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Building billion dollar product companies from India A research paper outlining the challenges faced by product start-ups in India and providing recommendations to improve the entrepreneurship ecosystem and position India as a product nation on the global map

Author: Jyoti Ramnath, MBA 2014, London Business School 5/23/2014

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Contents Executive Summary ................................................................................................................................. 3

Problem Statement ............................................................................................................................. 4

Research Methodology ........................................................................................................................ 4

Terminology Definitions....................................................................................................................... 5

Entrepreneurship in India: General Trends and Observations ................................................................... 6

Hypothesis ............................................................................................................................................ 11

Research Findings: Testing the hypothesis ............................................................................................. 14

Recommendations ................................................................................................................................ 22

Conclusion ............................................................................................................................................. 31

Bibliography .......................................................................................................................................... 32

Appendix 1: Questionnaire to test the hypotheses ................................................................................ 34

Appendix 2: List of participants .............................................................................................................. 35

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Executive Summary

India has been a well known global IT services hub. Most of the technology entrepreneurs in

India during 80’s and 90’s started companies providing offshore services to the global world.

Entrepreneurship in India has seen an impressive growth over the last 10 years. In year 2013,

$1.6b was invested via 293 deals1 compared to year 2003 when roughly $124m was invested in

24 deals2. Currently India has more than 3000 active startups with around 1000 being added

every year3. Many Silicon Valley VCs such as Sequoia Capital, Silicon Valley Bank, DFJ and Accel

Partners have local offices in India and have been actively investing in Indian startups.

India has a huge technical talent pool, entrepreneurial drive and investor ecosystem –

ingredients required to be a driver of product innovation. On the surface it seems as if India

would have a strong start-up and innovation ecosystem, however scratching that surface

reveals many shortcomings. On a global map Indian start-up ecosystem lags way behind. As per

Startup Ecosystem Report 2012 by Startup Genome, Bangalore (also known as India’s Silicon

Valley) ranks at 19th position. Though services start-ups have been able to build traction, there

is a still a long way to go before we see globally recognized billion dollar product companies

emerging from India. Difficult to penetrate market with barriers to access government

contracts, lack of sufficient angel & VC funds directed to product firms, and difficulty attracting

and retaining talent are some of the challenges product startups face.

1 Source: YourStory : http://yourstory.com/2013/12/1600mn-invested-in-indian-startups-in-2013/ 2 Source: www.ventureintelligence.in 3 Source: Indian Software Products Industry Roundtable (iSPIRT)

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This management report uses primary & secondary research to identify these gaps and

proposes recommendations for ecosystem players, investment community and policy makers.

Problem Statement

The key problem statement this research is trying to address is “Why India does not have many

billion dollar technology product companies?” Indian Software Products Industry Roundtable

(iSPIRT), India’s software product industry think-tank estimates that the country has the

potential to build $100b software product industry by 2025 up from current $2.2b4. But how do

we realize that potential? What are the challenges faced by product start-ups in the current

ecosystem? What changes are required to reach $100b goal? These are some of the questions

that this report is seeking to address. Solving this problem would help contribute significantly to

the nation’s current account and fuel the growth of tomorrow’s Indian economy especially at a

time when a new government has been elected and country is eagerly looking for growth.

Research Methodology

The report follows a hypothesis based research and testing. An initial research was conducted

to derive hypotheses of the reasons for lack of billion dollar product companies in India. This

initial research was followed by in-depth personal interviews with product startups, investment

community, ecosystem players and organizations such as NASSCOM that represents and sets

the tone for public policy for the Indian software industry. The insights from in-depth research

were further used to test the hypotheses and derive a final set of recommendations.

4 Source: “Need for Software product Companies for India’s Economic Growth” – presentation by NASSCOM Product Conclave

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Terminology Definitions

Following are some of the terminologies used regularly in the report and their meanings as

interpreted in this report:

“Product”: Refers to software product either for consumers or for enterprise. Note

eCommerce is not considered a product.

“Start-up”: A company, a partnership or temporary organization designed to search for

a repeatable and scalable business model5. For the purpose of this report, “start-up”

includes technology companies and not vegetable vendor or retail store owner.

“Accelerator”: Seed accelerators are fixed-term, cohort-based programs, that include

mentorship and educational components and culminate in a public pitch event or demo

day. E.g 500 startups and Morpheus in India.

“Incubator”: Incubators are usually run by educational institutes that provide office

space, mentoring and other facilities to start-ups. Start-ups can usually stay from 6

months - 2 years. E.g NSRCEL, an incubator at Indian Institute of Management (IIM-B).

“Seed fund”: Very early stage investment (sub $100k) made by individual investors,

incubators or accelerators.

“Angel Fund”: Early stage investment (typically $100k to $2m) made by either angel

investors (those investing their own money) or venture capitalists (those investing

others money).

“Venture Capital”: Venture Capital investments are made by well established VC firms

investing others money and invest around $2m to $20m.

5 http://en.wikipedia.org/wiki/Startup_company

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Entrepreneurship in India: General Trends and Observations

Brief History of technology entrepreneurship in India6

1991 saw the growth of software industry in India. By 1992, internet and mobile telephony

arrived. Between 1996 and 1999, ITES7 industry in India started picking up. India grew as the

outsourcing hub answering calls from the developed world. Most companies were services

based and there was hardly any innovation or software products being built from India. The

startup mania during 1999 dot-com boom sowed the seeds for a new ecosystem of

entrepreneurship in India. Companies started dreaming of building their own products and

moving away from services. However the market crash of 2000 halted new investments. Post

dot-com blues were felt from 2000 to 2005 when “failure” and “start-ups” were reinforced as

bad words. But, the seed of entrepreneurship was sown. From 2005 onwards many angel funds

such as “Mumbai Angels”, “SIDBI Venture” and “Seedfund” started investing in the range of

$100k - $800k. The entrepreneurship landscape evolved further from 2010 with a new breed of

first time entrepreneurs experimenting with diverse sectors and new business models.

Current Trends

The current entrepreneurship landscape in India is fast changing with many new trends

emerging. The following pages outline some of these general trends of the ecosystem.

6 All given facts have been derived from the presentation “Entrepreneurs and Opportunities in India” by Paula Mariwala 7 ITES stands for Information Technology Enabled Service

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Multiple start-up hubs emerging with Bangalore still holding the top position

Bangalore has traditionally been known as the Silicon Valley of India and is the top choice for

people to start-up in India as shown in the chart below. In 2013, Bangalore saw the most

investment activity with 28% of all VC and Angel deals falling in its lap8. However over the last

few years, multiple other startup hubs are emerging in India as shown in the chart below. Powai

an eastern suburb of Mumbai and home to IIT-Bombay, India’s premier technology institute is

fast emerging as an attractive destination for many companies. Avnish Bajaj, co-founder & MD

of the US-based VC firm Matrix Partners India, says this mirrors what happened in the 80s and

90s in Silicon Valley. "There was Stanford, there was Xerox Palo Alto Research Center (PARC)

and then VCs started flocking to the Valley seeing the number of start-ups that were coming up

there. Then a second hub got created in Boston as it had Massachusetts Institute of Technology

(MIT). I see the beginning of a trend here. Powai could be the start-up centre for India feeding

into the talent coming out of IIT-B."9

8 Source: http://yourstory.com/2013/12/1600mn-invested-in-indian-startups-in-2013/ 9 http://timesofindia.indiatimes.com/business/india-business/Welcome-to-Powai-Valley-Indias-new-start-up-hub/articleshow/29126534.cms

31

62

83

136

149

203

237

591

Ahmedabad

Kolkata

Hyderabad

Mumbai

Pune

Chennai

Delhi (NCR)

Bangalore

Distribution of start-ups across different hubs

Bangalore, 34.78%

Mumbai, 20.90%

NCR, 9.09%

Hyderabad, 9.88%

Chennai, 9.09%

Ahmedabad, 6.71%

Pune, 1.97% Other, 7.58%

Best city to start-up

Source: Data from a survey conducted by YourStory.com Source: World Startup Report: http://www.slideshare.net/WorldStartupReport/india-startup-report

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eCommerce and Enterprise products seem to be the most attractive sectors

India is seeing a boom in eCommerce in the last two years. There have been many online travel

websites in the early 2000’s but online retail was very much non-existent. With rapid growth of

Flipkart, India’s biggest e-commerce company and entry of Amazon into India, the industry is

seeing a lot of action and positive outlook. India’s e-commerce market (sans travel sites) is

currently worth $3.1 billion annually - just 1.5% of the value of China’s e-commerce sales, which

is approaching $200 billion.10 With 20% internet penetration, India is projected to have 243

million people online by June 2014.11 India’s eCommerce market is projected to grow sevenfold

to $22 billion in the next five years. 10

In terms of products start-ups, Enterprise

and SaaS products take the lead. The

domestic market for software products in

India currently stands at $2 billion however

is projected to be $10 billion by 2020

provided companies get the right kind of

support from government12. With organizations such as NASSCOM and iSPIRT working actively

to boost the software product ecosystem in India, there is an increased interest from

entrepreneurs to tap on to new opportunities and build companies solving enterprise

problems.

10 Source: Techcrunch Article: http://techcrunch.com/2014/03/26/inside-indias-e-commerce-boom-growing-base-of-mobile-internet-users-women-shoppers-and-several-infrastructure-bottlenecks/ 11 Source: Internet And Mobile Association of India (IAMAI) 12 Source: NASSCOM Data

Enterprise 35%

SaaS 25%

Consumer 10%

Mobile 8%

Other 22%

Distribution of product start-ups

Source: Data from a survey conducted by ISPIRT

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0

20

40

60

80

100

120

140

160

2000 2006 2012

No. of VC Investments by Sectors within IT

Other

IT Services

BPO

IT Products

Mobile VAS

Enterprise Software

Online Services

VC Investment in India is growing with increased investment in Consumer Web and Internet

Services however it still lags way behind compared to other start-up ecosystems

In early 2000s, most of the money

invested by VCs in Information

Technology (IT) Industry was directed

towards Online Services, IT Services

and BPO. By 2012, the number of

investments in Online Services grew

4x along with an increased shift

towards Enterprise Software and

other IT products.13

India still lags when compared with the other global startup ecosystems. Below table shows

2013 statistics comparing VC investments in India with those in US, China, Israel & Europe.14

India US Europe Israel China

Invested Capital (US $b) 1.8 33.1 7.4 1.7 3.5

Invested Rounds 222 3480 1395 166 314

Median Round Size (US $m) 4.00 4.20 1.98 4.43 7.00

No. of VC backed IPOs 1 74 15 2 15

Dollars raised (US $b) 0.01 8.2 0.6 156 2.0

No. of VC backed M&As 13 436 157 10 20

Median M&A valuations (US $m) 46.5 57.5 63.8 143.1 87.5

Median time to M&A (years) 2.6 5.0 6.3 7.5 3.5

13 Source: “Entrepreneurs and Opportunities in India” – a presentation by Paula Mariwala, Seedcamp 14 Source: Global Venture Capital Insights and Trends by E&Y (Investments across both product and services ) http://www.ey.com/Publication/vwLUAssets/Global_venture_capital_insights_and_trends_2014/$FILE/EY_Global_VC_insights_and_trends_report_2014.pdf

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A third of the total VC investment in 2013 was directed to companies at the profit making

stage, more than double the proportion in 2012.15 This indicates that investors are more

cautious about early stage investments. Though VC activity seems rather slow, angel funding

ecosystem seems to be evolving at pace. Over the last two years proportion of funds invested

by angels and incubators in Indian startups has reached 16% up from 3% in 2011.11 However

going forward in 2014, angel investments could slow down. Most of the angel investments

made since 2011 have not shown considerable returns with only 20% of the angel funded

companies raising Series A.16 Compare this with US where 39.4% of angel funded companies go

onto raise follow-on financing.17 Even accelerators have been observing similar trends and are

experimenting with new models. Morpheus, one of the early accelerators in India recently

announced that it is planning to move away from its existing model and even stopped taking

applications for its next batch. Accel India scanned around 1,000 companies across 62 different

accelerators and incubators in India over last few years, and the results speak for themselves -

only 30 of them went on to receive Series A funding18.

15 Source: Global Venture Capital Insights and Trends by E&Y http://www.ey.com/Publication/vwLUAssets/Global_venture_capital_insights_and_trends_2014/$FILE/EY_Global_VC_insights_and_trends_report_2014.pdf 16 Source: http://www.nextbigwhat.com/angel-investing-in-india-is-broken-297/ 17 Source: https://www.cbinsights.com/blog/seed-investing-report 18 Source: http://techcrunch.com/2014/02/06/accelerators-in-indias-nascent-startup-ecosystem-face-a-reality-check/

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Hypothesis

To understand the needs and challenges of the product startups in India, a preliminary research

was done using existing blogs, debates and discussions over online media and various forums.

Based on the learnings from that research, following are some of the initial hypothesis that

answer the research question – “Why India does not have many billion dollar product

companies?”

1. India offers a small local market: The software product industry is a $1.2trillion

opportunity globally however in India it is just $2.2billion19. Many of the successful

product startups from India such as Zoho Corp, inMobi and Fusion Charts have grown

their business by acquiring an international customer base. The bulk of Indian products

have a very low presence in global packaged software market as such distant

relationships are hard to establish and sustain for most of the small start-ups.

2. Lack of early adopters of technology in India: India has been a late adopter of

technology. Bangalore-based “1Click”, a company that enables video conferencing

through a browser, started off with an India focus. However it is slowly changing its

focus to US and European markets. As per Hrishikesh Kulkarni, founder and CEO of

1Click, he would have loved iClick to be an India-focused product. But there were no

19 Source: “Need for Software product Companies for India’s Economic Growth” – presentation by NASSCOM Product Conclave

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early adopters.20 Another entrepreneur Tarak Nagar’s company built a product called

Abhaya, SME ERP solution targeting the Indian ERP market, focusing on manufacturing

companies with $2 million to $15 million in revenue. The segments of manufacturing

that Abhaya is working with - textiles, dyes, garments, leather goods - tend to be very

backward from a technological standpoint. Thus, for every customer, Abhaya has to

conduct extensive training to plant the seeds of adoption. Also his training cannot be

conducted online. He has to run in person trainings making the adoption cycle longer

and more expensive21. Many companies such as Dhruva, Thinkflow and others also have

similar stories to share.

3. VC and Angel money is not directed to product companies: Most common complaint

from product start-ups is that investors are risk averse especially when it comes to

investing in a product company. Product companies need at least 2 years of gestation

period before they can acquire their first customer and investors often don’t have the

patience to wait that long. Many start-up founders resort to offering services to fund

their product R&D as they are unable to raise external funding22.

4. Lack of role models and mentors: India is yet to see many billion dollar exits from

product start-ups. As per Shirish Deodhar, CEO & Founder of Sapient Analytics, there are

20

Source: Quotes from the article : http://economictimes.indiatimes.com/news/emerging-businesses/startups/indian-tech-startups-find-few-takers-among-big-it-companies/articleshow/35151352.cms 21 Source: http://readwrite.com/2010/07/15/strategy-roundtable-a-market-of-late-adopters#awesm=~oEN1icyttUS6N5 22 Observations made from reading online blogs and forums such as this: http://nasscom-emerge.groupsite.com/beta/discussion/topics/374050/messages

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very few role models who have built successful product companies, which limits access

to mentors, who can provide guidance.

5. Lack of relevant talent for building products: 78% of product startups in India have

homogenous founding partners. Though the founding team is well experienced with

close to 40% of founders coming from R&D section of MNCs such as Yahoo, Intel, IBM

etc, rest of the employee base is fairly young23. The reason for this is inability to pay

competitive wages and lack of brand reputation. As per iSPIRIT’s Product Industry

Monitor, the most difficult talent to hire is product management and sales.

23 iSPIRT Product Industry Monitor Report 2014

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Research Findings: Testing the hypothesis

To test the hypothesis, primary research was conducted through personal interviews with

founders of product start-ups, Venture Capitalists, Angel Investors and ecosystem players. The

questionnaire used for the interviews is given in Appendix 1. Following are the findings from

that research:

Hypothesis 1: “India offers a small local market”

The hypothesis, as worded above is not true. Instead two market related issues exist:

1. Indian market is difficult to penetrate: Though in comparison Indian Market size is less than

US and other developed countries, it is interesting to note that many start-ups struggle to tap

even the existing $2.2 billion software product market. This is due to issues such as customer’s

price sensitivity, hesitation in buying from start-ups, long sales cycle and competition from large

tech firms. This assertion is supported by the following quotes by the entrepreneurs

interviewed:

“Indian enterprise customers are very price sensitive. The prices they demand is one fourth of what

we can get selling to US based customers. Customers are cutting down their IT budgets but need to

innovate is even higher. In such a case they are more willing to engage with startups for higher

innovation but given their risk perception they seek a much lesser price to reduce their risk.” –

Sumeet Anand, Founder & CEO, i-nable Solutions

“Local market is big but difficult to crack. We lost big deals to traditional large players such as

Microsoft and IBM as the perceived risk with a startup is much higher than these companies in terms

of longevity and financial viability. So only way to grab a deal with a large customer and large

competition is not just tech innovation but the right price at which risk perception is low.” – Sumeet

Anand, Founder & CEO, i-nable Solutions

“Local Market is big but they are not buying from start-ups. To test a new player, customers ask for

recommendations, references or case studies. As a start-up it is difficult to provide all that.” – Varoon

Rajani, Founder & President, Blazeclan

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Apart from the difficulty presented by enterprise customers, even government has built entry

barriers for start-ups. In many countries with mature startup ecosystems, government spends a

considerable amount in procuring from SMEs. This is a great way for start-ups to establish their

credibility which in turn helps them secure further private contracts. For e.g US government

awarded 22.25% of its contracts to small businesses in 201224. Though Indian government is

estimated to spend close to $6.4 billion on IT products and services in 201425, Indian product

start-ups would hardly get any share of this spend because small firms are often unable to

satisfy the bidding criteria laid out by the government. Following are some evidences for this

claim26:

In summary, India is not a small market as a whole but is a difficult market to penetrate with no

favorable buying policies even from government.

Hypothesis 2: “Lack of early adopters of technology in India”

The hypothesis holds true. Indian consumers are late adopters of technology. This assertion is

supported by the following experiences shared by entrepreneurs in the interviews:

24 http://www.entrepreneur.com/article/227283 25 http://www.channelworld.in/news/government-it-spending-india-reach-64-billion-2014-gartner-500552014 26 Source for the quotes: http://articles.economictimes.indiatimes.com/2014-02-14/news/47336777_1_software-product-industry-ispirt-government-contracts

“We've sold to global banks and Indian private banks, but we haven't got to the government. In their

tender process the bar is set so high and it is not based on technical capability. It's all about age, size,

profitability and past experience. And because these (the tenders) are influenced by global players,

they are the only ones who win on this." – Vivek Subramanyam , CEO of banking product firm

iCreate that counts Bank of America and HDFC Bank as its clients

"Indian PSU and government buying norms have been hijacked to provide support to foreign product

companies. This is done by requiring membership in Gartner's Leadership Quadrant or by specifying

global size requirement," ISpirt said in a paper analyzing the industry

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Another theory that supports the above hypothesis is outlined by Mukund Mohan, Director,

Microsoft Ventures27 in his personal blog. As per Mukund, Indian markets do not follow

traditional diffusion characteristics laid out by Geoffrey Moore’s “Crossing the Chasm” in which

first innovators buy, then early adopters, then the early majority, and then the late majority

and finally the laggards. In India there are only 2 market adopters – those that are early and

those that are not. The Innovators (less than 1 % of the population or 12 Million individuals) in

India (entrepreneurs mostly) who conceive and develop these products for the Indian market

and the early adopters (less than 5% of population or approx 60 Million individuals) together

make up the entire “early adopter” category. Unfortunately less than 30% of this group has

both the interest, and the desire to be early adopters of technology. This prevents the Indian

startups from building an early market at home. For e.g. A B2B SaaS company will quickly

(within 3-6 months) get 10+ customers and over 30 in the pipeline, only to find that the next 50

and the next 100 or the next 1000 are either non-existent or will come in 3-6 years.

27 http://bestengagingcommunities.com/2012/03/26/the-two-speed-state-of-indian-market-adoption/

“Initially when we started selling our products, we never targeted the Indian market as the market

was not ready for the product. We could have sold the product here but it would have required a lot

of effort in educating the customer” – Anup Tapadia, Founder, TouchMagix

“There is hardly any innovation in India. We see a lot of me-too products. Most enterprise startups

started here are focusing on US and most of their growth has come through international sales.

Initially lead generation was quite difficult for us as we had to spend a lot of time in educating

customers regarding our product space and innovation but recently we have started seeing an uptake

and more informed and clear needs being articulated by them.” – Sumeet Anand, Founder & CEO, i-

nable Solutions

“Indian enterprise customers are late adopters of technology. They look for references from other

users before trying a new product”- Varoon Rajani, Founder & President, Blazeclan

“Companies in India are risk averse. They want to see validations from US market before adopting a

new product” - Sanjoe Jose, CEO, Interview Master, an online video interview tool

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Hypothesis 3: “VC and angel investments are not directed to product companies”

The hypothesis is true. The hypothesis is supported by the following quotes by product

entrepreneurs, Angel Investors and ecosystem players.

As per the survey done by iSPIRT28, on average 75% of the funding raised by product start-ups is

founders own money. Around 14% comes from Angels and only 2.5% comes from VCs (rest

from debt and some influx of PE money). Around 80% of these startups have raised $200k to

$1m and the rest 20% have raised $1m to $2m. Even if we take this well funded 20% pool of

entrepreneurs and do the math, Angels & VCs have together invested an average of $250k per

28 iSPIRT’s Product Industry Monitor 2014

“There is no shortage of funds as we have enough investors available in the market. However they

are cautious while investing in product start-ups and are not investing blindly. They do look for

traction before investing in a company.” - Avinash Raghava, Fellow at iSPIRT Foundation

“When I spoke to few investors in the initial phases of building my venture, they looked at my product

and said that no one in India would fund the product as it looks experimental. It is suited more for Bay

Area. India lacks experimental capital. Here VCs go behind something that has worked in US. Oculus

Rift kind of startup would never get funded here. ” – Anup Tapadia, Founder, TouchMagix

“Indian investors look for traction, an attractive team and prospects for quick exit. It is difficult to

raise funds for product companies as very few qualify this criteria.” – Sumeet Anand, Founder & CEO,

i-nable Solutions

“In India, the appetite to finance risky software is less. We would have struggled to raise seed finance

in India” - Joydeep Sen Sarma, Founder, Qubole

“Product startups need extended runway. Investors need to be patient which is not the case in India.”

– Manish Singhal, Angel Investor and Founder of LetsVenture

“Indian VCs have to identify the right company and take the risk to back it in order to be successful.

For instance, InMobi, which today is rated highly successful, has no Indian investor making an

investment in the company. In fact, a company like Zoho has still not able to find any Indian VC

showing faith in it so far.” – Sharad Sharma, Co-Founder iSPIRT Foundation

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company or $5m in total into the top 20% pool. Compare this with the money pumped in to

consumer web ($187m) & eCommerce ($880m) in 201329. We can clearly see that VC and Angel

money is not directed to product companies.

Though the hypothesis is valid, the reason for lack of funds is not just investor’s risk aversion.

Multiple other reasons stood out in the research:

1. Lack of fundable product ideas: As per Arpit Agarwal, Director, Headstart Network

Foundation,

“Entrepreneurs in India tend to be too product focused and often have no sense of what

customers need. They are mostly from engineering background and often tend to

imagine customer use cases and stay away from interacting with a real customer until

their product is almost ready. This results in a product that no customer wants to buy.

The first thing I look for while evaluating a startup is what problem they are trying to

solve. The way they define the problem explains a lot about their approach to the

business.”

This issue was also iterated by Manish Singhal, an angel investor.

2. No good way to discover good start-ups: As per Manish Singhal, Co-Founder of

LetsVenture.com and an angel investor,

“There are good product companies around but they are not getting discovered. We are

losing good product people as they either move to providing services to fund their R&D,

or leave India chasing US markets or join large companies.”

Manish Singhal is currently building a platform called LetsVenture.com similar to

AngelList of US to enable start-ups and investors to connect in a seamless manner.

29 http://yourstory.com/2013/12/1600mn-invested-in-indian-startups-in-2013/

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In summary, it is true that a larger proportion of VC investment is focused on services and

eCommerce companies and VCs are much more risk averse while evaluating product start-ups.

The issue is enhanced further due to lack of fundable ideas and no good way to discover the

good product start-ups.

Hypothesis 4: “Lack of role models and mentors”

This statement is partially true in the sense that there is a lack of role models in India however

mentorship does not seem to be a big issue. The assertion is supported by the following quotes

from the interviews:

The role model gap is slowly getting filled up with new successful entrepreneurs emerging in

the ecosystem. In a survey conducted by YourStory, India’s top media platform covering startup

news, many names such as Alok Kejriwal, CEO and Co-Founder of Games2Win.com, Deep Kalra,

“Yes I agree that India doesn’t have many success stories of product start-ups. I found it difficult to

find a mentor earlier and really missed having a mentor. But now we have a mentor and found his

guidance very useful.” – Varoon Rajani, Founder & President, Blazeclan

“Yes we do have lesser role models and mentors. But we are slowly seeing a rise in products

companies that are making it big for e.g inMobi, Zoho etc. Media has started to play its part in

establishing role models by highlighting these companies.” - Avinash Raghava, Fellow at iSPIRT

Foundation

“There is a lack of role models however we have been able to find mentors. Since we were new in the

recruitment space, we found few experts from the recruitment industry to guide us. Some of our

initial customers continue to guide us. We also learn from people in the valley. The only area where

we lack guidance is start-up law.” - Sanjoe Jose, CEO, Interview Master

“I come from a business family. So my father has been my mentor from childhood. In addition, we

also have some industry experts as mentors. Nowadays you can also get paid mentors. In terms of

role models, yes there is a lack of role models in India. I would like to fill this gap and be a role model

in the coming future.” – Anup Tapadia, Founder, TouchMagix

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Founder & CEO of MakeMyTrip, Naveen Tewari, Founder of inMobi and Phanindra Sama,

Founder and CEO or redbus emerged as role models30.

It was also interesting to note that none of the entrepreneurs interviewed for this research

quoted “Mentorship” or “lack of role models” as a deterrent in their start-up journey. While no

formal mentorship model exists, entrepreneurs seem to reach out to certain experienced

people when required and most of the successful entrepreneurs are quite forthcoming in

helping and guiding upcoming entrepreneurs.

Based on the above evidence gathered, I would claim that though there is a lack of role models

but this is not a critical issue that is stopping entrepreneurs from building product companies.

Hence the hypothesis stated as a reason for the lack of billion dollar product companies in India

does not hold true.

Hypothesis 4: “Lack of relevant talent for building products”

The hypothesis is not true. Every year close to 1.5million students graduate with an engineering

degree in India. There is also an interesting trend of “reverse brain drain”, Non-resident Indians

returning back to India. A study conducted by human resource and recruiting firm Kelly Services

India in 2011 estimated that 300,000 Indian professionals working overseas will return between

2011 and 201531. As per a study done by Harvard Law School, 50% of the NRI’s returning to

30 http://yourstory.com//2013/01/top-10-indian-role-models-in-the-startup-domain/ 31 http://www.hindustantimes.com/india-news/reverse-brain-drain-young-indian-professionals-are-returning-home/article1-1157720.aspx

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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India plan to start new ventures32. With this pool of technical and senior talent, one cannot say

that there is a lack of talent. Hence this hypothesis does not hold true.

However it is important to note that other talent related issues exist - Start-ups have difficulty

retaining talent and also struggle in attracting experienced people to join early stage

companies. Some of the quotes from the interviews that support these assertions are:

In summary, there is no lack of talent however entrepreneurs struggle to retain young talent

and to match the compensation of larger tech firms. In addition, bringing in experienced people

is also a challenge.

32 http://www.law.harvard.edu/programs/lwp/people/staffPapers/vivek/Vivek_Losing_the_best_and_brightest.pdf

“Finding talent has been a big issue for us as the good people are not affordable. It is difficult to find

good sales and marketing people as well. We have mostly been hiring fresh graduates and grooming

them but they often leave as soon as they learn and join large tech firms at 2x salary.” – Sumeet

Anand, Founder & CEO, i-nable Solutions

“We could find technical talent however it does take a lot of time to find the right people who are

motivated to work in a startup. It is also difficult to retain that talent. Entry level employees don’t

understand the value of stock options. We find it difficult to find people for senior roles such as

Product Management and ended up taking care of it ourselves. Even for sales & marketing role, we

spent close to 6-8 months to find the right person. Key issues are lack of trust in start-ups and risk

aversion.” - Bala Venkatachalam, CEO, CereBrahm Innovations

“I don’t think talent is a big issue any more. We are noticing a new trend of reverse brain drain as

many Indian are returning back to India after working in US for long. Not everyone looks for money.

In case we don’t have a specific talent in house, we hire consultants. For e.g., we worked with a

product designer from Apple on contract basis.” – Anup Tapadia, Founder, TouchMagix

“In India, we struggle to find talent with a strong depth of knowledge. If one were looking for hands-

on systems engineers with 15 or more years of experience - it would be very hard, if not possible, to

find such people in India. The US and Silicon Valley remains the go-to place to hire experts” - Joydeep

Sen Sarma, Founder, Qubole

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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Recommendations

As per the research findings following are the main issues that Indian product start-ups face

currently:

1. Difficult to penetrate Indian market especially the enterprise and government sectors

2. Small early adopter market

3. VC and angel investments are not directed to product companies due to reasons

including risk averse investors, lack of fundable companies and no good way to discover

good product companies.

4. Difficulty attracting and retaining talent

The above issues cannot be fixed by one entity. Instead the entrepreneurship ecosystem as a

whole needs to take multiple steps to address the specific problems. Below are some of the

recommendations to resolve the above issues.

Issue 1: Difficult to penetrate Indian market

Ecosystem players can play a huge role by bridging the gap between product start-ups and

enterprise and consumer buyers.

Bringing Enterprises & start-ups closer: Many of the B2B product start-ups mentioned

difficultly in penetrating the enterprise market as one of their biggest pain points. The

ecosystem players should focus on bridging this gap by organizing events or creating

virtual platforms for start-ups to connect with enterprise clients. iSPIRT has taken the

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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lead here and had recently organized a meet-up of product startups with Chief

Information Officers( CIOs) of global companies such as Citigroup, Procter and Gamble

Co. 33 etc. We need more such events across the country.

Increasing the trust between start-ups and enterprise customers: Enterprise buyers

often are reluctant in trying products from start-ups as they have had few bad

experiences in the past. To solve this issue, start-ups should be educated on how to

approach enterprise customers, how to draw contracts and what level of service to

offer. On the other hand Enterprise companies need to be educated on the pros & cons

of buying from start-ups to set the expectations right. They also need to be trained on

how to evaluate a start-up vendor.

Open the doors to start-up firms to apply for government contracts: As mentioned in

the research section, start-ups are often left out of the government contracts due to

bidding criteria that favor large firms. Government should work towards either relaxing

the requirements for bidding for government contracts or initiate a separate program

to award contracts to start-up firms. Another way to resolve this issue would be to

allow companies to compete for contracts based on their innovation and not be stifled

by impossible high qualifying hurdles. With a new pro-development Prime Minister Mr.

Narendra Modi been elected recently, the expectations are much higher. NASSCOM

and iSPIRT intend to begin lobbying government this year to level the playing field.

33 http://www.livemint.com/Industry/7g6Ylj2XgqQcfN9o2GGFEL/50-startups-to-showcase-software-products-before-global-CIO.html

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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Issue 2: Small early adopter market

India currently has an urban population of 27.8%34 with an internet penetration that stands at

20%35. The country is still evolving especially from technology perspective. Increase in early

adopter market would take its natural course of time as more people start adopting technology

in their daily lives and are open to try new products. Though the issue of small early adopter

market cannot be solved directly, in the meantime, more opportunities should be created for

Indian product companies to sell to the global world. Currently only a few selected product

start-ups such as Fusion Chart or inMobi have been able to establish a global presence.

Following are some recommendations to create avenues for start-ups to sell to global markets:

Bridge the gap between Indian start-ups and international customers: If we look at

Israel startup ecosystem which has a small local market, we notice that they focus on US

markets solely. India also can gain advantage of the large markets in US & Europe by

creating avenues for start-ups to sell to global markets. These avenues could be either in

the form of international treks taking selected Indian companies to US & Europe to

meet potential buyers or bringing international companies to India and showcasing India

product companies. In May 2014, Ravi Gururaj, Chairman of NASSCOM Product Council

led NASSCOM InnoTrek 2014, a first of its kind event that took a delegation of India’s

top product and entrepreneurial founders/CEOs to Silicon Valley. Apart from interacting

with product leaders, corporate development and business development executives, the

delegation also got an opportunity to showcase their products to US based companies.

34 Source: http://www.indiaonlinepages.com/population/india-current-population.html 35 Source: Internet And Mobile Association of India (IAMAI)

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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This is great initiative and first step towards putting Indian product companies on the

global map. More such opportunities would open the international markets for Indian

product companies.

Build sales office in international markets: Most start-ups cannot afford to have their

own international sales office. To resolve this issue, a common international sales and

marketing body should be established in locations such as US and UK. This common

sales office could help all India based product companies to reach out to International

customers by acting as their own sales office.

Issue 3: VC and angel investments are not directed to product companies

Before we get to the recommendations, it is important to understand why Indian investors are

risk averse especially when evaluating product companies. A deeper analysis reveals multiple

issues - Limited growth opportunities for product companies due to market issues addressed in

previous section and lack of enough M&A exits36. We already addressed the market challenges

above. To solve the issue with M&A exits, investors should focus more on smaller sub $40m

exits. As Sharad Sharma 37described it, for every Billion dollar startup (e.g InMobi) there should

be 10-12 $100m startups (which is the case right now). For every $100m startup there should

be 10-12 $50m startups; and for every $50m startup there should be 10-12 $10m startups. A

healthy power law distribution is a sign of a healthy ecosystem. In India, many believe that this

power law distribution is broken. Looking deeper one can see that it is not broken at the top as

36 As per Global Venture Capital Insights and Trends by E&Y, in 2013, India had just 1 IPO and 12 M&A exits with a median valuation of $46.5m. Compare this with China (15 IPOs and 20 M7A exits with medium valuation of $87.5m) or Israel (2 IPOs and 10 M&A exits with median valuations a whopping $143m) 37 Former VP of Yahoo India, Active Angel Investor and Co-Founder of iSPIRT Foundation

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

26

we can see many $100m companies rising up slowly. It is broken at the bottom! There are too

few small-value (sub $40m) exits. Fixing this situation by catalyzing more small value exits will

improve the entire distribution. We can visualize it as cyclic process - many sub $40m exits

would pump in more money in the ecosystem which in turn would translate to more companies

getting funded.

Some of the recommendations to resolve this issue are:

Create more M&A exit opportunities: Enabling more M&A opportunities for startups is

highly essential to set motion in the above cycle. iSPIRT has taken up this cause and had

drafted an elaborate M&A connect action plan in 2013. As part of iSpirt’s M&A Connect

Programme, they have been organizing multiple roundtables to showcase Indian

product companies to potential acquirers in Silicon Valley. This is a step in the right

More M&A exits

More Money in the hands of the

investors

More money invested back into

the ecosystem

More product companies

get the funds to scale up

Better Growth

Better companies

1

2

3

4

5

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

27

direction and we need more such initiatives to increase the volume of M&A in the

Indian start-up ecosystem.

Increase seed stage money through government innovation funding programs: Indian

government needs to fuel more seed money to fund innovations. Government currently

provides funds through bodies such as Department of Science and Technology (DST).

However the process to acquire these funds is extremely complex and often outweighs

the benefits. Moreover these programs are not well marketed and most software

product start-ups are not even aware of these funds. The government needs to have

much more transparent process to fund product innovations. One good way of doing

this could be to set-up government funded incubators in all engineering schools to

encourage student entrepreneurs and help them take their innovations to next stage.

Israel’s technological incubator program which was started by the government in 1991,

provides funding and know-how to people to become successful entrepreneurs. Since

the first companies emerged from the incubator program in 1993, 61% have secured

follow-on funding and 40% are active to this day38. Apart from that there should be

single window clearance for anyone seeking to obtain funding from government.

Bring more investors into the ecosystem: Another way to increase the early stage

capital available to startups is to bring in more angel investors into the ecosystem.

Platforms such as LetsVenture.com have recently sprung up to enable successful

entrepreneurs and HNI (High Net worth Individuals) to participate in angel investing

38 http://www.oecdobserver.org/news/fullstory.php/aid/3546/Start-up_nation:_An_innovation_story.html

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through a trusted platform. We need more such platforms to increase the corpus of

Angel money.

Provide Tax Exemptions or Tax holidays to start-ups: Start-ups in India start paying

huge amount of taxes the moment they start generating profits. This takes away even

the nominal profits that companies make. On the other hand large tech firms such as

Infosys and Wipro benefit immensely with tax holidays on IT exports. A suggestion given

by YourStory39 was to give startups in India tax exemptions on the line of Singapore tax

exemption scheme for new startup companies. As per this scheme, a newly

incorporated company that meets certain qualifying conditions can claim for full tax

exemption on the first $100,000 of the normal chargeable income for each of its first 3

consecutive assessment years. A further 50% exemption is given on the next $200,000

of the normal chargeable income for each of the first three consecutive assessment

years. Schemes like these would indirectly address the issue of lack of funding by

allowing the start-ups to reinvest more of their earnings.

Remove the start-up tax: The Finance Act 2012 of India brought in an amendment to

tax the share premium which is above the fair value of investment by the resident angel

investors and not proven satisfactorily to the tax assessing officer. This law makes it

much more difficult to raise early stage funding for start-ups. Instead the new Indian

government under Mr. Modi should follow the Israel model and introduce “Angel’s law”

under which a substantial tax benefit is given to individuals who invest in qualified

Israeli R&D companies. Under that law the investors can deduct their investment from

39 http://yourstory.com/2014/05/namo-entrepreneurship-india/

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any other income source such as salary, capital gains etc. In 2009, the Israeli

government also removed the capital gain tax for foreign investors.

Issue 3: Difficulty attracting and retaining talent

India is a risk averse country and people always look for stability and security when looking for

employment opportunities. Finding a good employment is not just a concern of the individual

but of his whole family. If a person opts to join a no-name brand start-up, he has to handle the

questions, concerns and taunting of the whole family. On top of this if the start-up’s salary

offering is less than what the individual would earn in other larger tech firm, matters get much

worse. This means that start-ups are at a disadvantage when hiring talented individuals. Solving

this issue requires action by entrepreneurs, the ecosystem & government.

Following are some of the recommendations on how to resolve this issue:

Organize “Start-up” Hiring events: Ecosystem players such as The Indus Entrepreneurs

(TiE), YourStory.com and others should also conduct regular start-up hiring events.

Recently “Headstart Higher”, a start-up hiring program run by Headstart Network

Foundation was a huge success. Apart from enabling recruitment, these events should

also be a medium to educate both fresh graduates and experienced professionals on

topics such as “benefits of working with start-ups”, “How to evaluate a start-up for

employment”, “Value of stock options” etc.

Sell the value proposition of working with a start-up: Many of the entrepreneurs

interviewed indicated that the only way they have been able to acquire talent is by

matching the salaries of larger tech firms. While it is good that they are addressing the

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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salary concern but this is not solving the underlying issue as every potential hires would

expect to get that much salary and not all start-ups can afford to pay that much. Instead

entrepreneurs need to do a much better job of communicating the value proposition of

working in a start-up (faster career growth, technical leadership and growth, quality of

work, long-term pay-offs, flexibility of timings etc) rather than trying to compete with

big companies on the strengths of big companies (salary, facilities, etc.).

Government should work in skill development making young population employable:

As mentioned earlier, close to 1.5million people graduate with an engineering degree

every year in India but only 3 out of 10 are actually employable based on the skill sets.

New government should focus on introducing development & skills programs to develop

skilled talents thus helping entrepreneurs who are always hungry for good candidates.

There are more than 5000 Industrial Training Institutes (ITI) in India40. However, the

quality of training is not up to the mark. They have poor infrastructure, outdated

curriculum, less qualified instructors and limited interaction with the industry. The

entrepreneurs who hire them spend considerable amount of time to first train them and

then use them. YourStory.com suggests a creative idea - businesses and Government

can work together on this, wherein businesses can train young force on the job and

government can motivate businesses by providing wage subsidy for a defined period.

40 Source: From YourStory Research: http://yourstory.com/2014/05/namo-entrepreneurship-india/

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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Conclusion

Indian start-ups are slowly getting noticed by the global world. Start-ups like Fusion Charts

(used by NASA and US president Barack Obama) and the more recent acquisition of Little Eye

Labs by Facebook are giving a new wave of hope and inspiration to the younger lot of product

start-ups. SaaS companies such as iCreate, Manthan, Druva and Eka have potential market sizes

of thousands of clients. FreshDesk and Wingify are in the 50,000 user range; EmployWise and

ApartmentAdda can hit millions of users soon; and the UID project41 can open up the billion-

user market in India via mashups and applications in areas like tax management. As per Sharad

Sharma, co-founder of iSPIRIT Foundation, former CEO of Yahoo India and an active angel

investor, at least one software product company from India each year is hitting the $1 billion

mark. All these signs indicate that India is moving in the right direction. However to ensure we

see more and more product companies hitting the billion dollar mark, we need to resolve the

core issues such as difficult to penetrate local market, slow adoption of new technology, lack of

risk capital and difficulty attracting and retaining talent. Resolving these issues require equal

effort from government, ecosystem players, investors and entrepreneurs themselves and could

take easily 6-8 years. Keeping the steps in the right direction and as NASSCOM and iSPIRT is

doing would enable India to see a future Facebook, Cisco and Apple seeded right in the

backyard.

41 http://en.wikipedia.org/wiki/Unique_Identification_Authority_of_India

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

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new-start-up-hub/articleshow/29126534.cms by Samidha Sharma and Hemali Chhapia. Jan 21,

2014

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33

[12] http://techcrunch.com/2014/03/26/inside-indias-e-commerce-boom-growing-base-of-mobile-

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returning-home/article1-1157720.aspx by Mahua Venkatesh, Dec 01, 2013

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Appendix 1: Questionnaire to test the hypotheses

Local Market

1. Are you targeting local or international market?

2. Which market is driving revenues for you?

3. Many people say that the local market is very small and that’s why product companies don't

succeed much in India. What is your view?

4. How big is the local market? Can you reach your goals by serving just the Indian market?

Technology Adoption among Indian customers

5. I have heard people say that India is a late adopter of technology. How receptive do you think

Indian market is to new innovative products?

6. How forthcoming are investors to fund new innovative ideas?

7. What challenges do you face when selling innovative products to local market?

State of VC & Angel Investments 8. How did you fund the venture initially?

9. What were the challenges in raising funds?

10. What is the risk appetite of investors?

11. What kind of questions VCs and angels ask when you approached them?

Role Models and Mentors for product companies 12. What is your support network? Whom do you go to in case you need to discuss any challenges

or issues?

13. Do you have any business mentors?

14. Are there people who are experienced in building products who can guide you?

15. Do you feel there is a lack of guidance especially for product startups?

16. Do you feel a lack of role models in India?

Talent Availability for building product companies 17. How easy or difficult has been for you to find the relevant talent to build a product company?

18. Do you see any skill gap? Which skills are difficult to find?

BUILDING BILLION DOLLAR PRODUCT COMPANIES FROM INDIA May 23, 2014

35

Appendix 2: List of participants

As part of the research, comprehensive interviews were conducted with product start-up founders, VCs,

Angel Investors and other ecosystem players. These interviews provided firsthand perspective on the

challenges product start-ups currently face in India.

Product Start-up Companies

1. Joydeep Sen Sarma, Founder, Qubole. Interviewed on May 07, 2014

2. Anup Tapadia, Founder, TouchMagix. Interviewed on May 07, 2014

3. Sumeet Anand, Founder & CEO, i-nable Solutions. Interviewed on May 08, 2014

4. Varoon Rajani, Founder & President, Blazeclan. Interviewed on May 09, 2014

5. Anuj Kumar, Director, Formcept. Interviewed on May 10, 2014

6. Bala Venkatachalam, CEO, CereBrahm Innovations. Interviewed on May 13, 2014

7. Sanjoe Jose, CEO, Interview Master. Interviewed on May 17, 2014

Individuals

1. Avinash Raghava, Fellow at iSPIRT Foundation. Interviewed on Apr 28, 2014

2. Manish Singhal, Angel Investor and Founder of LetsVenture. Interviewed on May 15, 2014

3. Sharad Sharma, Co-Founder iSPIRT Foundation. Exchanged emails on May 27, 2014

4. Amit Singh, Co-Founder & Director Headstart Network Foundation, Founder, Wow Labz.

Exchanged emails on Mar 23, 2014

5. Arpit Agarwal, Principal, Blume Ventures. Interviewed on May 14, 2014

Organizations

1. Yourstory ( www.yourstory.com ).

2. Headstart Network Foundation (www.headstart.in )

3. iSPIRT (www.ispirt.in ).