Why aren't there many software product startups in India ?

Why There Aren’t More Software Startups In India

Some factors that govern the lack of software startups culture prevalent in india could be one or all of the following:

1. 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.

2. 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.

3. 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 Rajasthan.

4. 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.

5. Too Much Bureaucracy: 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).

6. 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 or meebo.

Services companies practically cannot become Product Companies !!!

Why Infosys can’t be a product making company?

Before I answer this question (not that I have this beautiful and simple answer which suddenly solves the problem), let me talk about how we got here. Infosys is a great company. I admire Narayana Murthy for what he has done. He is like a WWI War Hero. He fought the war in trenches, faced the gas bombs and artillery shells. He created a services company and made an empire out of it. The fallout of building such an empire has been great for many other companies as well. MNCs started to look at India for outsourcing and nowadays Bangalore is compared with Silicon Valley itself (though that comparison is more hype than truth). Infosys is a great services company. Nowadays you can almost get any kind of software from this company, banking, finance, enterprise, telecom, satellite, wireless, nanotechnology, etc; you name it you get it. While making this superbly well-oiled machine for services (plus consulting and outsourcing), this company has created many war heroes who can fight a WWI with maximum efficiency and minimal cost.

In addition to Infosys, there are other great services companies, like, Satyam, HCL, Wipro, TCS, etc. The combined intake of engineers by these companies is pretty high. Some of these companies take 60-80 engineers from a single college. In the whole process, they create many engineers who are good at delivering services. Services companies have only two factors to play with- Utilization factor and Average Salary. The mantra is- “Keep most of your assets (employees, labs, and other resources) billable and keep the average salary of the employees to minimum”. Give this as a problem to any lay man and he will come up with almost similar strategy most of these services companies employ. You want your engineers to be on a project all the time. So, you scout for projects in all domains and put your engineers to work on them. Though a certain level of skill/expertise is required, you also figure out that most engineers can take up almost any project and work on it. You create engineers who are jack-of-all-trades. Then you also have a set of excellent managers who manage the gargantuan task of delivery (in time and with quality) using these jack-of-all-trades engineers. To keep the Average Salary low, one has to continuously recruit fresh engineers and move the experienced people out or to a management role. So don’t be surprised to see five-year experienced engineers becoming project leaders, and seven-year experienced engineers becoming project managers. Over a period of time, what you get out of such companies are excellent managers; managers who are proficient in delivery mechanism, who know how to thrive and deliver in a services environment, where the parameters for success are very different from that of a product making company. Those who do not succeed in such an environment will be weeded out slowly; or they force themselves to fit into such environments by working on their weaknesses and strengths to adapt to such environment. Give this process twenty years and what you have is hundreds of managers and leaders who are good at running services companies. This is like creating many Generals and Soldiers suitable for WWI. (Just for the sake of argument) Imagine WWI to be services industry while WWII is a product making company.

Now, how can these leaders be suitable for product-making industry (WWII)?

Just by infusing cash and incentives you can’t make product making companies out of this environment. To wage a new kind of war these Generals and Soldiers have to consciously adapt to new rules. Yes, they have the ability to adapt but will they do it? Why should they do it? Especially after winning the laurels and successes in WWI they are keen on keeping the warfare more WWI-like and reap rewards. It is not in their interest to change the rules of the game. Why should one change the rules of the game and turn out to be a loser?

Therefore, all the success stories we get to see are come from services industry. The ex-entrepreneurs are all from services companies and they tend to promote more services company. Books are written on how Bangalore is an ideal place for outsourcing, off-shoring and cost-cutting (by giving projects to services companies). The MNCs who open up shop in Bangalore tend to look at Bangalore as a cost-cutting center, relegating the kind of work they would have given to other services companies. The VC firms who only see such success stories end up promoting services industry. The partners at VC firms have been on board of such services industry and have now attained a flair for advising and helping such companies. Their affiliations and networking is in that industry and hence add value for such industry. Some of the ex-entrepreneurs who have joined this VC firm are comfortable in measuring, assessing and adding value to services industry. If you want to fund a startup that has big names in the industry, those big names come from services industry. The community of VCs and and ex-entrepreneurs consists of people who have waged this services war and have succeeded in this game. They tend to promote more of such industries. Familiarity is the key aspect. It breeds the same kind. So, what we have is a self-perpetuating environment, also called ecosystem, that promotes services industry. There is no room for product-making companies here.

If there are any product-making companies out there, they are exceptions. Such startups may find it difficult to get senior team members with product-making experience. Most of the potential team members with 8-12 years of experience are now managers in a services company. Are they valuable to a product-making startup? Even if they are, will they leave their cushy job and lifestyle to take on this new kind of warfare which they are not used to? Moreover, the startups in product-making space will not find advisors who are veterans of this industry. The VCs are not ready to fund such high risk companies who do not have enough exposure to this different game. Why should they when they have a choice to start another services company? Therefore, most product-making ideas do not take off.

You need precedents to create such an environment but how can you create such environment when you can’t even start off? That’s where it becomes very tough for someone to startup a product-making company in India.

Another analogy that I use is that of a space probe (like Voyager) launched into space. You have two choices. You can move to a planet like Jupiter and use its gravitational force to become a satellite of Jupiter and stay there forever, or use the same gravitational force plus an added thrust to move to the next planet. Most of the Indian companies tend to choose to stay at one level, that is services company, and do not want to venture further to the next level, that is product-making company.

Why do I stress so much on product-making companies?

It’s simple actually. [To repeat myself] In short, it [services-company] is not a scaleable business. If a services-company does $2 Billion revenues with (say) 50,000 engineers, to get to $20 Billion in revenue they need to hire 500,000 engineers. It’s not very practical.

Compare this with a product-making company. A small group of individuals can make a big difference and if successful can create mega business. And it’s not hard to think of a 50,000 people product-making company with $50 Billion revenues.

[Note that I took Infosys just as an example. I could replace it with any other services company and this topic still holds good]