I have spent several years as a technology venture capitalist in both India and Silicon Valley. Hence, I have a unique perspective from which to analyze the Indian startup scene.
Any startup ecosystem consists of three fundamental constituents – startups, investors and the market. When analyzing India, one has to use a “relative” lens rather than an “absolute” one. India is orders of magnitude removed from Silicon Valley in absolute numbers (startups and capital). But, on a relative basis, compared to where India was a few years ago, the country is clearly moving “up and to the right”.
The quantity and quality of Indian startups has continued to improve over the past few years for several reasons. The idea generation and curation machine is starting to take hold. Top tier technology and management institutes (IIT’s, IIM’s, ISB) have institutionalized entrepreneurship as a topic of academic and business interest. Some have established entrepreneurship cells, with regular business plan competitions leading to seed capital. Seasoned executives from India and the US have catalyzed Angel investing in tier 1 cities (many are moving back to India to be close to their aging parents, for example). Certain US university alumni have created their own investment circles. Successful startup founders themselves have turned investors, bringing not only capital but startup expertise to investee companies. There are a few seed or micro VCs along with several independent or corporate incubators, providing real estate, mentorship and in some cases, capital. For the first time in history, there are examples of several Indian startups garnering valuations (at least on paper) in excess of $200M, and in a few cases north of $500M. This is having a tremendous impact on the overall psyche of the Indian tech entrepreneur, who has historically been accused of thinking incremental rather than monumental (in terms of both the idea as well as impact). I am a fundamental believer in the “success begets success” philosophy. Now that some startups are starting to blossom, there is anticipation of meaningful exits in the coming year or two, which is adding fuel to the entrepreneurial fire. There is a secondary benefit as well. As potential exits are realized and wealth creation takes place, employees start valuing equity and stock options instead of cash salary, which is the primary motivator today.
Indian entrepreneurs still suffer from stigma attached to failure. The irony is that the fundamental tenet of startups in Silicon Valley, most of whom now have an Indian founder, is willingness to fail, and therefore take massive risk. In India, it’s a matter of time before the fear of failure turns into an embrace.
With few exceptions, startups in India still fall in the “me too” or “US clone” category. The innovation in those areas has more to do with distribution channels or business models than fundamental IP. People often make the mistake of mentioning China and India in the same breath. Unlike China, where language and regulation benefit local startups, the FB, LNKD, GOOG and TWTR of India are indeed FB, LNKD, GOOG and TWTR. Going back to the theme around relative vs. absolute, FB did make its first acquisition in India, which, while not a large transaction, signifies a seminal moment in Indian startup history.
The single biggest attribute that got me excited about moving to and investing in India was the sheer “impact” that startups can have there. There is a blossoming category of the “do good do well”, profit minded but socially impactful startups that are saving and improving millions of lives. Transplanted American entrepreneurs who simply wanted to do something meaningful, and create large profitable businesses in the process have founded many of them.
India is really a tale of two very different sets of entrepreneurs. One is focused on the Indian consumer. That could be the high-end price-insensitive top of the pyramid customer looking for the latest gadget or accessory; a middle of pyramid aspirational customer buying his/her first smart phone or Nike shoes; or a bottom of the pyramid customer seeking clean drinking water, access to electricity, healthcare and education. There are tremendous opportunities for those investors and entrepreneurs who are willing to be patient. The second set are technology entrepreneurs aiming for the global market, and cannot wait to get to the high margin, sophisticated US customers.
While Silicon Valley can boast significant concentration of startups and capital, India is extremely broad based geographically along both dimensions. There is no single city with hyper-concentration of startup activity. Some of the best technical universities are actually in tier 2 towns (IIT-Kanpur, IIT-Kharagpur, IIT-Roorkie, BITS-Pilani). Investor universe in India is made up of angels, US and India based venture capital funds, few corporate VCs and private equity groups. The biggest challenge for both startups and investors is the lack of portfolio exits. The thesis for many VCs and investors in general was that cash rich technology companies from the US would buy Indian companies (rather than build) as their market entry strategy. That simply has not happened. As a result, most investors now have dozens of active companies in their respective portfolios, with more being added and very few, if any, exiting. This is having a secondary impact with respect to the investment appetite of Limited Partners (those who provide capital to VCs). Having invested in India centric funds, they are now looking for cash returns before investing further into Funds 3 and 4.
There are two trends to note. One, there is a Series A and to a certain extent a Series B capital crunch in India. Given the fairly brisk angel investing climate, the funnel of seed funded companies is sizable, without ample Series A capital to follow. Those lucky enough to raise series A financing are running into a series B crunch since early to mid stage venture firms have a heavy existing portfolio load, and little to no bandwidth to make and manage new investments. Later stage venture capitalists and private equity groups who traditionally are technology investors have been busy investing in non-technology companies around healthcare chains, educational institutions, and infrastructure. Interestingly, some of the bigger technology related exits have been secondary transactions where existing venture capitalists have sold their stake to larger private equity investors rather than get liquidity through a typical M&A or IPO route. There was just one venture funded technology company IPO last year worth mentioning (JustDial), three years after the previous meaningful tech IPO (MMYT).
Finally, as technology startups have matured over the past few years, global investors including Softbank, Rocket Internet, Naspers, Tiger Global among others have entered India with hundreds of millions of dollars invested in primarily B2C companies betting on leaders in specific verticals. That has boosted investor confidence and provided partial exits for both investors and entrepreneurs.
India, as a market, is a conglomeration of mini nation states, with different languages, cultural nuances and ways of doing business depending on the region. India, generally speaking, is a tough geography within which to create a large profitable business in a timeframe that is commensurate with VC expectations. Indians are also the most price-sensitive and value-conscious species on the planet, which makes India a very high volume, high touch, thin margin market for many startups. Layer on top of that infrastructural challenges around logistics, payments, government approvals, corruption, IP enforcement and constantly changing regulations. I often say that if one can create a profitable business in India, one can do so anywhere in the world.
Given the challenges with both capital and markets, the clear trend that has emerged especially over the last year is the fact that Indian startups are thinking global from the very beginning. Some are creating sizable businesses serving the Indian consumer, but many others are using India as a test bed for product or service design, but then taking that solution to other countries. Some are aiming straight for the US market, while others are taking a phased approached, extending first to SE Asia, ANZ, Europe and then eventually the US. Even seed stage companies are joining the wave of startups flocking to the US, looking to get a spot on one of many thriving incubators in the US, ideally in Silicon Valley. Indian VCs have also realized this phenomenon, and have set up or are in the process of setting up either direct or indirect presence in the US to provide a bridge between two geographies.
Bottom Line: For anyone who has visited India, they know that it’s a hotbed of activity. The startup scene is no different. While on an absolute basis, the country has a long way to go to catch up with Silicon Valley, foundational stones are being laid to create a large and sustainable startup environment. I imagine that this is not dissimilar to what Silicon Valley might have looked and felt like in its formative years. My bet is that India will take years not decades to catch up, and generate some remarkable lasting technology giants in the process.
This is a longer (and a bit more entertaining) version of the article that I published for the Wall Street Journal that you can find here.
(Mohanjit Jolly is the managing director, Draper Fisher Jurvetson India. The views expressed are strictly personal. They do not represent the views of the organization he represents.)
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