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  Technology�s New Entrepreneurs
  Six years after the dotcom bust, India�s battle-hardened tech whiz kids are taking a second shot at fashioning Silicon Valley on home turf.
Nelson Vinod Moses

In the wireless space, factors like the increase in telecom penetration and the need for last-mile connectivity have given startups room to innovate. Companies like Tejas Networks, which makes optical networking switches, and ARE Technologies, which develops proprietary wireless software, have sprung up. The SaaS space is a little different. It is still nascent and, in fact, is the ASP (application service provider) model re-invented � it essentially provides enterprise software to companies on a pay-per-use basis. Companies like Salesforce.com and Atlantis Computing are betting on the fact that the price-sensitive Indian market will fuel growth. And India�s cost advantage is turning out to a big plus for these segments. �The cost of experimentation and making mistakes is far less than in the Valley. That could be India�s trump card,� says Beerud Sheth, co-founder and CTO, Webaroo.

The other big marketplace driver has been the outsourcing boom. But while outsourcing in India has been associated with IT services and BPO, the tech innovation that is taking place has been more of an offshoot of outsourcing. Around 2002-03, when MNCs like Oracle, SAP and Microsoft started moving non-core R&D work to India, Silicon Valley�s startups followed suit. Soon enough, these startups realised that they could actually do cutting-edge development out of India. By early 2004, more than 50 per cent of Silicon Valley�s startup population was doing R&D out of India. By 2005, many had even started incubating next-generation technologies here. �In India, it costs 50 per cent less to start a business,� says Thomas Binford, founder, Read Ink.

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Thomas O. Binford, chairman & CTO
Read Ink, Bangalore

The 70-year old Stanford professor set up Read Ink in 2002. It works on handwriting recognition and document analysis. Binford has put in $8 million of his own money so far.
Manish Gangey, co-founder & CEO
Elina Networks, Bangalore

Gangey quit Tejas Networks to start up Elina in 2005. It is building optical networking products for SMEs and plans to rope in VC funding once it has a couple of customers.

That�s exactly what this generation of Indian entrepreneurs is tapping into. In Bangalore, Minglebox�s Kavita Iyer and co-founders Sanjay Aggarwal, Sushma Abburi and Sanjay Mittal, all between 33 and 34, are developing a social networking site that will combine the Internet and mobile to generate user-driven content. Cosmic Circuit�s Ganapathy Subramaniam, 38, heads one of the rare analogue design startups. It is developing proprietary software for the analogue and radio frequency space. And Chetan Venkatesh, 30, at Atlantis Computing, is developing a SaaS platform that will help small companies bring down IT costs. In Mumbai, Indiagames, founded by Vishal Gondal, develops PC, video and console games for a global audience. We find the Webaroo team, Beerud Sheth and Rakesh Mathur, at IIT-B where it was incubated. Seasoned entrepreneurs both (Mathur founded Junglee in 1996 and sold it to Amazon in 1998 for $250 million, while Sheth co-founded online talent marketplace eLance), they conceived Webaroo as an offlne search engine that stores relevant data on a desktop or a mobile device and makes it retrievable. And in Hyderabad, Dayakar and K. Ramachandra Reddy are driving MosChip, a fabless semiconductor startup.

This tiny sample of the kind of people who are driving the resurgence gives us interesting clues into why they may achieve what their dotcom peers didn�t. First, age is no bar � the present lot swing between 23 and 70. Therefore, there�s an even mix of fresh-off-campus entrepreneurs and those with operating experience. Second, many of them have survived the nuclear winter � Tejas Networks� Sanjay Nayak, Herald Logic�s Vishal Gupta, AdventNet�s Vembu brothers and Baazee�s Avnish Bajaj (see �The Survivors�). Their success, which became prominent only around mid-2005, has set the ground rules for today�s startups.

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The resurgence itself has three phases. In 2001, former Wipro president Ashok Narasimhan teamed up with UniMobile founder Rajesh Reddy to set up July Systems and develop integrated mobile marketplace solutions. They decided that the road to success lay in splitting the company between the US and India. So, Narasimhan would front sales and marketing in the Valley while Reddy would man R&D in Bangalore. The gamble worked and July has roped in nearly $28 million in VC funding from investors like Sequoia Capital, JumpStartUp and Motorola Ventures. This was the beginning of the US-India, cross-border startup wave. Since then, some 50 have sprung up. Pure Indian startups � Cosmic Circuits, Elina Networks and Atlantis Computing � belong to phase II, which began to gain strength around early 2005. Two kinds of entrepreneurs have spurred this phase. One, fresh-off-campus students, typically from an IIT or IIM, either incubated on campus or started on their own. About 30 per cent of the startups are in this category. Two, startups led by people who had quit operating jobs with large India-based outsourcing firms or R&D outfits. They owe a part of their independence to the booming economy, which has enabled them to cash in on factors like ESOPs (employee stock options) or stockmarket investments. Now all that money and experience is going into creating the next generation of IT companies.

The third phase is still emerging. This will be dominated by US-returned Indian tech workers. An estimated 50,000 came back during the US slowdown in 2001-03. By then, many global tech majors had set up R&D bases in India and quickly absorbed them. Now these folks, who have the advantage of global experience, are striking out on their own � Raghav Kher of SeventyMM (an online DVD rental service) and Ashish Kumar of Tekriti Software. �People are leaving Motorola, Intel and Cisco to start companies. Teams may not be complete, but there is tech innovation and the ideas are disruptive,� points out Silicon Valley Bank (SVB) Global chief Ash Lilani.

SVB has been an important catalyst in the return of the Valley�s VC community to India (see �The Second Coming�, BW, 21 February 2005). In November 2003, Lilani led a delegation of 20 Silicon Valley VCs to India on an exploratory mission. �At that time, it was only about outsourcing. Now the funds want to be in India. The fly-in-fly-out model is dying,� he says. So, Sequoia Capital acquired Bangalore-based WestBridge in 2006 and set up Sequoia Capital India, Matrix Partners roped in Avnish Bajaj and Rishi Navani to set up Matrix India Partners, and Kleiner Perkins Caufield & Byers (KPCB) got Sandeep Murthy to head investments in India.

That November mission has been followed by several more under the aegis of organisations like TiE and the Indian Venture Capital Association (IVCA). Today, almost every VC in the US wants an India presence. Again, there are two reasons for this. First, emerging economies like China and India are opening up as tech consumer markets. And like Silicon Valley, they too have the skill base to develop these technologies. The icing on the cake, as Binford says, is that the cost of developing new technology is 50 per cent less in these markets. That�s a big draw for VCs. After the Internet bust and the tech slowdown, exit valuations in the Valley have plummeted. In 1999-2000, if it cost $100 million to start a company, the return potential was $1 billion. Post-slowdown, the return potential dropped to $200 million. That meant VCs would have to start companies with $20 million-25 million to achieve exit multiples of nine or 10.

The re-entry of US VCs has also led to the creation of a handful of local VC funds � the $10-million Seed Fund, the $6-million Erasmic Fund and the Band of Angels, a group of corporate head honchos and entrepreneurs who have pooled resources to fund startups. The infection has spread to the veteran state government-sponsored VC outfits as well � GVFL (formerly Gujarat Venture Finance) has raised a new $11-million fund, Karnataka Information Technology Fund (KITVEN) is raising an $11-million fund and Kerala Venture Capital Fund (KVCF) has raised $4 million.

As the convergence of men, money and market forces begins to take root, an ecosystem akin to the one that exists in Silicon Valley will begin to emerge. In fact, a shadow of this ecosystem is already in evidence. (See �Making Silicon Valley In India� on page 38.)

As in the Valley, which started largely out of an initiative of Stanford University � it set up a programme for startups in 1939 that later became the Stanford Industrial Park � the incubators at the IITs and IIMs have taken the first step towards an industry-academia relationship. Entrepreneur-VCs � a trend started by Eugene Kleiner and Tom Perkins who set up KPCB in 1972 (Kleiner was a founder of Fairchild Semiconductors and Perkins was one of the leaders of HP�s computer division) � are now part of the Indian fabric. Baazee founder Avnish Bajaj joined Matrix Partners this year, Daksh co-founder Sanjeev Aggarwal is part of the Helion founding team, Jobsahead co-founder Alok Mittal is with Canaan Partners, and Subrata Mitra and Prashanth Prakash (think NetKraft and Tavant Technologies) have set up Erasmic Venture Fund. Then, intermediaries like SVB Global and legal firms like Wilson Sonsini Goodrich & Rosati have thrown their lot into India.

Long Road Home
The convergence, however, will not find full expression till all the pieces of the ecosystem fall into place. The weakest link is in terms of industry and academia linkages. Investment into university R&D is abysmal, compared even to neighbours like China. �The most prestigious research institute in India, IISc, has a research budget of $60 million. Compare that with Tsinghua University in China, which has $500 million (Tsinghua University is similar to the Indian IITs),� says Ajit Nazre, partner, KPCB. The other gap is the low availability of seed funding. In the Valley, successful entrepreneurs often become angels and feed the pipeline. India has no angels because it has not seen enough big-ticket entrepreneur successes. It will take India at least five years to get all the elements of the ecosystem in place. It will take another five years, maybe 10, for it to achieve the clockwork precision of the one on the US west coast.

Even the elements that are falling into place now are in their nascent stages. The 44 funds that are in India have to familiarise themselves with the terrain. And the local VC community, one funded by local institutions, is yet to emerge. Entrepreneurs themselves are in infancy � an overwhelming number don�t even know the basics of writing a business plan, let alone build networks to vend their ideas. Add to that the fact that social acceptance of entrepreneurship has a long way to go. �Individuals do not want to work in a startup because their chances of getting a good match for marriage is brighter if they were working for an HP or Intel,� says Sabeer Bhatia, who co-founded Hotmail and sold it for $400 million in 1998.

There are other big questions that remain unanswered. For instance, is there one clear identifiable place where India�s Silicon Valley will find full expression? Some say Bangalore, due to its natural inclination towards technology and the presence of the world�s largest tech companies. But as the resurgence spreads to places like Mumbai, Chennai, Hyderabad and Delhi, that looks unlikely. While Silicon Valley, the original, is both an idea and a physical entity, in India it will largely find expression in multiple locations simply because of the sheer diversity of entrepreneurs and opportunities.

That Silicon Valley will come to roost in India eventually is given. Where India�s first big winner � the next Skype, as Lund puts it � will emerge from remains to be seen.

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