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Nasscom study indicates that over 1,300 startups have been set up thus far in 2019 and that their number has been growing at a healthy clip of 12-15% over the past five years (Photo: iStock)
Nasscom study indicates that over 1,300 startups have been set up thus far in 2019 and that their number has been growing at a healthy clip of 12-15% over the past five years (Photo: iStock)

Opinion | Indian tech firms must catch up on engaging startups

They do not seem to have engaged startups with the same urgency as foreign firms

It is now becoming better accepted that India’s engine of growth for the future will be driven by its entrepreneurial class, and that the “organized sector", as generally defined, will be less of a contributor to future growth. This is coupled with the fact that the country’s other large employer, our government, has realized that privatization of assets is the way forward, as evidenced by recent news reports of public sector disinvestment of state-owned companies.

Nasscom recently released a report on startups in India. The study indicates that more than 1,300 startups have been set up thus far in 2019 and that their number has been growing at a healthy clip of 12-15% over the past five years. Seven of these startups reached “unicorn" status this year (a unicorn is a start-up whose private market valuation is greater than $1 billion), and 24 of these companies are already active in India. The report also counts 60,000 new jobs directly added by these startups, with a knock-on effect of twice-to-thrice that number of indirect jobs getting created. In what is good news to a deep tech/science investor like me, the report says that the share of these startups leveraging deep tech has grown by a compounded annual rate of 40% since 2014 to over 1,600.

It is also evident that startup founders who have successfully cashed out of their first forays are now reinvesting at least some of those proceeds in the startup ecosystem. For instance, over 20 startups were founded by former members of Zoho’s team and over 10 startups by the alumni of FreshWorks.

Outside India, large organizations are engaging startups in growing numbers. This willingness to engage with the startup ecosystem is in part due to a general realization among senior management that their companies are not “agile" and, as a result, not organized efficiently enough to respond timely to fast-paced technological change.

In addition to the slew of quarter-by-quarter investor demands, employees who have been coddled by an internal bureaucracy pose significant resistance to change in existing corporate cultures. While some lip service has been paid to “internal disruption", the truth is that the lumbering nature of large enterprises makes them ill-equipped to handle innovation. Engaging with startups instead makes more sense for most large organizations, given that while startups tend to explore low-margin, high-risk and small-market propositions at first, such efforts do not support short-term company growth targets. Given time and money, they may well “disrupt" or shrink the market share of today’s large firms a few years later, though.

There are many ways for established companies to engage startups. The first is through corporate venture funds and accelerators. These need clear objectives and often require a leader from outside the organization. Balancing collaboration with operational independence from the mother entity is crucial. Other popular modes of engagement are for corporations to pitch their problems to startups, asking for solutions, and offer themselves as early customers so as to gain insights into emerging technologies and guide their product evolution processes.

There are two examples from Germany that have been in the news recently: Bayer, with its focused programme to engage digital health startups called Grants4Apps, and BMW’s Start-Up Garage programme, which offers startups an opportunity to gain BMW as an early client.

Interestingly though, India’s corporate houses don’t seem to have responded with the same level of urgency as their foreign counterparts. Nasscom’s report suggests that 90% of the corporate investors who are active in equity funding are global multinational corporations. Further, while there were about 35 acquisitions in 2018 and 2019, it appears that it is mainly Reliance Industries that has increased its acquisitions this year.

Also, some casual research on participation from Nasscom’s original member firms, such as the big five Indian information technology (IT) service providers, throws up interesting findings. These stack up quite differently from the efforts of Big Tech firms.

In addition to Bayer and BMW, Microsoft, Google and Amazon are extremely active in the space. All three of these Big Tech firms actively provide credits to startups to use their colossal cloud computing environments. They also provide financial assistance via investment through corporate venture funding arms, in addition to assistance via joint go-to-market and sales enablement. For a startup focused on a business-to-business (B2B) technology value proposition, a joint go-to-market offer from a firm like Microsoft, which has an almost unassailable market share for its Windows products, can prove irresistible. The Redmond, Washington-based tech behemoth, is willing to provide over $120,000 in credits for the use of its Azure cloud platform for qualified startups to boot.

By contrast, IT services players such as Wipro, Tata Consultancy Services and Infosys primarily engage startups via financial assistance through corporate venture capital and by granting them access to their client network. They lack the extra cloud operation platforms that are critical to getting startups up and running in the first place. These IT firms may risk getting left behind, given the attractiveness of Big Tech’s value propositions to B2B startups. It might be time for many companies to rethink their engagement of startups, especially in India.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on deep science and tech in India

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