Compass, the Silicon Valley-based startup monitoring agency, just released its report: The global start-up ecosystem ranking 2015 , and we have every reason to be proud. The report ranks Bengaluru at 15, four places above its 2012 ranking.
Bengaluru’s inflow of venture capital in 2014 amounted to approximately $2.25 billion, ranking seventh in VC investment among the top 20. According to Yourstory.com, Sequoia Capital India, which raised its fourth India-focused fund worth $530 million last year, heads the list with 26 deals, followed by Tiger Global Management, Helion Venture Partners and SAIF Partners. This restates the phrase “Bangalored” which occurred about 20 years back when the current IT bellwethers such as Infosys and Wipro took the global IT services sector by storm.
Apart from Bengaluru, Delhi, Mumbai, Chennai, Hyderabad and Pune also significantly contribute to the IT sector in the country. Juxtaposing the IT services sector with the startups of today reveal stark differences in their evolution.
In the 90s, when Infosys, TCS and Wipro invented the Global Delivery Model of software development and set up development centres in India, the world’s perception of India as “the land of snake charmers” changed to “the land of good programmers”. Since then the IT and Business Process Management (IT-BPM) services sector has come a long way, contributing $130 billion in revenue, about 9.5 per cent of the country’s GDP and 40 per cent of the total exports in the last five years. The number of employees in the sector stands at about 3.5 million.
Multiplier effects There were also multiplier effects in other sectors of the local economy including education, telecom, transport, realty and hospitality. However, even today, the IT services sector is externally focused with just 20 per cent of the revenue coming from domestic projects. The industry traditionally focused on B2B and had its own challenges that include building a reputation as a reliable outsourcing partner, protecting intellectual property and providing a clear cost arbitrage for the foreign clientele. The firms in the industry also came together through organisations such as Nasscom to present a unified view to the client and the outside world. Compare that with the often criticised telecom sector with two sets of firms — the so-called GSM and CDMA groups — often presenting contrarian views to the government.
The unified view also helped the government formulate consistent policies such as building software technology parks and providing associated tax breaks. The funding for these firms mainly came from vendor financing. For scaling up, they mostly depended on the equity market within and outside the country to raise finance. Due to scale economies, larger ones still dominate the market with the top 11 firms in the industry contributing about 40 per cent of the total market share.
Consumer shift About two decades later today, another revolution is in the offing — that of startups in the IT sector. Graduates from the country’s premier institutes are no longer joining the large companies or multinationals, they prefer to join fledgling startups. These startups, contrary to the large IT services companies that focus on exports, address local markets, even hyper-local ones, and typically offer B2C services.
Most of these startups have built platforms that connect sellers, hotels, hospitals, restaurants, and drivers on the one side with buyers, travellers, patients, foodies, and passengers on the other, typical of two-sided markets. Unlike the time when only engineers could directly benefit from the IT revolution, today’s startup revolution is largely benefiting the blue collar workforce including cab drivers, delivery boys and girls, cooks, maids, plumbers and electricians alike, bringing a semblance of organisation to the hugely disorganised sectors of the economy.
Unlike the IT services companies that had to muster financing on their own, angel investors and venture capitalists are lining up to fund today’s startups.
These startups face challenges in navigating the regulations of the local economy in the various sectors in which they operate — be it radio taxi licensing, food licensing, FDI restrictions, or taxation. Firms are taking up these challenges through technology solutions, partnerships and, more than anything else, self-conviction, determination and willingness to make things work. Though artificial price discounts and freebees are prevalent due to VC money pouring into the sector, it is likely this ecosystem will generate positive social welfare.
The writer is a professor at the International Institute of Information Technology, Bengaluru