I am one of those who took the entrepreneurial route right from college. People ask me if it was the right thing to do since I didn’t have any industry experience at the time. There are 2 rational reasons I think it was great to start right in college.
1. Investment was very low: In India, the job offers at the time were offering a median of Rs. 2 Lakhs/year. So my investment in terms of not making money was very low. I didn’t make any other investment into the business.
2. Even Rs. 10K moved the needle: Given that I had no salary, I also didn’t have any costs. I remember my first project was Rs. 10,000 and I could stretch that money to 2 months! So even very little financial success moved the needle for me.
Entrepreneurs often think in these two ways when they think of starting a business. Sure, there are a lot of irrational reasons also – passion, family, location or simply accidental, but rationally these 2 are topmost.
This also explains the mushrooming of IT services businesses in India. For a team of 2-3 technical founders, they can pretty much start working using their own computers and start a company; hence the investment is just in terms of giving up salary. And if you can win just one international project for 3-4 people, and if you don’t plan to grow by hiring a team etc., you can start paying your own salary. It offers a great DIY (Do it yourself) opportunity with a moderate success of getting to say, 50 people in 4-5 years, it would still move the needle vs. what you would have earned as a salaried employee.
Lets evaluate if E-commerce businesses possess characteristics.
There are a lot of investments required to grow an E-commerce business like customer acquisition costs, inventory costs etc. However, the costs that come immediately are technology costs. Hence, like IT services, it also offers a great DIY option for technology entrepreneurs. They can put up a site that lists a catalogue very cheaply, on their own! They can do boutique marketing on social networking sites or using SEO very inexpensively to start with. However, more investment might be required as you grow it.
Let’s take the example of a technical developer whose salary is Rs. 10L/year. In a 3 year, time frame, taking some increments and applying a future value, his/her investment is about Rs. 40L. Hence, to move the needle, this entrepreneur needs to create a value of lets say, 50-100% more than that, i.e. Rs. 60-80L at the minimum to move the needle. Or he/she needs to start making Rs. 1L/month or more to be able to continue investing.
We often read that even large E-commerce businesses are not yet profitable. Hence, this is the aspect an entrepreneur should carefully evaluate without getting swayed by the perpetual hype around E-commerce valuations. One way people are doing this is through private labeled E-commerce. Selling your own products (high margin) vs. other brands (low margin).
Compared to IT services with the low investment and steady cash flow, e-commerce seems riskier. You can argue that it’s more scalable. Hence, statistically, fewer e-commerce businesses may survive than IT services but those which survive (acquisition is also counted as survival) may offer a bigger return to entrepreneurs.
And that, now, comes to an individual’s risk/reward appetite.