Module 2: Opportunity-based and Necessity-based Entrepreneurs

Module 1 argued that entrepreneurship is defined by acting under uncertainty. Module 2 asks a different question: what pushed you in? That question, the plunge decision, produces the course's first and most important typology, the split between necessity-based and opportunity-based entrepreneurs.

This module also contains the course's central definition of entrepreneurship, and an unusually candid 18-page conversation in which Prof. Bhagavatula dissects his own failed rural ventures.

Where the typology came from: GEM

The Global Entrepreneurship Monitor (GEM) is a UK-based consortium that studies economies by measuring the level of entrepreneurial activity inside them. (See the Module 1 note for the fuller GEM description and link.)

When GEM came to study India, they did not expect India to be entrepreneurial. When they went out and actually collected data from people, they found a high prevalence of entrepreneurship, and then found the same thing across other emerging economies.

That surprise is the origin of the whole typology. The data forced the realisation that there are two kinds of entrepreneurship, and only one of them matched the popular mental model. The default picture of an entrepreneur was, and still is, Elon Musk, Kunal Shah, Narayana Murthy. GEM's data said that most of the entrepreneurial activity in an emerging economy looks nothing like that.

Memory hook: GEM did not invent necessity entrepreneurship. The phenomenon was always there, in front of everyone, on every street corner. GEM is what got it categorised.

Necessity-based entrepreneurship

Necessity entrepreneurs start because there is nothing else to do. Not because they spotted an opportunity, not because they want to scale, not because they have a calling or a passion, and not because they wanted to leave a job for something more meaningful. They have no resources and no alternative.

The canonical entry pathway

The lecture gives a full causal chain rather than a label. Learn the chain, not the label:

1. A household owns a small farm.
2. A drought or failure of rain hits.
3. They had taken loans for seeds, fertiliser and pesticides.
4. The crop fails, so there is no revenue to service the loan.
5. To service the loan they sell the tiny piece of land they own.
6. They are now landless, with no productive asset at all.
7. They migrate to the nearest town or city.
8. They start a street stall: a tiny street restaurant, a vegetable cart, small repair work.

There is a second route that is equally common: calamity. Natural disasters wipe out assets. And a third: running away from home when things there were not good.

Common trap: Assuming the paan seller or the puncture-repair man chose that trade. The professor's line is that the paan seller may not have chosen to be a paan seller by choice. He picked it up for some reason, and the reason is almost never preference.

Informality is the defining structural feature

Necessity ventures are informal. That is not a moral judgement, it is a set of hard constraints:

Economists pay attention to this precisely because it is invisible in official statistics and yet it is where an enormous share of livelihoods sit.

Mimetism: replication as a rational strategy

The typical way a necessity venture starts is not with a novel idea. It is:

1. Work in an existing establishment first, say a bajji or snack stall.
2. Learn how things are actually done: who the suppliers are, where the raw material comes from, what the margins look like.
3. Then open something similar in a different area, where the set of customers is completely different.

This produces heavy replication and mimetism in the informal sector. The important point is the professor's defence of it: this is not a failure of imagination. These operators have understood exactly what it takes to make a product and sell it into a market at a profit, and they are reproducing a known-good formula in a new catchment. It is a survival strategy, and a rational one.

The thesis sentence

Necessity entrepreneurship is just as hard as opportunity entrepreneurship.

Prof. Bhagavatula arrives at that line the hard way, by failing at it himself, which is what the next section is about.

Microfinance: Yunus, Grameen and community as collateral

Microfinance has been the single biggest source of resources for necessity entrepreneurship. It has changed the lives of many people who had no other opportunity and no other source of capital, letting them take tiny loans and reach a slightly better and slightly more regular income.

Note also the link to Module 3: a great deal of microfinance in India works because of milk, livestock and eggs, which is exactly why the Amul cooperative model matters so much to rural incomes.

Memory hook: Conventional lending asks "what can you pledge?" Microfinance asks "who will be ashamed if you default?" Social collateral replaces physical collateral, which is the same substitution logic as the Module 1 diamond-community story: reputation and ostracism doing the work of contracts.

Anecdotes: what happened when the professor tried it himself

(This section reconstructs the dedicated 18-page conversation between Prof. Bhagavatula and Pradanyu of the BBA DBE team. It has no handout and no summary sheet, and it contains the most useful operational detail in the module.)

How he got there

• Like many young people from Visakhapatnam, he assumed his future was in the US. American scholarships were scarce in that recession, so he looked for anywhere in the world that would pay for him, and found a scholarship to study renewable energy in Germany.
• Renewable energy in the wake of the 1970s oil shock was where sustainability, carbon footprint measurement and climate scenarios were being worked out, but only inside academic circles.
• The decisive observation: biogas systems worked for thirty years in the lab and failed in the field once the project funding ended. Nobody was left with an incentive to come and fix your biogas plant. That is the moment the thought arrives: an enterprise would sustain what a project could not, because an enterprise has a reason to answer the phone.
• On a funded internship in Kenya he saw ILO-supported projects helping women run ventures. He had gone to study how internet-based information systems could serve rural areas, the "appropriate technology" agenda of the day.
• Back in India, in Vizag, there was no internet yet, so the internet option was dead and the women's-enterprise option won.
• He set up the Enterprise Research and Marketing unit, wrote full business plans with working capital requirements, cash-flow statements and break-even points, and, in his own words, everything was wonderful in Excel.
• Funding came from young volunteer members of AID (Association for India's Development) in the US, roughly two to three lakh rupees, which felt like a seriously large amount. (Aside: AID was the inspiration for the film Swadesh.)

His original model, which he now calls a naive notion of development: write the plan, buy the ingredients, hand them to rural women, have them make the product, take it back and sell it. They would supply labour for wages and he would supply everything else.

The papad post-mortem

The choice of product looked obvious: urad dal, a well-known recipe, everybody's aunts used to make papad as a collective activity. Except that when he asked, most had forgotten the recipe, because nobody had made papad at home for years. This was the late 1990s, internet access was scarce and expensive, so he wrote letters to CFTRI and to Lijjat Papad to obtain one.

Then the venture met reality:

The workaround was a classic constrained-resources hack rather than a fix: over-spice the papads and sell them into bars, where the lighting is dim and nobody is inspecting colour as long as it is spicy. They sold a batch that way. It was not a business.

The energy bar post-mortem

• He had eaten energy bars in Germany and wanted an Indian version that was not chikki and not laddu.
• He went to a home science college (his aunt's friend headed the department) with a clear brief: nutritious ingredients, cheap, locally available.
• The recipe came back in two weeks and it was good: jaggery, peanuts, chana dal, til. Crunchy, right level of sweetness.
• In the field it fell apart, literally. Gas was hard to get, so production ran on wood-fired stoves, which could not reach the temperature needed to caramelise the jaggery. Without caramelisation there is no binding, and the bars crumbled.
• The team suggested selling them as laddu instead. He refused, and the refusal is the interesting part: relabelling as laddu or chikki collapses you into an existing, lower price band. The whole point was to create a new category in which customers would pay more.
• The stock was dumped on local schools on a buy-one-get-three basis, at a heavy loss.

Why screen printing worked when food did not

The most successful of all the ventures was screen printing: handmade paper carrying mugulu line drawings (the white-line kolam patterns drawn in the mornings, not colourful rangoli), turned into wedding cards, visiting cards, letter pads, plus "say no to plastic" bags in 1996 and 1997. AID volunteers sold them in the US.

The generalisable lesson:

Craft does not expire, food does. If you cannot sell a printed card today you can sell it tomorrow. If you cannot sell it tomorrow you can sell it next year. Food gives you no such option, which is why food ventures are unforgiving to beginners.

A second operational lesson: he had trained young unmarried women, and within a couple of years they married and moved to other villages, taking the skill with them. The fix was to train women who had married into the village and would therefore stay.

The retrospective lesson, and the most quotable idea in Module 2

Do not teach a woman how to make papad. Go to the woman who is already making one kilo of papad a day.

With her, the work is not teaching a craft, it is running an improvement programme:

1. Efficiency: how do we get more output from the same hours?
2. Bulk purchasing: buy inputs together to get economies of scale
3. Raw-material grade: buy better and better-graded inputs so the product itself improves
4. Branding: rebrand, package, add a bit of colour
5. Scale: take her from one kilo to five kilos, in both volume and product category

You never have to teach her how to roll. She is already rolling. Meet entrepreneurs where they are, and work on the constraint that is actually binding.

Amul and Lijjat, the two great rural models

The professor's own verdict: no other model has created as much wealth in rural India as the Amul milk model, and Lijjat Papad is an incredible business model alongside it. Most rural households still rely on milk as a revenue source, and much of microfinance is underwritten by milk, livestock and eggs.

Both are now large enough to buy national visibility. Amul is the primary sponsor of the Indian Olympic team. Nandini, the Karnataka cooperative brand, sponsored two World Cup cricket teams, and the cleverness is in the choice: if India plays the West Indies and you have put your brand on the West Indies jersey, Indian viewers see Nandini for the whole match. It costs less than sponsoring India and reaches the same audience.

Module 3 explains how both models actually operate. Read the Lijjat supply-chain story in Module 3 directly against the papad failure above: Lijjat controls the black gram variety, the seed, the contracted farmers, and its own dedicated mills with a different milling method per spice. The professor had a shared village mill contaminating every batch. That single difference is most of the story.

India versus the US: two shapes of necessity entrepreneurship

Important qualifier: this is not an intelligence gap. Talking to people in Dharavi, the professor found "immense intelligence" and constant thinking. If they are not attempting something it is usually because A was tried and failed, B was tried and failed, and the community rationally concluded those are outside the operating boundaries.

Indian counter-examples that did scale: Adyar Ananda Bhavan, Naturals Ice Cream, Saravana Bhavan. And things are shifting: the internet now surfaces successful outlets (Rameshwaram Cafe is the obvious current case, where even hostile publicity drives curiosity), and the Darshini format, a Bangalore invention, showed that a standardised low-cost format can be replicated. When models to emulate become visible, more necessity entrepreneurs scale.

Common trap: Concluding that scaling is always better. The Indian pattern is a considered response to a real cost of capital of 24 to 36 percent and uncertain family labour. Refusing to scale can be the correct decision.

Three cases worth knowing in full

Vasanpoli, Visakhapatnam. Vasanpoli is an old name for idli. The founder sources ragi and other millets from indigenous and tribal communities in the local hills, through the Girijan Corporation in Vizag, and brings them into the city. He serves the millet idlis in small pouches made of tendu leaves stitched with coconut twigs, with a couple of good chutneys, originally from a pushcart. He persuaded Girijan Corporation to give him a spot outside their premises on Beach Road on the argument that everything he sold came from the agency region. The differentiation is not the food alone, it is naming and nostalgia: he calls it Vasanpoli, not idli, and the leaf pouches make it an experience. An IRMA professor wrote about him and senior public figures came to know of him. Just before COVID he was offered an outlet and moved from pushcart to a small formal kiosk. People keep asking him for franchises. It is imminently franchisable and yet nobody has copied it, which is unusual in a sector that copies everything.

The cycle-repair widow. Her husband ran a cycle repair shop and died suddenly, leaving her with small children. Somebody told her to take over the shop, although she had only ever watched her husband work. Asked where the confidence came from, she said: when your back is against the wall and you have children to feed, you will do anything. What followed was a sequence of nudges, each from a different person:

1. Start doing cycle punctures. Neighbours bring her their cycles, partly because they know her situation.
2. Move nearer the main road, out of the back of the village, to reach a larger market.
3. If you can do cycles you can do scooters. She learns scooters.
4. Then small motorcycle repairs, cleaning and refitting spark plugs.
5. Then, with a special economic zone nearby and large vehicles passing, buy a machine and do truck tyres, because the logic of a puncture is the same at any size.

By the end she has bought land, built a pukka house, and her son, in tenth standard, is helping.

The Dharavi garment worker. He arrives in Bombay from Bihar with nothing but a distant contact of his uncle's. He stays a couple of days with that contact, who puts him into a garment workshop picking waste cloth off the floor, the most basic job there is. He learns a bit, then a bit more. After seven or eight years the owner hands him ₹50,000 and tells him to start on his own. This is generosity, but it is also good business: the owner is ageing, his children may not be interested, and outsourcing to a trusted contractor while keeping the selling relationship suits him perfectly. Very often, the venture someone works for is the venture that funds them out of the door.

Entrepreneurship is corridors

The cycle-repair story is the vehicle for one of the course's best ideas:

Entrepreneurship is corridors. You move into one corridor, and only from inside it do you see the other corridors available. You could not have seen them from where you started.

This is why business plans do not survive contact. What eventually works is not knowable in advance. The professor's own worked example: you plan to sell 54 litres of milk a morning, and it does not sell. So you turn it into koya, because now you only need to move 5 kilos instead of 54 litres, koya keeps, and anyone can eat it any time. But now you need a stove. You are figuring out the next move from inside the situation, because the plan failed, or because somebody standing nearby suggested it.

He adds a sharp observation about his own student ventures: you had computer skills to fall back on, so you did not need the venture to work. Had it been survival, you would have thought of a million other ways to sell. A large part of why necessity entrepreneurs do well is precisely that there is nothing else to be done.

The fieldwork exercise and how to interview

The module sets a field exercise: go and talk to necessity entrepreneurs in your own neighbourhood. The method matters more than the questions.

Worked economics from the chaat vendor:

• roughly 100 customers on a weekday, about 200 at weekends
• roughly 1,000 plates a week
• at ₹40 a plate, that is about ₹40,000 a week
• roughly ₹1,60,000 a month in revenue
• cost of goods around 40 percent
• leaving roughly ₹1 lakh a month gross, before the operating reality of paying off various people to keep the location

And the milk vendor: up at 3:30 am, rides a long distance on his scooter to source the milk, must finish house deliveries by 6:30 am, sleeps, and then works a second job as a vegetable vendor in the afternoon, selling to the same households.

Memory hook: "The milk guy" is the whole point of the exercise. Nobody thinks of milk delivery as a venture until they ask where the milk comes from, how the route works, and what the second job is.

Opportunity-based entrepreneurship

Opportunity-based entrepreneurs start a venture although they have a definite career available to them. There is a job trajectory in front of them, there are vocational choices, and they start anyway because they have chosen to pursue an opportunity.

The plunge decision is the axis, and it says nothing about outcome

The organising concept is the plunge decision: the moment of jumping in, and specifically what was the antecedent, what pushed you in, and did you jump of your own choice?

The critical consequence, and an easy exam question:

• Vocalising that you will disrupt something does not mean you will be big.
• Starting because you had no other option does not mean you will stay small.

Some necessity entrepreneurs end up with seriously large ventures and many stores. How you play the game after the plunge is what determines scale. The typology classifies the entry, not the outcome. What differs is degrees of freedom: necessity situations are more constrained, opportunity situations usually have somewhat more resource to play with.

For a long time it was assumed that only opportunity entrepreneurs create wealth, jobs and progress. The data says necessity entrepreneurs matter comparably, because they provide livelihoods in difficult and distant situations where nothing else does.

The definition of entrepreneurship

Entrepreneurs - anybody who has the will to take risks and be their own boss in hopes of innovation or in hope of survival, be it a small venture like a food truck or a multi-million dollar company. Pursuing opportunities even without all the needed resources analogy - jumping off a plane and building a parachute mid-air (acc. to reid hoffman)

The professor's version is the same idea with a caveat about the swagger. His preferred wording is:

Entrepreneurship is pursuing opportunities although you do not have all the resources with you.

He notes that Reid Hoffman's parachute framing means the same thing but is deliberately macho, and the downside of failing to build the parachute is rather severe. He prefers the modest version because it gives you ground to stand on: maybe I could do this too.

Why this definition deliberately excludes personality

Read the definition again and notice what is not in it:

What the definition actually describes is a detection and amplification problem. You see something. You think there might be an opportunity there. You put your attention on it and analyse the signals around that space, looking for a faint beep. Is the beep real? Can I amplify that beep into a large signal?

Memory hook: "It is a cognitive game, not a fire-in-the-belly passion game." It is chess. You may sometimes play fast, but you are thinking the whole time.

Case: the Delhi caricature artist who cycled to Sweden

Around 1975, a young man from a village, most likely in Odisha, was in Delhi drawing caricatures for money. That was his entire livelihood and his entire skill set. A Swedish woman had her portrait done, they became friendly, and they fell in love and decided to marry. Her visa was temporary, so she had to return home and reapply.

He then did an inventory of his resources, which is exactly what the definition asks for:

1. A skill. I can draw portraits and people pay me for them.
2. A bicycle.

His conclusion: it is all landmass, there are no seas in between, so if I pedal hard enough and long enough I will reach Sweden. Everyone he knew presumably told him it was a stupid idea.

The execution is the interesting part:

• No map, no Google Maps, no GPS, no YouTube. He simply pedalled west.
• No foreign currency, and no need for any. In each market town he passed he set up and sketched for whoever wanted a portrait, and was paid in local currency. His working capital regenerated at every stop.
• People were amused by him, and the story was compelling enough that many gave him food and a place to sleep for free.
• He posted letters as he went: Tehran, Istanbul, Romania.
• Some luck was involved. In that particular window the whole route was passable, with nations simmering but not in open conflict.

He reached Sweden, married her, and still lives there with their children.

Memory hook: Two resources, drawing and a bicycle, and every sane person would say those two things cannot get you to Sweden. They did. This is the clearest illustration in the course of pursuing an opportunity while disregarding the resources you lack, and of the fact that the resources you do have can be recombined into a means of travel.

Case: Mango Technologies and Qualcomm

The flagship opportunity-based case, and it also sets up the resources material in Module 3.

Setting. Around 2007 to 2008, at NSRCEL on the IIM Bangalore campus, Bannerghatta Road. Bannerghatta Road at the time was, in the professor's words, back and beyond: at six in the evening auto rickshaws demanded double or triple meter to come the ten or twelve kilometres from MG Road, because they would be returning after dark.

The insight. Smartphones were arriving (the Nokia N72 with wifi was the reference point) and everyone assumed the world was going smart. The founders looked the other way: the world is still full of feature phones. Most people, including necessity entrepreneurs, plumbers and carpenters, were on feature phones and would be for years. So: build an operating system with a much smaller footprint, and use that tiny footprint to make a feature phone do far more for people whose lack of resources had conditioned them into that hardware.

The funding problem. Nobody believed global innovation would come out of India in 2007. There was no money and no resources. So the founders, who were highly skilled IT professionals, sold services to companies and used the services revenue to fund product development. Coding on the product ran in parallel with billable work.

The corridor moment. They went, very reluctantly, to a conference in Bombay. They were not interested in the conference. They went to please somebody who might later give them resources, because that person had done them a favour. Flights and Bombay hotels were expensive and they could not really afford it. They went anyway.

Nothing at the conference was interesting, so one founder ended up on the periphery of the hall, making small talk. He mentioned he was building an operating system for low-cost phones. The stranger said he was part of a group doing exactly the same thing.

The demo. The stranger asked to see the phone. They did not have a handset. What they had was a video on a laptop demonstrating the software's capabilities, and that is what was shown. The big-company engineer kept asking, does it do this, does it do that. Mostly yes. Occasionally: not yet, but we think we can crack it. He said wait here, went inside, and brought back a colleague to watch the same video. His verdict: "you are solving a lot of problems that we have."

The blocker and the fix. The engineers wanted to hand over one of their chips so the software could be ported to it. Legal refused: you cannot give proprietary technology to a no-name entity based in Bannerghatta. The resolution was to make the relationship formal by putting money into it. They organised a quarter of a million dollars and invested it in the startup.

The names. The startup was Mango Technologies. The Fortune 500 company on the other side was Qualcomm. Mango was eventually acquired.

The "legs tied" argument

The question the case exists to ask:

How can Qualcomm, with virtually unlimited resources and the ability to hire any MIT or Stanford engineer it wants, have a product that is not as good as a startup on Bannerghatta Road?

Consider the recruiting reality of 2007. If you were a smart graduate of a decent college, would you join Infosys or Mango Technologies? Would you take a masters abroad or work at Mango? Mango was playing with its legs tied and one hand behind its back, and still coded better.

The payoff line:

In entrepreneurship you are more likely to die of indigestion than of hunger.

Too many resources can be counterproductive. A degree of resource crunch forces creativity, forces you out of the standard approach, and produces the "let us just go do it" state. This is the bridge into Module 3, where resource constraint is treated as something to be worked with rather than solved.

The two types side by side

Common trap: Treating necessity versus opportunity as a proxy for small versus large, or unsophisticated versus sophisticated. It is neither. It classifies only the plunge. Module 4 adds a second, independent axis, deliberate versus accidental, and the same warning applies there.

Founder interviews linked to this module

Two of the course's guest interviews sit in the Module 2 folder. Full write-ups are in the course-wide Founder Interviews appendix.

Additional resources

• Necessity vs Innovation-Based Entrepreneurs: https://entrepreneurship.mit.edu/necessity-vs-innovation-based-entrepreneurs/ This article discusses the concept of entrepreneurship, distinguishing between necessity-based and opportunity-based entrepreneurs, illustrating how various motivations and economic conditions shape the entrepreneurial landscape.
• India's forgotten entrepreneurs: https://medium.com/the-time-of-the-product/indias-forgotten-entrepreneurs-a50369252234 This article portrays the challenges faced by India's street vendors, who are often overlooked entrepreneurs operating in a highly regulated and fragmented market.

Lecture mirrors

• Necessity-Based Entrepreneurship: https://www.youtube.com/watch?v=KK3y8oLpbPM
• Anecdotes from Prof. Suresh Bhagavatula: https://www.youtube.com/watch?v=4JDaOBQcvdc

Key takeaways

1. GEM created the typology by being wrong about India. It expected low entrepreneurial activity, found high prevalence, and had to invent a second category to explain it.
2. Necessity entrepreneurs start because there is nothing else to do, usually via drought, debt, land sale, landlessness and migration, and they operate informally with no registration, no bank access and no PF.
3. Microfinance is the sector's capital base: Yunus, Grameen Bank, and the community as collateral, which produces surprisingly high repayment.
4. Mimetism is rational. Working inside an existing stall and replicating it elsewhere is learned survival, not a lack of imagination.
5. Necessity entrepreneurship is just as hard as opportunity entrepreneurship, and the papad and energy bar post-mortems are the evidence: elastic dough, rice-powder residue in the oil, a single contaminated village mill, and jaggery that will not caramelise on a wood stove.
6. Do not teach a woman to make papad. Find the woman already making a kilo a day and work on efficiency, bulk buying, raw-material grade, branding and scale.
7. Indian necessity ventures are sustenance plus a catapult into the formal economy for the next generation, because there is no collateral, money costs 24 to 36 percent and family labour is uncertain. US ventures more often chain up. Adyar Ananda Bhavan, Naturals and Saravana Bhavan are the Indian exceptions.
8. Entrepreneurship is corridors. You see the next corridor only once you are in the current one, which is why business plans do not survive contact.
9. Entrepreneurship is pursuing opportunities although you do not have all the resources. Not passion, not hustle, not need for achievement. A cognitive game.
10. Resource constraint can be generative. Two resources got a man from Delhi to Sweden, and a services-funded startup on Bannerghatta Road out-built Qualcomm. You are more likely to die of indigestion than of hunger.