Why should there be Googles, when we celebrate Infosys?

Prof Anand Nandkumar, Research Director, Center for Innovation and Entrepreneurship, Indian School of Business, lauds the innovation capabilities of Indian startups and discusses their potential contribution to the Indian economy in this interaction with TPCI.

TPCI: What have been the main catalysts fueling the startup ecosystem in India over the past 10 years?
Prof Anand Nandkumar: There are two big reasons in my study. The first big reason appears to be the fact that the seeds of the startup ecosystem were sowed from the evolution of the IT industry itself. Most startups are trying to solve problems that are idiosyncratic to India using technology as a base. So the first catalyst was the building up of the capability on the technological front. This includes a number of factors that influenced the rise of the IT industry itself. So it includes the contribution of the engineering colleges, especially the private ones in many parts of India; just the creation of the capacity itself. The second factor was the advent of a lot of multinationals. These were in some way seeding the systematic thought processes around solving some of these efficiency-related issues or service delivery kind of issues. People who fundamentally had the technological expertise and were in some ways thinking systematically about solving these problems idiosyncratic to India, eventually went out and did their own startups. In many cases, the successful IT companies nurtured the startups by themselves.

If you think about it, the startup ecosystem kick-started circa 2007-2008 and started to grow rapidly from 2010 onward. So there are two reasons – one was that we already had the technological expertise. Also, a lot of these multinationals were thinking about solving these efficiency issues in India, given that it became one of the larger markets to operate in for them. The employees that came out of these companies eventually ended up starting their own firms.

TPCI: There is also a view that VCs played a key role, since they were looking to replicate some successful ideas from the West to the Indian market. What is your opinion?
Prof. Anand Nandkumar: I do not think that way, if you see what a large global retailer is doing in India, they are actually thinking about India’s experimental context. So it is actually about what they can learn from here and see how they can apply these contexts elsewhere. When Amazon came to India, they quickly realised that some of these processes (not the procurement part but essentially on the service delivery front) that worked elsewhere may not actually work in India. So this is the learning that startups actually benefited from. In my opinion, and from some of my conversations, it seems a little bit far-fetched to say that those people actually brought those business models and hence they were working.

If you talk about service delivery, things like how do they retain their delivery agents, how they set up logistics in India is actually quite different from the rest of the world. It’s not a large logistic provider that they use for delivery in India if you talk about even the large MNC online retailers for that matter. If you were in the US, a van would drive to your location and deliver the package. This process of learning also has spill over benefits for the startup ecosystem. And that’s my point.

TPCI: How has the startup ecosystem been instrumental in driving growth, dynamism and greater competitiveness in the Indian economy?
Prof. Anand Nandkumar: It’s happening, I don’t know if it has already happened. As we speak, there aren’t any systematic empirical studies that tell you the contribution of the startup ecosystem to the economy. But there are lots of possibilities and lots of pockets where they have delivered. One clear example is employment generation. You have these agents that come to deliver your packets and clearly that has become a very flourishing industry. In fact, some of the delivery agents now have worked for multiple such startups now. If you look at the advent of the gig economy, it was completely kick-started by these startups. With the gig economy-based taxi operators  for example, many people have become entrepreneurs from just being chauffeurs. So it has effectively created the second tier of small and medium entrepreneurs, who now do not want to work for somebody. There are lot of possibilities as well. For instance, we have had a lot of debate about the trade practices of large online retailers.

What this could also do is to solve a very difficult problem that we have been facing. On the agricultural front for instance if they could get into large-scale procurement of groceries, etc, they may actually help in price stabilisation. If they were creating these large supply chains, they would eventually have the ability to move these commodities across India, which is something we have often struggled to do. However, this has not happened yet. However, it could offer the price stability that particularly small farmers appear to need. What wipes them out are not the prices per se but the fact that they are unstable and hence decision-making is fraught with uncertainty.

So it has the potential to contribute in other ways, but we have to decide whether we are willing to give these startups the scale benefits or not. When we say that big traders are resorting to unfair trade practices it is essentially becoming a story of small vs large. However, there are benefits of being large and of course the detriments of having few large players in the market. Therefore, this is something that needs to be thought through carefully.

TPCI: Quite a few Indian startups develop global ambitions early in their journey now. What are the lessons on managing risk and maximising returns in such expansions from your perspective?
Prof. Anand Nandkumar: 
So there are reasons why a number of startups actually set up their shops in Singapore. One of the reasons is that as a country, Singapore appears to be very well connected to the rest of Asia at least. It appears that India does not have those kinds of benefits just yet. High skilled talent is available for instance in countries like Singapore at a fraction of the cost because the government essentially subsidises those kinds of talent, many freebies are given to the startups and they simply hire somebody local. At present there seem to be many benefits for startups to move offshore not for shifting their businesses but at least for operational purposes.

On the business side, many risks are idiosyncratic to any market expansion. For that matter, a startup that is shifting business from the southern part of India to North India, it is also fraught with risk. That is why we have this lean methodology, etc which is being advocated for startups. And these in some way would apply to other geographies as well. Hence the risk mitigation strategy seems to be to start small, do the small experiments and then eventually if they succeed, scale up. If you take out the cultural aspects embedded in any kind of international expansion, it is not very different. At this point, the thinking in the community seems to be that for operational reasons, there are many benefits of setting up offices offshore, but most of the startups are not experimenting with non-Indian markets at this point. That is because we have essentially solved problems idiosyncratic to India and it is not obvious whether the ideas themselves are scalable to other countries. They need to set up an experimental organisation, and scaling up if they succeed.

TPCI: How is this ecosystem expected to evolve in the next 10 years, and what role will it play in the Indian economy? What critical gaps need to be filled in the ecosystem?
Prof. Anand Nandkumar: For the startup ecosystem to mature, it is important that the other ancillary industries like venture capitalists and private equity actually start to mature. We still do not see the kind of deals that are being done in the US. Sourcing capital is much easier than it used to be but it can still be better. If you think about what can happen in the next ten years, a lot depends on how venture capital and private equity deals mature in the next few years.

These are essentially dependent on many of these tax laws. It is only now that we have this pass through Income Tax legislation. But there are still issues on whether losses can be transferred at the fund level. If the fund is not paying any tax on the money that it makes, can it be allowed to set off its losses? Other countries have figured out these tricky issues, but India is still in the process of doing so. Simplifying the tax laws to make them more investor friendly is certainly one of the aspects, if we want our startup ecosystem to evolve in such a way that we are creating these global blockbusters. The second thing is corporate taxation. The current tax rate is still high for startups – if a startup is making US$ 100,000 of profit, US$ 30,000 is still a very big deal, if you consider neighbours like Singapore, where the maximum marginal tax rate is 17% and you start as low as 8.5%. It is important that taxation laws and ease of doing business norms are rewritten for startups. So it is essentially about legislations that improve ease of doing business, ease of funding a startup, not overtaxing them and letting them grow before we start to tax them. These would significantly hasten the process of attaining maturity.

TPCI: India has been criticised as being a laggard in terms of innovation. Nandan Nilekani recently said that Indian third wave of innovation could produce a tech titan like Google or Infosys. What is your perspective on this and how are startups faring on the innovation barometer?
Prof. Anand Nandkumar: My view is that there are reasons why certain countries are better at certain kinds of innovation. Who is to say that our IT service delivery model is not that innovative? I do not feel the need to be very religious about product vs process innovation. In fact, our forte has been the latter since we are surrounded by lots of human capital and that is a problem we need to solve. People would say that a lot of innovation is also driven by necessity. That is probably why we have emerged this way. On whether startups are innovative, you bet they are. They are solving problems that are relevant to the country, relevant for many people, creating value and consuming a part of that value. Sure, there are no Googles from India, but why should there be a Google from India, when we celebrated the likes of Infosys? I do not feel the need for making value judgments about what these people are doing. As long as there is a market, people are consuming, there is a systematic process of creating these products and services, I don’t see what the problem is frankly. An idea like cash on delivery was actually piloted and done in India for the most part. Moreover, there was a lot of value created. The cell phone provisioning which made the Indian telecom market one of the largest in the world, or the largest, is an innovative idea. To judge innovation based on factors like it is product or process, services or something else – as long as there is value being created and appropriated, I don’t see a problem.

TPCI: A number of Indian startups have prioritised growth over profitability. Do you see this trend now changing with the benefit of experience? Please elaborate.
Prof. Anand Nandkumar: I spent 15 years in America and worked 5 years in the valley. Silicon Valley went through the same set of issues way back. I think there will be correction as we go forward, because VCs in India generally appear to be more conservative than in the West for a variety of reasons. As people understand better the value of profitability and not just growth, these models will actually change. However, there is a rationale why many of them are playing this game. Many markets appear to be ‘Winner take all’ markets at this point in time. This is why there is this temporary focus on revenue share. Once the shakeout eventually happens, then this will all move towards profitability. This is not uncommon and there are two reasons. One is the nature of these hot and cold cycles. The second one is that as these markets mature in the sense of shaking out all the inefficient players, essentially the focus would be on efficiency and profitability rather than just growth.

TPCI: Which are the potential sectors in India for startups to emerge in the coming years?
Prof. Anand Nandkumar: AI is definitely one of the areas where there will be lot of growth and focus and analytics, which is quite close to AI and ML. There is a lot of work on health as a whole, and not just pharma. I see significant growth in these three areas and the reason is very simple. Anything that is heavily dependent on university collaboration will probably not happen in India, except in a few pockets like Chennai and Mumbai; where the IITs are doing some great work. But apart from these, I do not see big blockbusters happening on a large scale in sectors that are essentially reliant on university innovation like biotech, genetics, etc. The other areas that are generally reliant on engineering talent and just raw computing like analytics, AI and healthcare would see growth, and these are the areas where we could end up pioneering some products or services for the rest of the world.

Prof Anand Nandkumar, Associate Professor of Strategy, ISB, explores industry and firm level phenomena that influence innovation – the generation of new ideas and entrepreneurship – distribution and commercialization of new ideas. In the entrepreneurship stream, his current work examines the influence of venture capitalists on entrepreneurial performance.

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