How Indian tech startups win by repeatedly expanding their market

(Successful consumer Internet companies often start with dominating what looks like a niche market, but then expand their market repeatedly. For successful Indian startups, this often happens much sooner in the lifecycle than say Silicon Valley startups. How should founders and investors use this to inform their decisions?)

Take a look at the list of startups that are closing angel financing on the leading fundraising platforms this month, and chances are, that many would appear to be focused on rather niche markets. Are we reaching a point where a bulk of the mobile and Internet value creation is done, and only small problems are left for companies to solve? Are startup teams thinking big enough?

Flipkart CEO Sachin Bansal recently had an engaging Twitter conversation with several early stage investors and startup enthusiasts revisiting the classic debate of whether investors prioritize founding team or the idea in their funding decisions. The overwhelming investor response was that they bet on the team first and foremost.

The two observations above are linked. Successful startup teams start with a great idea in a market segment that may initially look small, but then build upon initial traction to either significantly expand the market or catapult into broader adjacent market segments. That is why investors say they look first for team quality (along with size of the broader market), and also the reason why a handful of the niche-sounding angel funded startups may turn into unicorns a few years from now.

Many Indian consumer Internet startups that are reaching superlative scale and valuation numbers today started by addressing niche markets at their early stages. Take Zomato for instance. If you looked at them in 2011, it would have been very hard to envision the scale that the market is expecting them to reach now. At the time, the company primarily monetized by tapping into the Indian restaurant brand advertising market. This market is tiny, and almost none of it was online at that time. If you used reasonably liberal extrapolation, the total available revenues in five years would top out at perhaps $20-25M. The company has, via the ingenuity and drive of its founding team, continually expanded its market by growing its core offering, entering new geographies and bolting on new business models.

A recent post by Todd Francis (“What Billion dollar companies look like at Series A”) touches upon this ability of high performance founding teams to expand the market:

“However, successful companies often start with executing very well on an initial concept that is the beginning to a much bigger offering.”

 

In India, this market expansion often happens much sooner in the lifecycle of companies than it does in say US (or China). That’s what we have found over the past several years looking at various investment themes across US, China, Europe and India. Many market segments in India could be relatively thin due to low monetization levels, but that hasn’t prevented the best entrepreneurs from building companies of massive scale. This is one of the key reasons you see disproportionate amounts of investment going behind stellar teams which at present may operate a business that does not appear to justify reported valuation levels.

The tech industry, unlike say the airline or telecom industries (which also deliver services to consumers/businesses), allows platform businesses to leverage their customer bases, data and market knowledge to expand into adjacent segments rapidly, and to disrupt status quo dramatically. Tech companies can create new experiences, use cases and price points which can alter market size significantly.  Benchmark’s Bill Gurley has written an insightful post on how Uber has expanded its market size well beyond what conventional wisdom would have entailed.

Here are some ways successful Indian startups have been expanding their markets beyond their initial niche:

  • Expand into adjacent verticals, and verticalize offerings. Flipkart at Series A was a tiny online book-seller. Many other vertical-focused eCommerce sites were funded in the same general timeframe, but Flipkart rapidly built on an early lead and expanded systematically into many other large eCommerce verticals. Similarly, Ola is beginning to leverage its market position in the taxi/transportation vertical to enter various other logistics/delivery verticals (e.g. food, grocery deliveries), which would help it grow into its heightened expectation and valuation levels. Quikr in an example of a successful internet company that is expanding by driving deeper into its verticals of focus.
  • Expand into adjacent market segments. Some successful startups use their expertise, data and customer base to offer a different type of product that builds upon their position and enhances customer stickiness, revenue per customer and sales ROI. Vizury, which started off with an ad retargeting product, has expanded its product portfolio to include various big data and marketing-tech offerings that it sells to its marquee client base. Netmagic added cloud offerings and managed services to its solid datacenter business, which helped it get to a substantive sale to NTT in 2012. Snapdeal, one of the leading online marketplaces, started off as a card-based couponing play, and expanded or morphed its model several times before getting to its current broad marketplace model.
  • Expand geographic footprint. Companies such as Vizury, Zomato and InMobi expanded into multiple other countries very early in their evolution, and are creating a global or transcontinental footprint with products that would have appeared to have a relatively small addressable market in India. These companies built strong products in India and ventured out into distant markets at a time when there were few successful precedents. These days we see geographic expansion highlighted as a key growth lever in many pitch decks, especially those for B2B product companies. Expanding into foreign countries for early startups is never easy, but there is often great value in doing things that are not easy.
  • Expand business model.  Many companies start with a business model that suggests a moderately sized market, but later tag on deeper monetization models e.g. JustDial and Zomato, which initially focused on listings/lead generation models, are actively moving into transactional local commerce models
  • Use low margin consumer aggregation products to get into more attractive segments. PayTM (which recently raised $575M) and FreeCharge (recently acquired by Snapdeal) both used low margin mobile recharge models to rapidly aggregate massive bases of transacting customers, and are now beginning to funnel these consumers into marketplaces for a wider range of products. In the process, they sidestepped competition from the leading eCommerce marketplaces, which had a significant head start at the time these two started
  • Integrate vertically: Many eCommerce platforms including FashionAndYou, Healthkart, Myntra, UrbanLadder and others have focused extensively on private labels and vertical integration in order to drive higher margins than the base e-retailing business. eCommerce marketplaces building their own logistics networks is another example.
  • External Investments and Corporate Development: This classic growth tool was nascent in the Indian startup/Internet ecosystem till about a year back (except perhaps Info Edge, which has used this tool well for almost a decade). This is starting to change rapidly with Flipkart, Snapdeal, and Amazon building out significant capabilities for minority investments and acquisitions that will help them expand their markets further. We are now starting to see smaller companies leverage corporate development/M&A successfully in India, and are likely to see much more activity on this front.

The above list has an obvious selection bias. It only lists a handful of companies that succeeded in expanding/reinventing their markets, but there are of course hundreds of other funded startups that failed to do so.

So if you are an entrepreneur starting off with a new venture, how to do you decide whether your idea, which may appear niche, is worth pursuing?

Or if you are a tech investor, how do you take a call when it may seem that most early startups you look at are operating in small market segments?

Here are some thoughts:

  • Team, team, team. Clichéd but true. The above list is a testament to why angel/venture investing is first and foremost about team. Great teams can expand their business well beyond the initial idea or model. In addition, the ability to raise future financing rounds of increasing size has now presented itself as a core requirement of any team looking to drive towards a large outcome. Unfortunately, the above abilities are nearly impossible for investors to predict based solely on the team’s resumes or institutions they attended. These are also often hard to evaluate based on an initial meeting. It takes a several meetings, some smart background work and/or observing over a period of time to see evidence of the persistence, drive, ingenuity, single-mindedness, passion, resilience and leadership skills needed to continually expand the pie. 10x founders leave their fingerprints in various aspects of the business, and smart investors learn to pick those up.
  • Keep an eye on new disruptive technologies, and how your venture/investment may be able to harness those to ride a massive upcoming wave. Internet of Things, Wearables, Drones, 3D Printing, Autonomous Driving Cars, Deep Analytics, VR/AR and AI will provide today’s early stage ventures with powerful catalysts to explode their market, just like mobile, social, local and cloud did for many of today’s unicorns
  • Founders must define their target market more broadly for the medium and longer term. If you are an entrepreneur, lay out a plan, perhaps a decision tree of segments/models you could eventually expand into and disrupt. This will not only help in your conversations with potential recruits and investors, but also serve you and your employees as a guiding light at various points in the journey. Your eventual path will almost certainly look different from your initial plan or decision tree, but a well-thought plan will help immeasurably. Similarly, investors sizing an addressable market must look for and understand large adjacent markets that the team, if successful, could address. Build out your outcome scenarios layering in different levels of success with addressing these adjacent segments
  • On the flipside, management teams and investors should keep in mind that many existing consumer Internet leaders or startups can and will enter your space, since they will also look to expand their And the massive amounts of funding that is going into leading Indian consumer Internet companies will only accelerate their expansion into adjacent segments. Have a plan to deal with this. Identify the moat you are building, and build it fast.
  • Investors must think critically, maintain high risk appetite and create a broad, balanced portfolio. While a few select teams will expand markets, ride new S-curves and create massive value, a vast majority will spend their time tackling the base market, and may stumble along the way. Out of ten very high caliber teams in ten large markets ready for disruption, you may only get one outsized outcome if you are fortunate. That’s the law on which venture investing works. In the new world of massive private funding rounds, this dynamic will only accentuate further. Be prepared.

Comments and feedback are welcome.

(Anupam is a VC investing in mobile, internet & technology businesses in India and the US since 2007. Companies linked to are NGP portfolio companies. Data and facts cited are based on public sources. Views are personal)

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Why eCommerce in India will meld into Local Commerce

It is no secret that e-retail in India has been growing at a dramatic pace. It is expected to exceed $22B in three years (from a negligible size five years back) after attracting billions of dollars in venture investment. Several unicorns have been created in this space. 40M+ users already shop online in the country, and this number is expected to rise rapidly towards the 100M mark.

The classic eCommerce model entails a small number of large efficient warehouses built across the country, coupled with a well-oiled logistics network that can deliver merchandise to consumers anywhere within a few days. However, this model has three basic constraints that will lead to its disruption and evolution:

First, the big centralized warehouse eCommerce model is economically sub-optimal in India. Shipping one package across the country and into smaller towns costs significantly more on a unit basis than ‘caching’ goods closer to where the demand is. This issue is more pronounced in India than it is in many other markets – the ASPs in India are typically low, while the logistics (shipping, warehousing) costs are not proportionately low. E.g. for a generic retailer, the AOV in India may be Rs 1000 ($16) vs $50 in the US (i.e. a third) for a retailer with a similar category mix, but the unit logistics cost at scale may only be 40% lower in India. Return shipping and logistics increases unit costs further. The marketplace model with platform fulfillment could add in yet another leg of shipping. Shipping and logistics can cost 8-10% of the gross merchandise value for many e-retailers and marketplaces, and this cost item appropriates much of the gross margin/platform fee for several e-retail categories. In fact, classic eCommerce in India may not have the structural cost advantage over traditional brick and mortar retail that it has enjoyed in many other markets. Charging separately for delivery on a widespread basis will always be hard in a highly competitive market like India. In order to drive towards profitability and better unit economics, eCommerce companies will need to find disruptive ways to optimize their shipping and logistics expenses.

Second, as the consumer gets used to instant on-demand services such as food delivery and taxi services, waiting say three days to receive the USB drive s/he ordered from a distant seller will become increasingly unacceptable even to consumers in smaller towns. With the traditional eCommerce model, delivery to various parts of the country could take several days on average. This is further impacted by additional areas of friction such as inter-state taxes and state border check-posts. Many large eCommerce companies are already racing to build next day and same day (in larger cities) delivery, often via a combination of local warehouses in larger cities and overnight air shipping. Instant gratification is a key advantage of local purchase at offline retail stores, which needs to be countered or offset by eCommerce platforms. Thus the natural pressure is for eCommerce to move towards more instant models, such that consumers can receive goods they ordered within a few hours or less. Amazon, JD and others are looking to achieve this by building a chain of metro area warehouses across their respective geographies of focus. Leading Indian marketplaces have also set off on this path. However, this model is highly capital intensive, and by itself, may not be ideal in the Indian context where unit real estate/rental costs are high. Additionally, while it may work for some categories such as consumer electronics, it could be cost prohibitive for other categories such as appliances, furniture or home goods. Further, this approach does not work as well with the marketplace model which is predominant in India.

Third, the eCommerce model doesn’t lend itself to instant returns and exchanges e.g. consumers do not have the option of taking a defective product back to a nearby store and exchanging it immediately for a functioning one. For many consumers, this is a significant mental barrier to ordering some categories of goods online, and a big psychological advantage of shopping locally.

Most large eCommerce platforms in India function as marketplaces with tens or hundreds of thousands of merchants. Many of these merchants are local shopkeepers who have begun to sell online via these platforms. These merchants already stock the goods at their own premises in local neighborhoods.

The Evolution to Local Commerce

Several of the above constraints could be addressed by scale marketplaces with sufficient density of local merchants such that a reasonable volume of transactions is fulfilled locally. This would bring down unit shipping costs, provide significantly faster delivery, and provide consumers the comfort to return/exchange merchandise more expeditiously when needed.

This model makes imminent sense for categories where local availability of merchandise is high, and the logistics cost form a relatively high proportion of net revenue, e.g. appliances & furniture (where shipping long distance is cost prohibitive and time consuming), groceries (which constitute 60% of overall retail sales in India), home goods and books. We are already starting to see various leading horizontal marketplaces launch the grocery category via a local fulfillment model, e.g. Amazon’s recently soft-launched Kirana Now service, which aims to deliver groceries locally within 2-4 hours via tie-ups with local stores.

This local commerce model will expand to several other major e-retailing categories.  The LCD television, microwave, book or even smartphone could be conveniently delivered in an hour from the nearby electronics or book store rather than making its way across the country via various modes of transport.

The eventual optimal model may be a hybrid one with a reasonable bulk of demand being fulfilled locally via neighborhood merchants or fulfillment centers, and only long tail products (or those more readily available in other regions) being shipped individually to the customer from a centralized warehouse.  As eCommerce/marketplace platforms push ahead in their quest for profitability and compete on faster delivery times, they will push harder into local commerce, and converge with various other startups already building out the local delivery model.

Consumer Internet in India – Bubble or Massive Opportunity? Seeing both sides

There has been an incredible, unprecedented rise over the past year in the sentiment around the consumer mobile and internet space in India. There are now several private companies in the ecosystem valued in the billions of dollars and a slew of new deep pocketed global investors active in India ready to invest tens or hundreds of millions of dollars into relatively young companies. 2014 saw tech VC/PE investment of over $5B, more than double of any prior year on record. 2015 so far appears to be on pace to beat that high watermark.

Having been active as an investor in India for the past several years and having seen the ecosystem and many companies negotiate both ups and downs of investor sentiment, this is a very interesting time. Every week I speak with multiple potential investors – usually those looking from afar or just entering India – who are brimming with optimism, and I speak with many others – usually those who have been on the ground for a while – who privately voice that we are in some form of a frenzy or bubble.

Here I capture some thoughts looking at both sides – the bull case as well as the key risks around investing in growth stage consumer mobile/Internet companies in India in the current environment.

There is a strong Bull Case…

  • Digital platforms at scale: Mobile Internet has unleashed digital platforms of massive scale in India. There are over 200M unique Internet users in India today, likely to cross 500M in five years. Most of those 500M users will access the web primarily over mobile. When you have hundreds of millions of users with a connected device on their person, the platforms and services you can create are endless. With 175M+ mobile internet users, 200M+ internet users, 900M+ mobile users and 150M+ social media users, India’s digital economy has reached critical mass, and continues to grow faster than most other large markets. For the foreseeable future, India will be second only to China in the sheer scale of digital platforms.
  • China benchmarks: For India, China provides a direct upside benchmark of a buzzing Internet ecosystem at scale in a large emerging market. The Alibaba IPO was arguably a major trigger for the ongoing consumer Internet investment boom in India. China has 30+ Billion dollar consumer digital companies, which are cumulatively worth over $500B on the public markets. In China, almost every large vertical and model – eCommercce, social, search, gaming, classifieds, mapping, payments, portals, travel, real estate, jobs, taxi – has seen billion dollar outcomes. And the Chinese Internet market still has a long runway ahead of it.

India, by contrast, currently has just three public Internet companies with a total worth of under $4B, and only a handful of Billion dollar private companies (even after the funding frenzy of the last twelve months). Given the fact that India has a population similar to that of China, is now reportedly growing at least as fast as China, and has a political dispensation perceived to be business-friendly, most investors agree that this gap represents a large opportunity for value creation in India. Purely based on this macro comparison basis, we should expect to see many more ‘unicorns’ coming out of the Indian consumer digital space.

  • Global product companies from India: The other leg of the India tech story is the emergence of global product companies being built out of India. Given India’s deep entrepreneurial and technical talent pool, a large itinerant base of global Indians, and lack of linguistic barriers, India is well positioned to create an Israel-like ecosystem of startups that builds locally but sells globally. There are already examples set by companies such as Vizury, Zomato, Druva & Freshdesk, and this trend will only accelerate over time as cities such as Bangalore develop into startup and innovation hubs rivaling Silicon Valley.
  • Network effects and betting on the winner: Many consumer Internet segments have a strong network effect, and thus have a strong winner-take-most dynamic. Segment-leading Internet companies in India have had relatively high historical survivability, and have generally demonstrated ability to maintain market position through tenacity. Therefore in many cases, investors believe they can’t go wrong when investing in a market leader, even if they understand well that they are entering at a very high price well ahead of current traction. Given the large long term potential and network effects, market leaders in many segments should still fetch outsized returns over the long term.
  • Local winners: Unlike the first wave of the Internet (search, portals, news, social), most emerging/growth segments in the consumer space (eCommerce, taxi/transportation, real estate, food, local deliveries, local merchants/services) have a strong offline or local component. Local well-run companies are better positioned than their global counterparts to address the unique nuances of building large offline operations in the Indian market
  • Internet/Mobile eating up industries: Entire industries are being created or disrupted by consumer tech companies. Take the retail, travel, taxi/transportation and food industries today. Over time, this will extend to many other spaces such as education, healthcare, real estate, local services, automotive and others. In fact in India, the opportunity for technology led industry disruption is perhaps higher than in many developed economies. India may leapfrog a generation of companies given limited penetration of organized offline businesses across these industries, e.g. eCommerce in India is in the process of leap-frogging traditional organized retail, which remains relatively small in proportion to the economy. Other sectors such as transportation, real estate and travel may also see Internet companies emerge as bigger value creators than first generation offline companies

 

…But many challenges to be overcome

Where there is opportunity, there are challenges. And challenges continue to be aplenty in the India consumer digital space. However, the good news is that many of these question the “when”, not the “if” about the opportunity, and the smart ones will figure their way around.

  • Low Monetization: India has the unique dichotomy of extremely large user numbers and extremely low monetization per user. India’s average per capita income is still barely above sustenance level (~$1500), leaving very little disposable spend per capita. Take the digital ad market for instance. Digital ad market in India is around $600M/year. At 200M Internet users, this implies a digital ad spend of about $3/user/year. The analogous figure for China is about $50/user/year. For the US it is over $200. For sure this represents room for upside. However, the Indian digital ad market, while growing rapidly, is not yet growing meaningfully faster than user base growth, i.e. ad monetization per user is only growing at a moderate pace. The wide differential in monetization levels holds across other sectors with direct monetization, including eCommerce and travel. E.g. in the relatively mature online travel space, for India’s leading OTA, net monthly revenues are estimated to be $0.4 per MUV, while the same figure for China is around $1, and for the US around $18. These gaps will converge, albeit over a period of several years (or decades).

Add to this the fact that direct monetization is harder in India outside of areas where the consumer is already used to paying for a good or service offline, or where online services provide a large discount to alternatives (e.g. travel, eCommerce, local commerce). Sectors such as digital music, gaming, consumer/SMB SaaS have created large winners in markets such as China and the US. However, in India, digital content, virtual goods, software subscriptions have so far been relatively hard to get customers to pay for, and companies in these spaces will take longer to get to scale.

Companies and investors must thus look for models with direct monetization where possible, and/or be geared to build slowly as the market expands.

  • Challenging unit economics and high burn rates: I look at local marketplace businesses across geographies, and India has by far the toughest unit economics of all markets I look at. Monetization levels per customer are low, but costs are often not proportionately low owing to systemic inefficiencies. Customer acquisition is expensive (relative to ticket sizes) given the highly crowded environment and inefficient acquisition channels. Real Contribution Margins for many high growth businesses are negative, even in their steady state localities or segments. Discounts and aggressive competition push the unit economics further into the red. Many businesses, including several of the large ones, seem to perpetually be in ‘investing’ mode (known less charitably as selling 100 Rupee notes for 90 Rupees).

While in many cases investing ahead of the curve is a necessity to build the market and stay ahead of competition, companies and investors need to have a very clear view of how they will/can get to positive unit economics. Not all companies and segments will be able to make that transition.

  • China analogs not directly applicable to India: The Chinese internet economy is arguably one of a kind, the scale and vibrancy of which may remain unparalleled for a long time to come. Indian Internet may not mirror what has happened in China. There are several reasons for this. Everyone is familiar with statutory constraints on foreign entrants in China, which created a natural walled garden and a facilitating environment for the hyper growth of local companies. An equally important but less appreciated difference is that traditional media and distribution are not as developed in China as they are in India. E.g. India has a well-developed ecosystem of hundreds of private TV channels, print media, radio, local entertainment etc, while in China, the Internet forms the predominant channel to access information, entertainment, communication, commerce etc, especially for the younger population. Lastly, China’s per capita income is about 3.5x that of India. But for many relevant consumer discretionary segments the gap is much larger, as the ratio of disposable incomes is much more skewed than the ratio of incomes.
  • Diminishing returns: While the Internet user base in India is on track to get to 500M users in a few years, it is important to realize the hurdles associated with engaging and viably monetizing the incremental users getting online. The incremental users will predominantly be those with significantly lower spending power than current Internet users. Many of these users will be based out in the hinterland and may have needs very different from what many current services offer.

Many vertical marketplaces getting funded today dispense products or services that are applicable to a relatively small subset of today’s online user base, let alone the next 300M Internet users. Business plans and investment theses need to appropriately bake this in.

  • Valuations: It is no secret that current valuations in the consumer internet market in India are priced for perfection. Any global or local macro event, or a couple of adverse ecsosystem situations can send the party into a tailspin. India has gone through these cycles before, as has rest of the world.

Many growth stage investment cases today must necessarily rest on the “Greater investor theory”. At current pricing levels, many growth stage investments can only be justified based on aggressive growth investors purchasing the asset at some point in the future. Many companies will not in the next 5-7 years reach anywhere close to a level of baseline profitability where exit at a fundamentals-driven valuation would provide a reasonable return to investors getting in now. So exits must be timed during a future period when the music is on and there is a high appetite for assets of larger size than today.

  • Macro view and Hot Money: The current rally in tech investing got triggered primarily after the change of political dispensation in India (along with the massive Alibaba IPO), with the new establishment viewed widely as business friendly and growth oriented. This has triggered an inflow of large amounts of capital from various geographies and sources that see India as a bright spot in a world that is largely slowing down. These cycles unfortunately tend to be ephemeral. Hot money is always on the lookout for the next Brazil, Turkey or Indonesia. Interestingly, the last such upcycle lasted till as recently as 2011, when the global macro view on India was incredibly positive, there was a positive vibe on Indian political dispensation and its reformist credentials. All that changed rather quickly in 2012.

Companies must at all times have a plan of action for an environment where they may not be able to raise sufficient money to fund tens of millions of dollars in monthly burn.

  • Last but not least, Talent Shortage: Anyone who has invested in or run a company in India is familiar with the level of talent crunch the country is currently going through. There just aren’t enough engineers, salespersons, product managers, CXOs, data scientists to execute against all the opportunity. Capital is abundant, and so is entrepreneurial talent. But there just aren’t enough skilled folks to do all the work! The well-funded will fight fierce and pricy talent wars, while many others will be forced to drop off the radar. While VC funding may have grown 2.5X in a year, talent availability in India will grow linearly at best. This may be the prime supply side constraint to the growth of many startups.

So is this a good time to invest in the consumer digital space in India, especially at the later stages? Well, as always, there are no blanket right or wrong answers. Outcomes will vary by company, sector, specific situation and level of preparedness.

Tim Draper on Indian VC Scene, Drought of VC backed IPOs et al

A few days back I came across this interview with Tim Draper: part 1 and  part 2.

Tim is a real maverick, innovator and risk taker if there ever was one. Not only has DFJ backed some truly pathbreaking innovations, but they have also led some innovations in the VC industry itself – globalizing through their affiliate network is one good example. 

Here is one statement from the interview, that I couldn’t agree more with: “[India is] a fantastic country, with huge opportunities, very large marketplace and a group of highly educated people. The culture is incredibly entrepreneurial. I don’t know what you guys did during that time before the free market, but you really know how to deal with a free market.”

Product Innovation in India

I was recently asked to comment product innovation in India – i.e. the often-raised questions around why we haven’t seen extensive product-based innovation from Indian companies, what the challenges have been, and how that can change etc. I have given thought to this issue a few times in the past, and I’ve copy pasted some of my thoughts below.

Product innovation is a step in the life-cycle of an industry’s evolution that comes after significant maturity. Product innovation requires a complex interlinked talent pool (engineers, researchers, designers, managers, executives, lawyers etc), sufficient amount of risk capital, and proximity to the customer. None of these had achieved critical mass in India till a few years back, but this should happen soon (possibly with the exception of the ‘researchers’ category).

Moreover, the need for path-breaking innovation wasn’t very apparent in the past. Most consumer needs were best satisfied by taking concepts already invented elsewhere, and customizing those to the Indian landscape. This still continues to be the case – after all, what is the point of reinventing the wheel? The best returns to customers, investors and entrepreneurs still continue to be from these so-called incremental products. However, the zeal within a lot of Indian entrepreneurs, engineers and even investors for helping build some truly innovative products is tremendous.

However, there clearly are several encouraging success stories now in the product domain in India (especially wireless equipment and mobile apps), but I think there is still some ways to go for Indian products in the areas of:

  • User interface: The UI of a large chunk Indian products and websites has a lot of catching up to do. There are obviously some notable exceptions though, and the situation will change as UI design talent availability in India improves. The core of the IT ecosystem in India has been composed of teams working on outsourced or off-shored work, and in the past, the UI design work was typically not done in India, which propagated the dearth of UI design talent in India.
  • Product management and customer focus: Most products and services built in India in the past were targeted at a Western/foreign customer. Innovation is an exercises that is intricately intertwined with customer input and feedback, and becomes an order of magnitude harder if the innovator is removed from the customer. 
  • Focus on quality
  • Research-based Innovation

We are now seeing some decent products coming out of Indian startups. Also, large tech companies such as Google, Cisco, Microsoft, Adobe etc are now developing a few of their products almost entirely in India. This will create a viruous cycle that iteratively reduces the intensity of the aforementioned challenges. 

I think that the first wave of products is/will be around areas where there are direct customer touch points in India, so this would include areas such as:

  • Information and advertising services tailored to more restricted interfaces such as SMS, VoiceSMS etc
  • Payment and micro transaction mechanisms
  • Products around new media formats such as interactive TV, digital signage and animation
  • Gaming (both mobile and otherwise)
  • Wireless equipment
  • Productization of services such as security testing, banking software, specialized accounting etc

I believe (and hope) that we would start to see extraordinary companies of the magnitude of Apple, Google, Microsoft and Facebook being created in India within the next 5-7 years.

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