No virtuous circle, or how India's Silicon Valley is... different

I've lived in Bangalore since I was three - we moved here in 1987 after my father retired from the public sector that year. Bangalore, then, was known as a retirement city, famed for its pleasant weather and abundant greenery. The Indian economy was still closed, most of the jobs were in the public sector and salaries were low. Top executives in the public sector earned less than Rs. 60,000 a year - my father retired as the General Manager of United India Insurance, giving me a reference point. At an exchange rate of about fourteen rupees to the dollar, this amounted to around 4200 US dollars a year, give or take. Somewhere around this time was when Bangalore started to be called the "Silicon Valley of India" by the local media.

1997

Ten years on and six years into the post-liberalisation economy, Bangalore was already starting to become a software hub. I remember my cousin doing a course in Java and joining Wipro, making him one of the lucky few to have a well paying job at a respected firm. At this point, Texas Instruments had been in Bangalore for twelve years and Infosys for fourteen. Wipro had diversified from vegetable oil into IT a full seventeen years earlier. Younger upstarts like MphasiS hadn't been founded yet. The average software engineer earned about Rs. 100,000 a year right out of college which at 1997 exchange rates was around 2800 dollars a year. Senior executives in the private sector were taking home heady sums like fifteen lakhs (1 lakh == 100,000) a year if memory serves.

2007

Twenty years on, it's 2007. This was the year Flipkart.com was founded by a couple of ex-Amazon engineers. I'm twenty three years old and working at ThoughtWorks while also (with my employer's permission) moonlighting at my first start-up, InActiv Labs, where we're frantically trying to raise money. Our first offering, a SMS based personal accounting service had tanked the previous year, but our group messaging service, Activ Mobs, had gone viral. Serving the 60,000 users we accumulated in the two months after launch was costing us about three thousand rupees with spikes to six thousand rupees - every day. We were basically spending 60% of our combined founders incomes from our day jobs just paying for text messages and the numbers were rising rapidly. Raising funding was absolutely critical. Several of the bigger VCs were already in India back then, and we pitched to all of them, but for better or worse, failed to raise money. A year passed in this manner, with the service limping along. By mid-2008, we'd decided that we were going to pour our combined life savings of about five lakhs (INR 500,000) into the business in a last ditch attempt to save it.

One month later, my mother was diagnosed with a leiomyosarcoma. After that, there was no question of spending my savings - every paisa had to be saved against the possibility of our life insurance cover running out. For twelve months I hoarded money and liquidated all my investments against a rainy day. Then, through sheer good fortune, my father's forty year career in public sector insurance paid off - a new government scheme was approved which allowed retired senior executives and their families nearly infinite health cover. We could finally afford to have my mother stay in a bigger, better hospital room when she went in for her chemo. Our personal financial situation no longer impacted her treatment. My relief was immense, but it would be another six months before I even thought about starting up again.

I tell this story only to illustrate out what is perhaps obvious: That life is uncertain and when things go wrong, entrepreneurs running bootstrapped businesses are often forced to choose between loved ones and their venture, mostly for financial reasons.

2012

So on to the present, twenty five years after I moved to Bangalore. The top Indian outsourced services firms have all exceeded 100,000 employees. The total number of truly successful Indian internet startups is under ten, and every single one of them replicates a validated business model imported from the first world. Funding is easier to come by, but Bangalore is still an arid desert when compared with the Valley. Basically, the Indian tech startup ecosystem is still a tiny tiny thing in much need of nurturing.

From an economic perspective, salaries are rising at 15% annually, with most college grads starting at one of the big services companies with around 3 lakh rupees a year (or 6000 dollars at the current exchange rate). Most mechanical engineering, civil engineering, industrial engineering and chemical engineering graduates wind up at one of the large services firms where they learn to how to write software. Their engineering degrees are largely wasted; the more driven among them embrace this reality and do an MBA in a year or two and stop writing code in favour of a career in management.

CS grads that are above average start work at about five lakhs a year, and the really good ones can start with ten lakhs or more, though there are just a handful of openings at this salary level. Salaries for roles that require serious programming skills are going through the roof, but it's still incredibly hard sifting through the chaff to find people qualified for the role. Amazon, Zynga and other product companies that have development arms in Bangalore still find talent inexpensive relative to the six figure salaries they pay in the US and are happy to pay very very well, especially in contrast with the large services firms. Most capable programmers now naturally gravitate toward established product firms, where it's not unusual for someone with five years of experience to earn twenty lakhs a year (40,000 dollars at current conversion rates). You'll notice that while the India-US PPP ratio is 1:5, software salaries are actually at about 1:3.

No virtuous circle

This now brings me back to the title of this post, the "virtuous circle." In the valley, failing at a startup for the right reasons earns respect and makes people take you more seriously. It also makes it more likely that you'll raise funding in the future. Failure benefits you in visible ways, creating a positive feedback loop that works to increase your opportunities. In the valley, you're surrounded by people that made serious money by founding or working at startups. It's obviously a viable way to earn a living; sure, starting a Facebook or a Google is like winning the lottery, but even without you can earn a very respectable income from your salary and stock options. Startup meet-ups happen every other week, with a hundred people or more in attendance at every one.

In contrast, I don't know anybody in my personal network in Bangalore that's made significant money from a tech startup. I know of a handful of people, but have never met them. Start up meetings are rare, with a handful of people showing up. Most of the time in the meeting is spent bike-shedding. If you're lucky, you'll meet one person running their own business at such a meeting - the rest are all aspiring entrepreneurs.

Negative feedback loops

In India, failing at a startup means you go back to a regular day job for a couple of years to refill your bank account. Your failures create no additional value, because the learning from them aren't useful to the current ecosystem. You'll certainly get a regular job based off past experience, but don't expect the fact that you started a company to count for much. We don't have two generations of successful technology entrepreneurs ready to give a leg up to the current crop by mentoring them. We don't have the early stage investment ecosystem to infuse money into promising businesses. Most fundamentally, we don't have a society that values risk takers, because in an economy like India's, risk takers crash and burn and may well take their families with them. Everyone, from your parents to your siblings to your in-laws will call you crazy for giving up that cushy job at a top product firm. And you know what? They're likely right.

Here, doing a product startup only makes financial sense if you're in your early twenties, intend to remain single or have a substantial inheritance. As you get older, you absolutely need a steady, significant income because unlike the first world, you're paying for your kids education from the age of three and up. You're likely to also be supporting your parents by the time you're is your early forties. Education and healthcare are, as I'm sure you know, expensive.

This means that you have a narrow window early on to successfully do a product start up. Missing that window means the realities of life will force you into a regular job. Even if you tenaciously hang on, you're doing so knowing that you're forcing your family to compromise on their lifestyle to allow you to pursue your dreams.

Added to this is social pressure from older generations, many of whom lived through the Licence Raj and struggled to find any job, leave alone start something of their own. As a friend of mine pointed out so succinctly, unless you're fabulously, visibly successful, you're always the chap running that "computer angadi" ("computer shop" in Kannada). To most of our grandparents and parents, quitting a steady job is tantamount to social and financial suicide.

Quitting a steady job at a big-brand firm to join a smaller company is not as bad, because, you know, you're still an employee (which is a good thing), but they'll still call you stupid for giving up the brand. "Your son didn't get job in Infosys-aa?" was a question my mother had to field from all quarters when I joined first started working.

Doing it right means playing safe

In India, the deck is both socially and economically stacked against the entrepreneur. The question, then, is how do we change the odds and make life a little easier for ourselves?

Let me start by outlining the constraints that we need to satisfy:
1) You need market-equivalent income to support those who depend on you.
2) Your business needs to be stable so you're better able to hire.
3) Your business needs to be very profitable so you can pay well, because you're looking to hire top talent, you're competing with Amazon and Zynga, not Infosys.

You'll notice that there's a conflict inherent in (2) and (3). Stable business models grow slowly and usually aren't very profitable. Since you clearly can't do both, you need to pick one. Most entrepreneurs in Silicon valley shoot for (3) and trust in their ability to raise money and bring in senior advisors to introduce some stability. We don't have that luxury, so we need to shoot for (2) first, and then figure out (3).

Satisfying these three constraints led us to the business model that C42 Engineering currently follows. Here's our reasoning:
1) We solved the market equivalent income problem by starting out as a boutique Ruby consultancy. We get good rates, which means we can pay fairly well.
2) A services business run right is very stable and predictable. It is also an excellent source of challenging engineering projects, making it even more attractive to programmers which in turn makes it easier to hire.
3) Channel 100% of services profits into a product arm with multiple products if possible. Iterate. Fail fast. Ship. Rinse. Repeat.

C42 Labs, our product arm that was responsible for RubyMonk, has an annual budget of 60,000 dollars, a sum we're likely to double in the coming year. This is about 4.5 times my annual salary when I quit to start C42 Engineering two years ago, so it's clearly an improvement over my ability to fund such a project back then. It may not be much when compared to the millions that startups in the Valley routinely raise, but it's a solid, dependable sum produced in a sustainable manner. We're also creating a brilliant team of engineers in the process of growing the consulting business and are getting to work on some amazing projects for  interesting, successful companies in the process.

We have big dreams for RubyMonk and the learning space. The ultimate goal of the Young Lady's Illustrated Primer beckons. But the best ideas sometimes fail, and if, to our ill fortune RubyMonk is one of them, we'll still be back at work on the next business plan in our pipeline the very next day. No downtime, no salary cuts, no layoffs, no bad mojo.

Conclusion

If you've been involved in the Bangalore start up scene, you know that services start-ups are often looked down upon as being "impure." When I was a working on Activ Mobs, I too was of this opinion and strongly felt I'd never like to do a services business. This harsh perception is driven by the fact that many product startups start doing a little consulting on the side to ease cashflow and before you know it, they've become full fledged services firms. The comfort that a steady stream of revenue offers is extremely attractive after you've scrimped and compromised for a couple of years. There's a second, more valid reason for such critical view of services - every new business you add will dilute your focus. When you have both consulting and product, you focus is halved. This is a risk any diversified business faces, and frankly, there's no good answer to this besides "be more disciplined."

What I do have to say is this: Deal with the risk. Define it. Work it into your business model. The solution to a paucity of early stage funding and expensive talent isn't hoping that things will get better, and that your business will survive until then. Figure out how to make a small amount of money early, and in a reliable manner. Then re-invest and diversify. You'll grow more slowly and take longer to become massively successful, but you're now much more likely to make it to the end of the road.

Don't worry about local "wisdom" -  just do the sensible thing. This could mean you start with consulting like us, or simply bootstrapping in you spare time like my friend Akshat's doing until you get to sustainable revenue, then quit to run the business full time.

But whatever happens, don't let the naysayers stop you from starting up. Just remember that you must be pragmatic about how you go about it, because even though we wish it were more similar, Bangalore isn't quite Silicon Valley yet.

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