When will we see more product companies in India?
Rajesh Jain wishes to see more and more product startups in India.
First, salaries in India will rise faster than cost of living which would make it unattractive for employees working with the international majors to quit and create or join a start-up. Second, even the ones who are venturing out seem to be more focused on services than products. Third, the few in the products area seem content OEMing their creation to the market leaders rather than taking them on with full stacks. Finally, Indian companies lack vision to think big and global. I agreed with him on all four counts and added one of my own. It is well nigh impossible to do a tech, product-oriented start-up because angel and early-stage funding is simply not there.
All these are valid points but I think the biggest challenge for an Indian company trying to create a technology oriented product is that the domestic market is too small and the international markets are very hard and expensive to sell to. This is where China has an edge over us. With much higher computer and internet penetration, China has a huge local market for software. Companies always start small even if they have global ambitions. And in early stages, it is easiest for a startup to sell and cater to the domestic market. Could an Indian technology business recreated the success of a Baidu.com or Lenovo? I very much doubt that. Indian product startups need to think and act global from day one and do not have the advantage of a large test bed in their backyard. That could very well be the reason why there have been so few product startups in India.
Comments
I read the article on lack of angel funding for product-oriented start-up. However, the reasons are not adequate, and Rajesh Jain has never tried any product start-up.
1. Due to higher R&D cost, a product start-up requires Intellectual property for protection. Unfortunately, the Tech-Angels available in India have earned their money through services without any IPR; usually by outsourcing of services, by leveraging cost differences in services in the US and in India in dollars. So, the role of IPR is drastically undervalued, while the role of man-agement (so necessary in manpower-intensive business) is overvalued, and the start-ups are required from day-one to have an experienced management, which never happens. After all, did Google, Microsoft etc had experienced managers when they required Angel funding?
2. Angel funding requires company vaulation. However, a product company with IPR usually has patents filed; not even the prototype as the proof-of-concept, and if necessary, market testing. Angels of the Silicon-valley provide such funds; in fact, that is the basic angel investment. So, the company valuation is reduced to patent valuation. Now find me a any fund provider in India, which knows about patent valuation of new inventions (not marginal improvement over an existing one).
3. Above problems have come due to tech managers being highlighted as techies. Someone completed B.Tech in Electrical engineering, then completed MBA, and since then worked for financial companies and as manager of service companies for 20 years. How much can he judge the value of a patent? It requires assembling of people with expertise in the domain of the invention, organize their meeting with the inventors, verify and conclude the domain related part of the invention (Which might be biotech, genetics, medicine, agriculture, Psycology, etc). Next step is to verify the claims in the patent search by hiring a competent patent-attorney firm. Final step is to verify the implementational mechanism; if the inventor implements the invention using microprocessor, one has to call hardware/software people. If invention is implemented using mechanical devices, one has to call mechanical engineers. Otherwise, how to you get the worth of the patent? Strangely, most of the angels in India do not even know that patent valuation is derived not from the cost incurred in the research, but from the possible profit arising out of the market monopoly, plus the team.
4. Since none of the above steps are systematically followed, there is no way to value a patent. So there is no way to estimate the company valuation. It is clear that if someone cannot estimate the company valuation, one cannot fund it; how would one calculate one's share against the funds provided?
These are the basic problems why angel funds for product-inventions at large are not available.
The funds can become available only if there are independent and credible organization to estimate the patent valuation, since an angel can not gather the experts in all fields. Otherwise, angels must fund specifically in his own area of expertise.
However, till India remains a heaven for cheap skilled labour; coders in SW services, BPO etc, angels would be tempted to fund only in such companies, where returns are more for lesser risks, and product-inventions shall never get angel funding.
5. An alternative might be a campaign for angels to fund product-inventions, and install proper patent valuation mechanism for this purpose. However, since this does not concerns many, there shall not be much cry for this, and things shall remain as they are till cheap industry loses attraction due to competition from China, Malayasia, BanglaDesh, etc.
Till then, the Americans and the Europeans shall involve their free manpower to create the 21st century Intellectual property, while burdening our engineers with the coolie-jobs.
Posted by: Vijay Jha | September 5, 2006 09:33 PM