Bangalore: India’s biggest technology firms are scrambling to create start-up funds for investing in fledgling ventures, as they seek disruptive business ideas being demanded by top outsourcing customers such as Target Corp. and Nike Inc. that have begun to look beyond commoditized software code writing and maintenance projects.
Tata Consultancy Services Ltd, the country’s largest software services firm, said it plans to set aside money for investing in start-ups outside the company as well as incubating ideas pitched by employees. Chief executive N. Chandrasekaran said in an interview on Tuesday that the company has already started evaluating different models to invest and partner with startups.
“We are in a period when the dynamism with which the technology is impacting businesses is at a significant pace. It is very important for a company like TCS to understand what the possibilities are because we have size, we are successful with a very large customer base. We definitely recognize that there is a start-up ecosystem out there and we want to be there to understand what’s going on,” Chandrasekaran said. “Secondly, we can also bring these firms to work with our customers.”
TCS isn’t the only large IT company doing this.
On Tuesday, Wipro, India’s third largest software firm, announced a $30 million (around Rs.165 crore) investment for a significant minority stake in Opera Solutions LLC, a New Jersey-based big data company. Last month, Infosys unveiled a $100 million fund to incubate internal ideas and pick up stakes in start-ups around the world. Big data refers to the massive volumes of data generated by businesses that are analysed by specialised software to reveal patterns and trends.
Analysts say it is a surprise it took this long for Indian IT services companies to start doing this.
For almost two decades now, large technology corporations have invested in external innovation. For the Indian IT firms, the decisions have been largely driven by the needs of major clients such as Wal-Mart and Target that are demanding useful products in their specific sectors.
“It’s coming out of a realization that innovation has become very difficult to do within a corporate set-up. Innovation is being done by start-ups,” said Rajesh Sawhney, head of GSF Accelerator in Bangalore, which invests in start-ups.
Infosys’ $100 million fund is part of the company’s broader revival strategy. A new product arm, now in its eighteenth month with 750 engineers and seven software products in sectors like data analytics and digital marketing, is also part of this strategy.
“This is run like a start-up inside the company. We all operate with very nimble, small teams,” explained Sanjay Purohit, senior vice-president of the Products, Platforms and Solutions, Infosys.
“We don’t get billed for the number of hours we put,” he added. “This is a different game.”
TCS’ internally incubated businesses function similarly. iON, the company’s business unit offering software applications for small and medium enterprises, “does not even run on our corporate IT systems, but uses the same software it sells to smaller firms”, said Chandrasekaran.
TCS is now incubating businesses around products for the retail sector that could potentially be spun off as a separate entity.
The hunt is also on to identify external start-ups that will help it tap into disruptive solutions. According to Chandrasekaran, the company scans around 100 start-ups a year, in areas such as mobility, analytics and security, and builds active relationships with at least a fourth of this number. “So far we have not invested in these start-ups, but that doesn’t mean we should not. It (investing in start-ups) can happen,” he said.
Some analysts remain sceptical about the ability of large services companies to either innovate or identify innovative start-ups.
“The challenge with many of the Indian companies is they only focus on each other,” said Vinnie Mirchandani, a technology historian and analyst.
“In newer tech markets, disruptive players have evolved (that) are far ahead of them” he said, mentioning Amazon’s work in the cloud services business and Mu-Sigma, the analytics company.
Placing bets on developing new companies is a risky venture, particularly for large IT firms that are themselves not in the best possible shape, said Dev Khare, a partner with Lightspeed Ventures in New Delhi. “When venture investing gets done by large corporates, it’s usually at the top of a cycle,” he noted. “This is a downturn—I’m not sure what’s going on here.”
Khare is more bullish on Wipro’s decision to invest in an established start-up that can immediately supplement its services.
At the moment, the specifics’ of Infosys substantial investment—whether it will create only an internal incubator, and how it will identify and invest in start-ups—is unclear. “I don’t have details on how we are operating,” Purohit said, calling the company’s fund a “work-in-progress”.
Broadly, the strategy appears to be set on germinating products for its current clients, some of which, like Nike, are leaping ahead with their own technology start-up incubators.
With its huge global reach and customer base, Infosys can give a big boost to young start-ups in India targeting solutions, if the services firm turns to them, experts said.
“When it comes to enterprise products in India, there is very little mentorship”, Khare said. “There’s an upswell of enterprise oriented products and they can use all the help they can get.”
So far, TCS has been incubating internal ideas through R&D and other budgets, but the company plans to have a focused incubation fund.
“At this point in time, the funnel is not fully operational, and the number of ideas (generated) internally, small. But the number of start-ups we are looking at outside is large. We are thinking to have a budget for incubation currently,” Chandrasekaran added.