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.
- 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.
- 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.
- 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.
- 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.
- 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.
