The new age techies

When legendary investor Warren Buffett visited India in March last year he was asked several times why he had ignored technology companies. “There will be some huge winners among technology companies and, unfortunately, I won’t be in them ... I will never know enough about the business.” Buffett joked that he’d rather stick to bubble gum, where consumption is constant and market patterns apparent. What Buffett perhaps did not realise was that Internet services in India were consumed like any other commodity—including bubble gum. Telecom service providers promote Internet activity because it will contribute to a higher average revenue per user. The Internet user base breached 100 million in November last year; over 45% of these users accessed the Internet on mobile phones, according to the Internet and Mobile Association of India. In tier I and tier II cities, social media has accelerated web adoption. Users are cottoning on to what’s new on Facebook and Twitter, promoting ideas in daily conversation. The heaviest Internet users are aged 15 to 24, who are not bound by the idea of experiencing products offline, and are happy to buy online.

That makes e-commerce a hot business opportunity today. Young entrepreneurs, such as the 12 featured in the Fortune India Under 40s list, are driving this fact home. The rise of e-commerce has also affected related businesses: payment gateways (to authorise payments for online purchases), couriers, design and online marketing agencies, technology companies, etc.

All this activity wouldn’t have been possible without the $2.5 billion (Rs 13,237.5 crore) of venture funds that have chased business ideas since 2005. Over 110 of the 144 venture-backed exits in the past six years have been in technology companies, according to data from Venture Intelligence, a database of private equity and venture capital deals in India.

“In the early ’90s, access to capital was a deterrent for entrepreneurs,” says Rajeev Chandrasekhar, member of parliament and founder of BPL Mobile in 1994, one of the country’s early mobile service ventures. “In 1999-2000, anybody with an idea attracted venture capital. We have arrived at a stage today where it is all about execution.”
Most new businesses on the Fortune India Under 40s list fall in the $4 million to $150 million revenue range, and started around 2004. In the period spanning 2004 to 2009, there were 418 technology venture capital deals, out of 588 in total. In effect, 70% deals were in the technology space. In large part, this is the result of India’s changing demographics—the large number of youngsters aged between 18 and 34.

It’s also because results are far quicker in the case of tech ventures, especially when compared with non-technology sectors. Zahid Gangjee, founder of HR consultancy Zahid Gangjee & Associates, cites the example of a bunch of transporters who began as truck cleaners in mid-sized towns in Karnataka such as Hubli. When these individuals began, they were typically in their mid-thirties, and attained success somewhere in their mid- or late forties.

This is where technology entrepreneurs have a different experience. First, it takes them much less time to give shape to their ideas. More important, technology companies in India have given 5.2 times the return on investor capital, whereas non-technology ventures have given 3.3 times, says Sudhir Sethi, chairman and managing director of IDG Ventures India. “Non-technology businesses tend to be cash flow businesses, whereas the technology ones are about intellectual property, products—and are disruptive in nature. Because these are newer areas, adoption by younger people is also faster,” he explains.

Technology entrepreneurs today achieve more in less time on the information highway than entrepreneurs of previous eras. In the realm of IT services, Shiv Nadar and N.R. Narayana Murthy were over 50 when they saw HCL and Infosys become household names. In comparison, Binny Bansal—co-founder of online books and electronics retailer Flipkart—turned 29 in November. One of the founders of travel portal Redbus.in, Phanindra Sama, is 30 years old.

With entry barriers minimal for technology start-ups, anybody can start an e-commerce business. “The question is: Can you create categories in the users’ heads?” asks Suvir Sujan of Nexus Venture Partners, and co-founder of Baazee.com, which eBay India bought out in 2005. “Being a first mover, and cracking that space, is critical because people tend to associate a web portal with the concept itself.” So for books, it must be Amazon or Flipkart. For daily deals, Snapdeal; apparel, Myntra, and so on.

Private equity and venture fund investors are heartened by a more circumspect and prudent bunch of Indian leaders. “It is a combination of the Old Economy cash mindset, and New Economy consumer businesses,” says Sandeep Singhal, MD of Westbridge Capital, a private equity fund. This is a trait that distinguishes the current crop of techpreneurs from the first-generation dotcom entrepreneurs of 1999-2000 in India. Makemytrip.com and Info Edge (famous for Naukri.com) are two instances of first-generation dotcoms in India that listed, and stayed true to the plot. Unlike them, most entrepreneurs of that time struggled to get funds; those who did became notorious for poor cash management and excessive risk appetite.

For Sethi, the decision to invest in apparel e-retailer Myntra.com in 2008 was made when he saw the humble leadership style of Mukesh Bansal, its founder and CEO. He recalls a board meeting during the economic slowdown of 2008-09, when Bansal said he would take a salary cut of 33%. In the next few months, his senior managers offered to conserve cash by taking salary cuts. “He demonstrated leadership by taking the cut himself,” says Sethi.

Nitesh Mittersain, 31, CEO of Nazara Technologies, impressed the Sequoia India and Westbridge teams with his Old Economy mindset. “He raised $2.5 million with us, and never used it in a way that suggested he was being irresponsible,” says Singhal of Westbridge. Many believe that such a frugal mindset equips leaders to manage risk better even if external funding dries up.

Growth is slow and steady in the IT products space; investors like what they see in niche areas such as commodity trading (Eka Software Solutions) and business intelligence in banking (iCreate Software). The tipping point is not far in the software products space, as investors, innovators, entrepreneurs, and the growing market are in sync.

The under-40 leaders are also introducing disruptive solutions with newer technologies and better price-performance ratios. And this is attracting the interest of global venture funds. While Silicon Valley is still where the best tech innovations originate, it is a cluttered market and more expensive from an investment point of view.

The task is hard for new entrepreneurs though. It is important to be successful in the first 18 months. This helps with cash flows and scale. “The intense competition means entrepreneurs can’t have long incubation periods,” says Chandrasekhar. “The word ‘incubate’ has disappeared from the private equity space. You only fund an idea that has the potential to be on its legs and running in 12 months, and generate real cash flows and real customers.”

If and when these businesses realise their potential, a lot of it will have to do with these first-generation entrepreneurs’ motivation and passion. At 33, Chennai-based Murali Balan has been running Tenovia Solutions for five years, managing online stores for retailers. Two years ago, he founded another company that created loyalty programmes and sold his stake in it early last year. He’s now working on his own e-commerce portal, fitright.in, and hasn’t considered venture funding. “I’m not against funding, but it’s important that you get funded for the right reasons, say research and development, to strengthen a fantastic concept and take it to market sooner,” says Balan.

Entrepreneurship for the tech crowd has proved liberating. “All entrepreneurs are driven by the fun of achievement—the journey excites them,” says Gangjee. There is a need for affiliation (wanting people to like your idea, and being around people); and eventually, there is a need for social power to wield influence in building institutions and systems.