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Wednesday, October 05, 2005

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?

47 Comments:

At 9:24 AM, Blogger Rajan said...

Such a breather to read 3 0f 3 after reading 1st part of your meme.

I would say that a silicon valley kind ecosystem is just starting to begin its formation here and those who are helping build this naturally will have to pay huge pioneering costs. But then they will be the ones of will be rememberd as the pioneers of bangalore valley as we remember the pioneers of the valley like Kleiner Perkin, Grove, Andreesen ( too huge to list all of them :) )

Having said that here is my take I have been in bangalore for about only an year now & also I am not superconnected to know all interestig stuff going on in every garage but of the little observation that I have made I have'nt seen so far anything which has the wow factor in it.( Not the kind of excitement that you get to see in valley).

So I might want to expand the timeframe of 2 years you mentioned to little bigger window(4-5 years)

cheers,
rAjan

 
At 10:53 AM, Blogger Akshat said...

I am 23 yrs old and do not know the evolution of Silicon Valley in 20 years, but having been subscribing to over 20 VC blogs for sometime now, I do know that a lot of companies and products even at very early nascent stage are able to garner tremendous buzz.

In India also such a thing happened with InstalColl(When I read about Sabeer Bhatia's name in the newspaper, I immediately tried the service).The above can be attributed to Hotmail's success and Sabeer becoming a household name in India.

I feel that if VC's like yourself are able to generate buzz not only for your companies but for the spirit of entrepreneurship, it will be great.

 
At 11:01 AM, Blogger TP said...

This is surprising: "I have started seeing interesting start-ups in areas such as telecom equipment, enterprise software, mobile application software and chip design."

IMO, It will be a real challenge to get anything substantial in these areas done out of India.

Here is a challenge for you. Take out Myzus, Phonologies, Prologix, ittiam (though doesnt belong to this category), Pramati. can you name ONE firm that runs prod dev in india w/o a base in US?

Lets face it, the brains sit in the US and the hands sit in Bangalore.
( remember what pramod haque said?

"And so rarely do we start a company today in the US where we do not ask the entrepreneurs to fund or to outsource some of their development work to India."

TP
http://billgates.co.in

 
At 11:04 AM, Blogger Akshat said...

"I have started seeing interesting start-ups in areas such as telecom equipment, enterprise software, mobile application software and chip design"

It is great to see that in India also such companies are being started...which leads to my other suggestion...

I think that creating a weekly platform where people starting companies...or wanting to start companies...get to meet on a regular basis will be a great step forward, and none but a VC like you will be in a position will be able to create such a platform.

PS: Sorry for the 2nd post...but had missed that comment

 
At 1:39 PM, Blogger l'optimiste said...

Cool blog, with good information on India!

I agree with Rajan that the time frame for good Indian-VC backed startups will take more like 4-5 years. And with the other person that to launch a company in Telecom/Semiconductor space will be very tough, if not impossible, in India.

IMHO, we also need local VC funding sources (eg. Local Banks giving more loans/seed money: as of now, it's miniscule, even if your credit rating is good), and may be the big families starting to feed into the system will also help.

With some uncooked opinions,
Le Optimiste

 
At 12:49 AM, Blogger Pointside said...

How are you defining critical mass???

I do not see this. Everyone still comes to the U.S. for training and start up plays. Though talent is incredible inside India, a cultural divide for a social system that embraces such a valley-like attitude is to narrow. Unlike the U.S. where the entrepreneurial spirit is as wide-spread as the population, India's is singularly located and not pervasive. In addition, a host of rather smart-minded friends from India continue to see a growing and exciting country, but not a valley like systemic environment. I see this more 10 years away. At the 4-5 year mark, some semblance might take form. But, its influence and ability to pervasively influence or even begin such a process would be ultra limited.

 
At 10:23 AM, Blogger Paddy said...

Came here via Mr.Cowan's blog.Insightful. On an orthogonal note the following link in which John Mashey expounds on what startups need to succeed still apply to India IMHO.

http://yarchive.net/comp/startups.html

 
At 3:03 PM, Blogger Pravesh Biyani said...

India is still far far behind US as far as cutting edge work goes. Most of the IDCs of the US based startups develop relatively unimportant part of the overall product. Main design and developement is still done in US by guys (may be Indians) sitting in India. But I should say that the number of so called good statups is steadily increasing in India, but not at the rate at which Indian Silicon can compare to US.

 
At 10:36 AM, Blogger Dr Aniruddha Malpani, MD said...

You write " 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."
However, the fact remains that Google finds it very hard to get the right kind of talent in India, which means their India office is one-hundredth the size of their US office ! Even though there are so many Indian engineers, most are entry-grade hacks. Few are of the calibre required to work in world-class companies. I think this is a result of our exam system ( "if it's not in the syllabus/ portion, don't study it !) ; and the tuition classes which teach children how to memorise and regurgitate facts, but not how to think for themselves !

 
At 11:24 AM, Blogger http://www.shrikantpatil.com said...

Anand

more than being just based in India you need to be committed and passionate about India and building world class companies. Many VCs like your come and confuse budding entrepenuers instead of actually helping them. Please read my post on the Extinct Indian Entrepreneur http://shrikant.emergic.org/archives/2005/09/13/the-extinct-indian-entrepreneur/

In the evolution of a comapny we have angel, 1st round, 2nd round with exits by acquisition or listing. Please clarify to many who will seek angel investment and both will waste time. Its the curiosity of 1st round VCs who waste the precious time of many budding entrepreneurs.

Good luck in India and may you build a Skype here too!

 
At 9:34 AM, Blogger Chinkus said...

It is somewhat sad to read comments that try to compare someone born in India (I guess with reference to Indians) and others, and their capability to innovate and build world -class companies.

We should be looking to forming a venture model that attracts capital and talent to India and helps connext to a network where the product/service can be commercialized wherever there is a market. India is just now learning to take its first baby steps in nurturing early stage innovative companies but it need to attarct both capital and talent from outside (ideally silicon valley VCs) to stimulate and mentor the proper skills locally.

 
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