STVP-2005-010 [Rev. Feb 2, 2006] Rise of the Global Entrepreneur: Leveraging the India-U.S. High-Tech Corridor It was a bright warm day in Bangalore on January 15th, 2005. The aftermath of the catastrophic Tsunami disaster was still unfolding and people all around the Indian Ocean were grappling with the uncertainty of life. The high-tech industry in India however hadn’t missed a beat; the Mumbai stock exchange was still healthy and the average Bangalore resident was contemplating new ways to succeed in India’s burgeoning high-tech economy. Kumar Ramachandran1 knew that his life had changed forever. He had just resigned from his position as Managing Director at Applied Materials, India and was ready to start a company of his own. The future would be full of new challenges he thought. As he sat in his chauffeured car on his two hour, 30 mile commute, he started making a list of people to call. He was glad to be following his heart. After all, life was too short to not pursue your passion. Although Kumar did not know what awaited him on the road ahead, he was determined to leverage his past experience and network of working relationships to launch a new venture of his own. Given his professional background and his knowledge of the new areas of growth in India’s services industry, he firmly believed that the best opportunities for him laid within the realm of engineering services outsourcing. India had pioneered the outsourcing of Information Technology Enabled Services (ITES) and Business Process Outsourcing (BPO) starting in the 1990s. Several Indian companies, such as Infosys, Wipro, and Tata Consultancy Services had become important global players by 2005. In the future, Kumar knew that companies would leverage the Indian workforce not only for software design and back office work but also for product engineering and innovation. His instincts told him that this process would generate incredible opportunities and wealth for those who dared to execute on their dreams. The time was ripe for a company that offered world-class product engineering services at a fraction of the cost to companies anywhere in the world. He chose to call this company “Vignani” – the Sanskrit word for scientist. Kumar had met a number of global entrepreneurs and venture capitalists in the emerging ecosystem that linked India with Silicon Valley and other high tech hot spots around the world. He was eager to learn how into tap this corridor of mentorship, financing and business best practices. Learning 1 Kumar Ramachandran’s biography is provided in Exhibit 1. This case was prepared by Aparna Bhatnagar and Rishi Manocha, Graduate Students at Stanford University, under the supervision of Thomas J. Kosnik, Consulting Professor, Stanford School of Engineering as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Success stories outlined in this case were derived from interviews with a number of key individuals from the entrepreneurial and venture capital community. The authors would like to acknowledge their support and thank each of them. They are in no particular order: MJ Aravind, Professor M. Balakrishnan, Sanjeev Bikchanandani, Joydeep Bose, Somshankar Das, Vinod Dham, Sridar Iyengar, Surendra Jain, P.V. Kannan, Dr. Sridhar Mitta, Professor Sangeneni Mohan, B.V. Naidu, Sanjay Nayak, Anu Parthasarathy, Gunjan Sinha, Suvir Sujan and Sunil Verma. Copyright © 2005 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Stanford Technology Ventures Program. Rise of the Global Entrepreneur: Leveraging the India-U.S. High-Tech Corridor STVP 2005-010 from prior successes and failures would be an important first step in launching his own entrepreneurial venture. Kumar understood that launching a global high-tech start-up was a risky proposition. Managing those risks required that he successfully execute four main tasks: raising start-up capital, building a global team, identifying an unmet need in a large potential market, and creating a disruptive product or service. As he continued his commute, he reflected on new developments related to all four of these tasks to the high-tech corridor that had been developed between India and the U.S. in the last few years. Why Consider India? In 2005 India and China were widely viewed as two prominent regions of new economic opportunity. The excitement around India stemmed from two related factors. First, India had proven to be a viable off-shoring destination for a variety of software and IT related functions (see Exhibit 2 for a list of attractive destinations for offshore IT services). Second, the growing economic prosperity of India was creating a potentially very large new market for all types of products and services. Nascent Market Poised to Grow In 2005, India was home to over one billion people of which approximately 64% were within the working ages of 15 - 64 years old, with a median age of 25. These people would be future consumers of all kinds of goods. India’s GDP was U.S.$692 billion, making it the tenth largest economy in the world (see Exhibit 3 for the largest economies in the world). Its GDP on the PPP basis was U.S.$3.3 trillion, the fourth largest in the world, just behind China. The unemployment rate was 9.2% but approximately 25% of the population still lived below the poverty line (Exhibit 4 provides key information about India and lists the country’s high tech hubs). Given the large population, the rise in employment and the 6% growth rate of the economy, India was considered by many as a large market poised to grow rapidly over the next few years. However, because the majority of the population was poor and rural, only products and distribution networks that were well adapted to those conditions were expected to succeed.2 This process of designing the correct type of low-cost high efficiency products for the emerging world was expected to spawn innovation3, which could in turn impact the availability of such products in developed countries. Based on these arguments, a presence in the nascent Indian market was important not only because of its size but also as a source of strategic competitive advantage. The opportunity presented by the lower segments of the Indian market was explained by Prof. C.K. Prahalad as “The Fortune at the Bottom of the Pyramid4”. In fact this approach was already being adopted by technology companies such as AMD which had announced in 2005 that it would launch a low-cost (less than U.S.$200) internet-ready computer system by the end of the year, to bring 50% of the world’s population online by 20155. A domestic market with strong buying power in India presented opportunities for innovation and investment that would also possibly alter the type of services and products exported from India in the 2 Kuldeep P. Jain, Nigel A. S. Manson, and Shirish Sankhe, “The right passage to India,” McKinsey Quarterly (February 2005). 3 John Seely Brown and John Hagel III, “Innovation blowback: Disruptive management practices from Asia,” McKinsey Quarterly 1 (2005). 4 C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Upper Saddle River, NJ: Wharton School Publishing, 2004). 5 “AMD tries unique marketing for cheap PCs,” The Washington Times, April 29, 2005, http://washingtontimes.com/upi-breaking/20050429-065018-3694r.htm, accessed on July 2005. 2 Rise of the Global Entrepreneur: Leveraging the India-U.S. High-Tech Corridor STVP 2005-010 future. This had already begun to occur in the automotive sector by early 2005. Increased domestic demand for automobiles had led to cost effective manufacturing plants in India, which not only catered to the domestic market but also exported automobiles to Asian and European countries. The domestic demand for electronics could in the future create a similar trend in high-tech manufacturing where Indian companies thus far had no significant global competence. Burgeoning IT Services Industry India’s software and services industry flourished partly through planning and execution and partly due to timing. In the early 1990s, the Department of Electronics (DoE) in India set up the Software Technology Parks of India (STPI) scheme, which was explicitly designed to enable the export of software services from India6. The STPI provided reliable telecommunications links, basic computer and office facilities, and tax incentives for the export of software services. These parks were the starting point for India’s IT service firms, which established themselves during the 1990s by achieving global standards in quality while delivering services at lower cost to their clients. The timing was also right because the demand for IT and software services continued to grew dramatically during the decade that followed. Indian companies were well positioned to meet this demand because they had access to a large well-trained workforce and the processes required to utilize it effectively. Every year, nearly two hundred thousand IT engineers graduated from India’s engineering schools and private software institutes and many migrated to Silicon Valley in the late 1990s (see Exhibit 5 for the number of IT admissions and graduates in India in the years 1992 - 2004). After working in the U.S., many of them returned to India following the dot-com crash in early 2000s. The economic boom which followed them to India changed their perceptions of what they could achieve back at home.