India's startup ecosystem still developing

Nowhere close to being Silicon Valley of Asia, but this can happen with government support, changes in country's education system, and vibrant network of investors and mentors.
Written by Swati Prasad, Contributor

NEW DELHI--Although it is fast emerging as a dynamic destination for entrepreneurship, India is nowhere close to being Asia's Silicon Valley. Government support, changes in the education system, and a more vibrant network of angel investors and mentors can help the country get there.

India has come a long way since 1991, the year it opened its economy to foreign investment. Today, it has several first-generation entrepreneurs such as Infosys' Narayana Murthy and Bharti Airtel's Sunil Mittal, who have shown how multinationals can be built from the ground up.

With proof that garage startups can work in India, thousands of professionals are taking the entrepreneurial plunge to pursue their own dreams.

"India has the skills necessary to emerge as the Silicon Valley of Asia," Chandramouli C.S., senior director at Zinnov Management Consulting, said in a phone interview.

Concurred Prakash Sreewastav, CEO of mobile application developer, WINIT: "The country offers immense opportunities. The population is huge, it's a young country, and the economy is booming." The startup entrepreneur told ZDNet Asia in a phone interview that there also are no regulatory barriers to entry insofar as IT and software development is concerned.

Despite all the positives, however, India is nowhere close to emerging as Asia's Silicon Valley. "Innovation is very low in India," acknowledged Sreewastav.

The likes of Facebook's Mark Zuckerberg, Google's Larry Page and Microsoft's Bill Gates had their big idea in Silicon Valley while still in college, but in the case of India, very few are willing to give up their cushy jobs to become entrepreneurs.

Moreover, startups find it hard to get talent. "People do not want to leave big companies to work for a startup," Sreewastav said.

Noting that some 200,000 engineers currently work in India's R&D (research and development) market, Chandramouli said: "Even if 1 percent of them decide to do something on their own, we will have a huge number of startups."

Lack of startup ecosystem
While opportunities are there, India lacks the right startup ecosystem. Sreewastav noted that except for some top business schools in the country, most educational institutions do not help students to become entrepreneurs.

Funding tops the list of challenges faced by startups.

Sashi Reddi, founder of SRI Capital Fund and angel investor at Hyderabad Angels Network, said in an e-mail that most startups struggle to find the INR 2 to 3 million (US$38,852 to US$58,278) typically required to get the business started.

Concurred Chandramouli: "The VC and private equity market is still shaping up." Nidhi Saxena, president and CEO of Karmic Lifesciences, a clinical research organization (CRO), identified several key challenges Indian startups today face. First, the lack of support from the government. "In CROs, policy approvals and the speed of response pose a huge challenge," Saxena said in a phone interview. "I could do five-times more business if we got approvals [more] easily."

The government also does not offer any incentives to startups, unlike in Israel where startups developing technology for national security or defense receive government support and subsidies. "In Israel, companies initially need to provide their technology exclusively for defense, but later are allowed to exploit it commercially," Vishwanath Alluri, a startup entrepreneur and chairman and CEO of IMImobile, told ZDNet Asia. IMImobile is a global provider of cloud-based mobile technology.

Saxena added that private venture capital is not innovation-oriented. "There is not enough venture capital for a long-term business plan [and] focus is not on innovation," she said.

She also noted that India's poor infrastructure--bad roads and train network, and poor logistics services--are reducing efficiencies. "Everything is interlinked. So if the roads are bad, efficiencies are reduced," she said.

Playing second fiddle
The potential notwithstanding, the Indian market is very different from that of the United States. "Ours is not an Internet economy," Alluri noted.

According to Reddi, even students from the prestigious IITs (Indian Institutes of Technology) cannot replicate the success of Google or Facebook. "Our education system does not provide any forum for free-form thinking," he explained. Reddi, an alumnus of IIT Delhi, said: "Asking questions in a classroom was not encouraged when I was at IIT.

Alluri further noted how India was playing "second fiddle" to developed countries. "We are using software engineers like masons, not as architects and designers. It's a tragedy that a company like Google has not come from India," he said.

Citing the example of telecommunications player Huawei, he noted that Chinese companies have exploited local market conditions to develop indigenous technologies which are first used in the domestic market, and then exploited in the international markets. That kind of innovation has yet to happen here, he said.

Indian startups are also too focused on making a quick buck and then exit, Alluri said, adding that they lack both vision and leadership.

According to Saxena, VCs are the culprits. "They tell aspiring entrepreneurs they want 30-fold returns in five years," she said. "VCs need to be patient, take risks and back innovation."

They also currently favor dot-coms. "VCs need to invest in engineering, manufacturing technology, environmental technologies, energy and so on," Saxena added.

However, Chandramouli said it is good to have an exit strategy: "They give rise to serial entrepreneurs."

Rise of mentors, angel networks
Regardless, India's startup ecosystem is beginning to develop. Several companies including Infosys, Wadhawan Group and Wipro have started incubators as well as VC and private equity funds. There are also initiatives such as the National Entrepreneurship Network (NEN). Established in 2003, NEN today has 536 mentors and 70,000 students or members. Similarly, IIM Ahmedabad's Centre for Innovation Incubation and Entrepreneurship (CIIE) seeks to foster innovation through incubation, investment and training.

On Apr. 15, Startup Village, a telecom incubator in the public-private partnership mode was inaugurated. Functioning in Kerala, it plans to groom 1,000 startups over the next 10 years.

These highlight that the Indian government is not sitting idle.

"In some areas it is doing better work than in the U.S. and U.K.," Saxena said, pointing to Small Industries Development Bank of India and Small Business Innovation Research Initiative. The latter is centered on public-private partnerships and an initiative under India's government-led Department of Biotech.

"The real challenge lies in accessing these schemes. You need to be well-informed and well-networked," she said.

Reddi urged the Indian government to provide clear laws on taxes and investments, and eliminate unnecessary regulation on starting companies, raising money, and selling products and services.

The government in this year's budget had introduced a startup tax, implementing a new clause that will treat all individual investments, including genuine angel money, in a company as "income from other sources". These will be subject to a tax of 30 percent. "This move will impact the still nascent but growing startup ecosystem in India," Chandramouli said.

Reddi said: "I am optimistic of things changing, thanks to the angel networks that are popping up everywhere... We are slowly, but steadily, changing the dynamics of early-stage funding.

"We have a long way to go, but there is enough interest and activity. We will substantially address this key issue over the next 10 years."

Swati Prasad is a freelance IT writer based in India.

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