Wednesday, April 29, 2009

Creating high technology companies in India

I think that the primary problem with creating a high technology/software product company in India is the lack of the eco-system (in the form of an organised distribution, suppliers, skilled staff, critical mass of high tech product companies, VCs, etc.). It is, I think, the single biggest reason why the VCs have a perception of high risk associated with the success of an enterprise of this kind here. It makes success at every point in a ventures life (creation, growth and exit) more challenging and negatively impacts the net outcome. The task becomes even more difficult if the company is focused on the (considerably smaller) domestic market.

All other things being equal - Lets assume that there are five factors related to the ecosystem that a start-up must get right in order to succeed. Let’s also assume, that the difference in the probability of success in each in Silicon Valley is a little more than in India due to a better developed ecosystem there. For the sake of calculations let's assume this probability of success in each of these factors is 80% in silicon Valley and 65% in India. The net outcome is a much higher chance of failure for a company in India than in Silicon Valley.

Chances of finding suppliers to deliver as per the plan
-80% in Silicon Valley; 65% in India

Chance of succeeding in getting the product developed on target on time
- 80% in Silicon Valley; 65% in India

Chance of succeeding in setting up a distribution system 
- 80% in Silicon Valley; 65% in India

Chance of reaching a critical mass of customers before money runs out 
- 80% in Silicon Valley; 65% in India

Chance of finding the next round of funding to sustain momentum  
- 80% in Silicon Valley; 65% in India

The combined probability of success owing to these factors is Silicon Valley would be 32%
Whereas the combined probability of success in India due to these factors would be only 11%

Secondly every kind of product has a different cycle times over which it matures. The fault with most VCs entering the Indian market lies with the small and standard cycle time that they set for all their investments and exit.

While this might be fine in mature eco-systems like the Silicon Valley (where exits are easier) this time needs to be a stretched (and even adjusted, as per the product categories, target markets etc.) here in India to account for the extra time needed to take action to compensate for the lack of a developed ecosystem.

The fault with the entrepreneur lies in benchmarking themselves against the present day entrepreneurs of Silicon Valley, instead of benchmarking themselves against the early entrepreneurs that appeared at the genesis of the Silicon Valley. The content of our work is probably closer to what they had to do.  Entrepreneurs in India must allow for (indeed give themselves) time to build this ecosystem (of distribution, suppliers, skilled workforce etc.). 

Entrepreneurs must invest in building this ecosystem and even enjoy the process of doing so. After all most of us are not in it for bread alone. We enjoy the process of creating something new, overcoming the challenges and dream of leaving behind a worthy legacy.

The VCs will follow. As happened in Silicon Valley.

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