The meeting and minutiae are etched in Sudhir Sethi’s mind. It was Sunday, May 21, 2006. At the time, he was based in Hyderabad as president of Infotech, a $100 million (Rs 493 crore) software services firm. But a meeting with Patrick J. McGovern, founder and chairman of the $3 billion International Data Group (IDG), brought him to Bangalore. The American billionaire wanted to start IDG’s venture-funding arm in India. Sethi, who had been corresponding with McGovern, had some contrarian ideas about what IDG should do. At a time when investors wanted to blood the next Infosys or Cognizant, Sethi made a case for product companies in a three-page note to McGovern. Their meeting at Bangalore’s The Oberoi, scheduled for 30 minutes, ran two hours longer. A month later, Sethi was in charge of IDG Ventures India, a
$150 million fund.

More than five years later, eight of the 17 companies funded by IDG Ventures focus on products. The underlying premise of Sethi’s note to McGovern was simple. “To build up a services business, I don’t need to buy out a company. I need to bring together the necessary people,” he says. “However, if I want to build a product company, I can’t do it by just hiring people. The product, its intellectual property, and patents rest with the business. A product company is an irreplaceable entity.”

It wasn’t as though there was a bunch of product companies ripe for the picking. But there were companies with promise, particularly in health care devices. These married innovation with demand for affordable equipment. Chennai-based Perfint Healthcare, for instance, was dabbling in several fields—a product for premature babies, a portable CT scanner, and even health care engineering services. But what caught Sethi’s eye in 2008 was PIGA CT, a robotic device, which the company had developed for biopsies.

A little guidance from IDG Ventures and the founders were soon focussing on becoming the leader in image-guided and minimally invasive oncology (cancer diagnosis and treatment). It soon came up with an enhanced version of PIGA CT called Robio—a robotic arm that uses a needle to extract tissue from a patient to check
for cancer. Perfint’s focus on innovation attracted other investors, such as Accel Partners India, and Norwest Venture Partners. Since 2008, it has raised $10.7 million. A fresh round of funding from the three investors is expected in March. By then, its annual revenue is expected to cross $5 million.

The excitement around Robio is palpable as it has plugged a technology gap in the health care industry at a low development cost. The frugal engineering trend in India, started by multinationals such as Philips and GE with the help of local engineering talent, has caught on among entrepreneurs. This has resulted in less expensive MRI and ECG equipment and is being bankrolled by the venture capital community.

Products are risky to back. Arvind Thiagarajan, founder of HD Medical Devices, which makes FonoDoc, a Rs 25,000 handheld device to detect cardiac problems early, told Fortune India last year that he didn’t find backers in India. He ultimately received more than $10 million from investors in South Korea, Singapore, and Australia. As Srividya C.G., partner and head of valuation services for Grant Thornton, a business advisory, says, “Quality assurance and customer growth are different for a product company, compared to services businesses [such as telecom or IT]. A problem in the product can undermine growth and all the hard work. That threatens scale, and efforts are then diverted to fixing problems.” That also explains why successful product companies are valued at figures ranging from four to seven times revenue, while services companies’ valuations decline as costs rise.

Today, within Bangalore’s investor community, there’s optimism around the medical devices being built locally. India’s tech sector has often been criticised for being obsessed with services and not developing enough products. Are these the early stirrings of change? Some liken the mood to the one that surrounded the Indian pharmaceutical industry’s early attempts to enter markets abroad—the opportunity is huge, but it won’t be easy.

Products matter, says Sethi. If China had an original idea like the Reva electric car, the largest selling of its kind in the world, it would have scaled it globally. The Indian government, however, couldn’t create an environment to grow Reva at home, leave alone the world. “We can just be content it was an Indian company [Mahindra & Mahindra] that bought out Reva, not an overseas
one,” says Sethi.

In January, about 70 radiologists and clinicians at a medical conference in Chennai witnessed Perfint’s flagship product Robio in action via a live broadcast from Global Hospital in the same city. Robio’s precursor, PIGA CT, was sold to over a 100 hospitals in India and overseas—mostly South and West Asian countries. Robio is expected to do better. “In most emerging markets, the skills required to perform accurate biopsy procedures were found wanting. We focussed on robotic solutions for CT [computer tomography]-guided operations,” says Nandakumar S., founder and CEO of Perfint Healthcare.

Needle biopsies used by radiologists to extract tissue are a tricky business. The most efficient needle handler can be thwarted by the patient’s breathing, critical blood vessels, or the toughness of the tissue, resulting in a bent needle. A miss by millimetres can result in erroneous findings. It’s just a speck of tissue, but its analysis is what helps oncologists plan the treatment. When done manually, several insertions and manipulations are required to get the right tissue sample. Doctors often have to wait for the tumour to grow to a size they find easy to handle. Robio’s precision allows for tissue to be removed when the tumour is tiny and helps in early detection.
The alternative to getting tissue extraction right was to use electromagnetic markers and optical navigation manufactured by the likes of U.S.-based Veran Technologies, and distributed by GE. But, where an electromagnetic marker procedure may cost over $300, Robio gets the job done for $200 or even less, depending on how the hospital wants to recover its $100,000 cost.
Perfint has filed for several patents for Robio, including its software algorithm. The company is, meanwhile, working on Robio’s successor, which will assist in “ablation”, or the elimination of the tumour cell. That kind of product lifecycle and focus keeps investors interested.
Perfint’s isn’t the only success story. Bangalore-based ReaMetrix has devised a tool to monitor antiretroviral therapy for HIV-positive patients. For Rs 120, it conducts the ‘CD3/CD4’ test which determines if an HIV-positive patient’s immune system is stronger after therapy. A test done with diagnostic tools sold by multinationals costs about Rs 1,200. The ReaMetrix test has received the European CE mark for conforming to health, safety, and environmental protection standards of the region. Baring Private Equity Partners has invested $7 million in it.
“Few Indian companies come up with diagnostic tests, so they are priced high,” says Amit Chander, head of health care and pharmaceuticals, Baring India. About 75% of the medical equipment in India is imported or sourced from multinationals.
There’s also Forus Health, which makes detection tools for eye problems such as cataract, diabetic retina, etc. Forus seeks to make detection more accessible and affordable. There are 12 million people in India with different forms of blindness, 80% of them termed ‘avoidable blindness’, and most medical expertise and equipment are in urban areas. So, Forus developed 3nethra, which performs three ophthalmological functions: imaging the cornea and the retina, and detecting refraction errors. That’s three pieces of equipment bundled in one. Users can be trained in two months to do the imaging, and send the images to city hospitals for medical opinion.
K. Chandrasekhar, founder and CEO, Forus, says: “In a day, a doctor in a hospital sees 100 cases and does 10 surgeries. If my device helps detect cases early, say through telemedicine, a doctor can improve his productivity; and complicated procedures may be avoided.” Forus now has Accel Partners and IDG Ventures interested.
Indeed, IDG Ventures has a list of 65 health care product companies, of which it has shortlisted five to consider for investment. An indicator of the hectic activity in the health care and life sciences sector is that it has attracted nearly $2 billion across 135 deals since 2008, according to Venture Intelligence, a research firm focussed on venture funding and M&A. Of course, more than half that money has gone towards hospital and clinic deals, but new facilities will only increase demand for medical devices and diagnostics.
Investors are also heartened by the excellent exit options. In 2008, Philips Healthcare acquired Alpha X-ray Technologies and Meditronics. This helped the company diversify locally into cardiovascular and general X-ray systems. GE and Siemens, too, are frequently on the prowl for robust medical device businesses. “Disruptive innovation challenges in India are about how to make low-cost, high-quality health care accessible to a larger population,” says Terri Bresenham, president and CEO, GE Healthcare India.

THE TURNING POINT came around the financial meltdown of September 2008. Investors in India began to review the prospects of export-oriented services businesses such as the $100 billion IT industry. The U.S. and European markets, which contribute over 80% of its revenues, were in turmoil. But the domestic economy was growing, and the hunt began for new ideas in the products space. Coincidentally, at the same time, a crop of professionals working with health care product multinationals began toying with entrepreneurship—it was only a matter of time before they parlayed their expertise elsewhere.
Indeed, most of the founders or CEOs of these companies have spent close to a decade with health care multinationals. Forus, for instance, was co-founded by Philips Healthcare’s technical director Shyam Vasudev. Its CEO was in the semiconductors division of Philips. Perfint’s founders are from GE Healthcare.
Gnanasekar V., formerly a senior design engineer at GE Healthcare India, now heads the intra-operative ablation assistance business at Perfint. He has two pending patents in image-guided robotics. Such folk are soaked in the best practices of multinationals, have networks with universities and hospitals in the West, and have worked abroad. They have cut their teeth working on the development processes of software modules, CT tables, MRI tables, etc. It was, after all, in Bangalore that GE developed generators for CT scanners, vascular and surgical imaging systems, etc., to solve a typically Indian problem—poor voltage.
Such experiences have given the entrepreneurs an understanding of mass demand in India, the ability to harness frugal development, and the knowledge of how a world-class product ought to look, feel, behave, and deliver. “In product marketing, that’s what it’s all about,” says Prashanth Prakash, partner in Accel. “I give credit to the multinationals for that. They played a big role in educating our entrepreneurs to see the not-so-obvious elements.” Therefore, the big shift. Earlier, entrepreneurs may have often felt no one was buying what they made, but today they start backwards from what the user wants. While low-cost platforms from India are par for the course, the smart entrepreneur adds the bells and whistles (say an LCD display screen, or a handheld version).
Many follow what is called the i-flex model. “You can build world-class products in India at half the cost. If the local market buys it, scaling becomes rapid. Based on that, you can go outside the country,” says Sethi.
i-flex was the first software product to come out of India. Founded in 1992, it became popular in some 25 English-speaking countries in Africa and Asia, even Japan. By the time Oracle acquired i-flex in 2005, India’s contribution to its revenue was less than 5%.
“We went to emerging countries first, not the U.S. and Europe,” recalls Deepak Ghaisas, former CEO of i-flex’s Indian operations. As it turns out, Ghaisas’s next investment was in health care. He co-founded Gencoval in 2009, and its first business, Stemade, is creating a network of dental stem cell banks.
THE NEXT STAGE FOR INDIAN innovators is to strengthen their ties with academia and health care institutions in the West. “About 25 global institutions determine the technologies of a clinical setup,” says Perfint’s Nandakumar. “When they say ‘yes’, the world says ‘yes’. It is important to connect with them and understand what they think at the R&D stage.”
Perfint’s advanced technical office has been set up near Boston to engage with that network. A good chunk of its second round of funding worth $6.5 million in mid-2010 went towards developing an international variant and establishing a global distribution channel, to take on the global market. Currently, most young product companies have a scientific advisory board, comprising academic experts and professionals from the West.
“The requirement emanates from India; the validation of technologies happens in the U.S.,” says Nandakumar.
There is also the pressure to constantly innovate and not rest on one’s laurels. “It is likely somebody will copy us. By then, we should be five steps ahead,” he says. “Patent protection differs from market to market, and depends on legislation and enforcement. So, the best way to protect patents in a competitive marketplace would be to innovate continuously.”

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