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Can India Develop a Third Way?

By Dr Uday Phadke, Director, AcceleratorIndia.

Building technology companies is hard work, as most entrepreneurs will testify. The challenges include: technology development, matching technology to a market need that is big enough (existing or imagined), creation of a product or service, finding the right business model, and raising enough money to make all this happen. It is no wonder that the survival rate of technology start-ups is so low, as Amar Bhide and others have shown in their extensive surveys, mainly based on US data.

But I want to talk about the philosophical differences in the building of technology businesses between Europe and the Unites States, and what this might mean for India.

In the US, the pre-dominant ideology or narrative today for building technology companies is based on the VC-backed funding model, even though venture capital as a method of funding only really came to prominence in the 1980s.

The founders of Hewlett Packard, for example, could not draw on this model and started their business over a garage, funded by what they could sell along the way. But today, the ‘Silicon Valley VC’ model is held up as the way to build successful technology companies fast.

The VCs essentially see this as a process of placing relatively large bets on a number of companies, based on a statistical model of success. This model has its own internal dynamic of success, which requires very rapid growth, accelerating valuations, and an early exit, preferably by listing on public markets. The reality is that this model generates a very small number of ‘winners’ and plenty of companies (99 per cent) who never make the big time. And the success of these companies may depend on fashion, and the ability of the VCs to promote their investments, rather than underlying differences (for an extreme example of this, just think about facebook vs beebo).

In Europe, mainly because Venture Capital was, and still is, difficult to obtain, many technology companies have been funded by selling products and services along the way, in particular consulting services. For example, Cambridge (UK) has created close to 1,000 companies over a 30-year period, based mainly on this model. This may have constrained the rate of growth of these companies but has probably resulted in fewer business failures.

This European model may also sit more comfortably with cultural attitudes in Europe, but relative to the US, it has resulted in fewer blockbuster companies, which is lamented at frequent intervals by Governments, investors and entrepreneurs, not withstanding the current pain in Silicon Valley, as the VC-based model stumbles through the problems in the US economy.

So what does this mean for India? US-backed VCs poured into India in 2004-5, aggressively promoting the Silicon Valley model for India. Unfortunately this wave was slowed by two factors: the heavy corrections (ie reductions!) in valuations caused by the collapse of the Web 2.0 bubble and the recession of 2008-9; but possibly more importantly by the attitude of Indian entrepreneurs to the amount of equity they were willing to sell to outside investors and their emotional attitude to control of their companies.

While some US-backed and indigenous Indian VCs have managed to tackle this, by and large, Indian companies have refused to embrace this model. I would argue that the European model, based on consulting services, more organic growth and smaller percentage ownership for external investors, is more suited to India.

In this context, Indian technology companies may have more to learn from Cambridge than Silicon Valley. Indian IT and software companies, for example, have been very good at using outsourcing contracts to develop core competences and domain knowledge, which they have now started to apply to higher added-value services, and in a small number of cases, new product creation where they retain the IP rights.

So the question is: will Indian companies follow the Cambridge or Silicon Valley models? Or in this area, like, the Indian telecoms industry, for example, will India develop a Third Way to build technology companies?

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A version of this blog was originally published at India Incorporated, the social media platform for news, views and information on India.

Published on 21 February 2011

Last updated: 25 Feb 2011