MANTHAN SYSTEMS IS a nine-year-old software products company that specialises in selling data analytics products to global clients such as McDonald’s and Prada. Headed by Atul Jalan, the $18 million (Rs 108 crore) firm is looking to buy a data analytics company. There are eight targets, some almost as big as Manthan, others bigger. It’s an audacious move, especially in what is a relatively untested sector in India—software products. But Jalan has a reputation of being different. He’s known to meet prospective customers and settle down to protracted conversations about everything from particle physics, to poetry and world cinema, to football (he supports Barcelona). Not a word about his company’s products. “He leaves the vendor duties to us,” says N. Anand Sri Ganesh, Manthan’s senior vice president for strategy and new business.

Then there’s his chutzpah, wanting to buy up companies that are bigger than his. The Manthan board has approved of the acquisition of an analytics company because it wants to improve margins. Jalan doesn’t agree, saying that if he only wanted to improve margins, he could sack 200 of his 600 employees. His rationale for the acquisition: “I have a compelling set of 14 products. I want somebody with a [large] customer base to shorten my time to acquire customers.”

GAME ON<br />
From left: Nishant Mungali, Krishna Depura, Deepak Diwakar, Co-founders, MindTickle<br />
Gaming mechanics in the software make even HR processes seem interesting.
GAME ON
From left: Nishant Mungali, Krishna Depura, Deepak Diwakar, Co-founders, MindTickle
Gaming mechanics in the software make even HR processes seem interesting.

People like Jalan are turning the spotlight on the hitherto unknown software products sector. “If the revenue is predominantly through licence sales, then, in effect, you’re looking at a product company,” says Sandeep Singhal of Nexus Venture Partners, a $600 million fund in Mumbai. This is something that has become possible only in the last few years, with cloud computing no longer an obscure phenomenon, and with open source code entering the mainstream.

It’s not that these companies are new to India. Some, such as Tally Solutions (accounting software), Polaris Software (tools for banking and financial services), Nucleus Software (banking and financial services tools), and Ramco Systems (enterprise resource planning, analytics, and aviation) have been around since the late 1980s. But they came up at the time the country’s software industry was gathering momentum, and in the years of rapid growth, when services grew to become a multi-billion dollar industry, products companies were overshadowed. In 2009-10, IT services exports made $27.3 billion, and products generated barely $1 billion.

Software services companies now seem to be losing their sheen, with markets in the West moving away from offshore services. And attention is moving to products companies. By 2012-13, exports of IT services touched $44 billion, with products moving up to $14 billion. Since 2010, the revenue of software products companies has grown by 60%, and international companies are opting for Indian products over established global ones. For instance, the Infocomm Development Authority of Singapore, a statutory board, selected Manthan for a consumer analytics project in July 2012. Manthan beat IBM, Saas.com, and MicroStrategy, as well as retail analytics specialist DunnHumby from Britain, to win this.

The irony is that even seven years ago, these global companies would not have been competing with Manthan; they would have been buying it. That’s what happened to i-flex Solutions, a products company (which began as Citicorp Overseas Software) that was exporting banking software to Africa, West Asia, and Europe, before Oracle bought it in 2005 for over $900 million. At the time, i-flex’s products revenue was nearly $150 million of the $261 million it made in FY05.

Today, the targets are becoming the buyers. Manthan is in the market for a large company. In April this year, $16 million commodity-trading software firm, Bangalore-based Eka Software, bought Canada’s EnCompass Technologies, which provides software solutions to energy companies in America. Eka wants to become a $100 million company by 2017, and this is a big step towards that. Then there’s Pune-headquartered Persistent Systems, a product engineering services company, which acquired three global businesses in the past 18 months. With this, the $238 million company has embarked on a journey to earn a third of its revenues from intellectual property-led businesses.

Of course, not all firms will turn buyers. As Indian software products companies enter the growth phase, some of them will become attractive buys for global software giants. SAP, for one, has chosen an M&A route to become strong in cloud-based platforms and mobility. Since 2010, it has made five significant acquisitions, and seems ready for more. Oracle has made nearly 30 strategic acquisitions in the same period. Leaders in SaaS (software as a service) also have an eye on similar companies from India.

WHETHER THEY BUY OR SELL OUT, with a ready market and easily available technologies, software product companies seem poised to take off, and are gaining a voice that’s being heard even in a trade body like Nasscom, widely seen as a software services lobby. This February, more than 20 product companies that are part of Nasscom, set up iSpirt, or the Indian Software Product Industry Round Table. Initially seen as a Nasscom breakaway, it was soon clear that iSpirt was to be a forum for software product companies.

TRACKER<br />
Eka Software, Manav Garg, Founder and CEO. Software that lets traders track commodity prices for transactions.
TRACKER
Eka Software, Manav Garg, Founder and CEO. Software that lets traders track commodity prices for transactions.

Investors are looking at these companies with interest. In 2012, some 20 software product companies were funded in India, with $110 million going into them from venture capital funds such as Sequoia and Norwest, according to Venture Intelligence, a Chennai-based research service on private equity and VCs.

Between 2007 and 2009, $113 million went into 26 deals. In 2010-12, this doubled: $249 million into 55 product companies. Ashish Gupta, senior managing director of Helion Venture Partners, says Helion would love to draw from its $605 million India fund to invest in these companies. He has already reaped dividends from one investment: Last year, Helion-backed Zmanda was picked up by Boston-based online backup services player Carbonite. Zmanda makes cloud-based enterprise backup and recovery products.

The challenge for Indian software products companies is to wait through the product development and testing cycle before going commercial. That can take two years or more, so funding is important, as is effective incubation, which allows the company to weather the waiting period.

Products companies are getting a boost from engineering colleges as well. Colleges such as the Indian Institutes of Technology (especially IIT Bombay) and the Birla Institute of Technology and Science (BITS) in Pilani, Rajasthan, are seeing an increase in the number of students interested in software product development companies. That’s because “gaming companies, mobile analytics companies, Facebook, Microsoft, and Google are paying better”, says Prateek Poddar, batch of 2010 from IIT Bombay.

When Poddar’s batch graduated, financial services companies were still seen as the place to be in. Poddar had joined Morgan Stanley, but quit to set up Clipr, a company that provides a technology platform for online businesses like e-commerce portals.

The corporate world is also encouraging the shift. Chipmakers Texas Instruments and Freescale are prodding engineering students to engage in developing products by providing the basic resources. Students are already developing and selling apps, and taking part in hackathons.

“The dramatic change is in students’ ambitions; they don’t want to be seen just as coders anymore in large IT companies,” says Prof. G. Raghurama, director of BITS Pilani. “They want to use their domain knowledge, innovate, and shape new ideas, rather than work on existing programs.” That’s one of the big reasons why institutes such as BITS and the IITs incubate startups, and then allow students a chance to intern with those startups. Raghurama points to young companies, such as Grey Orange Robotics, which started as ideas on the BITS campus. There’s also Redbus.in, an online bus ticket agent, created by BITS alumni Phanindra Sama, Sudhakar Pasupunuri, and Charan Padmaraju. In late June, South African media company Nasper acquired Redbus.

Tarun Mishra, an IIT Bombay alum, founded Covacsis with Abhijeet Mhatre in 2009 to sell his software solution to improve shop-floor efficiency. They took two years to design and build the software, but Mishra has taken advantage of the incubation facilities of the Society for Innovation and Entrepreneurship (SINE) at his alma mater, and uses the premises to test the product for the company’s 14 clients. Covacsis has access to IIT Bombay’s technology facilities and rooms, in return for a minor stake that the incubator holds, and a share of revenue.

CENTERSTAGE<br />
Manthan Systems, Atul Jalan, Founder and CEO. Offers data analytics products used by global retailers.
CENTERSTAGE
Manthan Systems, Atul Jalan, Founder and CEO. Offers data analytics products used by global retailers.

Of the 29 firms that have completed incubation cycles at SINE, there is a mix of companies that have exited, folded up, been acquired, or grown and become independent. Over time, this has led to colonies of startups and entrepreneurs in the region, with many settling in localities such as Powai, Jogeshwari, and Chandivili. Some even pool in to move into the posh Hiranandani Gardens, where it is common to see tech entrepreneurs huddled over their laptops inside cafes, building the next big thing.

THE NEXT BIG THING is often from the little people of software product development, and not giants Microsoft, Oracle, and SAP. With cheap (often free) technology, it’s possible to start a products company almost on a whim. Pubmatic, a “web-ad optimiser” for the digital publishing industry, was started over a lunchtime conversation between Amar Goel, Mukul Kumar, and Anand Das in 2006. The big idea behind Pubmatic came from Goel’s brother, Rajeev, who had written the specs when he was living in California. Goel was already an entrepreneur in Mumbai; he had founded Komli Media, exclusive resellers of Facebook’s premium inventory in India, Thailand, Indonesia, and the Philippines.

Pubmatic’s first product was built in the basement of Kumar’s home, using two laptops running Ubuntu, the free Linux-based operating system. “There are so many ways to build a product without investing a lot,” says Kumar. Today, Pubmatic is hurtling towards the $100-million revenue mark, working with 250 publishing companies as Rajeev has been commercialising it from Silicon Valley.

Companies such as Microsoft and SAP revolutionised the idea of software to solve business problems by selling licences to install products on users’ premises. Open source software allows startups to get into this act. When Varun Singh founded ScaleArc, a company that builds database environments, he went the open source way. In the early days of ScaleArc, he says he offered a prominent open source developer in Paris a third of ScaleArc’s $600,000 seed fund as a consultation fee. His offer was refused, but the Parisian gave him advice that solved some of Singh’s most pressing software issues.

SCALE IT<br />
iCreate Software,Vivek Subramanyam, CEO. The banking products company has clients across developing markets.
SCALE IT
iCreate Software,Vivek Subramanyam, CEO. The banking products company has clients across developing markets.

“The mental frame to understand how to build a high-performance product doesn’t exist in India. You have to realise very quickly what skills you don’t have. Ask for help, and you will get it,” he says, referring to the open source community.

An open source learning management system, Moodle, has allowed businesses like e-teaching portal EduPristine and web-conferencing facility DimDim to go global. “If Moodle was not available, it would have taken developers five years to build the offering, and the opportunity may have passed,” says Nexus Partners’ Singhal.

What all this has also done is bring down sales costs. “Once the Internet became a way to reach out to people, the sales effort has in some measure got replaced by more marketing,” says Gupta of Helion. Smaller companies have almost no sales force, but focus on online marketing. The cost of building a product company and selling software has come down.

Manav Garg, an engineer and the founder of Eka Software, says his company is a great example of a products company growing almost entirely by word-of-mouth. “The first few customers have to speak positively about you,” he says. But low entry barriers mean more competitors. Rajeev Goel of Pubmatic says a small company like his has to continuously invest in infrastructure, such as bandwidth, disaster recovery, security, and server capacity. For on-premise software providers such as Microsoft and SAP, these costs don’t arise as often.

The good news is that when software is sold as a service via the Internet or a private cloud, which is what Indian firms are doing, even small companies can afford to buy.

INDIAN DEVELOPERS HAVE taken a leap in the past three years. “In every country, companies reach a scale where they cannot continue business as usual without bringing software into the picture,” says Gupta of Helion. That opens new niche zones. And so there are companies such as MindTickle and FreshDesk, which use ‘gamification’ to simplify functions with a gaming-like experience. MindTickle’s clients have friendlier online HR processes, while FreshDesk clients’ customer support has a game-like interface. Both are backed by venture capital fund Accel Partners.

iCreate Software spotted an opportunity in using analytics in the banking sector. Its products have applications in understanding customer classes, regulatory reporting, and assessing risks. It has got funding from venture-capital funds IDG Ventures and Sequoia. “A product startup is better off solving business problems that are generic to its targeted clientele,” says Vivek Subramanyam, CEO of iCreate, referring to how product companies can build scale. “If the defined business problem is too specific, it is better to be in consulting than products.” From one customer in 2010, iCreate now has 27.

India has proved to be a low-cost destination for product development. But as it evolves as a market, it will propel startups to the next level. Ashok Jhunjhunwala, who leads the telecom and computer networks group at IIT Madras, says: “The cost of failure in foreign markets is huge, and consumers there can be unforgiving.” In contrast, the home market allows startups more leeway in building and testing products.

ON FIRE<br />
Covacsis, Tarun Mishra, Co-founder and CEO. Incubated at<br />
IIT Powai, the company's product helps manufacturers map their <br />
factory floors.
ON FIRE
Covacsis, Tarun Mishra, Co-founder and CEO. Incubated at
IIT Powai, the company's product helps manufacturers map their 
factory floors.

Where Silicon Valley tackled technology problems local to the U.S. and developed markets, Indian products are globalising, as ScaleArc, Pubmatic, and Eka have shown. Once they build the product, they can use the Silicon Valley ecosystem to commercialise it. Prateek Poddar, founder of Clipr, says, “In the U.S., a product has a better ecosystem for testing.”

Michael Lewis is best known for his 2003 book Moneyball: The Art of Winning an Unfair Game. In 1999, Lewis had written about the technology wave in The New New Thing: A Silicon Valley Story that began with Netscape Communications in 1995, and became the bubble that burst in 2000. Lewis captured the Internet boom on Wall Street in the late 1990s through Jim Clark, who co-founded Netscape. Lewis wrote about Clark: “There is no name for what he’s looking for, which typically is a technology or an idea on the cusp of commercial viability. The new, new thing ... is a notion that is poised to be taken seriously in the marketplace. It’s the idea that is a tiny push away from general acceptance and, when it gets that push, will change the world.” Today, Indian companies seem to be creating that new, new thing.

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