Investing in India (3 of 3) - Holy Grail

Based on the feedback I received, I decided to switch the order of the remaining 2 posts of this trilogy. Let me talk about the more interesting area first - Indian IP-led companies. The Holy Grail for any VC is what Christian Mayaud calls a MOTU investment. A recent MOTU example is Bessemer’s investment in Skype that returned well over 100x returns in 2 years, when Ebay acquired Skype. Such dramatic value creation in a relatively short time-span can only occur through technology that is both truly innovative and incredibly simple to use, thereby fueling widespread adoption. Can the next generation of such companies originate in India? Or will we continue only in the (Revenue = # of employees * utilization * billing rate) set of industries? There’s always the chance that we see a blazing genius from IIT Madras (ha, ha – slipped that one in) come up with a revolutionary technology that will change the world (hopefully for the better). Serendipity apart, what we need is a thriving Silicon-valley-type ecosystem that systematically allows new technologies to emerge, develop and get commercialized. Dozens of books have been written on the Valley and what makes it tick, by people far wiser than me. Let me stick to what I’ve seen in India that makes me confident about our ability to create successful, innovative companies in the long term. I’ve spent a lot of time in Bangalore over the last year. Based on what I’ve seen, I am convinced that is a question of when-rather-than-if before we see home-grown innovative product companies that could dominate their respective markets. Here is a set of anecdotal, yet indicative, evidence to support my confidence:

• World-class product design now done in India: I met one of the smartest guys from my undergrad class, with a PhD to boot, who has moved back with Intel from Santa Clara to Bangalore. His work in Bangalore is as cutting-edge as in the valley. Google’s Bangalore center is considered a ‘peer’ of their Mountain View center, and their Bangalore employees have the option to move to the valley whenever they choose, as the people & work in both places are comparable. Similar examples abound from Microsoft, Oracle, TI, Cadence and many others.
• Emerging pool of people with start-up experience: A start-up environment is unique and requires people with passion, drive, flexibility, risk-appetite and comfort with ambiguity. Thanks to hundreds of India development centers of US start-ups (including some of Bessemer’s), several high-quality product design teams with such experience have emerged, would form the core of a new set of such start-ups.
• Academia has come a long way: Groups such as IITM’s TeNet and IIT Mumbai’s KRISIT have facilitated greater interaction with industry both among students and faculty, and incubated several start-ups. While these are not yet where a Stanford-Silicon Valley interaction would be, what’s been done is commendable. I’ve personally met several students who’ve passed on more lucrative opportunities to follow their passion in a campus start-up. Two of my IIT classmates, who became top-tier researchers in analog design (they did their PhD with Yannis Tsividis of Columbia, a God in the field – rumor has it that Tsividis considered these 2 to be his best students ever!) have now returned as faculty at IIT Madras. Their skills and research are as good as it gets, with spillover effects on the students and industry they interact with. Academia is critical, both as a supply of talent and as an incubator for innovative research ideas.
• Awareness of and efforts to plug gaps in the ecosystem: It is well known that seed-funding, incubation and mentorship are still lacking in the system. Dr Sridhar Mitta (e4e, India Semiconductor Association) shared with us some of his efforts to create incubators in Bangalore, in conjunction with TiE. The ISA forum itself acts as a great networking and mentoring opportunity. I know of at least one early-stage-tech-focused fund being raised, with an India focus.
• VC time & money: Building a successful company from scratch is as much about investing time as it is about investing money. Given the response at last month’s Silicon Valley Bank VC conference where over 30 US, UK, Asian and Israeli VCs participated, there is plenty of money and interest. The time angle is about having people on the ground in India, who can work closely with the company. Bessemer made a conscious choice, for both Dinesh Vaswani and myself to be based full-time in India, so that we work with our Indian companies just the way we do with our US companies. There is increasing realization that companies cannot be built from 12,000 miles away and several other VCs have recruited people to be based in India.

Naturally, none of this is going to happen overnight. However, most of the ingredients are either in place already or moving in the right direction. This effect is strengthened by longer-term trends - India/China graduate more engineers than the US, more new hiring is done in India/China that in US for companies such as Intel and TI. There are a few factors around our education system not fostering real-world thinking and broader social acceptance of off-beaten-track career paths that I worry about, but do not have definitive views on. I am also concerned about the domestic market for these high-technology products being relatively small (except possibly wireless) and therefore not having adequate market knowledge/networks in our teams. These can be partly offset by returning Indians with such experience or hiring local sales teams in the target markets, but still remain a challenge. The main question, in my mind, is “how long will it take”? I have started seeing interesting start-ups in areas such as telecom equipment, enterprise software, mobile application software and chip design. I expect these to grow, both in quantity and quality, for the reasons outlined above. When do I see critical mass –2 years, give or take! What do you think?