India's Startup Scene: Will VC Dollars Create The Next Amazon?

Two years ago Aditya Bandi decided there had to be a more elegant way of working with documents in the cloud. So he quit his job at Microsoft and along with two friends started BookPad Inc. Yahoo acquired the Indian startup -- backed by Microsoft Ventures -- last month for a reported $8.3 million.

Bandi is representative of a new breed of entrepreneur in the typically risk-averse subcontinent where a stable government job or corporate spot has always been the ticket to security and where failure has been considered shameful.

Now many young Indians like him are staking their own savings to follow startup dreams. In the process they are attempting to solve problems for India -- and the world. “This is a very healthy change. Year on year, we’re seeing an increasing number of companies coming to us for raising funds, which means more and more startups are coming up,” said Bharati Jacob, co-founder of Bangalore-based venture capital source SeedFund.

“We’re seeing young people even dropping out of college, taking risks, making more money than their parents ever did,” Jacob said.

INFOSYS TO FLIPKART

In the 1990s and into the new millennium, entrepreneurs such as Infosys Ltd.’s iconic founder Narayana Murthy and rival Wipro Ltd.’s Azim Premji built IT services giants that sought to be models of transparency, ethical governance and wealth creation. “That’s when ‘businessman’ shifted to ‘entrepreneur,’ which wasn’t very popular in our lexicon,” Jacob said.

Today there are new role models such as online shopping business Flipkart, India’s poster child for entrepreneurship, founded by two former Amazon Inc. employees who raised $1 billion in venture money.

Flipkart and competitors like eBay-backed Snapdeal are vying for the largest chunk of the growing ecommerce market in a nation of 1.2 billion people, where Internet and smartphone use is on the rise. “The biggest, most powerful trend in India is the mobile Internet ... smartphones in the hands of 400 million to 500 million people over the next four to five years,” Rishi Navani, managing director at Matrix Partners, told IBTimes.

Accel Partners estimates online shopping for physical goods in India will grow at 63 percent per year to $8.5 billion in 2016 from $2 billion in 2013. The number of online shoppers is forecast to double to 40 million in that period.

Matrix has invested in several Indian consumer-oriented startups -- from taxis to locally inspired products to mobile platforms -- that are on the cusp of growth. Verse Innovation, for one, delivers local-language content in India via its mobile platform NewsHunt. It just raised 1 billion rupees ($16.4 million) in its second round of funding.

That investment was led by Silicon Valley firm Sequoia Capital’s Indian unit. Matrix and another existing investor, Omidyar Network, invested again as well. “Once people see quality startups getting into emerging markets and creating scale, value and role models, they experience the game by following these people, talking to these people, by aspiring to be like them ... it will spawn a lot of entrepreneurship,” Navani said.

MORE CAPITAL

The growing number of firms like SeedFund and Matrix in India means more money available. “Everybody was talking about Flipkart’s debt, their business model, lack of profitability ... and you get up in the morning and they’ve raised $1 billion,” said Jasminder Gulati, co-founder of NowFloats, which helps small businesses and suppliers set up an online presence.

“Why are those venture funds and private equity firms cutting such large checks? Because there is a strong belief that this disruption in India is now significant. It’s completely different from what we’ve done before as a country or as any online shop," said Gulati.

The "norm" of, say, $5 million raised in the second round has given way to amounts of $25 million to $30 million or more for Indian startups, virtually every week. Tiger Global Management of New York led a $60 million funding round at Quikr, an online classifieds startup, according to a Sept. 18 statement. Three weeks before that, Tiger Global led a $65 million investment in Hike, a mobile instant-messaging specialist. Sequoia Capital led a $33 million investment in FreeCharge, a rewards-for-recharge mobile phone play.

In 2013, there were 660 private equity deals in India that added up to $10.5 billion in investments, compared with some 420 deals that totaled $8.6 billion in investments in 2010, according to VCCEdge, a deal tracker in India.

Meanwhile, business accelerators like Microsoft Ventures and Google Capital are ramping up plans for India. Industry networks and lobby groups such as the Indian Software Product Industry Round Table are raising the profile of Indian startups and even Indian IT services companies are spawning product-focused startups.

India’s richest individuals, including Mukhesh Ambani and Wipro’s Premji, are also backing young entrepreneurs: Reliance Group, Ambani’s diversified conglomerate, which includes one of the world’s largest oil refineries and a pan-India fiber optic network, recently agreed to partner with Microsoft to fund and mentor startups in India.

National Association of Software and Services Cos. (NASSCOM), which until recently was dominated by Indian outsourcing companies, is finding success with efforts to promote product developers as well as with a program called Nasscom 10,000 startups. BookPad found early support from this program, which eventually led to its being shortlisted for the Microsoft Ventures accelerator in India.

LEAPFROG

Shekhar Kirani, an Accel partner who specializes in technology companies, sees Indian startups leapfrogging the U.S. in some niches: “We are invested in bookmyshow.com,” a startup that offers a mobile application to book and pay for movie tickets.

“In the U.S. there were so many iterations of this idea, but in India we went straight to mobile,” Kirani said.

Indian IT services companies were looking to tap the export market through major outsourcing deals, but the startups in India today are primarily “trying to solve for India,” Kirani said, and some of them have no counterparts or equivalents anywhere else in the world. “Once you solve [a problem] at the Indian cost structure at high quality, then you can take it global,” Kirani said.

Startups looking to build something for the global market, such as HMS Infotech, whose product Hotelogix helps midmarket hotels boost clientele, stand out not so much in the originality of their products but through a sharp focus on the end user. “Originality isn’t the yardstick” at this stage, Kirani said.

“We’re in the first 100 meters of a marathon and already we’re declaring a few winners. The market is so huge, inefficiencies are so much, technology can be a way to leapfrog, if you look at any of our problems in India,” he said.

CROSS-BORDER POLLINATION

What’s also helping Indian ventures today is the growing presence of startups in the U.S. that are looking to set up development centers in India, at hubs like Bangalore, to tap the city's large talent pool. The move is often led by an India-born senior executive working for the U.S. startup who has gained several years of experience in Silicon Valley and is comfortable with the cultural issues of hiring and leading an Indian staff in Bangalore, Mumbai or Pune, for instance.

Chris Todd, chief executive of Theatro, a Texas company, a pioneer in hands-free wearables that have commercial applications, said adding a center in Bangalore and expanding it was the idea of the company’s India-born CTO. Todd wants to double his staff in Bangalore as soon as he can find the recruits, he told IBTimes during a visit to Bangalore.

For Play It Interactive, a Canadian mobile gaming startup, India is both an important market and a source of talent for product development, said Cory Cleveland, the company’s president and co-founder.

India’s hundreds of millions of consumers -- migrating from feature-phones to the plethora of large-screen, feature-rich Android smartphones in the $100-to-$150 price range -- are a big draw for Play It, which is setting up its Indian base in Mumbai. Play It is seeking to partner with India’s largest media companies to get programming for mobile subscribers.

The model taps the opportunity to place advertisements on mobile platforms, which in India grew at 260 percent since July 2013, faster than any other Asia Pacific market, Opera Mediaworks, a mobile advertisement platform provider, said in a report.

WHAT’S MISSING

Despite having so much going for it, India’s startup ecosystem has two significant hurdles: The first is bureaucracy unfriendly to startups -- but there are signs of change in that regard. For instance, India’s federal government allocated 100 billion rupees in the budget for the fiscal year that ends March 2015, specifically to help fund startups. The hope is that newly installed Indian Prime Minister Narendra Modi will take further steps to boost the country's investment climate.

The second has more to do with the Indian psyche and traditional conservatism, which is averse to serious risk-taking and often fixated on mistakes and failure. “Today, if a company is not making revenue, and continues to not make revenue for two or three years, I would want to see how many VCs are ready to fund that company in India,” said Aditya Sanghi, chief executive and co-founder of HMS Infotech, which makes Hotelogix.

“The difference between when Hotelogix got funded versus when it didn’t get funded was only 20 customers,” said Sanghi, who eventually found backing from venture capital firm Mumbai Angels, which gave him $350,000 in December 2010 after others had turned him down. “There was no change in vision, no change in offering, no change in target market, but the industry wanted to see paying customers before signing a check.”

Sanghi and co-founder Prabhash Bhatnagar went on to get more funding from Accel Partners, but said they could have grown faster and bigger if some of the investors they approached for seed money had been willing to bet on them.

Cultural factors also come into play. “I have an employee who came to us from a large multinational company ... he was really keen on working for us, he wanted to be in a startup,” said Theatro's Todd. “But he was getting married, and his in-laws would have liked to see their daughter marry a young man with a stable job in a large company,” he said.

“In America, it’s cool to be part of a startup ... that’s not the case here yet,” Todd said. “I had an employee who had to leave suddenly because he had to move to a different city to help his family. ... He didn’t even want his stock options,” he said.

At a recent party, SeedFund’s Jacob found herself appealing to a friend, one of India’s best-known IT services leaders, to convince another friend to help her son chase a startup dream. The mother wanted her son to “get a job in a multinational company,” Jacob recalled.

That attitude spills over to local investors, too, she said, meaning that much of the funds that SeedFund and other such firms raise to invest in startups comes from overseas sources, where “it’s more about whether India is the flavor of the season” and less about the potential of a specific Indian startup or set of startups. “We need more local investors to invest with firms like ours, taking a bet on India,” Jacob said.

“Perhaps my daughter will grow up and build something big,” said Ahimanikya Satapathy, chief executive at DocEngage, a Bangalore startup that’s building a suite of automation software aimed at medical clinics.

Satapathy spoke of how he discusses his business very seriously with his school-going daughter, aiming to make her much more commerce-savvy than the average Indian college graduate. For now, says SeedFund’s Jacob in a view echoed by many in the Indian startup industry: “We are still a nation where our schools and colleges produce employees and not employers.” But that is quickly changing.