India’s Mighty Microeconomy

In this excerpt from her new book Brilliant, Crazy, Cocky: How the Top 1% of Entrepreneurs Profit from Global Chaos, author Sarah Lacy examines the unique market that has emerged in India, where the poor spend money to buy minute amounts of luxury and forgo physical bank accounts for mobile banking.

Brilliant, Crazy, Cocky

With fewer than 1 percent of Indians living the high-paid
services dream, building a big consumer company in
India isn’t easy. How do you reach a fragmented, poor market?
Think small and talk to someone like Lakhan Lal.


It’s not hard to find him–or hundreds of thousands like him–
throughout India. He’s everywhere from the busy street corner in
the largest city to the side of the road in the most remote village.
A guy like Lal sells the most in those grungy urban neighborhoods
that Indians describe as places where “you can’t tell if the sewer
drain is in the street or the street is in the sewer drain.”

Lal is a man of few words, which may have something to do with
the constant flow of traffic coming in and out of his shop. It would
need a revolving door if it had a door at all. As is, the shop’s facade
is either wide open for business or locked tight by a pull-down
garage door. That door protects a mini-empire. In a working-class
Delhi neighborhood where migrant workers earn less than 3,000
rupees a month doing everything from delivering food to building
the new airport, Lal’s tiny shop has huge traffic. And all those people
come there every day to buy tiny things: mobile airtime by the
second, one pill, a day’s worth of shampoo.

Some of the things Lal sells, like mobile minutes, require a passport
photo in India, nevermind that most Indians never leave their
cities, much less the country. No problem: Lal has a blue backdrop
on the wall and a digital camera. He pulls it out–with a totally
deadpan face–and snaps a photo of me as I’m asking him questions.
I’m not sure if this is defensive or mischievous, but the picture
can’t be pretty. It’s a hot, sticky day, I’ve been vomiting for 48 hours,
and we’re only standing a few feet from each other. There’s little
room in the store for much beyond the counter that Lal is crowded
behind with a sulky-looking teen who is blaring a Bollywood video
on YouTube, playing on the Acer computer that catalogs Lal’s
microworld. It’s a cheap computer, but it’s likely the most expensive
thing in the store. Lal seems to know everyone who comes in and
what they want the second he sees them. A customer barely leans
in the store, mutters a word or two in Hindi, plunks down a few
rupees, and Lal tosses the customer the desired, tiny treasure.


Over the course of a month, Lal makes thousands of rupees per
item. A big seller is Pantene, which offers “sachets” of shampoo and
conditioner, just enough for a day’s use and typically reserved for a
special occasion. Strings of these sachets are hung on wires in every
cornerstore and ramshackle kiosk in the country, looking like condoms
or packets of ketchup from afar. During religious festivals or
the auspicious Hindu months for weddings, these sachets practically
fly off the wires.

This isn’t a poor thing–this is an aspirational market thing. On
a per-drop basis, this shampoo is outrageously priced, but in such
small volumes, it’s affordable as a splurge. This micro-aspirational
culture was illustrated by an Airtel commercial running constantly
in late 2009 that showed a well-dressed, pretty Indian woman
walking by a fancy bakery and admiring an elaborate cake. She
walks in and the grumpy baker takes the cake out of the counter
and shows her the price tag. She mimes that she would like a tiny
slice. He frowns. She makes a pleading face. And in the next scene
she’s walking out beaming and eating a microscopic slice of cake.

This amuse-bouche market is the most sure-fire way that companies
have found to make huge money on India’s 1.1 billion-person
but unequal market. It’s the perfect bite-sized chunk for a country
where an urban crush and a flood of multinational jobs have conspired
to make everyone want the city, Zippo-flipping lifestyle, even
if only a small percentage can afford it. The woman in the Airtel
ad isn’t depicted as poor or cheap; she simply wants a tiny slice.


Smart entrepreneurs in India are taking this microconcept and
pushing it further. Increasingly things aren’t marketed in a physical
packet, they’re marketed virtually over the most mundane, prepaid
cell phone. After all, telecommunications is one of the only parts of
India’s modern infrastructure that works, and part of that is because
it exploits this microeconomy with network plans that sell airtime
by the paisa, which is worth less than the value of one penny.

A company called aggregates and sells bus tickets. It’s a
huge market in India, with some 750,000 tickets sold daily through
3,000 different agents. The company only took off once the founders
accepted that they weren’t a Web company; rather, they were a
company that sold bus tickets over any medium. More than half
of the thousands of tickets redBus sells every day are sold over
cell phones. It’s such an important delivery channel that redBus’
co-founder and CEO Phanindra Sama insists on building regional
call centers throughout the country to make sure the operators
know the local routes, language, and slang. (In a nod to the earlier
chapter’s point about how well India uses connections, redBus got
this advice through a mentor in the TiE network and was funded
by Pravin Gandhi’s venture fund.)

A company called SMS GupShup is building something that’s a
cross between a social network, Twitter, and the Yahoo! Groups application,
all for basic mobile phones. The founder, Beerud Sheth, was
ranked first when he took the IIT exam and got his pick of schools
and majors. He went to IIT Mumbai, and the next logical step was
MIT in the United States for grad school. He went to Wall Street
instead, and in the late 1990s, he cofounded an online talent marketplace
called eLance and moved to Silicon Valley, his team wearing
orange eLance shirts and popping champagne bottles on the flight.


Sheth has put those Valley connections to good use. SMS GupShup
has raised an impressive $37 million in Silicon Valley venture capital
and has 32 million users. But that’s nothing compared to the opportunity.
While the Web has 1.5 billion users worldwide, mobile has
more than double that. In the emerging world, even those who have
Web access only get it an hour or two per day, versus 24-hour access
with a phone and a far better connection. But most mobile versions
of Web sites don’t work on basic phones, making users hungry for
more interactive functionality. The more functionality they get over
their mobile, the less incentive they have to switch to computers,
Sheth says.

The money is there, too–the same way it is for Pantene, in
micro-aspirational chunks. The good and bad of text messages is
that they cost money. That means a company like SMS GupShup–
which is sending hundreds of millions of messages per month–is
expensive to build out, but people are used to being charged to
send a message, as opposed to the Web, where the expectation is that
everything is free. Low-tech, pooh-poohed SMS generates about $100
billion in annual revenues, where the consumer Web generates just
$75 billion, and $25 billion of that goes to Google, Sheth argues.

The ambitious Sheth looks at this situation and sees the opportunity
to build the Yahoo! of mobile. Even with its slumping stock
price, Yahoo! is still one of the largest media properties ever created,
with half a billion unique users coming to its homepage every
month. “We could be the world’s largest social phenomenon in
a way you can’t on the Web,” Sheth says. “When societies adopt
media that becomes the standard, it’s hard to switch. There’s a
Valley-centric view that mobile is a second-class experience, but
SMS is the social glue of the emerging world.”


Several miles south of Sheth’s offices in Mumbai, a company
called Justdial is the Google equivalent for the mobile phone nation.
People think of something they are looking for–a phone number,
a restaurant, a category like “doctor”–and call Justdial as automatically
as someone online would enter a word in Google. It promises
an answer within 30 seconds, and you can be connected, texted,
or e-mailed the information for free. The company generates
more than $30 million in annual revenues for the audio equivalent
of Google’s paid search ads. That is small on a global scale, but
Justdial’s reach is huge in India, answering close to 100 million calls
per year, growing at a rate of 40 percent annually. Said one woman
who has never used a computer: “Before I can think of what I’m
looking for, I’m calling them.”

The company was started by an entrepreneur named VSS Mani,
who dropped out of school, which is downright shocking in
education-centric India. He first tried to start this company in the
late 1980s, at least a decade too early and well before India’s telecom
explosion. Years later, when he tried again, he had to apply for a
landline and wait several years before he could open the business.
After years of fits and starts, he could only afford a 300-square-foot
office in downtown Mumbai. “I didn’t care as long as I had the
address on my business card,” he says. When the late 1990s hit,
everyone argued that the Internet was the new thing, not phone calls,
and Mani changed his business under pressure. But the Internet
didn’t take off broadly in India, and mobile adoption soared. He’d
been right all along and pulled the business back to its roots.

Mani insists there’s no substitute for a human being answering
the phone, armed with powerful software. In 2010, Justdial
has pulled what might be an India digital first, expanding into the
United States. In March, the company launched 1-800-JUSTDIAL,
a direct volley against 411 services, which increasingly use voice
recognition software to connect people to businesses. The plan
is to launch local call centers in poor areas of the United States.
Ironically, an Indian company will be bringing call center jobs to
the United States. It may be ambitious, but Mani has raised $46
million from Tiger Ventures, SAIF, and Silicon Valley powerhouse
Sequoia Capital, which funded Google early on. The entire sum is
still in the bank. Justdial has reached this point off of its own revenues
and Mani’s original, paltry $1,000 investment.


With such an emphasis on voice calls, it’s a good thing call centers
are a core Indian competency. Like BYD and CK Telecom in China,
these companies aren’t outsourcing the tasks their country has
excelled at providing; they are using them as endemic advantages. A
growing number of Indians are getting call center jobs from Indian
companies, not American ones. And, like BYD and CK Telecom,
companies like redBus, SMS GupShup, and Justdial are actually
building products and services for themselves, not for the West.

Back in Lal’s store, he pulls out a stack of little green booklets
and slaps them on the counter in front of Abhishek Sinha, exclaiming
something in Hindi. Sinha is starting a company called Eko
India Financial Services, and this stack of books full of crossed-out
codes is good news. It means Eko’s mobile phone bank accounts–
Lal’s newest product in his micro-arsenal–are selling fast.

Eko’s bank accounts don’t try to be everything to everyone. It
aims squarely at the unbanked–some 60 percent of India’s huge
population. There are no extra bells and whistles with Eko’s service
because there’s no room for them, and at the end of the day, probably
little need for them. The accounts are actually held by the State
Bank of India, which insures up to 100,000 rupees per account,
but Eko’s customers don’t ever go into banks. The tellers are grocers
like Lal–the benign feudal warlords of every street and village in
India. Eko just seeks to give this already trusted, daily-visited vendor
one more thing to sell.


Making vendors like Lal the tellers of Eko’s virtual bank is crucial
to wide adoption. These vendors are the hub of India’s poorer
economies, typically extending credit when even a sachet of shampoo
is too expensive, essentially acting like trusted bankers already.
Lal has only been opening up Eko bank accounts for about five
months, and business is growing. He slides Sinha a handwritten
ledger showing the day’s volume–28,000 rupees deposited and
30,000 rupees withdrawn. Lal gets a tiny cut of each transaction,
ensuring he’ll keep pushing the accounts. He is looking at Sinha
with a self-satisfied, smug grin. And why not? Even for the surging
microeconomy, Lal is a “rock star,” says Sinha.

Ironically, by getting intensely local, India is digitally stretching
across its unconnected, mostly impoverished, half-illiterate nation
the way the British did in colonial times with the railroad, and the
impact on people’s lives is no less vivid. As the country signs up
millions more mobile users per month, the trend is reaching deeper
into the villages.

Finding a way to modernize the villages is key to making life
better in India. Unlike China, Indian cities don’t have the infrastructure
to support a full-scale migration, nor does India have a
powerful, autocratic government that can mold new satellite cities
out of nothing. Delhi tried with Gurgaon, a city constructed
so haphazardly that most of the companies operating there run
off generators. India isn’t 10 years behind China, as many pundits
say. What worked for China won’t work in India. India has to find
another path to modernity. Even Mahatma Gandhi used to say: If
you want to change India, change the villages.


Too high-minded social thinking for greed-based entrepreneurs?
Hardly. The villages are where the mass market is in India. And if
the country can crack the sachet equivalent of the digital revolution,
it will have a leg up on bridging the same divide in Africa,
Southeast Asia, and any corner of the world where the Web is experienced
over a pay-as-you-go monthly phone.

Excerpted with permission of the publisher John Wiley & Sons, Inc. from Brilliant, Crazy, Cocky: How the Top 1% of Entrepreneurs Profit from Global Chaos by Sarah Lacy. Copyright (c) 2011 by Sarah Lacy.