Why There Aren't More Software Startups In India

Written By: Dharmesh Shah January 8, 2007

These days, you can’t help but read about the economic growth that is going on in India.  Lots of people are talking about the huge emerging middle-class, the overall growth in their economy and the increasing likelihood that India will have a seat at the table when it comes to economic superpowers.   [Disclosure:  I was born in India and spent many of my formative years there, including high-school and a couple of years of undergrad].  

But, instead of looking at the macro-level trends in
India (which are certainly mostly positive), I’d like to instead look at the entrepreneurial process there – and more specifically at software startups, which is my main area of interest.  Though we hear about lots of IT companies in India driven by  the big push towards outsourcing in the U.S. and elsewhere, most of these Indian companies we hear about (big and small) are fundamentally service companies, not product  companies.  Nothing wrong with service companies, but the kinds of startups I’m most interested in are those that are building software products.  I think the environment required to build a large pool of entrepreneurs starting software product companies is different from those starting service companies.

I’ve been doing a fair amount of reading on what is going on with startups in
India and also had the opportunity to meet with a local entrepreneur there during my last visit (he is indeed working on a software product startup).  

So, here are some thoughts and ideas on why we haven’t yet seen a lot of software product companies come out of India – yet.  I’m sure these factors are changing for the positive even as I write this, so it’ll be interesting to watch the entrepreneurial community develop in India.

Why There Aren’t More Software Startups In
  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.

  1. 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.  

  1. 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 Gujarat.

  1. 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.

  1. Too Much Bureaucracy:  Here 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).

  1. 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.

So, what do you think?  If you’re an Indian entrepreneur, have you faced any challenges in getting a product company kicked off?  Am I completely off-base here and are there hundreds of Indian software startups building cool products as we speak?  If so, why aren’t we hearing more about them?  Would love to hear your thoughts in the comments.

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