OnStartups

This article is a continuation of my series of articles on software startups in India (a topic I know very little about, but am hopeful that I can spark interesting conversation in the comments).

I’ve read in several places that the level of private equity investment (and VC investment specifically) is growing in India.  One example is “Venture Firms Making A Difference In India” from Silicon Beat.

Clearly, the VC industry here in the U.S. is vibrant (2006 was a good year, and software continued to take the majority share of VC investment dollars).  Though I’m generally not big on large VC investments in early-stage software companies (I’d prefer to see startups bootstrap for a little while and prove out the concept), I think the situation is different in India.

How VCs Can Help Indian Software Startups

Here are some ways I think the introduction of a robust VC community in India might help software startups there.

1. Cash Is Still King:  Just like in the U.S. (or anywhere for that matter), cash is always useful.  This is obvious and I won’t bore you with any further elaboration.

2. Balancing Employee Risk:  One of the big advantages of a startup in India getting VC funding is that it can then better balance the risk/reward profile of people it hires.  I think it can dramatically improve the quality of people a startup has access to.  For example, whereas a non-funded startup might expect new hires to take on lots of risk (in exchange, presumably for higher equity), a funded startup has the option of finding the “optimal” point of risk/reward.  My guess is that potential employees of a startup in India might respond more favorably to a healthy balance of cash and equity.  In this case, it’s nice to have the option.

3. Increased Credibility:  In India, credibility and prestige go a fairly long way.  Even brilliant people that are passionate about startups may have a leaning towards a company that has some credibility and stability.  The fact that a VC has funded a startup sends a signal that someone has done some due diligence and likes the idea and team.  This is somewhat the case in the U.S. too, but I think the issue is amplified in India because there is not yet a long history of successful software startups.  By passing the high expectation bar of a VC investment, a startup can demonstrate to some degree that the idea is not completely moronic and that someone determined that the founders were worth betting on.  Of course, this increased credibility does not stop at just employees.  Potential customers and partners will likely be more willing to do business with the startup.

4. Staying Power:  Even though attrition rates amongst software engineers is still alarmingly high in India, I think employees still seek career paths that provide some stability.  A VC investment provides a fair amount of comfort that the company will be around for at least a little while.

5. Expanded Network:  Chances are, one of the key challenges for startups in India is getting distribution (either within their local market, or within other strong software markets like the U.S. and Europe).  The right kind of VC connections makes it much more likely that a startup will be able to find effective ways to sell their product.  Of course, this applies here in the U.S. as well, but once again, because the software startup ecosystem is so much more evolved here in the U.S., it is possible for startups to figure out a solution to their distribution problem on their own.  It can happen in India too, but it’s just harder.  The VC network (as long as it’s the right VC) can make this a lot easier.

I’m actually very encouraged by the recent willingness of the venture community to make increasing investments in India.  I was forwarded an article recently by one of the OnStartups readers that describes in detail the lineup at a local tech startup gathering in India called “Proto.in”.  Swaroop does a great job summarizing the proto.in conference.  If nothing else, look through the list of startups that were there.  It’s starting to look an awful lot like an event I might see here in Boston (except there seems to be more telecomm, wireless and enterprise software in India).

What are your thoughts?  Does the entrance of more venture capital into India help startups there, or is it unnecessary?  Will the Indian software startup environment succeed regardless?  Would love to hear your thoughts on the topic – particularly if you are an Indian entrepreneur and have experiences (positive or negative) with raising venture capital.