Indian startups need a wake-up call: Narendra Gupta

Naren Gupta

Narendra Gupta is one of India’s highest profile venture capital investors (founder of Nexus Venture Partners) as well as the founder of various investment and software firms (CEO and President of Integrated Systems Inc. (ISI) for a decade and a half).

 

The last 10 years have seen the birth of remarkable new-age startups in India. What are the common themes among these startups? They are technology-based and innovation-driven, and are often launched by motivated, educated, high-energy founders. These startups are changing a variety of industries, such as retail, health care, logistics, transportation, education, and entertainment. They enable a broad swathe of people to access high-quality products and services at affordable prices. Most importantly, these startups can scale rapidly and create millions of well-paying jobs, something India sorely needs.

Founders with grit and vision, fuelled by risk capital, have driven this vibrant startup scene. Recent changes in government regulations and tax policies are recognising the importance of startups among broader economic policy initiatives. Done right, these startups have the potential to form the foundation of long-term economic growth and bring millions of people out of poverty.

But the experiment that anchors India’s future is beginning to stumble. At least it seems far from realising even its modest potential. Let me explain why, and share some thoughts on what can be done before it is too late.

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Based on my decades of experience in the Silicon Valley and, more recently, in India, I can say that Indian founders are, in general, world class. Venture funders and the media also have their hearts in the right places. The Indian ecosystem, however, lacks maturity. Unlike in the Silicon Valley, only a handful of investors in India have experienced multiple economic and venture cycles. All of us have a lot to learn.

While building great companies takes years, if not decades, many Indian investors have a short-term mindset. We often invest in areas that are ‘hot’, and shun larger, longer-term opportunities. The result is an over-funding of hot areas, with a concomitant funding dry-up a short time later. Indian investors also tend to value companies based on short-term metrics rather than an understanding of underlying technologies, business models and defensibility.



Post-funding, the investors’ focus seems to be on preparing for the next round of funding in preference to building sound, market-leading companies.

Exceptional founders need to be backed by a stable source of thoughtful capital from people who have gone through entire funding and company-building cycles.

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The Indian media tends to over-promote ‘hot’ business opportunities and founders, setting them up for disappointments and eventual failure. When the lofty, unrealistic projections are not met, the media is equally expeditious in trashing the companies and their founders. It is either boom or it is bust. Over the last five years, the media coverage of microfinance, mobile VAS, media, ecommerce, food delivery, and other business opportunities, together with their founders, shows the immaturity of the Indian startup ecosystem. In my personal dialogues, I have generally found India business reporters to be informed, caring and thoughtful. I hope that the media will provide a more balanced coverage in good times and bad. The press should take a leadership role in helping potential customers discover innovative products and services from early-stage companies; something these companies do not have the resources to do themselves.

Most of a startup’s early success can be attributed to the founders and the leadership team. For this, they rightly deserve fame and fortune. Recently, I have observed rampant short-term orientation in Indian founders. Do irresponsible investors and the media drive this behaviour? I don’t know. In any case, exceptional founders should have the courage to go against the grain and do the right things. Startup leaders who cannot say ‘no’ to their board and venture investors when they are being misdirected are not good leaders.

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In the early years of the Silicon Valley, in 1980, I started Integrated Systems, a company focussed on software products for real-time design and implementation. Our team wanted a company that would outlast any of us. We made numerous mistakes. One time, at the suggestion of one of our large customers, we got diverted into building a hardware product that could implement real-time logic for laboratory testing. It brought us revenue, but the decision almost killed the company since we were not set up to support hardware products in the field. Our biggest mistakes were, however, mistakes of omission—things we should have done, or the initiatives we should have killed, but did not, despite our instincts. Why? In every case, the decision would have caused short-term pain, but the long-term benefits would have been substantial.

We made many mistakes, large and small, but fortunately none turned out to be fatal. We learnt from every mistake. I ran the company for almost 15 years as president/CEO, with a maniacal focus: I took no outside board seats, or made any startup investments. It was the best time of my life. We took the company public in 1990, and merged it with Wind River in 2000. Integrated Systems remained a leader in the real-time space till Intel acquired the merged company for almost a billion dollars in 2009.

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In 1995, after I stepped down from the CEO’s position at Integrated Systems, I met a young professor from Harvard University for lunch. Dr Yagyensh (Buno) Pati, in his post-doctoral research, had discovered a technology that would enable many more components to be placed on a semiconductor chip. I agreed to fund his company under only one condition: He would work on the company full time. Giving up an academic position at one of the most esteemed institutions in the world was a very difficult decision. In addition, bringing a new technology to market involved much iteration, some causing significant drops in short-term revenue. Buno had the courage to make the right calls. Five years later, the company went public and had a valuation of more than a billion dollars. As Buno says, “When you are standing on a pier with one foot in the boat, the boat is unlikely to go anywhere and you are likely to end up at the bottom of the sea.”

Over the last few years, I have failed to see this focus or commitment in many of the new-age company founders or management teams in India. They seem overly focussed on their image in the media, maximising valuations in the next funding rounds, and other short-term bragging rights. Where is the focus on exceptional products and customer satisfaction?

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My belief is that today’s even moderately successful Indian entrepreneurs are so distracted that they cannot maniacally focus on building great companies. The baubles that distract them range from angel funding to building fancy bungalows. During my recent visit to Bengaluru, I cringed when I was told that many executives of rapidly growing companies were spending time with architects and builders, while their companies were losing millions of dollars every month and are in survival battles against strong competitors.

Some people say that the tendency to take short cuts is in our blood; the so-called ‘jugaad’ mentality. I disagree. It has nothing to do with Indian family values, culture or markets. Narayana Murthy and Sunil Mittal built large, durable companies in a less hospitable environment in the not-too-distant past. Indians around the world are doing exceptionally well as founders and leaders of market-leading innovators.

Two other major factors are affecting the ability of Indian founders to build large and sustainable market leaders.



One: Indian founders lack a culture of mutual support and brotherhood (and sisterhood) with other founders. In the Silicon Valley, founders frequently celebrate other founders’ successes. They try and buy products from other startups. The early-stage companies that we have funded in India tell us that moderately successful startups are their worst customers. For example, they would often defer payments to these early-stage companies while making timely payments to more established players. Startups that are further along also fail to leverage other startups’ innovative products and solutions. Rather than building a strong ecosystem around their companies, these founders set up competing teams within their own organisations. These teams are often incapable of competing with agile startups and distract the company from its main mission.

Founders, it seems, are doing everything possible to see other founders fail, even if they are in complementary businesses, at the expense of significant distractions, wastage of resources and less-than-optimal outcome. Founders and management teams need the courage to change conventional, dogmatic notions of ‘How India works’.

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Two: Startup leaders need to embrace the notions of sharing and sacrifice, which are the key foundations of Indian culture. Authority, responsibility, credit for success and financial rewards should be shared broadly and deeply. When I ran Integrated Systems, one thing that made me proud was that most employees referred to Integrated Systems as “my company” in talks with their family, friends and the media.

The ‘me first’ way of thinking makes it difficult to build strong, committed teams with a wide range of expertise. As a startup scales, the capabilities of each team member and how well the team works together determines long-term success. The larger pie even allows more participants to benefit from the success. Silicon Valley has excelled on this philosophy of broad sharing. Given our culture, Indian startups can do even better.

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Ten years ago, I decided to take a detour to help build the Indian startup ecosystem with a dream; a dream that the next mega success will originate in India. While the last couple of years have taken us sideways, the dream is alive and well.

We – founders, venture investors and the media – are all privileged to experience the once-in-a-lifetime opportunity first hand. But this privilege comes with responsibilities. Let us learn from the best in India, the United States, and elsewhere. Let us work together to leverage entrepreneurship for the benefit of billions of men and women in India and around the world.

This article was originally published in Forbes India



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