Sramana Mitra recently asked me to share my thoughts on entrepreneurship in India for a column she is writing for Forbes.
There’s a lively discussion going on at Sramana’s blog on what ails entrepreneurship in India. Rajesh Jain and Abhijit Nadgouda have also written about the topic on their own blogs.
The discussion is filled with the usual narrative about why entrepreneurship in India hasn’t taken off.
The Indian education system doesn’t encourage independent thinking. The Indian social system discourages risk-taking and punishes failure. Therefore, young people in India are encouraged to settle down into safe careers with large corporations.
The adventurous few who do step off the corporate ladder face several problems on their entrepreneurial journey. Foreign venture capitalists either do not understand the Indian market, or do not give it sufficient importance. The venture capitalists who do invest in India are risk-averse and unwilling or unable to offer the right size of investment at the right stage.
Even the few startups that do get the right funding at the right time quickly run into problems. They fail to attract the right employees, or are unable to work with large corporations, or get bogged down in antiquated government regulations.
I’m not an entrepreneur myself, but I hang out with a lot of entrepreneurs, both online and offline, and I know that all those “supply-side” issues are indeed serious. I’m surprised, though, that almost nobody has talked about the “demand-side” issues that are equally, if not more, serious.
Let’s look at two inter-related demand-side issues that are holding back innovation in India — the low internet penetration in India and the (comparatively) low purchasing power of the Indian middle class.
Most of the innovation and entrepreneurial activity around the world is happening in the internet and mobile web space. In India, the internet and mobile web penetration is still in single digits. As a result, even if it becomes easy to get seed funding to start new ventures, it will continue to be difficult to scale them up, because the market is simply not big enough to support several large players in most niches.
This is in contrast to internet in China, which has reached the scale, with 298 million internet users and 117 million mobile web users, at which the domestic market is big enough to support several large players in all major niches. Do note that the Chinese internet players like Baidu, QQ, Sina, Taobao, 163, Youku, Tudou, Sohu, Sogou, Kaixin 001 and Xiaonei aren’t necessarily more innovative than their Indian counterparts, but the size of the Chinese domestic market, and a little help from the protectionist CCP government, allows them to compete with the big four (Google, Yahoo!, Microsoft, Facebook).
India does have a substantial mobile base, and we are seeing some interesting innovations in the Indian mobile VAS market. However, most mobile VAS startups in India are finding it difficult to scale because the big numbers in SMS and voices aren’t backed up by big purchasing power. So, the scale required to be viable in India is much bigger than elsewhere and niches that are viable in developed markets haven’t yet emerged in India.
Going forward, I don’t see any easy solutions on both the demand and supply sides. The market won’t reach the required scale overnight and the entrepreneurial ecosystem will mature slowly. On the demand side, most of the innovation will continue to happen in the mobile VAS space and the software as a service space. On the supply side, the entrepreneurial ecosystem will evolve around the incubation centers at IITs/ IIMs and initiatives like TiE/ Proto/ Headstart. I don’t know how long it will take us to reach the tipping point on either side — it may be five years or ten — but I do know that the problem exists on both the demand and supply sides and we’ll have to search for solutions on both sides.
Update: Here’s another way to think about entrepreneurship in India, which looks at both the demand and supply sides.
On the supply side, a startup can be based on two types of innovations: a new-to-the-world invention or a tweak on an existing concept. It’s important to note that most innovations, including Google AdWords and Apple iPod are tweaks, not inventions.
On the demand side, the startup can have local or global appeal. Often, it’s easier to design and market an offering for the local market than for the global market.
SMSGupShup is a good Indian example of a tweak with a local appeal. Zoho is a good Indian example of a tweak with a global appeal.
I couldn’t find good examples of Indian inventions so I’ll imagine two. A SMS based social network (that works!) will be an invention that will have (mostly) local appeal. A “semantic social network” (whatever that may look like) will be an invention that is likely to have global appeal.
Since most innovations are tweaks, and local is easier than global, a tweak for local markets is the type of innovation that works most often. Which means that we will be doing fine if there are enough Indian startups like SMSGupShup that are built on tweaks with local appeal, even if we don’t have too many startups in the other three quadrants.
The problem, as I have pointed out above, is that the Indian market isn’t deep enough to support many startups at scale. The problem with entrepreneurship in India isn’t lack of innovation, it’s lack of domestic demand.
As I have said above, going forward, I see Indian startups being most successful in the mobile VAS space (tweak/ local appeal) and the software as a service space (tweak/ global appeal).
What do you think?
