‘Ideas’ could be India’s next growth industry
10/10/2010 1:46 AM EDT
Enter the VCs
“I feel the only way to abolish poverty is to embrace entrepreneurship and create lots of jobs with high disposable income. If I can encourage entrepreneurs and youngsters to do that, it would be wonderful,” said Murthy. Among the organizations in which his firm has invested is SKS Microfinance, which funds cottage industries launched by poor rural women.
A number of well-known funds have set up shop in India, but entrepreneurs looking for angels are often disappointed.
“Indian startups and entrepreneurs have to work with a very different environment, and we recognize that out here in [Silicon] Valley,” said Sun Microsystems co-founder Vinod Khosla, who later became a general partner at VC firm Kleiner, Perkins, Caufield & Byers and today is a partner at Khosla Ventures. “To do business in India, you have to be a little creative and innovative to thrive. But I am still quite positive on India. The way to grow an economy is through entrepreneurship and capitalism, and India seems to have figured out the right formula.
“Clearly, there are still a lot of issues. Starting a business in India is still harder than it needs to be. But I believe fundamentally that the major energy breakthroughs will have to compete at ‘Chindia’ prices, because you have 2.5 billion people [in China and India] trying to raise themselves from poverty to a Western standard of living.”
Organizations such as The Indus Entrepreneurs; the National Entrepreneurship Network, a Wadhani Foundation project; Nasscom; the India Semiconductor Association; the National Innovation Foundation; and the Rural Innovation Network offer networking opportunities for Indian entrepreneurs. But most of the business founders here who manage to hold their heads above water are able to do so only with financial help from friends and relatives.
“It’s all about connecting with the right VC and getting someone to vouch for you; otherwise things just don’t happen,” said Partha Ray, who with partner T. Rai tried and failed to secure funding for a semiconductor project. Today, Ray and Rai are back at their office jobs, but both hope to give entrepreneurship another go in the future.
MindTree Consulting (now MindTree Ltd.) co-founder S. Janakiraman suspects the VC and private-equity firms that got burned as a result of the recent global economic meltdown pulled back in India just as they did elsewhere. But Janakiraman expects “the investment climate for startups to change for the better as firms see a few success stories from startups making it big in India.”
Nasscom, the primary trade organization for India’s software services industry, estimates that there are 652 early-stage IT companies in the country. VC Sharad Sharma at the Indian Angel Network said the numbers are rising as the startup environment grows more hospitable “due to several factors: better availability of angel/seed capital, the opening up of the domestic market and the ability to penetrate the SMB [small- and midsized-business] market in the West using software-as-a-service business models.”
But India is a huge country with enormous needs, and the VC pool is just not deep enough to float every worthy business plan. Seedfund partner Bharati Jacob said it’s not even possible to go through all the plans the fund receives.
One hurdle for startups seeking funding is India’s asset-based economy. “For a working capital loan from an Indian bank, you have to show asset-based collateral; they don’t value the intellectual property or capitalization of R&D that you have,” said Sandalwood’s Kondamoori, who has spent more than 25 years in the Silicon Valley investment community and says he is always on the lookout for promising startups in India and China. “It’s different in the U.S., which is an earnings-based economy; the valuations [of U.S. companies] are very high based on earnings. A lot of this kind of metrics—measuring and building valuation in companies—needs to come into Indian management teams. Anyone I speak to in India always talks about revenue and top-line growth; they don’t concentrate on net margins.”
Kondamoori believes such metrics will fall into place as more Indian companies start listing on the established global exchanges, as reservations booking service Makemytrip did in April with its Nasdaq IPO.
“Right now, there is no saturation in the [Indian] marketplace for any product or service,” he said. “Take the telecom sector, for instance . . . today every telecom operator is interested in merely putting up towers and attracting subscribers, and the way they go after the subscribers [by making incremental, cent-by-cent cuts in charges for calls] is taking its toll; they are losing money all the way. There is so much one can do in the telecom space if you really want to innovate, but everyone is too busy grabbing their share of subscribers . . . I think once saturation takes place, then innovation will definitely come in.”
Alok Mittal, a partner at Canaan Partners, noted that while India has engineering talent in spades, that’s not enough to build successful startups. “You need product managers who are able to chart out the road map and carry it through. And you need customers who would like to buy tech innovation from India—and right now, we don’t see customers rushing to buy products from startups. This, in turn, affects the availability of capital” for Indian tech startups.
The dearth of global customers for Indian innovations reflects Indian companies’ inability thus far to get the hang of global marketing, said Ravindran Govindan, executive chairman of Singapore-based Mercatus Capital. “Most of the [Indian] companies I meet with have global products, but they are not able to brand the product well and market it. When VCs like us do manage to connect with some good companies, we are able to accelerate the growth tenfold,” Govindan said.
Indian companies are self-sufficient and steeped in the culture—perhaps to a fault, as they can be provincial in outlook, said Govindan. “They carry the culture into the market, and it’s extremely difficult to break through. When you enter a foreign market, it is just not about opening an office there; it’s about knowing how to talk, how to engage people in relevant conversation, how to negotiate shrewdly and, most important, how to sell. I feel this where India is really lacking.”
On the other hand, the eastward expansion of technology markets is bringing the global marketplace to Indian companies’ doorstep, noted Raj Khare, co-founder of media convergence startup SureWaves. “The center of gravity is shifting to emerging markets such as India and China. Earlier, the [volume] markets were in the Western world, and it was not really possible for someone to sit here and say that he or she was going to innovate for someone living in San Francisco. But now it’s much easier, and entrepreneurs feel it’s a risk worth taking.”
Those startups that do succeed here are often led by seasoned professionals. “I had three very important things checked off: I had a fair idea of what I wanted to do in my company, I had a team that I trusted to be able to do that and I had done this startup thing before,” noted Narasimhan (Kishore) Mandyam, co-founder of cloud computing startup Impelcrm (formerly PK4 Software Technologies), which sells the Impel CRM contact management SaaS. “The initial challenge was to convince people in India that a cloud offering made sense. When we realized, very quickly, that it was an evangelical sale, we switched the emphasis to marketing Impel CMS to people [who were already sold on the cloud concept]. Although that’s a smaller number, any number in India is big.”
A final piece of the puzzle for India’s tech entrepreneurs is the cooperation and support of the country’s government.
Kondamoori believes tax exemptions on the portion of profits poured back into R&D would stimulate “innovation, IP [creation] and long-term sustainability.” Couple that with global reach and global ambition, he said, and “it’s just a matter of time” before India is known as an innovation hub.
Said Mercatus’ Govindan, “I see a spark in India, and if this country if given the right platform—government support, an organized initiative—innovation will take off.
“This is the future wealth [of India] . . . the wealth of ideas.”
|"To do business in India, you have to be a little creative and innovative to thrive," says Vinod Khosla of Khosla Ventures.