Hatching for Success

Date:   Tuesday , October 03, 2006

Vishal Gupta’s time in IIT-Bombay was coming to an end, almost. He was sad, but heck, his life was already stuff that most others could only dream of! For what else occupies the aspirational canvas of an average middle-class boy—IIT education, followed by a degree in the U.S., in his case Cornell University, and then…

The dilemma was just six months. The semister in IIT would end in March, the new one in Cornell would start in September. The intervening period was too long to take.

Around him, in hostel no. 6 of IIT-B, a few heads were conferring animatedly. The Kanwal Reki School for Information Technology had just kicked off its pilot incubation center. Making use of the facilities, his peers had launched Right Half and Myzus. The excitement in the air unnerved him, till he finally took the plunge. Just for some time, he swore, and then he would fly to Cornell.

Gupta decided to put his final year project on finger print technology to use. He approached the incubation center, and was asked to submit a business proposal. What went across was his resume attached to the final year project. The ‘business plan’ was approved! Since the center had just started out, he wouldn’t be required to pay for using the facilities, he was told. That was the beginning of his new venture: Herald Logic.

Alumni visiting the center gave Herald Logic some assignments to work on. As employees, he zeroed in on a few third year students. The company started getting more work, and the events panned out quite differently from what Gupta had planned. He chucked his plans of pursuing M.S., even let go of three promising job offers, and stayed on in the incubator for two years. Rs 2 lakhs was all he spent in building Herald Logic during that time—savings of 38 lakh, if done outside India. The company graduated out in 2003, and was acquired by Australian firm Value Chain for around Rs 13 crore in May this year.

Just like Gupta’s fingerprinting project that led to the creation of Herald Logic, there are thousands of ideas bustling across the country, waiting to be explored. Unfortunately, most of them don’t see the light of commercialization.

Indigenous Hatcheries; Indian brains
Some simple mathematics first: Roughly, graduates from each of the seven Indian Institutes of Technology (IITs) file around 700 industry projects every year. Add to that the theses of students across the seventeen National Institutes of Technology (NITs), and the projects of thousands of engineers churned out by private colleges across the country.
In terms of the number of prospective big-ticket ideas, it would constitute a mind-boggling figure. Many among them could have the potential to become the next killer technology big thing. But like Gupta, not all are fortunate enough to reside in a ‘protected environment’ during their initial days of struggle. Among those who dare to brave the odds and launch a start-up, by the time they fix the logistics and locate the experts—they come attached with a hefty price tag—the game is almost over!

It is in this space that an incubator fits in snugly. It provides the bridge between a nascent idea and a verifiable proposal that a venture capitalist (VC) can support with acceptable risks. Not only does it provide office space and access to faculty members—the
quintessential experts to a start-up—but also, in some cases, a seed-capital.

Though university-based Technology Business Incubation (TBI) is fairly recent phenomenon in India, IIT-Bombay’s incubator, fondly called the ‘crèche’, has turned out to be the most aggressive player. With 28 companies incubated, it’s way ahead of the other centers. Says Poyni Bhatt, Chief Administrative Officer, IIT-B incubator of her two-year experience of running the facility, “In the applications that we receive, most of them fulfill the technological requirements, but are not backed by sound business strategies.”

Incubators across the country organize business plan competitions from time to time to counter the drawback. “But,” says Dr. B.V Phani, Coordinator, IIT-Kanpur incubation center, “Students who win these competitions are not at all serious about starting their companies; their only motivation is the prize money.”

In its six years of existence, the IIT-Delhi incubator has managed to parent just 15 companies. “We have received around 60 applications,” retorts Dr. Arun Wali, the director. But then, sixty applications in six years from a premier institute like IIT-D, is that not a trifle too less?

Money Mechanics
While most incubators in India lay a lot of emphasis on the business aspect of a proposal, IIT-Kanpur would rather give it a miss. “Novelty matters,” notes Phani. “The technological spark is very important; business plan is something we can take care of.”

It’s a trend widely followed: Each of the incubators seem all willing to make a few considerations in order to attract prospective companies. And why not? The renting out of premises at about 75 percent of the market rate—25 percent in case of IIT-Delhi, quips Wali.

“We receive around Rs. 20 lakh every year as rent from the 15 odd companies incubated in the campus,” informs Bhatt. The companies themselves are all too willing to dole out the nominal charges. Explains Gupta of Herald Logic, “Roughly, Rs. 1.7 lakhs was the operational cost difference between the last month in the incubator and the first month outside it.” An incubator, apart from offering office space and personal computers for a nominal fee, also provides for conference facilities, official equipments and access to professionals with legal, financial, accounting and industrial expertise almost free-of-cost. In exchange, it holds an equity in the company once it graduates.

Typically, the stake hovers around the three percent mark, and in case of an Intellectual Property (IP) transfer, it rises to about ten percent. With no business incubation models present in the country, the figures, one would presume, have been drawn up with reference to models in the U.S. universities.

“Not at all,” counters Bhatt. “Their social and economic structure is entirely different.”
“Besides, the universities in the U.S. work outside government control,” seconds Dr. Ashok Jhunjhunwala, Director, Telecommunications and Networking (TeNet) group, the TBI of IIT-Madras. He further points out that audit regulations are far less rigid in the U.S., thus facilitating a change in the structure of the incubator as and when required.

“Moreover, formalizing the process has many pitfalls,” he continues. The contribution of each stakeholder in the company, including that of the host institute becomes clear only eight to ten months down the line. In such a scenario, deciding upon an equity-sharing model up front often acts as a de-motivator.

For reasons less obvious though, the decade old IIT-M incubator has chosen not to formalize its ‘payback’ model. The institute decides the numbers on a case-to-case basis. With telecommunication solutions provider Midas Communications, for example it has a unique royalty sharing arrangement, apart from the equity it holds in the company.

“It’s a single digit figure,” says Shirish Purohit, Chief Executive Officer, Midas Communications, of the royalty stake. The deal ensures that the company contributes around Rs 12-15 crores into the IIT-M kitty every year. Purohit does not seem to mind.
“We still have hundred odd engineers working inside IIT,” he informs. One can only guess the kind of money the institute will receive some years down the line, in terms of royalties for the prototypes being developed there.

“Such an arrangement wouldn’t have been possible had we had a formal revenue sharing model,” says Jhunjhunwala triumphantly.

Though it’s been quite a few years since business incubation took off in the Indian universities, the complete lack of coordination among the various ‘greenhouses’ is appalling. Most of the incubators are unaware of what the others are doing. More importantly, a majority of the companies incubated so far have, as founders, someone connected with the institute; be it a professor, alum, or a student. The number of ‘outsiders’-most of the TBIs is open to them, remember—making use of the facilities is negligible. It’s not that the others don’t have ideas, but just that the awareness levels of TBIs is very low. Not only among the ‘masses’, but among the directors of the TBIs as well. “I have taken over just three months back,” was the common refrain offered by them for not knowing the criticals with regards to their job. Nothing but an outcome of frequent change of guard at the top, one must say.

The ecosystem!
“Incubation in India makes sense. In the U.S., it is already matured” says Rakesh Mathur of Webaroo. “With over $20 billion is invested in start-ups by
venture capitalists every year in the Silicon Valley alone, why would you need an incubator there?”

Coming from the veteran of successful start-ups like Junglee (acquired by Amazon), PurpleYogi and Armedia, the words carry weight. Mathur started Webaroo in 2004, making use of the incubation facilities at IIT-B. Considering his track record and network in the U.S., did he really need to go to IIT-Bombay for launching his new company? After all, one idea from him and venture capitalists would line up to fund his project.
“I wanted to give back to my alma mater,” he declares. Besides, being based in IIT gave him access to the country’s top engineering brains. “About 40 percent of our employees are IIT-ians,” he notes.

The ‘ecosystem’ in the temples of learning is cited as the primary reason for having used the incubation facilities: Whether it be Reapan Tikoo of Powai Labs, Shirish Purohit of Midas Communications or Ashish Kumar of Tekriti Software. All of them vouch for their alma mater being the best place for research and development activities. “The incubation experience transformed us from number crunching engineers to process oriented businessmen,” opines Gupta.

“Success is an accumulation of many small things that need to turn out in your favor,” says a seasoned Mathur.

“Having basic facilities in place meant the time to get started was zero,” he adds of his experience. On the other hand, Dipinder Sekhon of KritiKal Solutions, one of IIT-Delhi’s success stories says, “KritiKal wouldn’t have existed if the incubator wasn’t there.” The company was spun off from discussions among its twelve founders following a presentation on incubation facilities in IIT-D. “We all wanted to do something of our own,” says Sekhon, his memories tracing back to the summer of 2002. Coming together was the next logical step. “Since none of us had market experience, we decided to begin by offering services,” he says. Learning the nuances of marketing helped them gauge its forces. Since graduating out late last year, the company spun off a subsidiary KritiKal SecureScan with Angel investment

“The consistent access to like-minded alumnus and experienced faculty members is a big plus,” notes Kumar of TeKriti Software. Though there is no formal database, as Gupta wishes, the governing board of each incubator helps resident companies get in touch with faculty members best suited to their domain. The arrangement works especially well for IIT professors such as Girish Saraph, associated with Vegayan Systems, and Kaushal Sarda of Collcraft Technologies . While Prof. Sarda quit IIT-B ‘to avoid conflict of interest’ Saraph’s firm recently received Rs. 34 lakh funding from U.S. venture capital firm Draper Fisher Jurvetson.
“We can participate in the boom without the risk of having to quit our jobs,” he exclaims.

Path to Progress
The scene is gradually hotting up. The Birla Institute of Technology and Sciences (BITS) is all set to operate incubation centers in premier metros, Bangalore being
the first. “It is to counter the locational disadvantage,” informs
S Gurunarayanan, Coordinator, BITS-TBI. That explains why it has on ‘record’ just two companies in its two years of existence.

On the other hand, IIT-Bombay and IIT-Delhi are running out of space. Around 35 engineers jostle for space in a room measuring just 350 square feet. Many gripe.
“Space, space and space,” says Tikoo on the problems of learning the ropes of survival in an incubator. But maybe, just maybe, that density will enhance the collaborative teamwork. A hurried conferring will follow, some sparks will fly, and then we will see India’s first big winner emerge out of the not-so-swank buildings. And touch our lives in a way it has never been touched before.

To the hatcheries of success!