Traffic jams are the least of your worries in India

Not since Christopher Columbus was funded to find a sea route to India has so much money been invested by financiers to foster entrepreneurship in what today is the world’s second-biggest country, one whose economy is growing at three times the rate of the United States. There is no shortage of reasons for this enthusiasm. Unfortunately, the latest quest for riches could prove just as disappointing as the original centuries-old venture.

At first blush, this may seem hard to believe. With a population of more than 1 billion, India will eventually rank No. 1 or No. 2 globally in the sale of most consumer electronics products, such as computers, cell phones, high-definition TVs and DVD players. The country has a growing and flourishing middle class of 300 million, a white-hot cellular market and, with an Internet penetration of only 4.5%, it represents one of the world’s fastest growing online markets.

Small wonder, then, that India has attracted the attention of investors. According to Ernst and Young, India ranked No. 5 worldwide in 2005 as a home for venture capital, attracting more than $1 billion, and it did just about as well in 2006 and in the first half of 2007.

Who’s who

Many U.S. venture capital firms have opened offices recently in India, including Bessemer Ventures, Canaan Partners, Clearstone Venture Partners, Matrix Partners, New Enterprise Associates, Nokia Venture Partners and Sequoia Capital. If these VCs can help Indian entrepreneurs build solid startups, there is a good chance they will face an accommodative public market. The Bombay Stock Exchange’s benchmark Sensex index delivered nearly a 50% return last year and sits at a record high this year.

Leading Silicon Valley companies like the opportunity they see in India. Cisco Systems, for example, already has 2,000 engineers in India, and the company has said that at least 20% of its top executives will be working in India in the next three to five years.

The problem is that all this promise, as impressive as it is, may nonetheless be insufficient, as we have seen over and over again in many cities and in many countries that have tried to replicate the success of Silicon Valley. India does not yet have the unique combination of factors that make Silicon Valley, Boston and Israel the premier epicenters of venture capital-backed entrepreneurship.

India does not yet have the unique combination of factors that make Silicon Valley, Boston and Israel the premier epicenters of venture capital-backed entrepreneurship.”

Sanjay Subhedar, General Partner, Storm Ventures

In addition, there are a number of challenging issues in India, including soaring salaries for engineers and high turnover. The country also has a weak legal and regulatory system, poor physical infrastructure and, perhaps most important, a limited number of entrepreneurs and startup managers that have the required discipline and commitment to tackle the daunting task of building a successful startup. Early stage companies need an ample supply of seasoned, dedicated people with the patience to build a company over six to eight years to compete with larger incumbent companies. At this juncture, the lure of quick promotion and salary increases at multinational technology companies establishing Indian operations is undermining this requirement.

Quittin’ time

The consequences of all this have become increasingly obvious. A number of Silicon Valley-based startups, for example, had opened second locations in India and then decided to throw in the towel. One of them was San Mateo, Calif., based Riya Inc., according to a recent story in the Wall Street Journal. The company opened an office in the technology capital of Bangalore in 2005, hiring about 20 skilled software developers. CEO Munjal Shah liked the fact that seasoned Indian engineers were earning only a quarter of what their counterparts did in Silicon Valley. But then Indian salaries soared. Last year, Shah paid his Indian engineers about half of Silicon Valley levels, and by early this year, the rate climbed to 75 percent. “Taking into account the time difference with India,” Shah told the Journal, “we weren’t saving any money by being there anymore.” He shut the Bangalore office in April.

Similarly, a negative scenario unfolded at Austin, Texas-based Pervasive Software, the Journal reported. It opened a Bangalore office in 2004 and hired 45 people. Soon, turnover exceeded 25% annually. The company kept investing in training workers only to see them leave. It ended up shutting down its Bangalore unit a year ago.

Some big technology companies have also been experiencing some problems in India. Kana Software, a public company based in Menlo Park, Calif., decided to eliminate 100 software development jobs in India in late 2005 and expand its U.S. hiring instead. Last year, Apple shelved plans to build a technical support center in India. And Intel, which has 2,400 employees in Bangalore, decided to build a new chip assembly plant in Vietnam instead of India, largely because it found sufficient technical talent there and a markedly cheaper workforce.

Besides soaring wages and sky-high turnover among the ranks of seasoned technical talent, another big problem is India’s very poor physical infrastructure, a problem for companies of all sizes.

Gridlock

There are a number of challenging issues in India, including a limited number of entrepreneurs and startup managers that have the required discipline and commitment to tackle the daunting task of building a successful startup.”

Sanjay Subhedar, General Partner, Storm Ventures

Every visitor to India has experienced frustrating traffic gridlocks. As a result, workers can spend more than four hours a day commuting to and from work. Silicon Valley’s Highway 101 is no picnic for commuters, but it is a Sunday drive compared to Hosur Road, one of the main drags in Bangalore. The street has only four lanes and is chronically inundated with cars, trucks, buses, rickshaws, cows and donkeys. Drivers run red lights all the time. Most American motorists would find such a road intolerable. Bridges, good airports, reliable power and clean water are also in desperately short supply.

India infrastructure today is about where China was a decade ago, according to a recent story in BusinessWeek, and China subsequently launched a gigantic upgrade initiative. Indian Prime Minister Manmohan Singh recently announced a plan to do much the same thing. He has estimated that public and private organizations will invest $330 billion to $500 billion over the next five years for highways, power generation, ports and airports.

But as BusinessWeek pointed out, the source of the money is highly questionable in a nation whose public debt equals 82% of the gross domestic product, one of the highest rankings in the world. In reality, much of the money for these projects must come from private sources. Yet India captured only $8 billion in foreign direct investment last year, compared with $63 billion for China.

India also lacks a consistent and cohesive public policy to support indigenous companies. Countries such as China, Korea, Japan and Singapore all have very business-friendly governments, policies and regulations. China has even created unique, highly business-friendly standards for its domestic market and has provided a number of other incentives for indigenous companies. Nothing like this exists in India, which pays a heavy price for being a democracy. If leaders cannot show results quickly, they are quickly replaced by non-incumbents who make promises they cannot keep. Some Indians yearn for a “benevolent dictatorship” in place of a democracy.

For a moment, forget about all of these drawbacks. At the absolute minimum, young technology companies need a talented team at all levels that is passionate and committed for years. High turnover and the scarcity of certain skills adversely impact the ability of a startup to deliver disruptive market solutions in a timely and capital-efficient manner. In addition, high turnover means that many talented individuals do not develop the skill sets required for their own career development.

As just one example, consider the semiconductor industry. If a semiconductor design engineer changes jobs every year, he or she never gets to participate in, contribute to or learn from the full design lifecycle of a chip, including, among other things, architecture, simulation, circuit design, verification, tape out, identifying and fixing bugs, and sampling products with potential customers and logging feedback. All of this can take up to five years, and it is a tremendous learning experience if someone stays in the job throughout the entire cycle. This isn’t what you see in India. Instead, young engineers commonly change jobs every year and build resumes rife with jargon and substantial deficiencies.

The upshot is that India today is not a good place for early stage venture capital-backed technology entrepreneurship. Given India’s enormous long-term potential, hopefully the picture will improve and this eventually will change. For now, however, early stage venture capital firms with an Indian presence are fighting an uphill battle.

Sanjay Subhedar is a general partner at Storm Ventures, an early stage venture capital firm based in Palo Alto, Calif. He was born in Mumbai, India, and received a B.S. from the University of Bombay, India and an MBA from Indiana University. Subhedar sits on the boards of Ad Infuse, Anchor Bay Technologies, IML, Mobio Networks, mSilica, Sierra Monolithics and Transera. He may be reached at sanjay@stormventures.com.