Monday, January 08, 2007

Startup hiccups in India

Dharmesh Shah analyses why there aren't more software startups in India. By "Startup", he means a company that produces a product - not the BPOs, or the software service companies. He means software product companies, of the likes of Tally Solutions, Picsquare and the new startup that I will be starting in a few days but haven't had the time to build the darn home page yet.

Now yours truly is going to counter-analyse and put in points from a) someone who started a company at age 23 and b) someone who is going to start once more at 32, but this time on a completely different front.

Service companies have lower risk
Startup or service company? When you look at it from an entrepreneur point of view, it's about food on the today (service company) or a gourmet meal far far away in the distance. Dharmesh says the risk of a software service company is lower; and I agree.

I will digress right now into a brief history of my first startup; we went down the "service company" route, though initially only as a funding source.

When I started Agni, I was 23, it was 1998, I had unending reserves of energy and was totally clueless. Which are the prime requirements for starting a company with nearly nothing in your pocket. We put in Rs. 30,000 each - four of us - which was all the money I owned at the time. All of us also brought in our home computers, and set it up in a first floor room of a company owned by a company that was ok with renting it to us without a deposit.

Chirag and I - two of the four founders - had no rent to pay or other big liabilities so we decided that we would go full time into the business, and Arun and Bhaskar, the other two, decided they will get themselves a day job. The deal was: Within three months we generate cash flow to pay us Rs. 15,000 every month, and we all go full time. Otherwise, we shut shop and go away.

We started as "corporate trainers" - meaning we would go to big companies and do five day training courses on C++, Delphi, Java and the like. Even the day jobbers took part - and in three months we generated the required cash flow, everyone went in full time etc. All a happy story till now.

Enter the product. Fin-Acc, an accounting software that would beat the pants off the competition. Two founders would develop it full time - but how to pay their salaries?

(Note: We hadn't even started to think of marketing costs - we were conveniently using Chinese math like 100,000 companies register every month, and where will they get their accounting packages, we can easily get 1% of this market and so on. Our eyes were the shape of dollar signs - because the rupee sign simply does not make for good eyeball graphics - and we honestly believed that if we built it, they would come, hand over their money in small bills in paper bags, and beg us to give them our product. I love those times.)

So, to finance this, there would be a "services division", which was the remaining two founders looking for service contracts worldwide. Luckily we got a break in Europe and then in the US and the "services division" became stronger.

Eventually, as the product started to take away more money than we could throw at it, we began to pull the rug. Take out the newspaper ads. Pull down the hoardings. No more stalls at IT.COM. And later, ditch the product idea - let's sell the service of getting companies accounts online.

What am I getting at? We were forced to go down the service route initially because we had no money. Later, we did it because the product was just not getting COMPARABLE revenues to the services division. Services is easy. Products are tough. Period.

Lack of precedence: Dharmesh says that the Indian story lacks the inspiration provided by prior startups, like in the US you have the Intels and the Microsofts. In India, whaddya got? Infosys, which landed a big contract in 1990 and became a services giant. TCS and Wipro, which was funded by an established house. And while these guys have some product lines, they are primarily service businesses.

But I think India has good stories, albeit not always in the tech space. Suzlon Energy, Bharti Airtel and Rediff have grown from fairly humble beginnings. The recent IPO of has brought a new angle to tech IPOs - that a web company can get an huge valuation in the Indian stock markets.

But yes, the garage companies have still not set a precedent. There aren't that many IPOs - I don't know why, in the face of growing investor awareness, large fund investments and lower regulatory problems - but I'm sure that equation will change. After all, I'm not the only soul that realises even a sub 100 crore turnover is enough to take a company public.

Early stage capital is hard to find: I've talked about it in the context of "not enough capital" and "no more VCs?" earlier. Deal flow is not acceptable and angel investors are either not there or are more chip-on-shoulder than VCs. Okay, gross generalisation.

Bureaucracy: Dharmesh says:

Here in the U.S., I can have a brilliant idea for a software startup and within about 72 hours have launched a “real” company. By “real”, I mean it will be registered (LLC or S-Corp), have a Federal Tax ID, have a merchant account to accept payments, a bank account and a small business credit card. I’m not sure how long the equivalent process takes in India, but I’m guessing at least weeks.

This may not be such a huge hurdle anymore, as even Dharmesh admits in the comments. But let me see:

- Starting a company: If you start a private limited company, this requires a Director Identification Number (costs Rs. 2000 or so and can take a while to get), a copy of a PAN card and such. You also need some "Memorandum and Articles of Association" and application documents which your accountant will snag from another similar company. You will then need to apply for the name of the company, which requires government approval. Okay, it's a pain in the ass. But if you choose to start a partnership firm, which makes sense because you're not going into debt, it's a 10 minute job.

- Getting a Tax ID for a company is an over the counter thing nowadays, and a bank account takes from 1 day to 7 days.

- Merchant Account: You can get one easily at CCAvenue. If you want to be an offline merchant, i.e. get a swiping machine and stuff, it will cost you more time and money. And you have to convince the bank you're not going to cheat customers. Such is life.

- Getting a small business credit card: You can probably forget about this one. Businesses don't get credit that easy, and all you can do is get a personal credit card.

- Dharmesh mentions that it requires a more gregarious attitude to get things done in India. Well, I don't know; I'm not an introverted shy sort of person, I'm more of the sort Dharmesh describes that will "get things done". You probably have to find such a person, but I've found that accountants and social circles help.

All in all, bureaucracy is a pain only if you want it to be. To me, it's the cost of doing business. I would love it to go away - and it's slowly easing up - but it doesn't stop me from doing what I want.

A small digression: One of the reasons I've never wanted to take up a job in the U.S. is because they grudge work permit holders the freedom to start a business. With an H1-B, you never get that freedom until you land a green card; and that process can take around 6 years. I'm ok with waiting a month for my company's tax id, but six years, man that's tough.

Recruiting employees is a challenge: This is the big one, mate. There are two aspects to this:
1) Finding people with the "drive": A tech startup needs people who are extremely passionate about what they do. So if you're going to write mobile games, you have to find people who will breathe games and understand mobile technology as if the acronyms were built into their chromosomes. There are about 10 such people, and the big companies have hired goons to protect them from you.

Okay, I'm exaggerating. But it will sure seem that way to you after a 100 interviews, 200 phone conversations, one-on-one meetings in coffee shops etc. You know what ticks me off? The kind of person that proudly puts "COM and OLE" on his resume, and when asked about how IDispatch interfaces work with late binding, will say "I don't know, we didn't touch that part in our project".

The very excuse that their "project" did not involve a certain area of a technology seems to absolve them from the need to ever learn it. This kind of person can never work in a startup. And yet, such persons are 95% of your candidates.

2) Ability to hire them: Now let's say you hit a gold mine and found a few potential hires. Convincing them to join is ultra-tough, like Dharmesh says, in the face of big corporate salaries, perks, and importantly the cultural peace you get by working with a "known brand". I'm one of those guys who doesn't give a rats ass about my "career growth", but the Indian recruit-o-sphere is littered with those that want a shiny, polished, smooth-upward-curve resume, in which your startup obviously causes undesirable bumps. So you can't hire the career types, the money types or the known brand types. Now you are left with a sum total of two people you can hire, one of whom is you.

It's also interesting that Dharmesh mentions the marriage angle; that startups are not considered kosher for the marriage market. One of my friends, who was a consultant making obscene amounts of money working only six months a year, had to join a big name company when his in-laws postulated that the lack of a fixed job was not explainable to their relatives. Think about it. His wife and his in-laws were ok with his job, and the money was great, but he got a job so that their relatives wouldn't raise eyebrows.

He quit the job a month after his marriage.

Product companies are tough and creative: What Dharmesh says here is a little subtle; that Indians, in general, don't want to spend time on the creative nature of product development, and are more focussed on practical, heavy things. Uhmm...I think he's right here. There are some essential small parts of development - usability, clarity, no. of clicks to get something done etc. which are largely ignored by developers and companies alike.

I think it's not that we don't think of it. It's that we don't try to refine ourselves once our product is out.

A commenter also mentioned that a huge problem is lack of local market. India by itself is not so much a consumer of software products. Not only is piracy rampant, but people simply do not pay in volumes that make any sense. The lack of local market means that most startups look to get customers from abroad; it is now painfully obvious that you should be where your customers are, therefore the startup moves to other shores for selling, customer acquisition etc. and leaves India as a development/testing location. It is now no longer an Indian startup.

The lack of a local market is relative. Maybe this is not the place for a youtube or a facebook. For mobile content providers, it's *the* market. For online travel ticketing, jobs and real estate portals and the like, it's showing tremendous potential. And I believe there is a big market for discount bookstores, tax return software, fast food restaurants etc.

Overall, I think startups in India will be tough to come by. It's largely the lack of good people that will kill the enthu of the few that do start. Yet, all it will take, and I shamelessly borrow from someone whose name I don't remember, is a few good men and women.


Hades said...

Nice Post !!.

Dharmesh Shah said...

Thanks for mentioning my OnStartups article.

Your article is extremely helpful (since I'm kind of on the outside looking in, I was sort of guessing on a lot of my points).

Good luck with the new startup!


Rithish said...
This comment has been removed by the author.
Rithish said...

Hello Deepak.

Nice blog...

I have been working in one of the 'Indian' product companies for almost 4 years now, and I fully agree with your points regarding employee recruitment... Indians (and I am no exception), are more career-oriented, and are always paranoid about their future.

We have grown from an 80-man company to a 600-man company in the past 3 years or so... But I hardly find the kind of people with the enthu and josh as were evident in the older lot...

People with the 'drive' are indeed a rare breed... :o)

And.. oh... I wish you all the best for your startup... :o)


Ashish said...

Good post. One more point.

We dont have enough contacts. Contacts that can get us thru legal issues, monetary issues [read - how to reach an angel investor],hiring issues [ability to reach out to 'correct' set of people], contacts needed to interface with 'those' successful people etc.

One more point.
Liabilities such as Parents,family etc. make u avoid taking risks...

Passion said...

It is not just red tape.
It is the people in India.
They de-motivate you.

Every one in America feels that America should be proud of him and he acts accordingly.

Is it possible to instill such culture in India?
How it can be done?

Deepak Shenoy said...

Passion: I think you are partly right - people don't encourage the making of profit. That stuff in a different post. But what kind of demotivation are you talking about? That society doesn't encourage you to start up?

Honestly, why should they? And why should you pay them any attention? Cultures don't change. People do.

Anonymous said...

Hmm, feels good to read about your ventures. I too had joined a startup here in B'lore. Our story was different in some aspects from yours. Hope we meet someday to have a chat and catch up. ~Prajwal.

Dimitar Vesselinov said...

Deepak, are you looking for European partners?

InfoCaptor said...

I recently quit Oracle and started my own software company. Although my startup is not entirely based in India it still has Indian roots :)


Bala Girisaballa said...

Deepak, Great post. You write well. Reg products vs. services, I think today's trend is towards services packaged as products or products packaged as services. Either way the IP is diffused. Given Indian "services" psyche, I am betting we will do well here. India also has a great long tail ecosystem.

Ashish said...

You might be interested in this article. Basically, startups are about love for tech [first and then biz!], and Indians arent techie by choice, but by compulsion [get a job,lotsa $$, onsite!]... Moreover the service mentality is killing the Indians..

To cut the long story short, People with bended back cannot rule the world. Indian companies are way too risk averse and way too deep in services


Anomalizer said...

Good stuff I must say. Will read your blog going forward. I did write about the attitude of the "IT people" on my blog