The Hindu Business Line : The ballooning effect

A combination of factors - the Internet's rebirth, viable use of emerging technologies, and VCs' keenness to fund start-ups - is sending more work from US to Indian shores. Sure, start-ups spell risk. But nothing risked, nothing gained.

About 90 per cent of those who outsource are getting their entire product release done from India.

The start-up arena is once again turning hot, especially in the US. Many factors are driving the activity.

For one, the rebirth of the Internet. And then, there is the emergence and usage of new technologies. More and more start-ups are being floated these days as emerging technologies such as Web 2.0 Services, WiMAX and Search, among others, have caught the fancy of entrepreneurs.

As a multiplier effect, product-engineering firms here are seeing increased business flow from the start-ups as they rush to get their products developed in India, leveraging the cost advantage.

Product engineering firms such as Symphony Services, Aztec Software, Aditi, Persistent Systems and Wipro Technologies are signing up more start-ups as new customers.

"Outsourcing by start-ups, which was a novelty earlier, has now become mainstream," says Ajay Kela, COO and Managing Director, Symphony Services.

Kela estimates that 60-70 per cent of start-ups are outsourcing their product development to India now as compared to about 10 per cent three years ago. About 90 per cent of those who outsource are getting their entire product release done from India, he adds.

Outsourced product development as a category is exploding and start-ups are increasingly facing cost and time-to-market pressures, says Bharat Ahluwalia, vice-president, engineering, Aditi. "We are witnessing growth from both start-ups and established," he adds.

The triggers

The return of the Web amidst declining development cost of technology is the key reason for the start-up activity, says Ahluwalia.

The cost of developing Web applications these days is cheaper by about 80 per cent compared to the pre-dotcom bust days.

Also, some of the mega deals that happened last year are seen as another factor sparking off all the activity.

The $2.6-billion acquisition of Skype by eBay, the $580-million buy-out of Intermix Media, the parent company of popular social networking site MySpace, by News Corp, and the $5-billion buy-out of Siebel, by Oracle, have reinforced the fact among entrepreneurs that it is still possible to build billion-dollar companies in the Web space, says Ahluwalia. The start-up activity is seen focussed predominantly on emerging technologies such as Web 2.0 Services, Software As A Service (SAAS), Search, WiMAX, Wireless and Telecom, Convergence and Bluetooth, among others.

Aiding this is the renewed interest on the part of venture capitalists in funding these firms. Reports suggest that VC funding in the US, which has been steady over the past two-to-three years, is seen accelerating.

Advantage outsourcing

By outsourcing to countries such as India, start-ups can get their products developed at 30 to 40 per cent of the original cost, thereby leveraging a cost-advantage of 2-2.5 times, says Kela.

They can focus on go-to-market and branding strategies with the handing over of the development to specialist firms.

For their part, venture capitalists are playing a key role in deciding the offshore/outsourcing initiatives of start-ups. VC firms are insisting that start-ups have a planned outsourcing strategy in place with an India element.

"VCs look at outsourcing as a way for start-ups to get off the ground," says Anand Deshpande, CEO of Persistent Systems.

Risk amidst opportunity

For outsourced product development (OPD) vendors, working with start-ups brings in its share of risks.

The OPD vendor stands to gain if a start-up becomes a successful entity. However, if the start-up idea or technology fails, the vendor stands to lose.As evidenced in the technology meltdown of 2001, several OPD vendors who had large exposure to start-ups in the Internet space took a hit after a good number of their clients went out of business following the dotcom bust.

"Work with start-ups has always been very rewarding both from a technology and innovation angle as well as from a revenue point of view," says Kela. There may be a high risk, but it also means high rewards, he says."Further," Kela says "Symphony views the opportunity to work with start-ups very positively because not only are we handling cutting-edge work but eventually if and when there is an exit event, and if the company is being bought by a major player, it could also provide us an avenue to work with the bigger player as well."

Minimising risk

In a bid to minimise risk, companies such as Persistent Systems prefer to work with many start-ups, says Deshpande. "We are not shy about working with start-ups", he says, adding the company is bullish on technology per se.

Start-ups, by nature of business, are dependent on technology.

Explaining the rationale behind working with many start-ups, Desphande says, "Imagine we are working with say about 10 start-ups. Assuming three of the 10 are going to go out of business due to unforeseen reasons, and three of the 10 are going to get acquired, one may make it big while two or three will be around as the technology advances. That way, we will not lose out."

"Today, we provide 90 per cent engineering services to 40 per cent of our clients."

Symphony, which added over 20 start-ups to its clientele in the first half of this calendar, expects to add another 20-25 firms in the second half, Kela says.

Aditi derives between 10-15 per cent of its revenues from the start-up space and expects to maintain it at that level. This is because Aditi expects the start-up business to grow at around 30 per cent, the overall growth targeted by the company.

Aztec Software, whose clientele formed a significant chunk of start-ups in the hey days of dotcom, seeks to maintain its exposure to start-ups at around 30 per cent of its total revenues even as its other business grows, says V. Chandrashekhar, CEO and managing director, Aztec.

vishwa@thehindu.co.in