The Indian Startup Eco-System Wants Acqui-hiring!

I spent large chunks of time in the last two days with my friend Sharad Sharma, one of the true deep thinkers of the Indian startup eco-system. I first met Sharad when he invited me to co-chair the Nasscom Product Conclave in Bangalore with him in 2010. I really enjoyed working with him, and over the years, have come to appreciate what he is trying to do for the Indian eco-system.

Sharad, by the way, is one of the 20 odd effective angel investors who invest in the technology sector in India. While the total number of angel investors is much larger, many of them come from outside the sector, and hence are not capable of leading deals. If you look at Indian Angel Network or Mumbai Angels, for instance, a vast majority of the angels made their money elsewhere (like real estate), and often find it difficult to fully grasp what’s happening in the software, mobile or Internet businesses, let alone networking or semiconductor. Thus, these lead angels are critical for the eco-system to mature.

In any case, I listened carefully to Sharad’s commentary, and here is a synthesis of our dialog and my own reflections:

(1) There has been a clear increase in the startup activity over the last seven years. However, I am hardly surprised to hear that some VCs with sizable funds are now thinking of returning capital to their investors. In July 2006, I wrote a piece called Too Much Money, Too Few Deals, observing that the large amounts of venture capital flooding into India would find it difficult to deploy because of the lack of fundable deals. I had highlighted the need for small seed funds, not large venture funds. Well, today, in 2013, after seven years of water has flowed under the bridge, what I predicted then is actually unraveling.

Ladies and gentlemen, the great country of India – the great emerging market powerhouse – has, currently, ahem, ~50 venture fundable startups in its belly.

Does the word pathetic come to mind? Nah, let’s be patient, and settle for disappointing.

(2) The more encouraging theme is that a small, but active seed eco-system has emerged. A couple of hundred angel-funded startups are currently active in the industry. A small number of them have received venture capital. Freshdesk, one of our portfolio companies, belongs in that elite club. And a few – very few – have had exits.

(3) Some real success stories have emerged. Flipkart, RedBus, InMobi, and Druva come to mind. One of my favorite stories, however, is Pallav Nadhani’s FusionChart. Why? Two reasons: one, the company was bootstrapped, and two, it was built out of Kolkata, a backwater city in our industry (where, incidentally, I was born and raised, and its small glories still warm my heart).

(4) In fact, if you take into account all the bootstrapped startup activity, there are somewhere in the range of 1500-2000 startups operating in India right now. Not bad at all. This is where the real progress has happened. 1M/1M continues to work closely and successfully with the bootstrapped startup category. As you know, it is a huge part of our core philosophy.

(5) Where there is a massive problem looming is in the area of exits. There are two kinds of startups: (a) those catering to the Indian market, and (b) those playing the global game. Neither kind of deal is happening readily. The reasons vary, but the bottom line is that the Indian industry has a concerning exit problem. This impacts all the constituencies: equity-driven incubators, angel investors, and VCs. [Note: 1M/1M is not an equity-driven incubator, for a reason.]

(6) As you know, I have always defined entrepreneurship as customers + revenues + profits. Financing and exit are optional. So as long as you keep that equation in mind, you should be fine. However, if you are among the unfortunate ones who have successfully raised external funding, and have not been able to generate enough revenue and find your way to profitability, showing a fast growth clip, you are in serious trouble. Neither follow-on financing, nor exit will come easily.

(7) Sharad thinks this category of companies is ripe candidate for acqui-hiring exits, the kind we see often in Silicon Valley, performed by Facebook, Yahoo!, Google, Apple, etc. Currently, such exits are not happening, mainly because of the attrition in the Indian eco-system. If that concern can be overcome, however, I do agree, that there is serious talent at play here. Really, the créme-de-la-créme of Indian entrepreneurially oriented tech talent is available for acqui-hiring. CEOs, senior execs, and corp dev folks, take note!

(8) Sharad is right to be both concerned and proactive on this topic, because if we end up with a scenario with a lot of angels and small seed funds losing a lot of money in this round, the nascent seed eco-system in India will fall flat on its face. That is NOT desirable. India needs those much more than it needs VCs. This was true in 2006. It is just as true today.

(9) For my part, all this continues to disturb me, and makes me question the capacity of mercantile capitalism to generate inclusive growth around the world. It reinforces my faith in bootstrapping, where exit is not necessary, as long as you keep in mind the 1M/1M mantra: Entrepreneurship equals customers + revenues + profits. Financing and exit are optional.

India’s ultimate solution will come from entrepreneurs who stick to that mantra and utter it in succession, around a rosary or rudraksh, until they find that healthy, sustainable footing.