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Should businesses in India innovate, imitate of adapt technology?

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Entrepreneurs, investors, government agencies, domestic companies & MNC executives in India need to think beyond “hi-tech” ventures and creation of IP and should focus instead of adapting existing technologies for Indian needs, points out Kaushik Gala in a new essay he published on his website. Kaushik is a Business Development Manager at Pune-based startup incubator Venture Center, so he does spend a lot of time talking to and thinking about all the players of our technology and startup ecosystem mentioned in the first sentence of this paragraph.

Kaushik Gala, Business Development Manager
Kaushik Gala, Business Development Manager at Venture Center occasionally writes essays on issues related to startups and small businesses in India. Click on the photo to see more of his essays, and his website

The whole article is definitely worth reading, and we give here a few excerpts from the article to whet your appetite:

So, will hi-tech entrepreneurs & startups drive economic growth & wealth creation in India? Consider this assertion by economist John Kay:

Advancing technology is the principal determinant of economic growth for the twenty or so rich countries of the world. However most of the world is well inside that technological frontier. For these countries, prospects of economic growth depend little on technology and principally on advances in their economic, political and social infrastructure.

Over the two centuries of rapid economic growth in rich states, the pattern has been for one or two countries to join the group of advanced states every decade or two. In the last fifty years or so these new members of the rich list include Italy, Finland and Ireland within Europe and the first Asian economies (Japan, Hong Kong, Singapore) to operate at this technological frontier.

Later, he points out that there are three kinds of tech startups in India: 1) Technology innovators (who are creating new IP at the cutting edge of science & technology), 2) Technology imitators (who are reverse engineering technology from elsewhere and implementing a copy here), and 3) Technology adapters (who take a foreign technology, and then adapt it to Indian conditions. This usually involves significant changes, and there’s usually a key piece of (non-technology) innovation required to make it successful locally).

He gives this example of technology adaption:

My favorite example is Sarvajal. They sell clean drinking water – but with many twists:

  • They’ve developed a (patent pending!) device called Soochak which combines existing water purification technology with cloud computing.
  • Their innovative ‘distributed’ business model uses pre-payment, franchising, branding, etc. to make it profitable to sell relatively affordable water to remote rural areas.
  • Success for Sarvajal is as much – or more – dependent on understanding the psychology of rural customers and village entrepreneurs (franchisees) as it is on the technology.

Kaushik ends by saying that while all three avatars of technology enterprises are required for wealth creation in India, being an adopter/adapter in India offers far more opportunities to excel.

Read the full article. Highly recommended.

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How many innovative small businesses are there in India?

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(This essay was written by Kaushik Gala, is taken from his website, where you can find more such essays by him, and is reproduced here with permission. Kaushik is a Business Development Manager at Pune-based startup incubator Venture Center. Please send any comments to galatime@gmail.com)

Kaushik Gala, Business Development Manager at Venture Center is looking for all innovators in the areas of biology, chemical, and material sciences.
Kaushik Gala, Business Development Manager at Venture Center is looking for all innovators in the areas of biology, chemical, and material sciences.

I want to estimate the number of innovative enterprises in India, and look into their (in)ability to access risk capital.

Why? Because I’d like to know how many Indian enterprises may offer higher returns than FDs, bonds, mutual funds & stocks. But with a lower risk than a VC funded startup.

Why? Because I believe it is possible to raise & deploy a large amount of risk capital to a large set of Indian companies. $1B+.

Why? Because 95%+ of innovative enterprises lack access to risk capital. And 95% of ‘rich’ Indians / NRIs lack access to private equity investments in India. That’s my hypothesis.

So what? Well, there’s a business model in here somewhere.

Definitions & Numbers

I’m mixing up the various terms used to describe relatively young & relatively small (by revenue) companies. These include: startups, Micro, Small and Medium Enterprises (MSMEs), Small Scale Industries (SSIs), new ventures, spin-offs, spin-outs, etc.

Per the 2006-07 census, there are over 26 million MSMEs in India. ~ 97% of these won’t show up in MCA statistics since they are unregistered or operate as sole proprietorships / partnerships.

A company is Micro, Small or Medium depending on the amount invested in plants & machinery. MSMEs employ ~ 60 million people (= 3 Mumbais) and contribute ~ 20% to India’s GDP.

Of these, over 98% are ‘Micro’ enterprises. The majority are ‘one-man shows’ that provide services to local markets with minimal investment. They use traditional techniques, have no formal management practices and lack access to bank credit.

The numbers are huge from a micro-finance perspective. But I’m looking for candidates for risk capital. Time to narrow down the potential market.

Innovative (M)SMEs

How many MSMEs have an innovative business model or technology, that is fairly scalable? Who knows! Let’s make a few random assumptions and pick numbers out of thin air. ‘Micro’ enterprises are less likely to be significantly innovative given their constraints. That leaves say ~ 0.5 million Small & Medium Enterprises (SMEs) to choose from.

Ignore stuff like product vs. service, urban vs. rural, geography, etc.. Let’s assume that at least some % of these 5 lakh SMEs are innovative enough. To qualify, they should have products/services with some ‘edge’, which provides growth & profits. These SMEs were ‘Micro’ at birth, and since they are still around, they must be doing something right.

Maybe 2% of SMEs meet this criteria. That’s 10,000 innovative (and perhaps risk capital worthy) enterprises across India.

My assumption of 2% may be wildly off, but remember that I left out 25.5 million ‘Micro’ enterprises. If even a fraction of those get added to the ‘innovative’ pool, the 10K number suddenly looks small.

Risk Capital for Innovative (M)SMEs

Most MSMEs rely on family, friends & personal networks for funding. Only a select few have access to risk capital from angels, VCs, and certain schemes from government/banks. For example:

  • On average, < 100 Indian companies get VC funding every year.
  • On average, angels & angel networks (eg. Mumbai Angels) fund ~ 50 startups every year.
  • On average, government schemes for startups (eg. DSIR’s TePP, TDB seed funds) fund ~ 100 enterprises every year.
  • On average, ~ 50 companies get listed (via IPOs) on our stock exchanges every year. Of the ~ 2000 companies that traded publicly, 80%+ are quite illiquid.
  • On average, bank lending to MSMEs accounts for < 10% of total commercial lending. It’s usually in the form of secured, collateralized debt – not ‘risk’ capital. With personal guarantees from borrowers. And probably only to the ‘Medium’ enterprises.

By any measure, this is hugely insufficient in the context of my 10K estimate. And it gets worse:

  • The average VC deal size in India is ~ 20 crore. That puts the average pre-money valuation at 40 – 60 crore.
  • To stand a chance of an IPO on the NSE or BSE, a company must ideally have revenues of over 100 crore.
  • While governments & banks may be more open to smaller deals, they offer a different set of challenges – slower processes, risk-aversion, stringent spending terms & conditions, limited exposure to risk capital, etc.

SMEs need to invest 10 lakh – 5 crore in their businesses. In the Indian VC world, this would count as ‘seed funding’ or ‘early stage funding’. It is supposed to be followed by Series A, B, C, … on its way to a 100-1000 crore valuation. But not every SME is a glamourous, Silicon Valley style, tech startup. Not every SME is addressing a 1000 crore market. Or even a 100 crore market. So all this talk of ‘seed funding’ is irrelevant.

Bottom-line: There is a tremendous shortage of risk capital – in the 10 lakh to 5 crore range – for innovative (M)SMEs.

[Caveat: Then again, how many of these business owners are willing to part with equity?]

For the MBA/VC types, here is what the SAM (serviceable/sellable available market) looks like: 10K SMEs * say Rs 50 lakh per SME on average = Rs 5000 crore = $1B. Maybe much more!

Demand is not a problem. What about supply? Time for Essay #2.

Broadband in India – Praying for better times

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(This article, by Pune-based Srinivasa Addepalli is taken from his blog and republished here with permission.)

India has about 7 million broadband subscribers, broadband, which by the way is defined in India at >=256Kbps: just about enough speed to let you experience the new, emerging Internet. The Indian Govt. had declared 2007 as the year of broadband, and a target of 9mn subs was set for the year. Even two years later, we are way behind! Just so you know, China has over 80 million broadband subscribers.

This article is a guest-post by Pune-based Srini Addepalli, head of strategy at Tata Co
This article is a guest-post by Pune-based Srini Addepalli, head of strategy at Tata Co

Why is a nation such as ours, IT superpower and aspiring global superpower, so poor when it comes to broadband penetration?

Very Poor Fixed Line Infrastructure

Most countries that have a high broadband penetration have (a) high wireline penetration, and / or (b) robust cable infrastructure. Simply speaking, if you do not have the basic infrastructure, you cannot provide a superior service such as broadband. Unfortunately for us, neither of these two conditions exist in India.

There are about 37 million fixed lines, of which only about 30% – about 10mn – are even capable of providing broadband. In recent years, there has been almost no investment in increasing and/or improving the quality of fixed line infrastructure. The country has added more than 400million wireless connections in the last 8 years, as against none in the fixed line space. While lack of focus on wireleine by the incumbents, BSNL and MTNL is an important factor, the blame must really be borne by the regulatory and policy regime which has not created an environment to encourage competition (and thereby, investment) in fixed line infrastructure / services in the country. The TRAI had recommended unbundling of the local loop as a step towards limited competition, but as has now almost become a norm, the TRAI recommendations were not accepted by the DoT.

Less said the better about cable infrastructure. It is a highly fragile and completely unregulated cobweb of many thousands of independent networks. It will take an investment of at least Rs 200 billion to upgrade the cable last mile to make it 2-way and broadband capable. Nobody, it appears, is willing to take that challenge up.

No Encouragement to Competition

It is well-recognized that the mobile revolution in India has been driven primarily by competition: at least 6-7 operators across the country. Private operators were licensed years before the incumbents were allowed to enter the mobile market; several steps have been taken towards creating a level playing field for all the licensed mobile operators. On the other hand, in broadband, there is absolutely no policy measure to encourage private operators to enter and compete; this in spite of the fact that none of them have any last mile infrastructure to speak of, and therefore, require considerable support in the initial years.

The incumbents that are riding on public-funded fixed line infrastructure have – in almost a predatory manner – dropped tariffs so much that India has, at the same time, the lowest broadband ARPU and the poorest broadband penetration in the world! Wireless broadband (read 3G & WiMax) is generally expected to become the competitive alternative – but there has simply been no urgency in creating the policy environment to encourage wireless. Spectrum â the essential ingredient to rolling out wireless networks â has not been made available for Broadband; the proposed spectrum auctions have been postponed several times in the last 2 years.

Can something be done to salvage the situation?

Unfortunately, in the short term, I see no option for the customers and private operators. During 2010, the incumbents will strengthen their dominance in the broadband market (for whatever it is worth); private operators will half-heartedly roll out parallel copper / cable networks and will be plagued with quality issues. If spectrum auctions happen in Jan-Feb 2010 as currently envisaged, 3G and WiMax services should become available in most metros towards the second half of the year.

The Broadband market will have to wait till 2011 for true competition, high quality and innovative services – available in all major towns and cities. But the rest of the world will not stay still. Singapore is experimenting with getting 100Mbps to every home by 2012; we hope to get to about 1Mbps in the top 100 towns by then.

Every year, since 2005, I have been hoping that the next year would be the year that broadband becomes widely available in India. I have been proven wrong before; I pray that things change this time around.

About the Author – Srinivasa Addepalli

Srini Addepalli has been dreaming of a Broadband revolution in India for years, in his professional capacity as the head of strategy at Tata Communications and due to his personal enthusiasm for all things technology. You can find him on Twitter here.

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