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India The Unsuitable Destination for Innovative Startups
Rakesh Verma
Tuesday, March 2, 2010
Small businesses and innovative startup ventures have made significant contribution in building and growing American wealth. During tough times, innovations have played a key role in rebuilding the economy. While large American corporate houses have taken advantage of the cost competitive offshore capabilities in India successfully, the innovative American startup companies could not do so. The reason lies in the business environment, unprofessional attitude, the legal system and the lack of it India, in addition to corruption in India. Startups generally lack enough resources and time to counter these hurdles in the beginning as opposed to large corporate firms.

Indian corporates have wrongly positioned themselves as cheap labor suppliers in global markets, while they could have commanded intellectual property ownerships and resultant premium as well as value. If you compare market cap per head count of Microsoft, Google, oracle, or Vmware with their Indian counterparts such as Wipro, Infosys, and TCS they are 15 to 25 times inferior. These companies do not have their own intellectual properties, technology, and products and they land up being mere contract laborers for American IP owners.

American soil produces entrepreneurs, while India breeds talent and technocrats. It has been found that 93 percent of intellectual properties created in India capitalize in America, ultimately adding to America’s wealth. Most of the American companies have budget and departments that constantly look for innovative startups that can be acquired to multiply small successes into large volume rather than doing everything themselves. The American manager takes the risk of trying a small and or unknown company for magnifying the order of benefit while Indian manager avoids taking risk at all. Therefore there is no incentive for Indian startups.

Bring up an innovative idea, creating a business plan, attracting angel investors and venture funds, and getting acquired by large companies is a very well accepted goal of life pursued by American professionals, while in India such success stories are not heard of.

This attitudinal inability originates from the depth of Indian psychology. A typical American student from a top university such as Stanford or MIT thinks of starting a venture while his counterpart in India wants to become a part of the crowded labor market. The parents here always advocate safe jobs rather than ventures for their kids. It means that the age when someone can take up risks in life is wasted due to a mindset that prevents taking risk. There is a general assumption that talent and education guaranty prosperity, while the fact that prosperity comes to those who take the risk is neglected.

The role of innovation in progress is recognized in America and is encouraged at the highest levels in government. I would like to quote the United States Federal CTO’s speech where he mentions “Conventional procurement process aim at a saving of 10 to 15 percent through vendor innovation. How about saving 85 percent by innovation?” Government procurement process ensures a fair share of business to the right vendors irrespective of their size in America.

If India has to change its position in the global market, it has to seriously plan to encourage and promote the startup culture. It has to reposition itself as the value creator and owner rather than being cheap labor to other value creators.

Such a change could only be brought about by the business executives who have seen both the cultures. Unfortunately for India, the business executives of Indian corporates doing business in America could not initiate such a change as they are constantly hard pressed by targets and to stuff many more in to the contract. American executives of Indian origin who have returned to India in recent past did not bring the innovative culture but have fallen in line with the prevailing Indian culture and turned themselves into bade babus.

Soon after the dot com era the Indian offshore talents came to limelight. Many NRIs turned towards India, and the union and state governments started attracting NRIs to start ventures in India through forums like ‘Pravasi Bharatiya Sammelan’ with a promise of smooth and clean startup formalities, legal clearance, tax incentives, and special economic zones. While these steps helped large companies they miserably failed to serve the needs of independent innovative startups willing to make India their R&D base.

The innovative startups are characterized by strong core value of an idea, huge potential of disruptive a technology, and the potential of magnitude order of financial value creation, but have very little resources and time. The keys to success are judicious use of resources and low burn rate. Going by the availability and economy of talent, a large number of startups should have come up in India; however, almost none of the scale equivalent comparable to America is noticeable on the scene.

Many NRIs and independent entrepreneurs started ventures in India to find the futility of Indian government promises, hostile and dirty legal and business ambience, in addition to the unprofessional and unethical behavior of Indian employees and local agencies.
Selected employees are not sure to turn up on joining dates, and employees quitting or absconding from work without notice and not honoring the notice period are commonplace here. The recruiting agencies themselves sometimes provoke the employees after 90 days, finding them another placement so that they can earn from the candidate for a second time. The legal system offers little help to the overseas employer. The Indian company law mandates physical presence of directors imparting unprecedented and unfair power to local partner, providing him a good incentive to cheat the overseas partners. You cannot run the operation in India while being away, so you must have a local partner.

Unfortunately, small Indian businesses have devised innovative ways for tax evasion, black money generation, and bypassing legal compliance for their personal benefits. This is very much an accepted norm for them and they find the NRI promoted startup ventures as a good instrument for their financial manipulation at the risk of the overseas partner whose physical absence is exploited and his property appropriated. This author has come across many firsthand horror stories of this kind in the American business circles and found many potential investors pulling back prematurely.

Many such ventures either folded up or moved back to America or the disappointed owners turned them in to cheap labor shops.

If India Inc wants to change the situation it must setup a special cell and make provisions in the legal system that would protect the interests of NRI ventures.

The author of the article is Rakesh Verma, Founder and CEO, AgeTak. He can be reached at rakesh@agetak.com.

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