India’s $15 Billion Software Challenge

India’s $15 Billion Software Challenge:
20 November 2007, 17:28 by Red Herring Staff

Indian companies should embrace innovation and focus on developing original software, industry leaders said Tuesday at a technology forum in Bangalore. They challenged Indian entrepreneurs to grow the country’s output of software from the current $1 billion to $15 billion by 2015. The call comes as India struggles to overcome cultural obstacles to innovation in a bid to grasp a sliver of the global software market, estimated at $300 billion.

'The growth of the Indian sector can only be limited by the risk-taking ability of the entrepreneurs and the venture capitalist funding ecosystem,' said Subash Menon, head of the product forum formed by the National Association of Software and Service Companies to promote India’s software industry. Mr. Menon’s remarks came in a speech at the opening session of Nasscom Product Conclave 2007.

India is the world leader in software outsourcing and services, but only a few Indian companies have delivered original software products. They include i-flex (now part of Oracle), Mr. Menon’s Subex Azure, Sasken, Tally, Tejas, and IndiaGames. Sameer Bhatia, a co-founder of Hotmail, indicated that he did not expect innovation to come from the large companies that dominate India’s IT services business.

“Ninety percent of product innovation comes from smaller companies ... and they get acquired by large global companies,” he said.

Mr. Bhatia cited a number of cultural obstacles to innovation. “India lacks the ‘questioning’ spirit,” he declared. “Nobody in our education system encourages you do creative thinking, solve problems, and get to working in a team. They should be encouraged to take a risk and not be afraid of it.” Mr. Bhatia and Jack Smith founded Hotmail, the first web-based e-mail service, in 1996 and later sold it to Microsoft for $400 million. “Nine out of ten companies fail in the Silicon Valley, and it’s only on failures that [the] success of the Valley was built,” Mr. Bhatia went on. “In India, too, there will be a few breakthroughs only if there are a number of failures–that’s the only route to making headway in product development.”

Ashish Gupta of Helion Ventures, an India-focused venture fund investing in high-growth technology firms, said he did not expect the situation to change quickly. “The big question today is whether product companies will come out of India,” Mr. Gupta said. “But I can say that we have reached an inflection point in India, and VCs are looking at this segment quite seriously.”

Sharad Sharma, head of Yahoo India’s R&D unit, said he had detected a change in attitude toward product creation. He said that when they have done campus recruitment in schools there has been a gradual change. The difference is that students are finally beginning to understand product companies.

“This was not seen two to three years ago,” he said.

The biggest obstacle for would-be innovators in India may be money. “The early stages of venture capital financing are underserved in the Indian market, despite their critical importance to the innovation chain,” said Samir Sood, Google's head of corporate development for South Asia. Google has made investments in two seed-stage funds this year, hoping to trigger the growth of startups.

But getting funding for product firms is still a hard route. Ramani Kothandaraman, who started Druvaa Software, a company focused on data protection, had a hard time pulling together an angel round of $250,000. He finally got $150,000 from entrepreneur Rehan VarKhan, who is a part of the Indian Angel Network. Even that sum, he says, depended on $80,000 that his reseller was pitching in. “We have our first product and don’t even have the money to file the patent.”

But VCs see some hope down the road for entrepreneurs like Mr. Kothandaram. Sudhir Sethi, founder and chairman of IDG Ventures, said “Forty three percent of our dealflow has been in product companies, while the rest are in Internet and mobile space.” But even Mr. Sethi admitted that his fund only considered companies that have been in business three or four years.

If Indian entrepreneurs are to meet Nasscom’s $15 billion challenge, getting funding may be a bigger obstacle than coming up with an innovative product.