India – A Silicon Valley for Emerging Markets?

Emerging markets represent 80 percent of the globe’s population and more than 50 percent of its GDP. So many consumers living in the emerging economies are digitally deprived, yet eager to explore the internet. India is well positioned to become the next hub for internet development. “Capitalizing on early investments in science and engineering development, India showed the world a new way of doing business despite bottlenecks of poor physical infrastructure and low domestic demand,” explains Dinesh C. Sharma, a journalist and author based in New Delhi. “Now the country is at the cusp of another change, riding on deep penetration of digital devices and robust unmet demand for digital services.” For many growing up in emerging economies, the mobile phone is their first digital device. They joined the internet by bypassing traditional devices like desktops, laptops, and develop idiosyncratic customs like “missed calls.” Tech firms in India are finding success by targeting the vast market while attracting acquisition attention from giants like Facebook or Twitter. – YaleGlobal

India – A Silicon Valley for Emerging Markets?

India’s tech firms target consumers in fast-growing emerging markets – and attract acquisition attention, too
Dinesh C. Sharma
Thursday, June 4, 2015

NEW DELHI: Providers make money when cell phone users answer a call, and entrepreneurs in India have found a way of profiting when calls go unanswered as well. The story of “missed call” entrepreneurs epitomizes the innovations in India’s IT market leading to mega-mergers.

Twitter made international headlines in January with the acquisition of Indian mobile marketing startup ZipDial for a reported $30 million. ZipDial is a brainchild of California-born Valerie Wagoner who moved to Bangalore after a stint with Ebay. She was amused over how Indians used their mobile phones, especially the feature of “missed call” – placing a call, letting the phone ring and then hanging up – to convey expected messages like a safe arrival to friends and relatives.

Wagoner teamed up with cofounders Amiya Pathak and Sanjay Swamy to monetize “missed calls,” turning these into a mobile marketing tool in 2010. Marketers encourage customers to make a missed call, and then they respond with marketing messages, coupons and other deals – ideal for emerging markets like India where data speeds are slow and data use is relatively low. Soon ZipDial counted dozens of Indian companies among its clients.

Not to be outdone, Facebook forged a partnership with Mumbai-based VivaConnect to scale up its “missed call ad unit” business. The social networking site had acquired Bangalore-based analytics and monitoring product startup, Little Eye Labs, for a reported $15 million a year ago.  

Other mega mergers and acquisitions involving India-bred startups also make headlines:

  • The buyout made by online marketplace, Snapdeal, of mobile recharge platform, Freecharge, for a whopping $450 million – said to be the largest such deal in the online space. Together, the two companies have a user base of 40 million and report a million transactions every day. Both Snapdeal and Freecharge were founded four years ago by first-generation tech entrepreneurs, heavily backed by venture capitalists like Soft Bank Internet and Media, which invested $627 million in Snapdeal in October 2014, and California-based Sequoia Capital, among others.

  • Not to be left behind, Freecharge’s close competitor, Paytm, recently garnered investment commitments worth $635 million from Chinese e-commerce major Alibaba and other investors like SAIF Partners.

  • Transport aggregator Ola which raised $400 from a consortium of investors in April acquired another startup TaxiForSure for $200 million.

The total market valuation of Snapdeal, Ola and e-commerce leader Flipkart is reported to be worth $15 billion. Their founders, all in their 20s and 30s, have emerged as new poster boys of the Indian tech industry replacing leaders of Infosys, Wipro and TCS from the front pages of business dailies. This change is not just symbolic, but indicates transformative – and disruptive – trends in the Indian software and technology sector during the past five years. Vivek Wadhwa, a fellow at Rock Center for Corporate Governance at Stanford University, was recently quoted in Economic Times: "India will see a technology boom over the next 5 years that will make the US dotcom boom look lame.”

 The appetite of investors from all over the world appears ferocious as they pumped in $2.36 billion in Indian firms during the first quarter of 2015 – significant considering that raising funds for any software-driven business was nearly impossible in India not long ago. Just two government-funded venture capital companies operated in the technology space in the 1990s and they would act as traditional bankers insisting on collateral for every rupee advanced. Most early entrepreneurial ventures in software services, like Infosys and HCL, were founded with family savings and borrowings from friends.

Funding advantage apart, the startups of today are benefiting from similar advantages as traditional software firms have in the past. They access the same talent pool that was long the favorite hunting ground of major software firms – Indian Institutes of Technology (IITs), Indian Institutes of Management (IIMs) and other topnotch engineering schools like the Birla Institute of Technology and Science. Most founders of the new tech companies, like the leaders of the traditional software and services industry, are products of these schools. The available talent pool is expanding.  Now India has 16 IITs with a total intake of about 10,000 students every year (five more IITs are in the pipeline) and 13 IIMs with annual intake of 3300 (six more IIMs are under development) compared to just five IITs and four IIMs in 1990. Several IITs have established incubation centers and also offer courses in entrepreneurship. More IIT graduates are opting out of campus placements, trying entrepreneurship or working for tech startups rather than established brands in the software business.

The high penetration of mobile phones is one of the several factors driving the change in the tech industry landscape. The number of wireless phone subscribers in India at the end of March was  969.89 million, of which over  862 million were categorized as “active users.” There are nearly 100 million broadband subscribers, most accessing the internet from digital devices like smart phones. There is increased willingness to engage in online activities such as booking railway and air tickets, conducting banking transactions, or purchasing apparel, digital products and groceries. Payment gateways, supply chains and logistic infrastructure are in place, facilitating the e-commerce boom. The government has begun offering online service for passports, income tax returns, transfer of cash benefits to the poor, house tax payments, registration of property and more. The federal government has an ambitious plan to roll out broadband services to all the villages in five years. Social networking platforms like Facebook, Twitter and YouTube are used for political advocacy. All these drivers fuel demand for new applications and services over mobile phones, and technology firms cater to this surge.

If the first phase of India’s technology industry development was driven by export of software and services, the current boom is largely led by domestic demand. Software services companies that made India a formidable player in the outsourcing business in the 1990s and 2000s are waking up to new market realities.Industry leaders realize that factors like the availability of large technical workforce, skills to handle IT projects overseas and cost advantages are not going to sustain high profit levels for long. Technology trends like mobility, cloud computing, social networking, analytics, artificial intelligence, SaaS (software as a service), the internet of things are fast changing the dynamics of the outsourcing market.

The business of software services continues to be human capital intensive, but fewer recruits and mid-level managers are required as repetitive processes are increasingly automated. Many big software firms are taking corrective steps to remain competitive. Companies like Wipro and Infosys have set apart funds for scouting innovation – either inhouse or through acquisition of startups in India and abroad. So far, innovation and product development have been weak points of India’s risk-averse software industry. Now a software products business – as distinct from services and projects-driven work – is taking shape.  A dedicated platform –  Indian Software Product Industry Roundtable, or iSpirt –  is busy nurturing software product ideas and entrepreneurs.

Capitalizing on early investments in science and engineering development, India showed the world a new way of doing business despite bottlenecks of poor physical infrastructure and low domestic demand. Now the country is at the cusp of another change, riding on deep penetration of digital devices and robust unmet demand for digital services. New products and applications developed in India could well show the way to companies on serving digitally poor all over the world in the years to come.  

 

Dinesh C. Sharma is New Delhi–based journalist and author. His latest book is The Outsourcer: The Story of India’s IT Revolution (MIT Press, 2015).
© 2015 YaleGlobal Online and the MacMillan Center at Yale

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