India’s rapidly evolving technology landscape

Most investors who have put capital behind consumer internet startups trying to build commoditised businesses will lose money.

India’s technology landscape can be characterized as having seen three waves of evolution and growth. The first wave was led by the likes of Tata Consultancy Services, Patni Computer Systems, Infosys and Wipro, who pioneered the outsourcing model based on labour cost arbitrage. These were firms founded in pre-liberalization India and took decades to establish themselves as global brands. The second wave occurred in post-liberalization India of the 1990s, when several IT firms adopted similar business models to the outsourcing pioneers. The small- and mid-sized enterprises that emerged during this period strengthened the foundation of India’s nascent software services industry and today form the backbone of that thriving sector. The third wave can be said to have begun with the advent of the Internet – startups such as,, InMobi and who have emerged as category leaders in providing web services.

The common thread to the three waves has been the domination of the services-oriented software and Internet companies, and in recent years, the preponderance of ideas that have worked in the West that were repackaged to suit the Indian context. The fact is India has seen more imitation than genuine product innovation.

India’s technology industry has been dominated by IT and Internet firms, and venture capital investment figures for recent years bear out this trend. Since 2009, VCs have poured over $810 million into 113 deals in the software, mobile and Internet sectors. In contrast, early-stage health care and clean technology companies have received $292 million across 71 deals. It’s also interesting that average deal sizes are larger for early-stage companies in software and Internet than for health care and clean technology – one would have thought that the former is less capital intensive than the latter, and would hence require lesser capital to grow at the early-stage. By some estimates, India’s software and Internet ventures have been raising larger amounts of early-stage venture funding than American clean technology startups.

The data points to a clear mismatch both in terms of funding size and sectoral capital allocation. My hunch is that most investors who have put capital behind consumer Internet startups trying to build commoditized businesses will lose money. Most of these ventures are pursuing unsustainable business models. As if having imitators of American Internet startups wasn’t enough, we’ve seen imitators of Indian imitators of US Internet startups successfully raise funding. These ventures have almost no pricing power and hence almost no profitability. A fund raising arms race is under way, and the vast majority of startups will lose out as capital providers cluster around the top 1 or 2 category leaders.

In a more rational world, India’s VCs would bring together some of the outstanding engineers and scientists working at corporate research laboratories operated by Fortune 500 giants like General Electric, who are conducting key R&D work that is in many cases indispensable to the parent company. VCs should be willing to back stellar teams pursuing big ideas, and should invest capital in ways that harnesses the economics of outsourcing to deliver path-breaking innovation.

The data also tells us that more India-focused venture funds will be forced to look in places other than the tried and familiar Internet and IT sectors. Health care, clean technology and energy are mammoth markets that are relatively underserved and in dire need of early-stage capital, particularly for areas with substantial technology risk. Investors are beginning to recognize this, and several new funds have emerged that are both willing to look beyond IT and are comfortable backing early-stage ventures with $1-2 million.

The emergence of product-driven companies in sectors such as life sciences and clean technology in this decade will mark the fourth wave of the evolution and growth of India’s technology landscape. India’s talent base extends far beyond computer science and IT into fundamental sciences and engineering – it’s only a matter of time before risk capital connects with this talent base to deliver world-leading product innovation across more sectors. In order to achieve outsized returns, investors should skate to where the puck is going, rather than where it has been, to quote ice hockey player Wayne Gretzky.

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A renaissance in Indian science

At the recently concluded 99th Indian Science Congress in Bhubaneshwar, Prime Minister Manmohan Singh lamented the decline of India’s scientific prowess relative to China and other nations, while listing several of the government’s initiatives to promote research and development. The press caught on to the comparison with China and largely ignored the achievements that the Prime Minister tried to draw attention to.

Scientific research and technological innovation form the bedrock on which nations build competitive economic strength in the globalized world. Research and innovation are also well-documented as engines of productive employment-generation and wealth-creation. Indeed, scientific research should have the mandate to create jobs and wealth for broader society. Moreover, scientific prowess is fundamental to national security and defence readiness – not only does it help in developing defense capacity indigenously, advanced military technology is imperative for India to play a meaningful role world affairs and to be secure given its antagonistic neighbors. In international relations, one is well advised to talk softly but carry a big stick.

In this sense, India’s national scientific strength is linked to and aligned with policies in the spheres of education and defense too. A nation’s capacity for scientific research and development (R&D) is tied closely to its higher education and research infrastructure. Without high-quality research institutions and the people to lead them, it’s impossible to have world-class research output. Manmohan Singh also claimed that Indian industry needs to dramatically increase research spending if India is to move towards spending 2% of gross domestic product (GDP) on R&D. It is true that India Inc can invest more in research – the Prime Minister can create incentives for the same by introducing more competition. Large sectors of India’s economy, such as power, mining, transportation, oil and gas, aerospace and defense could easily absorb substantially more private sector participation and increased competition. Many of these sectors are off limits to competition and are government-mandated monopolies or oligopolies. When firms have to compete for customers and profits, they are forced to innovate, and hence invest in R&D.

Manmohan Singh’s seven-plus year tenure as Prime Minister stands in marked contrast to other administrations – unlike others, he entered office when optimism was high and people looked to the future with firm expectations of a new India in the new century. India’s economy was poised for takeoff on the back of over a decade of continued economic reforms. An average GDP growth rate of around 8% since 2004 helped tax revenues almost double to nearly Rs 12 trillion for 2009-10. No government in the history of independent India has enjoyed such a financial bounty – most have had to deal with severe economic scarcity. It is in this background that the government’s record must be judged.

The UPA government’s policies in the areas of education and defence have hardly been beneficiaries of this abundance of capital in the treasury. Arjun Singh, HRD Minister in UPA 1, busied himself with increasing student quotas in central educational institutions. Where the debate should have been about capacity expansion so that there is enough opportunity for all sections of society, Manmohan Singh presided over the rationing of existing capacity first on the basis of caste, and more recently on the basis of religion, disregarding merit and capability. Ad hoc creation of new IITs is damaging their brand – no less an authority than C.N.R. Rao, chairman of the Prime Minister’s Science Advisory Council and one of India’s most distinguished scientists, has strongly criticized this policy. The reality is that without deregulating higher education and building privately-operated universities, India will never be able to meet domestic demand for higher education.

More recently, UPA 2 put forth the Right to Education (RTE) Act under the new HRD Minister Kapil Sibal. Besides enforcing quotas in private schools, RTE has put such draconian restrictions and regulations that many private schools will be forced shut. Study after independent study has shown how India’s poorest have rejected government schools and choose to enroll their children in private schools – but the government has ignored them all and enacted laws that hurt the poor the most. Separate from RTE, Kapil Sibal has tried to offer affordable computing to the poor by pouring public funds into the creation of a low-cost tablet computer, which recently failed conclusively in its first field trial. Despite consumer rejection of their misconceived pet project, the Minister and his bureaucrats have gone back to the drawing board, vowing to return with a better tablet by April. Does the government care about learning outcomes or is it simply too short-sighted to realize the grave damage its flawed priorities are causing by denying basic schooling to millions of children?

With millions of our citizens either denied access to effective schooling or divided on identity when entering universities, can we nurture the human capital needed to lead in science?

There is evidence to suggest that investment in defense research can spur scientific and technological advancement. In the United States, 55% of federal R&D spending goes to the Department of Defense, which has been a pioneer of several technologies born from scientific research that have had substantial impact outside of the defence sector. The Internet and GPS navigation are two such technologies.

Integration and cooperation between universities, research institutions and private industry can dramatically grow the pie and multiply quality output manifold. India never really had the money to make large investments and purchases for national security until recently, but it is time now that the research activities of existing institutions such as Defence Research & Development Organization (DRDO) are reformed. Recent research that DRDO has tried to commercialize include mosquito repellents, a spray that can keep clothes moth-free, body creams to keep away bugs, a high altitude toilet that was 15 years in the making, and a new fabric for bras. Clearly, India needs to rethink its defence research priorities.

China has managed to build scientific strength because it has made thoughtful and substantial investments in building universities and defense capacity. For India to witness a renaissance in science, it will also have to encourage symbiosis between defense spending, educational and research institutions, and private industry. Without such a holistic approach, comparisons with China will prove to be facile, and India’s tremendous potential to be a world-leader in science and technology will not be realized.

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India Learns To Innovate

India is regarded as the world’s outsourcing center and a production powerhouse for generic drugs. Information technology and pharmaceutical companies have lent the India story a rich layer thanks to their reputations for efficiency. Aside from creating hundreds of thousands of jobs at home, these industries have helped train a domestic labor force that suffers at the hands of a broken higher-education system. Above all, Indians who have worked at these companies have been filled with a confidence to strike out on their own, and the seeds of cutting-edge innovation are now taking root in the Indian economy.

For a long time, India’s economy was starved for capital. Its best scientific talent went abroad because there were no opportunities at home. Monopolistic companies found their products to be in permanent demand because of artificial shortages created by government policy, so they never felt the need to invest in innovation. But business realities have changed dramatically over the last decade as India transforms into an urbanized, industrial economy. An increasingly discerning consumer base and competition in the marketplace are forcing companies to innovate for the home market. One example is Tata Motors, the builder of the $2,500 Nano car, which changed automobile design fundamentally and invented new ways for automobile manufacturing. Nano factories use “smart” technologies and automation to manage supply chains in real-time and minimize the consumption of energy and resources during production.

Economic turmoil in developed nations and stringent immigration policies have made the prospect of returning home more attractive for expatriate Indians. Vivek Wadhwa, who researches innovation, showed that more than 60 percent of the returnees to India cited better economic opportunities as a key reason for making the shift. These individuals bring with them not just experience and skills, but a culture and professional network that is catalyzing innovation in India. Indeed, moving up the value chain this way is imperative for the economy to maintain its growth momentum and create jobs.

Seeing the quality of people flocking to India, global investors have eagerly set up shop. India has never seen the availability of so much financial risk capital — yet it isn’t enough, and it is spread rather unevenly. Many investors believe that India is still limited when it comes to product innovation and are hesitant to back innovation-driven ventures. Instead, they choose to play it safe by focusing on outsourcing-oriented businesses, a formula that has been known to work well.

As an entrepreneur and venture capitalist in India, I see that my nation is at a tipping point. India has always failed to achieve its potential when it comes to commercializing technology, but with the return of talent from abroad and the emergence of a large domestic market, it now has momentum.

I have found that companies that create knowledge and commercialize scientific research can attract engineers and scientists from across the globe. Two companies that I’ve invested in include founders who used to be expatriates.

India can be a chaotic and difficult place to do business, consistently getting a low ranking in the World Bank’s reports on the ease of doing business. Opening bank accounts or working with the government’s tax and regulatory agencies entail mounds of paperwork and can drag on for weeks. Still, it makes sense to invest in innovation because of India’s superior capital efficiency, which mitigates financial risks. Niranjan Rajadhyaksha, an economist, has shown in his book “The Rise of India” that India requires four units of capital to generate one unit of output, while China consumes five units of capital to produce one unit of output.

There are lessons here for policymakers as well — competition for talent and capital is now global. Nations that champion openness and freedom will be able to compete and prosper, while those that remain insular will fall behind. A lot remains to be done to cultivate such an environment in India. Outdated labor laws constrain the development of manufacturing, and the higher-education system needs large investments for expansion along with a boost in autonomy.

India has rapidly moved on from its rigidly socialist past, setting the stage for more openness and freedom. An older colleague in his sixties remarked to me that my generation of Indians was fortunate to be able to build companies from the ground up. In earlier times, India’s economy remained so tightly controlled by the government that this would have simply been impossible. The government can encourage entrepreneurship by making it easier to run businesses, enhancing access to finance and building transportation infrastructure and new cities.

India doesn’t have to be just the world’s back office. It can also be the innovation engine.

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Transforming India into a destination for the best scientific talent

I spent the weekend attending the Young Investigator Meeting in Boston (YIM). Held at the Harvard-MIT Broad Institute and organized by a group of energetic and enthusiastic scientists, YIM Boston brought together scientists, policy makers and the heads of some of India’s top science and technology institutions. Among those in attendance were leaders from institutions like the newly-established Translational Health Science & Technology Institute, IISERs, Bangalore’s NCBS, Tata Memorial Centre-affiliated ACTREC and senior representatives from the Government’s Department of Biotechnology. There were attendees from all over the US and India, and even a few who had flown down from Europe just for the 3-day conference.

Dr. Raghunath Mashelkar, former director-general of the Council for Scientific and Industrial Research, set the tone by delivering a rousing and inspirational address about India’s rise as a scientific powerhouse. Young scientists interested in moving to India presented their research to some of the best researchers in the world, and got an opportunity to meet with potential future colleagues and peers to help them make decisions about making the move – and they were not just Indians.

Peter Zwart from the Lawrence Berkeley National Laboratory in California said it was exasperating to be asked the question why he wanted to go to India, saying that it was becoming a destination to do cutting-edge work and there were compelling professional reasons to shift base. Yamuna Krishnan from NCBS, a young scientist who moved back to India 5 years ago, narrated her experience of setting up a research laboratory from scratch. She spoke with infectious enthusiasm and passion for doing top-notch science, and her talk found resonance with the audience. Dr TS Rao from the Department of Biotechnology took a number of questions on funding availability and described the government’s plan to fund scientific research.

The event ended with a session on commercializing science and moving inventions from the laboratory to the market. MIT’s Jeff Karp spoke about what it takes to build startups, outlining breakthrough science, a seminal published paper and a blocking patent as the key ingredients that can make for a successful venture. Shiladitya Sengupta of Harvard Medical School, who has co-founded three companies, talked about wealth creation via technology commercialization as a way to attract the best brains into scientific research and the importance of developing a cogent business plan before approaching venture capitalists.

There were several researchers who expressed an interest in starting companies, and this is very exciting news. The quality of talent considering moving to India is simply mind-blowing. For the first time in the history of our nation, we have the combination of well-funded research institutions, top-notch human capital and the availability of financial capital to back innovation-driven ventures. This makes for a very potent mix. The stars are aligning, and if our government continues on the path of higher-education reforms and economic liberalization, the sky is the limit for what Indian science and technology can achieve both in terms of fundamental research and technology commercialization.

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