US venture capital courts India tech

BANGALORE, India — At the Microsoft Accelerator office here, techies dressed in sandals, jeans, T-shirts and Bermudas hunch over keyboards in library silence.

It's a day for beavering away, tightening the nuts and bolts of software. But the evidence of voluble brainstorming is scrawled on whiteboards scattered around the forest of cubicles. There are funnels, flowcharts, and line graphs.

These aren't your ordinary cyber coolies. They're the founders of tech startups that Microsoft believes have an outside shot at becoming the Next Big Thing — and the leaders of a quiet revolution underway in India's outsourcing capital.

In the past three years, India's startup scene has experienced a paradigm shift, according to Mukund Mohan, CEO-in-residence at the Microsoft Accelerator. After bumping along a plateau since around 2000 or so, there's been a sudden burst of activity, an indicator of what math geeks call “step function growth.”

“That's what is exciting now,” said Mohan.

It's about time.

Over the past 20 years or so, at least one out of ten Silicon Valley startups was founded by an Indian immigrant, according to “Then and Now: America's New Immigrant Entrepreneurs.”

Yet India itself has lagged behind the US and China in developing its own startups.

Now, India's own startup scene is taking off, with a boom in funding from angel investors and top venture capital firms — including Google ($10m), IvyCap Ventures ($36m), and Sequoia Capital ($75m+ in 2012 alone), among many others.

Indian tech startups have nearly tripled to 450, from 162 in 2006, according to India's National Association of Software and Services Companies.

The numbers, however, don’t tell the whole story.

These entrepreneurs are not trying to emulate Facebook’s Mark Zuckerberg or Google’s Larry Page and Sergey Brin. Instead of inventing the future — instead of inventing things that people don’t need until they actually have them — they are taking a more pragmatic approach, addressing local needs common to billions around the world, albeit not necessarily to those in Europe or the United States.

“The startups that are the most successful and the largest are not technology startups the way we think of them when we look at Silicon Valley and advanced markets,” said Benjamin Joffe, co-author of a recent India study by the World Startup Report. “They're mostly companies that are solving fundamental infrastructure or service issues.”

A boom in funding

Investors are catching on to the idea that India offers something truly unique, and their interest is expanding rapidly. Over the past five years, India’s startup backers have grown from a handful of active investors to as many as 70 firms, including most of the marquee names in the business. Meanwhile, around 100 private equity firms have flooded in.

Practically non-existent as recently as 2007, networks of so-called “angel investors” — who fund startups when their founders have little more than ambition and a good idea — have also mushroomed across the country and grown large enough to compete with VC (venture capital) for million-dollar deals. And in the past two years alone, as many as 40 privately held, for-profit accelerators have set up shop, hoping to nurture India's own billion-dollar answers to China's Alibaba.com, whose e-commerce sites host transactions accounting for a whopping 2 percent of China's GDP.

“The ecosystem now has a lot of angels and a lot of VC funds,” said Sasha Mirchandani, co-founder of Mumbai Angels. “There's a couple billion dollars of early stage money available in India now.”

That's peanuts compared with the money flowing into startups in Silicon Valley or even Israel, where tech startups raised nearly a billion dollars in 2012 alone. But interest from big tech names and a successful first wave of firms — which have attained high valuations and seized market share in areas like ticket booking and retail sales — suggests that those first few billion dollars could continue to snowball.

“If you come from Silicon Valley, you realize there is very, very little VC action in India. It's almost scary how small it is,” said World Startup Report founder Bowei Gai, who spent three weeks meeting with Indian entrepreneurs and investors earlier this year.

“But if you compare India to other countries in the world, it's actually pretty good. Things are happening in India, [although] it's magnitudes behind the US.”

In the process, startups may soon replace Bangalore's giant but flagging service companies as the face of Indian IT. Google, Microsoft and Virginia-based Verisign (a network infrastructure company with nearly a billion dollars in annual revenue) recently partnered with India's National Association of Software and Services Companies and local angel investors to fund and nurture 10,000 Indian startups over the next 10 years.

“We're going from 100 funded companies a year, and we're trying to get to 1,000 funded companies a year. That is a quantum shift,” said Microsoft's Mohan. He notes that the cost to get a startup up and running has plunged from $250,000 to $2500 over the past decade or so.

Green shoots of success

China has seen more than 50 tech startups debut on the NASDAQ, and has yielded multi-billion-dollar companies like Alibaba.com, Baidu and Tencent. In contrast, India has yet to generate enough big paydays, or “exits,” needed to turn the venture capital market red hot.

But after some dot-com-bust era burnouts, a handful of tech startups launched over the past five years have evolved into large-scale, competitive businesses. A few have even paid off for investors. Travel portal MakeMyTrip.com’s $70 million Nasdaq initial public offering in 2010 pegged the company's value at more than $450 million.

“Some Indian startups have already reached very, very large scale,” said World Startup Report's Joffe. “There are companies like Flipkart, Redbus, and Healthkart, which are very, very large.”

MakeMyTrip reportedly accounts for more than half of India's online travel booking market, worth a billion dollars a year and poised for rapid growth as incomes rise.

Flipkart, an Amazon-style e-commerce company founded in Bangalore in 2007, already sells around $350 million a year worth of books, gadgets and clothes. Co-founder Sachin Bansal recently projected that sales will top $1 billion before 2015. Investors already estimate the company's worth around $800 million, in anticipation of an IPO slated for two to five years down the road.

Meanwhile, online bus ticket booking company Redbus.in has inked ticketing deals with more than a thousand bus service operators in a crowded and chaotic market. In its latest fundraising round, Venture capitalists put Redbus.in’s worth at about $110 million. It’s poised for rapid growth; this year it is expected to post a profit of about $400,000 on revenue of approximately $1 million.

And JustDial, a phone service christened “Google for Indians who don't have internet access,” is set for a $174 million IPO May 20 that could spark a flurry of followers. 

Solving Indian problems

Redbus.in is an obvious example of a tech firm tackling a local problem — a tangled, otherwise disorderly transportation network. The company negotiated with more than 2,000 bus operators and countless more tiny offline travel agents to bring order to the massive network. It provided back-end software to computer-savvy bus companies and bought tickets in bulk, travel-agent style, from the others. And to make the whole system work, it had to open about 75,000 brick-and-mortar, point-of-sale outlets around the country.

But even e-tailers — which appear modeled after US companies like Amazon — have had to innovate to suit emerging market realities.

For instance, Flipkart, clearly inspired by Amazon, has been forced to establish its own fleet of delivery trucks, and has pioneered cash-on-delivery payments, because existing Indian couriers were unreliable and too few Indians use credit cards.

In the end, these hurdles may slow the growth of Indian startups, but it could also expand their impact beyond that of pure-play internet firms of Silicon Valley.

“If you can provide your country with good logistics you'll actually profit your country more than if you create some kind of fancy gizmo for upper class Indians,” said the World Startup Report's Joffe.

“So in a way the problems they're solving are a lot more serious than what's happening with an Instagram, for example.”