The decision by the Mainis to exit Reva, India’s pioneering high profile electric car venture, coming close on the heels of the sale of the domestic formulations business of the Piramals to Abbott, indicates something new may be brewing on the Indian technology front. Even two swallows, not to speak of one, do not make a summer and the present deals may simply be the result of very high prices being offered. So, it remains to be seen if these early birds represent a trend that can address one of the key deficiencies that have held back India form becoming a centre for innovation despite its now two-decade-old prowess in information technology. One of the hallmarks of Silicon Valley is that ideas there quickly take shape in the form of startups which, over time, develop their nascent ideas and then, in most cases, sell out. On the other hand, ideas not only take longer to find financial backers in India, but also, once a startup succeeds in taking its initial idea forward, its owner finds it very difficult to sell out.
There are two main reasons for this. Most Indian promoters are reluctant to walk away from their own creations, facing the same wrenching that accompanies a daughter getting married and going away. The second reason is such promoters are unable to form a realistic value of their businesses, so workable deals with buyers become difficult. This price discovery becomes all the more daunting in the absence of a developed market for startups. On the other hand, Silicon Valley thrives on the dynamics of the knowledge and technology agglomeration that a major company achieves by buying out startups that have half-developed promising ideas. In fact, the US system is so standardised that technology buffs plan their ventures keeping in mind the known technology development plans of majors like Cisco and Oracle, and their acquisition strategies. The startups’ business model is to take an idea up to a certain point only to be able to sell out at a reasonable price.
For a technology market, which is the sine qua non for an innovation ecosystem, to develop, there is one other key requirement: early-stage funding. Established venture capital (VC) funds typically arrive once a startup is in place and its business is running, having established the proof of concept. The VC funding provides the investment needed to develop the product and market it further before the operation can break even. That is when the VC can exit. On the other hand, early-stage funding, when the person with an idea has little more to show than what’s in her mind or on paper, comes from friends or angel investors, many of whom are successful technology entrepreneurs themselves. Sabeer Bhatia, who founded and sold Hotmail, and Desh Deshpande, who founded Sycamore and is known for his mentoring of technology startups, are examples of what Indians can do if the ecosystem is right. The US leads the world in having such an ecosystem where innovation thrives and it is imperative for India to be able to put together all the pieces that go into making it up.