Where India goes from here

The high tech industry’s fixation on India seems to have reached a new peak recently. First there was a string of announcements as various large high tech companies announced multi-billion investments in offices in the region. Then the cover of Time magazine. Now there’s another string of announcements, this time by venture capital firms raising dedicated funds for India including Matrix Partners and NEA.

Clearly India is a land of opportunity, but I do wonder if the opportunity is as limitless as these investments seem to assume. As a basis for discussion, I want to suggest three questions about India in the next 5 years.

How big is the Indian talent pool?

It’s indisputable that you can draw very impressive people out of the IIT system or high-tech hubs like Bangalore and Hyberbad. But at the rate the large companies are hiring, these groups get exhausted very quickly. The Indian government recognizes this and is moving aggressively to expand the university system to generate more IIT or IIT-like graduates to meet growing demand, but one has to question the impact on quality.

In the US or in Europe or Israel, if there are a million people working in the IT industry and we need to grow the pool, it’s not difficult to get the 1,000,001st person to enter the labor market (switching from some other industry most likely) and with a minimal degradation of quality. With a country whose literacy rate is at 60% and whose poverty rate is at 80%, it’s not so automatic an assumption that the 1,000,001st Indian citizen to join the IT industry is as much a boon as the 500,001st one was. The signs of this supply constraint are evident in the double digit growth in salaries and double digit turnover reported in the Indian high tech industry.

What does CMM really get you?

“Ah, but don’t mind the rising cost, go there for the quality” say the boosters. Look, 75% of the world’s CMM level 5 software development organizations are based in India! But isn’t CMM is a once good idea that’s long since been turned into a giant marketing ploy? The reason why India has such a high percentage of the world’s CMM companies is because it was a great confidence-inspiring badge for the Indian outsourcers to show off to their clients. In point of fact I can’t think of a single highly successful software product that was developed in a CMM 5 organization. Lotus, Microsoft, vmWare, SAP, Google, Oracle, Siebel, IBM and Intuit all developed their flagship products with development teams that deviated substantially from CMM 5 orthodoxy. A process and procedure heavy approach that works for client CYA is counterproductive to creating great repeatable software products that are embraced by customers.

What sort of software startups will India create?

In the end, (physical and psychic) closeness to your customers is what defines success in the software business. It doesn’t matter how inexpensively you generate a thousand lines of code if the customer didn’t want it in the first place. This is one of the biggest advantages of US startups: proximity to the world’s largest and most flush group of software buyers. How will Indian startups cope with this?

One possibility would be Indian software startups follow the Israeli model: build yourself around the US market It’s quite common for a software company founded in Israel to hire the plurality of its employees in the US and even move their headquarters. In fact if you sift through the software portfolio companies of the leading Israeli VC funds, you’ll find that 70% of more of the portfolio now have US headquarters. This is a fine and good way to build companies, but it’s a recipe for a limited size startup ecosystem. Keeping with Israel as the example, the country probably has 3-4 good feeder universities and 7 or 8 venture capital funds. If this is the way the Indian startup community goes, I don’t think it’s going to justify the level of involvement that Matrix, NEA, Battery and others are contemplating.

Another possibility would be to build Indian software companies for the Indian companies. To go this way is to create a true challenger to Silicon Valley primacy because you now have a self-sustaining market to nurture startups in the early years. This in my mind, it the big outcome that the VC funds are counting on. I’m just not aware of an Indian software company that’s successfully executed this model.

As NEA, Matrix and other firms get established, I’ll be curious to read about the types of software companies they fund, their go to market model and from where they draw their employees. Maybe there will be a new startup model for Indian companies that we've yet to see.