These days, you can’t help but read about the economic
growth that is going on in
India.
Lots of people are talking about the huge emerging middle-class, the
overall growth in their economy and the increasing likelihood that India will have
a seat at the table when it comes to economic superpowers. [Disclosure:
I was born in India
and spent many of my formative years there, including high-school and a couple
of years of undergrad].
But, instead of looking at the macro-level trends in India (which
are certainly mostly positive), I’d like to instead look at the
entrepreneurial process there – and more specifically at software
startups, which is my main area of interest. Though we hear about lots of
IT companies in India driven
by the big push towards outsourcing in the
U.S. and elsewhere, most of these Indian
companies we hear about (big and small) are fundamentally service companies, not product companies. Nothing
wrong with service companies, but the kinds of startups I’m most
interested in are those that are building software products. I think the environment required to build a
large pool of entrepreneurs starting software product companies is different from
those starting service companies.
I’ve been doing a fair amount of reading on what is
going on with startups in India
and also had the opportunity to meet with a local entrepreneur there during my
last visit (he is indeed working on a software product startup).
So, here are some thoughts and ideas on why we haven’t
yet seen a lot of software product companies come out of
India –
yet. I’m sure these factors are changing for the positive even as I
write this, so it’ll be interesting to watch the entrepreneurial
community develop in India.
Why There Aren’t More Software Startups
In India
- Service Companies Have Lower Risk: Unlike product companies that
usually require some R&D and investment before revenues and cash-flows
can kick in, service companies can (and often are) profitable very
quickly. The business model for a software services company (commonly
an outsourced development company) is fundamentally simple. Hire
labor from the large pool of local talent at a price that is market
competitive for India.
“Rent” these resources out to clients at a higher price.
The clients get access to a less expensive pool of resources, the
employees of these Indian companies generally get a decent salary and benefits
and the company itself makes money. Seems like a win-win-win for
everyone. Hence the large number of IT services companies, both
small and large that have been established in India over the last 10-15
years. As an entrepreneur in India, this is what defines your opportunity
cost – or the risk/reward ratio you are trying to beat. Sure,
you could spend your life savings on building a product in the hopes that
there will be a large payoff someday, but a services company is just much less
riskier.
- Lack Of Significant Precedence: One of the great things about
the startup community here in the U.S. is that we have lots of
great examples of software companies that have succeeded, with highly visible
founders behind them. Examples include Microsoft, Intuit, Siebel,
Lotus, Oracle, Adobe and many others. We’ve seen hundreds of
successful software product companies started in the U.S.
Many of the software startups initiated today in the U.S. are done
so by employees of other
successful (or even unsuccessful) software startups. India does
not yet have this foundation of prior precedents that entrepreneurs can
look to for inspiration. This is going to take a while to change as India is just producing its first real
generation of software entrepreneurs like we had in the U.S. decades ago.
- Early-Stage Capital Is Even Harder Than In The U.S.: Historically, it has been
difficult for startup founders of product companies to get their ideas
funded in India.
The reason is that investors, even private equity investors, have
been reluctant to put high-risk capital to work and fund radically new
ideas for software companies. This is partly because there’s
been a large supply of other opportunities that seem to present a much
better risk/reward (like IT services). However, this seems to be
changing. The volume of private equity investments in India in
2006 was at an all-time high and is growing at a torrid pace. More
and more U.S.
venture funds are beginning to invest in Indian companies. I think
this is important because though many of us in the U.S. have access to sufficient personal/family
funds to bootstrap companies, this may not be true for the a brilliant
software engineer that has a great idea for a company in India. One
thing I’m worried about is that just like we have in the U.S. the venture investments will likely be
concentrated in a few key geographic areas (like Bangalore and Mumbai). Though it’s
a start, it still doesn’t address the needs of the large numbers of
exceptional entrepreneurs that are likely established in second-tier
markets, like my home state of Gujarat.
- Recruiting Great Employees Is Challenging: Lets assume for a minute that
you are a software entrepreneur in India, living in one of the
major markets and have a great idea for a startup. Even more
important than cash is the ability to find and recruit other members of
the early team. Your ability to do this will likely be one of the
single largest factors in your future success. As it turns out,
building out this team is pretty hard to do – even here in the U.S.
In India,
the challenge is that startups are competing with large brands that are
experiencing tremendous growth. With these large companies come
great salaries, some financial stability, phenomenal “perks”
(sort of like we see at Google) and the peace of mind that comes from
being able to tell your friends and family that you’ve got a great job
at company they’ve likely heard of. It’s important to
realize how important this last factor is. The ability to
demonstrate stability and prudence is an important cultural factor in India. A
startup’s potential employees are going to have a hard time
rationalizing why they’d take a risk on a no-name startup when there
are so many big companies looking to compete for their talent. If
you’re of marrying age in India, chances are that the
societal pressure to increase your “market value” in the
marital sense is often extreme. [Note To Self: This might make an
good article unto itself.] Startups have to overcome all of this to
try and recruit great talent. From what I have seen, heard and
experienced, this is non-trivial.
- Too Much Bureaucracy: Here in the U.S., I can have a brilliant
idea for a software startup and within about 72 hours have launched a “real”
company. By “real”, I mean it will be registered (LLC or
S-Corp), have a Federal Tax ID, have a merchant account to accept
payments, a bank account and a small business credit card. I’m
not sure how long the equivalent process takes in India, but
I’m guessing at least weeks. What’s more important than the elapsed time
to start a company is the personality required to do so. Folks like
me (quiet, introverted and not particularly aggressive) that are looking
to start companies in India
are going to be at a disadvantage as they try to navigate the waters there.
This is one of the reasons I left India
(India
is not conducive to mild-mannered introverts). So, if you’re
like me, you have the added burden of trying to find someone else that is more aggressive,
gregarious and generally can “get things done” in India. In
the U.S.,
it’s very different. Even folks like me can actually start
companies. Much of what is needed to be done can be done online (you
don’t even have to talk to people).
- Product Companies Are Hard: At the risk of drawing stereotypes, I
think Indians in general are a little impatient and like to see quicker “payback”
periods on their investments. There are a few number of them (than
in the U.S.) that are willing to spend the 2+ years it might take to build
a product, see how the market responds and “tweak” the
business as necessary to get it to a successful state. Product
companies are also more “random” and difficult to control the
outcome of. They involve a large number of “creative”
factors that will largely influence whether the product succeeds or not. I’ve
found Indians to be almost overly practical (in the short-term sense) and
not passionate about some of the softer things (like user experience,
marketing, branding and other things) which in today’s world are
large contributors to future outcomes of software startups. They’d
much rather work on the “harder” stuff that they can better
control and predict. This is a bit of a “squishy”
argument, but it’s a squishy issue. I guess the evidence of
progress I’d like to see is a cool software product coming out of an
Indian startup along the lines of an Adobe Photoshop or even a 37signals Basecamp.
So, what do you think? If you’re an Indian entrepreneur,
have you faced any challenges in getting a product company kicked off? Am
I completely off-base here and are there hundreds of Indian software startups
building cool products as we speak? If so, why aren’t we hearing
more about them? Would love to hear your thoughts in the comments.
