Emergic

Conservative estimates put the venture capital available in India at USD 1 billion. In the early part of 2000, over USD 100 mm was invested into dotcoms. Today, most of it is worthless. As a result, venture capitalists in India have become extra cautious. In many ways, it has been a good and quick learning. To succeed in India, VCs will need to think differently in 2001.

There are four major differences in the Indian market compared to the US:

• Most entrepreneurs are on their first venture. This means they need a lot more guidance and hand-holding in the process of building out companies. They are dealing with large sums of money (the investment which has come in). Managing hyper-growth is not way of life in most Indian companies and for most Indian managers!
• India also lacks an effective angel funds market. TIE has been making efforts in this, but it will probably still take another year or so before this becomes a viable alternative to start companies. Since VCs prefer to make slightly larger investments, India needs angels (successful entrepreneurs) who can spend time with the founders in the early days.
• Since India is not a large market, companies and their management teams need to think international. This is where companies need help. VCs can through their networks help open doors for many of their portfolio companies. In fact, in the ideal scenario, part of the management team needs to be stationed outside of India and this adds another dimension to the initial stages of company formation – living with geographical diversity.
• Exit in India is not easy. IPOs are possible, but only for profitable companies. Many software and media companies have been listed in recent times in India. Technology plays still do not have a route to list. Without an IPO, the exit route is MA, not a lot of which has been happening so far. So, VCs need to be patient. Hopefully, the vision for the OTC exchange in India can still be realised.

The approach that VCs in India need to take is to fund fewer companies, invest larger amounts, and work more closely with the founders in the early stages. They also need to act as marketing and HR managers for these companies in the initial weeks. Rather than taking the approach that a few of their investments may succeed, they need to work towards making each of the investments pay off, since exits will be available only to a limited number of companies. What will work as the perfect tonic is for a couple Indian VC success stories in the next year.

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The Indian Internet market is caught between b2b and b2c – b2b is still confusing and only happening in pockets, while b2c which only a year ago was the Great Hope for the Indian consumer is not taking off. The wonder that is the Internet has at best been hype for most Indian companies and consumers. But as we said earlier, this is the beginning. As cost-effective bandwidth options become available, Indian businesses will do well to adopt the Net as part of all their processes.

How can Indian companies leverage the Net? Let us start with the killer app: Messaging. Even today, most Indian companies do not have proper and reliable email systems. Email-for-all can help bring down the cost of communications dramatically in companies. Email does not mean one account per location, but one account per individual in the company. Email needs to be accessible from anywhere. For many companies, this also means a cultural change – to openness and sharing, which in many cases is harder. Messaging can be put in place within weeks in most companies, the attitude change to using it and replying to messages quickly takes longer. But this is the first pre-requisite of eBusiness.

What eBusiness software solutions will do is cut to the heart of the questions that every manager needs to answer, according to Mary Meeker from MSDW:

• Who are my best customers? Who are the Most Loyal, Most Profitable and Fastest Growing?
• How will customers behave and why?
• Why do they buy from me?
• How will they buy in the future?
• Would my customers behave differently with more info?
• Who are by best partners / suppliers?
• How does my business handle orders of One?

Some of the questions Indian companies will need to answer this year include:

• Strategy: what do I do on the Internet?
• Structure: is it a part of current biz or separate?
• Management: where do I get the right people?
• Money: do I fund it or go outside for finance?
• Model: will it scavenge my existing biz?
• Technology: do I build it or do I buy?
• Partnerships: do I do it on my own or do I partner?
• Rollout: how can I get it out in 90 days?

The pieces of the puzzle are now falling in place for 2001 to be the year Indian companies take to eBusiness. It is their game – to win or to lose.

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In India today, a bandwidth of 64 Kbps is a very big deal. It is also very expensive. George Gilder and his Telecosm have not yet touched us! While the commercial Internet has been around now for 5+ years, access speeds from home continue to be better for most of us than the shared connections at the workplace. India has kept pace with development on the LAN (local area network) front, but we are many years behind on the WAN (wide area network) front. This is about to change.

Many companies are now rolling out infrastructure to provide high-speed fibre and wireless connectivity to the corporate desktop. Reliance in 115 cities, Spectranet in Delhi, BSES in Mumbai, Satyam Infoway, MTNL, VSNL, the cable companies – everyone’s getting into the act. Even the cellphone companies are now talking of rolling out their packet-switched 2.5G (GPRS) networks in the next year. Broadband is coming to India. Hopefully, at an affordable price.

Bandwidth is critical if India has to keep up its growth in the IT sector. The next generation of IT-enabled services (call centres, eCRM, medical transcription, etc.) are bandwidth-hungry, and could rapidly eclipse the software companies in their demand for bandwidth. Unless a lot of bandwidth is available at very cheap prices, India’s cost advantages will be frittered away. It is very difficult to be entrepreneurial in one’s thinking when sending and receiving email becomes a daily chore!

The bandwidth bottlenecks in India are at each stage: last-mile, within the country and internationally. Different companies are working on solutions to eliminate these hurdles. 2001 will be the year when all of these solutions will dovetail nicely to provide a much superior end-user experience. This will further spur creativity and innovation – its difficult to dream up streaming applications when all you have is a 64 Kbps connection to the Net.

As bandwidth becomes less of a challenge, India can also become a hotbed for prototyping other mass market Internet ideas. Video mail, wireless data devices, voice-over-IP can all become possibilities, and change people’s lives for the better. India’s roads may not be the best in the world, but if our communications networks can be the best, then distance and geography will finally become irrelevant. This will open up opportunities for Indians and Indian businesses in ways we cannot imagine.

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For the first time in India, it is possible to build businesses with ideas. No longer does one need government licences, bank loans or inheritances. So far, most of the success stories of idea-driven Indian entrepreneurship have been outside India. This will change, and 2001 will be the year which will see the start of this. Indians tasted a flavour (albeit a bitter one) of entrepreneurship with the dotcom boom earlier in 2000. Once people are out on their own, success and failure are but two sides of the same coin. Out of these failures will emerge the success and the inspirations for tomorrow. The new generation of Indian entrepreneurs who begin life with a dream in their eyes and little in their pockets is here to stay.

In retrospect, so many people setting up portals was perhaps not the best way to utilise our talent and resources. The market was just not there. But look at it in another way: so many people have now tasted blood – they want to be on their own giving up the security of a job, they want the freedom to make things happen, driven by a passion to change the world. This is perhaps the best thing to have happened in India over the past year. On this will be built a firmer set of start-ups, companies in which rapid growth and profits will be blended together, and risk is concomitant with practicality.

India’s strengths lie in the knowledge and service industries. It is not just about ideas or putting a set of people together. There’s a lot more to building an organisation which can grow, and stand the test of time. Entrepreneurs in India should look at combining service and product models – start with services to get insights into what the market needs are and to create a steady revenue stream, and then build on the platforms and products that the marketplace needs. This is where companies will need to take risks and place bets on the future. Few Indian companies have grown beyond the dollar-based services model. This must change – we need to innovate and be leaders, not just followers.

For Indian entrepreneurs, a presence outside of India will be critical for success – India is still not a large marketplace for many products and services. Engineering-in-India and marketing-outside-India should be the mantra for startups. This will entail creating management teams which are cross-border. This is where organizations like TIE can play a valuable role. Indian entrepreneurship will not be just about funding companies in India, but about taking Indian start-ups global.

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The Red Herring recently came up with a Tech Trends for 2001. Its 10 Trends were: Computing, Intellectual Property, Venture Capital, Wireless, Communications, International, Government, Energy and Biotech. So, I decided to take a look ahead to what would be the 10 Indian Internet trends for 2001. My choices: Entrepreneurship, Bandwidth, eBusiness, Venture Capital, IT-enabled Services, Consolidation, Education, Mass Market, Wireless and Government. We will cover each of these in columns over the next 2 weeks. But first, let us take a look back at the last 12 months.

2000 began with a frenzy – a land-grab on the Indian Internet. Dotcoms launched, private capital and venture capital money flowed, a people exodus to the “new economy” began – it was like there was no tomorrow. First-to-market, eyeballs and Nasdaq were the only things that mattered. So, within a few months, we had 15 cricket sites, 20 personal finance sites, 10 horizontal portals. Advertising hoardings sold out, newspapers had website ads by the dozen. It all seemed like a perfect formula: raise money, spend it, raise more money at a higher valuation, spend that also and so on. Somewhere there, one would either get acquired or IPO – whichever fetched more money. The Internet had arrived in India. Finally. Or so it seemed.

The Golden era of the Indian Internet lasted less than 6 months. As the Nasdaq fell, so did the hopes of Indian entrepreneurs. What everyone forgot was that the user base was still only 2-3 million, and they were mainly interested in email, chat and cricket. The only audience generating any real value was the one outside India, and no one was really targeting them. As revenues became scarce, reality started dawning. This was not a short-term game. It actually consisted of creating an organisation, building a brand, and doing it all profitably. It is perhaps worth remembering that the two Indian Internet companies that did IPO on Nasdaq (Satyam Infoway and Rediff) were launched 5 years ago.

Sanity has finally returned. But it has been an expensive, and in some cases, a painful learning process — for entrepreneurs, for employees, for investors, for everyone. As the year nears its end, business is back to fundamentals: revenues, gross margins, profits and growth. The Internet is for real, dreams aren’t. Despair not – the Internet is having a profound impact on us, our businesses and our interactions with others. We have seen an end, but it is only the end of the beginning.

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Software for creating the Intelligent Enterprise is an emerging area. There is an opportunity for Indian companies to create Enterprise Application. We need to create factories which can construct this new class of software:

• Begin by identifying verticals in the e-business space which are likely to have a USD 1 billion plus market in 3 years. Also, create a process for development and marketing which can be leveraged from one vertical to another.
• Put together teams of engineers in each vertical to create these products: the 80-20 rule (80% of the functionality at 20% or less of the cost in resources, people and time).
• Leverage new technology like Java, XML to speed up development: many of the current applications have been written with legacy and may not be the most efficient from a software point of view. Companies should also use a common core software platform which goes across multiple verticals for speedy development – like databases, messaging, etc. XML should be used for enabling exchange of information allowing us to integrate with other applications, like pieces of a jigsaw puzzle.
• Build a marketing keiretsu internationally. A company selling one single vertical application may find it hard to build scale from India. What is needed is to aggregate the entire set of applications in one suite to give scale and clout in marketing. This is what Microsoft did with its Office suite, and what Infospace did with content and merchants.
• Leverage India’s service capabilities: Most applications require ongoing maintenance and management, and this is where India’s strength is services can be used to our advantage.

To become the software fab for enterprise applications and services, we can imagine how Japan began in the 1950s or for that what how Taiwan would have started. We may begin as “functionality replicators” but over time we must aim to be the leaders in innovation.

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The biggest impact of the Internet is likely to be in the way companies do business. Writes Frances Cairncross in The Economist:

[The Internet] is not simply a new distribution channel, or a new way to communicate. It is many things: a market place, a information system, a tool for manufacturing goods and services. It makes a difference to a whole range of things that managers do every day, from locating a new supplier to co-ordination a project to collecting and managing customer data.The changes that the Internet brings are simply more pervasive and varied than anything that has gone beforeAt the root of the changes is a dramatic fall in the cost of handling and transmitting information.

Management and analysis of this information is where the next set of opportunities will lie. The next generation enterprise applications will be an intelligent extension of the transactional systems in place in large corporations. ERP and CRM applications have been implemented across several enterprises. These ERP, CRM and SCP systems generate huge amount of data, which are stored over multiple databases in the organisation and its trading partners. The Internet now makes it possible to easily possible web-enable these disparate sets of transactional systems and databases – there lies the first real power of the web.

We now also find the second power of web being unleashed. This entails not just linking these transactional systems, but closing the loop between transactional and analytic systems. In today’s fiercely competitive businesses age, most decisions need to be proactive. Hence, we find an increasing need for business intelligent software, coupled with content management tools. These applications help businesses take informed decisions in real time, and help get the right piece of information distributed to the right people in the vast organisational intranets and extranets. These analytical applications generate informed answers to current day complex business problems.

According to Scott Phillips of Merrill Lynch, “[e-business analytics] tell companies what to do and why…They are the foundation layer for unlocking the value of transactional and unstructured data stores to realise the twin goals of e-commerce – namely, efficiency gains and revenue growth.”

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“The Intelligent Enterprise” and “Connected People” are the two themes for the world of tomorrow. The Internet’s impact is still in its infancy. Corporates and Consumers are both being profoundly impacted by the Internet. In the last 5 years, we have seen the visible impact of the Net primarily on people, and the way they communicate, get access to information and how they buy. Companies are only now beginning to start leveraging the Net for more than just putting up websites.

The Net does many things for companies – it works as a distribution system, a marketplace, a communications channel. It gives companies the ability to alter the way business is being done by making companies technology-driven. Unlike in the past where technology was peripheral to the business, it is now moving to the core. The Net is changing the way companies interact with their constituents – employees, suppliers, and customers. Think of the three key drivers here as Enterprise Information Portals, Supply Chain Management and Customer Relationship Management. These are the drivers for eBusiness in the future.

For Consumers, we are moving to an always-on, connected world. Irrespective of where we are, we can always get connected to the Net. This connectivity will come in many different ways – by a telephone line or cable at home, by DSL at work, and by wireless when we are mobile. How will people change when the connection to the Net is a given? How will their interactions with others and companies change in such a world?

As growth in the computer off-take slows, this is being more than made up by increased usage of handhelds and cellphones. In these devices, form factor becomes an issue. Bandwidth is also being dramatically impacted: for us at home in India, from perhaps a 4x increase over the past 4 years, this will explode to a 100x or more increase in the next 2-3 years for perhaps a 5-10x increase in cost. The incredible price-performance ratio of chips and communications makes impossible things which have not yet been imagined.

The number of interactions we have in a day go up. Managing these interactions becomes a challenge. Just in the last 6 years, I have seen probably a 10x increase in the number of things I am doing daily as a manager and the number of people I am expected to interact with on a regular basis. What will we need to cope in this connected world? These are where some of the opportunities of tomorrow lie.

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To foster Innovation in India, we need to:

Incubate/Fund Startups: the focus should be on technology products/platforms, with a mix of services. What services does is to give an insight into what customer wants, and what the state-of-the-art in that industry is. Most Indian companies tend to stop at services. This is what needs to change. We should work with international funds to create startups in specific verticals.

Build Marketing Bases Globally: India is a great engineering base, but not really a large market for many of the technologies. We need to set up marketing arms internationally – US, Europe and Asia. Companies – and senior management – needs to be close to where the customers are.

Initiate Research at Educational Institutions: There is little leading edge research going on at India’s educational institutions. This needs to change. We need to have faculty-led research spanning not just months, but years. We need to create centres of excellence at our universities. This is where the alumni can play a role, especially those outside India. We also need to have students work at companies outside India in their practical training to get a sense of what is happening at the cutting edge.

Partner with Complementary Companies in Asia: Imagine being able to combine Taiwan’s hardware skills, Japan’s design excellence and India’s software skills. Can we partner with companies in Asia to create end-to-end solutions? For example, Korea and Japan are leaders in wireless technologies, with Korea also having excellent broadband infrastructure. Indian companies must look at leveraging skillsets to create technology platforms for these emerging areas of wireless and broadband.

The challenge ahead of us is to create 2-3 success stories in the next 12-18 months in India – the equivalent of an ICQ or a Chromatis in Israel. India Inc’s mission should be to help Indian entrepreneurs transform their technical expertise and ideas into successful global enterprises that build cutting – edge products and services, companies that are leading the revolution.

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Venture Capital availability in India has risen dramatically in the past few months. Just in the last month, over USD 500 million of commitments have been made. And yet, one is seeing few investments, post the dot-com era earlier in the year. Many of the investments that are being made in the area of software services, where intellectual property (IP) is being created for someone else. What does it take for India to create new technologies, new platforms, set standards? What does it take for India to become an innovation hub?

Why is it important for India to create Innovation? We are seeing limits on the talent front – the demand for quality engineers far outstrips supply. Today, when an engineer works in India, he gets a salary of USD 10-20,000, whereas the company charges about USD 20-30/hour (USD 40-60,000 per annum). The same engineer posted abroad can generate USD 60-100/hour (USD 120-200,000 per annum). When the engineer is part of a team that is creating core technologies, the value of the group can be upwards of USD 1 million per engineer. (Witness some of the recent acquisitions by companies like Cisco, or the red-hot demand for fibre optics engineers). So, if we need to move up the value chain, the solution does not lie in just increasing the hourly billing rates, but also looking for opportunities to create IP.

What we need to do in India is make Innovation part of the entrepreneurial process. We need to create, like what Israel has done, a series of successful technology start-ups, which become leaders in their chosen business segments. We need to build on the engineering-in-India, marketing-outside-India formula – India is still not a market for most new technologies. We also need to build a base of research-driven innovation. This will not only better leverage India’s strengths in software, but also offer significant wealth-creation opportunities far beyond what stock options offer. In doing so, we can create many Innovation Valleys in India.

Send in your feedback to techtalk@samachar.com.