In the wireless space, factors like the increase in telecom
penetration and the need for last-mile connectivity have given
startups room to innovate. Companies like Tejas Networks,
which makes optical networking switches, and ARE Technologies,
which develops proprietary wireless software, have sprung up.
The SaaS space is a little different. It is still nascent and,
in fact, is the ASP (application service provider) model
re-invented � it essentially provides enterprise software to
companies on a pay-per-use basis. Companies like
Salesforce.com and Atlantis Computing are betting on the fact
that the price-sensitive Indian market will fuel growth. And
India�s cost advantage is turning out to a big plus for these
segments. �The cost of experimentation and making mistakes is
far less than in the Valley. That could be India�s trump
card,� says Beerud Sheth, co-founder and CTO, Webaroo.
The other big marketplace driver has been the outsourcing
boom. But while outsourcing in India has been associated with
IT services and BPO, the tech innovation that is taking place
has been more of an offshoot of outsourcing. Around 2002-03,
when MNCs like Oracle, SAP and Microsoft started moving
non-core R&D work to India, Silicon Valley�s startups
followed suit. Soon enough, these startups realised that they
could actually do cutting-edge development out of India. By
early 2004, more than 50 per cent of Silicon Valley�s startup
population was doing R&D out of India. By 2005, many had
even started incubating next-generation technologies here. �In
India, it costs 50 per cent less to start a business,� says
Thomas Binford, founder, Read Ink.
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Thomas O. Binford, chairman
& CTO
Read Ink,
Bangalore
The 70-year old Stanford
professor set up Read Ink in 2002. It works on
handwriting recognition and document analysis.
Binford has put in $8 million of his own money
so
far. | | |
 | |
|
|
Manish Gangey, co-founder
& CEO
Elina Networks,
Bangalore
Gangey quit Tejas Networks
to start up Elina in 2005. It is building
optical networking products for SMEs and plans
to rope in VC funding once it has a couple of
customers. | | |
| |
That�s exactly what this generation of Indian entrepreneurs
is tapping into. In Bangalore, Minglebox�s Kavita Iyer and
co-founders Sanjay Aggarwal, Sushma Abburi and Sanjay Mittal,
all between 33 and 34, are developing a social networking site
that will combine the Internet and mobile to generate
user-driven content. Cosmic Circuit�s Ganapathy Subramaniam,
38, heads one of the rare analogue design startups. It is
developing proprietary software for the analogue and radio
frequency space. And Chetan Venkatesh, 30, at Atlantis
Computing, is developing a SaaS platform that will help small
companies bring down IT costs. In Mumbai, Indiagames, founded
by Vishal Gondal, develops PC, video and console games for a
global audience. We find the Webaroo team, Beerud Sheth and
Rakesh Mathur, at IIT-B where it was incubated. Seasoned
entrepreneurs both (Mathur founded Junglee in 1996 and sold it
to Amazon in 1998 for $250 million, while Sheth co-founded
online talent marketplace eLance), they conceived Webaroo as
an offlne search engine that stores relevant data on a desktop
or a mobile device and makes it retrievable. And in Hyderabad,
Dayakar and K. Ramachandra Reddy are driving MosChip, a
fabless semiconductor startup.
This tiny sample of the kind of people who are driving the
resurgence gives us interesting clues into why they may
achieve what their dotcom peers didn�t. First, age is no bar �
the present lot swing between 23 and 70. Therefore, there�s an
even mix of fresh-off-campus entrepreneurs and those with
operating experience. Second, many of them have survived the
nuclear winter � Tejas Networks� Sanjay Nayak, Herald Logic�s
Vishal Gupta, AdventNet�s Vembu brothers and Baazee�s Avnish
Bajaj (see �The Survivors�). Their success, which became
prominent only around mid-2005, has set the ground rules for
today�s startups.
The resurgence itself has three phases. In 2001, former
Wipro president Ashok Narasimhan teamed up with UniMobile
founder Rajesh Reddy to set up July Systems and develop
integrated mobile marketplace solutions. They decided that the
road to success lay in splitting the company between the US
and India. So, Narasimhan would front sales and marketing in
the Valley while Reddy would man R&D in Bangalore. The
gamble worked and July has roped in nearly $28 million in VC
funding from investors like Sequoia Capital, JumpStartUp and
Motorola Ventures. This was the beginning of the US-India,
cross-border startup wave. Since then, some 50 have sprung up.
Pure Indian startups � Cosmic Circuits, Elina Networks and
Atlantis Computing � belong to phase II, which began to gain
strength around early 2005. Two kinds of entrepreneurs have
spurred this phase. One, fresh-off-campus students, typically
from an IIT or IIM, either incubated on campus or started on
their own. About 30 per cent of the startups are in this
category. Two, startups led by people who had quit operating
jobs with large India-based outsourcing firms or R&D
outfits. They owe a part of their independence to the booming
economy, which has enabled them to cash in on factors like
ESOPs (employee stock options) or stockmarket investments. Now
all that money and experience is going into creating the next
generation of IT companies.
The third phase is still emerging. This will be dominated
by US-returned Indian tech workers. An estimated 50,000 came
back during the US slowdown in 2001-03. By then, many global
tech majors had set up R&D bases in India and quickly
absorbed them. Now these folks, who have the advantage of
global experience, are striking out on their own � Raghav Kher
of SeventyMM (an online DVD rental service) and Ashish Kumar
of Tekriti Software. �People are leaving Motorola, Intel and
Cisco to start companies. Teams may not be complete, but there
is tech innovation and the ideas are disruptive,� points out
Silicon Valley Bank (SVB) Global chief Ash Lilani.
SVB has been an important catalyst in the return of the
Valley�s VC community to India (see �The Second Coming�, BW,
21 February 2005). In November 2003, Lilani led a delegation
of 20 Silicon Valley VCs to India on an exploratory mission.
�At that time, it was only about outsourcing. Now the funds
want to be in India. The fly-in-fly-out model is dying,� he
says. So, Sequoia Capital acquired Bangalore-based WestBridge
in 2006 and set up Sequoia Capital India, Matrix Partners
roped in Avnish Bajaj and Rishi Navani to set up Matrix India
Partners, and Kleiner Perkins Caufield & Byers (KPCB) got
Sandeep Murthy to head investments in India.
That November mission has been followed by several more
under the aegis of organisations like TiE and the Indian
Venture Capital Association (IVCA). Today, almost every VC in
the US wants an India presence. Again, there are two reasons
for this. First, emerging economies like China and India are
opening up as tech consumer markets. And like Silicon Valley,
they too have the skill base to develop these technologies.
The icing on the cake, as Binford says, is that the cost of
developing new technology is 50 per cent less in these
markets. That�s a big draw for VCs. After the Internet bust
and the tech slowdown, exit valuations in the Valley have
plummeted. In 1999-2000, if it cost $100 million to start a
company, the return potential was $1 billion. Post-slowdown,
the return potential dropped to $200 million. That meant VCs
would have to start companies with $20 million-25 million to
achieve exit multiples of nine or 10.
The re-entry of US VCs has also led to the creation of a
handful of local VC funds � the $10-million Seed Fund, the
$6-million Erasmic Fund and the Band of Angels, a group of
corporate head honchos and entrepreneurs who have pooled
resources to fund startups. The infection has spread to the
veteran state government-sponsored VC outfits as well � GVFL
(formerly Gujarat Venture Finance) has raised a new
$11-million fund, Karnataka Information Technology Fund
(KITVEN) is raising an $11-million fund and Kerala Venture
Capital Fund (KVCF) has raised $4 million.
As the convergence of men, money and market forces begins
to take root, an ecosystem akin to the one that exists in
Silicon Valley will begin to emerge. In fact, a shadow of this
ecosystem is already in evidence. (See �Making Silicon Valley
In India� on page 38.)
As in the Valley, which started largely out of an
initiative of Stanford University � it set up a programme for
startups in 1939 that later became the Stanford Industrial
Park � the incubators at the IITs and IIMs have taken the
first step towards an industry-academia relationship.
Entrepreneur-VCs � a trend started by Eugene Kleiner and Tom
Perkins who set up KPCB in 1972 (Kleiner was a founder of
Fairchild Semiconductors and Perkins was one of the leaders of
HP�s computer division) � are now part of the Indian fabric.
Baazee founder Avnish Bajaj joined Matrix Partners this year,
Daksh co-founder Sanjeev Aggarwal is part of the Helion
founding team, Jobsahead co-founder Alok Mittal is with Canaan
Partners, and Subrata Mitra and Prashanth Prakash (think
NetKraft and Tavant Technologies) have set up Erasmic Venture
Fund. Then, intermediaries like SVB Global and legal firms
like Wilson Sonsini Goodrich & Rosati have thrown their
lot into India.
Long Road Home
The
convergence, however, will not find full expression till all
the pieces of the ecosystem fall into place. The weakest link
is in terms of industry and academia linkages. Investment into
university R&D is abysmal, compared even to neighbours
like China. �The most prestigious research institute in India,
IISc, has a research budget of $60 million. Compare that with
Tsinghua University in China, which has $500 million (Tsinghua
University is similar to the Indian IITs),� says Ajit Nazre,
partner, KPCB. The other gap is the low availability of seed
funding. In the Valley, successful entrepreneurs often become
angels and feed the pipeline. India has no angels because it
has not seen enough big-ticket entrepreneur successes. It will
take India at least five years to get all the elements of the
ecosystem in place. It will take another five years, maybe 10,
for it to achieve the clockwork precision of the one on the US
west coast.
Even the elements that are falling into place now are in
their nascent stages. The 44 funds that are in India have to
familiarise themselves with the terrain. And the local VC
community, one funded by local institutions, is yet to emerge.
Entrepreneurs themselves are in infancy � an overwhelming
number don�t even know the basics of writing a business plan,
let alone build networks to vend their ideas. Add to that the
fact that social acceptance of entrepreneurship has a long way
to go. �Individuals do not want to work in a startup because
their chances of getting a good match for marriage is brighter
if they were working for an HP or Intel,� says Sabeer Bhatia,
who co-founded Hotmail and sold it for $400 million in
1998.
There are other big questions that remain unanswered. For
instance, is there one clear identifiable place where India�s
Silicon Valley will find full expression? Some say Bangalore,
due to its natural inclination towards technology and the
presence of the world�s largest tech companies. But as the
resurgence spreads to places like Mumbai, Chennai, Hyderabad
and Delhi, that looks unlikely. While Silicon Valley, the
original, is both an idea and a physical entity, in India it
will largely find expression in multiple locations simply
because of the sheer diversity of entrepreneurs and
opportunities.
That Silicon Valley will come to roost in India eventually
is given. Where India�s first big winner � the next Skype, as
Lund puts it � will emerge from remains to be seen.
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