Volume 14, Number 1 Article by G Sabarinathan March, 2002
Venture Capital and IT Firms in India - Vital Issues :
The phenomenal stock market success of IT services companies in the nineties may have generated the impression that IT services could well be the summum bonum of the Indian IT industry and that products were not all that critical to its larger growth objectives. Interestingly, over the past two years, a number of IT companies that are product centric or that are developing high end solutions based on cutting edge technology have come up, bringing the discussion on prospects for product / IP oriented Indian IT companies back to centre stage. (A McKinsey study has projected that in 2008, software products would account for revenues of $ 19 bn, representing 16.5% of the IT industry revenue for that year.) But the recently established companies are different from the traditional software services companies in that they are focussed on narrow market niches. This makes them riskier propositions but at the same time, could produce far greater upsides. Investing in these companies involves making technology-market calls and closer VC involvement with the activities of the company. The new breed of founders seems younger with more exposure to international markets.
If these welcome developments form a trend, VCs appear to have been facilitating it by encouraging companies to exploit the comparative advantages between India and the US, the possibility of germinating a venture in India and then transplanting it overseas and the growing entrepreneurial tendencies among engineers / technologists to pursue their technical vision at an early age.
G Sabarinathan asks whether this phenomenon itself will sustain, and whether the new ventures will be commercial successes too. Why did this phenomenon not develop in the software space previously? Again, is there some characteristic about the software industry (product side) that makes it less feasible for such start-ups? Can VCs draw on these developments and replicate them to a more broad-based software industry setting? Are there policy / regulatory aspects that need to be addressed from the VC perpsective? Lastly, can schools like IIMB / IISc do anything specific to promote this trend? The answer to these questions could be crucial in driving the next wave in the evolution of the Indian IT industry.
Reprint No 02106a
