unable to make the transformation to an organization run based on people and processes.

The result is that the Indian economy is experiencing a tremendous amount of consolidation and creative destruction. The large players are becoming larger and the trend is likely to accelerate. This change is very significant for us as investors. Many companies, even those that are listed (but ideally should have been private) are going to find themselves at the receiving end of this trend. They will suffer from the disease of hanging on too long and in the process destroying all their and their investors' capital. The smarter ones will sell out and figure out something else to do with their time and with their lives.

This change is having a tremendous impact on the fabric of Indian society. For first generation entrepreneurs now in their fifties and sixties, the exit can be honorable, graceful and well earned. The challenge is with second generation entrepreneurs in their small family businesses now in their twenties and thirties who do not get it. They continue to run things the way their parents' generation ran things and slowly see the ground slip from beneath them. They keep waiting for things to revert back to as they were during their parents' times and they are likely to keep waiting. The sad part for these second generation entrepreneurs is that not only will they see a completely destruction of the wealth inherited by them, but that they will also experience a complete destruction of their careers. Having spent a decade or more doing things the old way, very few will be able to extract themselves from the old order and to integrate themselves into the new Indian economy.

For a long time (almost 30 years) during the license raj (when everything was planned and controlled by the government), the average Indian entrepreneur had the upperhand while the average non-endowed professional remained stuck in a job that took him or her nowhere. Now the tables have turned. The average professional without any baggage (but with hunger and vision) is much better poised to create wealth for himself and the economy that the average Indian (traditional) entrepreneur.

A deep understanding of this phenomenon is very useful in trying to identify and invest in companies that are likely to do well versus those that will not.