Bangalore:Big deal or No deal? – Deepak Srinath

As an investment bank focused on Tech and tech enabled services firms, it would seem that Bangalore is the perfect location for us, right? Afterall, Bangalore is the tech capital of the country on any parameter that one may choose to use. The history of Indian tech entrepreneurship is full of success stories from Bangalore. However, we find ourselves in the middle of a very curious situation – We do not have a single client in Bangalore today. What’s more, in the last six months, we have hardly come across a firm from Bangalore that has really excited us.  Are we doing a bad job in our home turf or is there a more endemic rationale to this?

I set about posing this question to my colleagues in Viedea, VC’s ,  fellow I-bankers, etc and heard several interesting explanations. For one, they all agreed that they were seeing fewer ‘doable’ deals from Bangalore. (Now the word ‘doable’ in our industry parlance needs some explanation- It means that it is a VC or M&A deal that has all the hygiene factors covered – good entrepreneurs/management team, product or service addressing a large market,  solid business model validated by enough customers,  decent revenue and growth path, no complications or legacy baggage,  etc.).

A VC with one of India’s best known funds has this to say – Entrepreneurs in Bangalore understand enterprise services very well. Culturally and historically, this is their DNA. Therefore they have been able to build good IT Services, BPO, KPO, Analytics services type of businesses. These industries have all matured and compete on scale.  There is not much of an opportunity for a new entrant in this space and hence VC’s won’t invest. Moreover, those that haven’t scaled are languishing and may not be of much interest to strategic acquirers either.

Rajeev Agrawal, founder and MD of PE fund Ambit Pragma added another interesting twist – the first and second generation entrepreneurs from Bangalore (read late 80’s and 90’s) cut their teeth in the Wipro’s and Infy’s during their early growth phase. They were in many ways like the pioneers who ventured out ‘west’ and built the United States. They learnt how to deal with uncertainty, create new markets and built businesses from scratch. These skills were then put to use to create the Mindtree’s, Onmobile’s, Indecomm’s, etc.  Today’s executives in Bangalore’s mature tech industry learn a very different set of skills – managing scale, working in a highly process driven environment- not exactly the skills required to go out and build a start-up from scratch. Therefore, they may not equipped to become entrepreneurs.

While both these theories have merit, a very pertinent fact is that we continue to see plenty of startup’s from Bangalore, but very few of them are ‘doable’. I think the real reason is because the Bangalore entrepreneurs’ greatest strength (tech savvyness) is also his greatest weakness. He/She is enamored by a brilliant technical idea, but fails to do enough diligence on the market or requirements of the intended users.  The real opportunity today is for businesses that seek to serve the burgeoning Indian domestic market. In our interactions, we often find that entrepreneurs from Mumbai, Delhi and even Pune, seem to have a much better understanding of the market and consumers than those from Bangalore.  They build their products and services for the market and not the other way round, ie, build a product and then try to find a market for it.

We hope this is just a learning phase for Bangalore and we start seeing ‘doable’ deals from this city soon.  The city has some incredibly bright, tech savvy young people and it would be a pity if many of them don’t go on to build innovative, successful and large businesses.

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About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

4 Responses to Bangalore:Big deal or No deal? – Deepak Srinath

  1. The ailment is more chronic.

    By and large the business that have succeeded in Bangalore (or India for that matter), be it a first gen enterprise such as Infosys or Wipro or a second gen one such as Mindtree or Onmobile have managed to do this largely on (low) cost and availability of resource.

    The first generations that have successed had the first mover advantage coupled with low costs. Risks involved to global corporations in moving business to these guys were minimal and the benefits larger. Easy sell.

    The second generations were all fully- funded ventures and technically do not qualify a ‘start-up’ tag. They were started up with full-fledged offices, full bank accounts and with already signed up clients. Again so-sales required.

    However both these models are already floundering. As identified rightly above, when the cream has been skimmed, the skills left behind show a huge gap in understanding and delivering to the global market. Most sales techniques appear to comprise of only one thing – low cost. Service quality and innovation are used as secondary sells if at all. Ironic considering that most of what is sold from India in the global market is sales.

    For things to turn the corner, entrepreneurs need to understand that the global market and indeed the Indian market has matured. People want new, people want better and yes people want it cheaper. One out of three is not acceptable. And until such time that the entrepeneurs from bangalore understand this, it looks like you will indeed need to look elsewhere to invest your money.

  2. The ailment is more chronic.

    By and large the business that have succeeded in Bangalore (or India for that matter), be it a first gen enterprise such as Infosys or Wipro or a second gen one such as Mindtree or Onmobile have managed to do this largely on (low) cost and availability of resource.

    The first generations that have successed had the first mover advantage coupled with low costs. Risks involved to global corporations in moving business to these guys were minimal and the benefits larger. Easy sell.

    The second generations were all fully- funded ventures and technically do not qualify a ‘start-up’ tag. They were started up with full-fledged offices, full bank accounts and with already signed up clients. Again so-sales required.

    However both these models are already floundering. As identified rightly above, when the cream has been skimmed, the skills left behind show a huge gap in understanding and delivering to the global market. Most sales techniques appear to comprise of only one thing – low cost. Service quality and innovation are used as secondary sells if at all. Ironic considering that most of what is sold from India in the global market is services.

    For things to turn the corner, entrepreneurs need to understand that the global market and indeed the Indian market has matured. People want new, people want better and yes people want it cheaper. One out of three is not acceptable. And until such time that the entrepeneurs from bangalore understand this, it looks like you will indeed need to look elsewhere to invest your money.

  3. Mani says:

    The level of competition startup’s face in Bangalore in terms of support resources are very high compared to other cities in North. The first/second generation startups that have grown to 1500+ people organizations are taking away resources leaving very little for others at affordable rates. It is becoming extremely difficult for established companies with lower head counts to be profitable and run with some business sense, leave alone startups!.

  4. Deepak Srinath says:

    Smita,

    Thank you for adding to the points I made. You’re spot on when you say that people want newer, better and cheaper- for every product or service, be it domestic or international clients. I certainly do hope this awareness settles in soon.

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