'The ecosystem has not developed'

Round table on emerging product companies in India.

On the sidelines of Nasscom's India Leadership Forum in Mumbai last month, six IT entrepreneurs with interesting product innovations to showcase sat down with Ice World for a pow-wow on the problems and potential of small product companies in India.

The participants: Anil Bakht, chairman and managing director of Eastern Software Systems Ltd (which sells ERP software); Tushar Kothari, CEO of Beehive Systems (which has created video content software that allows TV newscasters to transmit broadcast-quality videos from laptops, making OB vans almost obsolete); Neil Salvi, CEO of PaceSoft Silicon, which has innovated in the area of video capture and playback for mobile devices; Ajay Shankar Sharma, CEO of Srishti Software (which has products for knowledge and workflow management); Vishwas Mahajan, co-founder and CEO of Compulink Systems (project and process management software for the services industry); Anand Adkoli, CEO, Likwid Krystal, which has developed an e-learning product that enables people to write and compile software programmes without a programming environment, and Pradeep Chopra, director, marketing, Whizlabs Software, which has achieved significant success with online marketing of e-learning products that allow users to simulate IT certification exams.

Business Standard's R Jagannathan moderated the discussion.

Excerpts from the hour-long discussion:

IceWorld: Most of the entrepreneurs gathered here are young people, running young companies. The average age of your companies is around four to eight years, with one exception.

Most of you also have innovative products, but you are still small companies. How does one know if you have succeeded? Is it about how long you have survived or how big you are?

Anil Bakht: If you are asking about the companies picked by Nasscom (for showcasing their products), only some will succeed. They will succeed because they are innovative in terms of product, marketing or whatever.

From an Indian perspective, if you are below Rs 75-100 crore in turnover, you haven't arrived in terms of critical mass.

Anand Adkoli: Companies that are our size will be innovative as long as we are challenged. When you are so small, any player in the world can come and squish you.

So we don't have a choice but to continue to be innovative as we grow. And it is not only innovation in terms of product. I am sure many of the people here have gone through a survival phase. I have gone through it, and still go through it sometimes.

Ice World: What were the early challenges faced at Whizlabs, Pradeep?

Pradeep Chopra : If we had had the (necessary) funding and resources, we may not have experimented with our online marketing model. When you don't have the resources, it forces you to be innovative and that's where an entrepreneur can really make an impact.

In the first three years, our main challenge was marketing, but we wasted huge time in developing our product. We had no idea whether the product would be successful as we had not tested it in the market.

One of our advisors, who is considered to be a net marketing guru, came and said that this would not take us forward. The challenge in the initial phases is that one is more inclined to spend time developing the product rather than validating it before we start development.

Now we are very clear that development should come last; first test the idea with customers and then develop it. We are through with the first challenge. The challenge we are facing now is scaling up.

Ice World: In online marketing, you hardly ever meet your customers "� at least personally. Is this a problem when you want to scale up?

Chopra: To some extent, yes. Till now we had deals of up to $100,000. Now we have deals of even half a million, a quarter million, or one million in the pipeline. We will not be able to crack these deals till we have at least some presence, one presentation, or one meeting.

But today we have the resources and we will have a physical presence in the US very soon. When you have million dollar or multi-million dollar deals, our pure online marketing model will not take us there, but our marketing approach will continue to be based on 'pull' and not 'push.'

Even when we have a physical (marketing) presence, we will adopt the 'pull' approach where people come to our website, send us queries, and we address them. We will not be going from company to company to sell our product.

Ice World: Is this a good model to follow for start-up companies?

Neil Salvi: The challenge every company faces is that of market access. We had our products built after a year or a year-and-a-half. We were very lucky because we were an Irish Indian company.

We were headquartered in Ireland, and the minister of trade and deputy prime minister of Ireland came and opened our centre here. What they have done fantastically well is to target sectors where they want their companies to succeed.

One of them was mobile. We told them how much money we were going to spend in Japan, Taiwan, Korea "� and they met those budgetary requirements by 50 per cent.

On top of that, they also had Irish officers in each of these countries who were well known to major companies there "� they allowed us to get a foothold in those companies. That (kind of help) is priceless.

I know Nasscom is setting someone to look at this; I would really just go and talk to Enterprise Ireland which does these things very well.

Bakht: This is the first year (Nasscom has showcased innovation by tech companies). Our first challenge was to do something for emerging companies, or SMEs, within Nasscom. The second challenge is to put these companies together with users.

In my opinion, more than funding, they need more customers. If they are leaders within their own country, their job of selling in America is certainly that much easier.

We are trying to tie up with organisations like Ficci (to bring innovative tech companies and potential users together).

Salvi: Ireland has two interests (in helping tech SMEs). One is job creation. The second is that the Irish government makes a heck of a lot of money.

They are not doing service at a loss. Forget the jobs, they are making money. They have got sophisticated venture capital investors and Enterprise Ireland then comes in and co-funds these companies. They make money when these companies go public.

Bakht: It will be some time before we are able to convince our government officers that it is actually a win-win situation. It is difficult to sell something that is visionary to the government.

If we were to say that you should help these innovative companies now so that India will benefit 10 years later, it is a huge battle. You can't run away from that battle. But it will only happen slowly.

Ice World : Should product companies be targeting the Indian market or look abroad? Once you have set prices low for the Indian market, can you raise it for foreigners?

Vishwas Mahajan: In a typically net-based sales model, you can't sell something here for Rs 50 and for $50 somewhere else. It is very difficult. But it has also to do with the kind of product you are selling and what your sales model is.

Our product (at Compulink Systems) is an enterprise product that has a fair amount of consulting and services built in. The second factor is international benchmarking.

When we go and pitch our product at between five and eight times what it is priced here, customers don't blink an eyelid because they are used to paying more.

We command something like a 50 per cent price advantage over our competition. What we don't have is the brand or the recognition (to market abroad).

Salvi: This is the great point. My view is that the first 10 customers will make or break you. Why not have as the first 10 those that are paying more? I just don't sell in India.

I have seen companies here "� one of them in Mumbai "� which have 25,000 customers and earning (just) $50,000. You can't service a customer base like that...

Bakht: Because of our focus on services (and not products), large Indian companies have outpriced IT services within the domestic market. That is the reason the domestic market is not developing.

People blame the government, I blame myself. I am saying, when the leadership in my industry is selling a man-month for $10,000 in New York and expects India to feel favoured when they try and sell here it for $4,000, it ain't going to happen.

They certainly have screwed up the domestic market. Now, as a small emerging company, if I were to go and sell to the United States, they will ask: how many users do you have? On the other hand, when you say I need a body for SAP, you don't need to know how many customers you have.

The customer just wants to know whether you have the skills to do programming. Unless this paradigm (of shipping bodies instead of products) shifts, we "� the companies sitting across the table here "� do have a serious problem.

That is why we have to price our products so low, at a price which the domestic market will bear.

Mahajan: I think it is okay to sell to customers at a low price to win business, because if you have no customers, you have no product.

Bakht: Over the next few years, the price of licensed software will become zero. You can then bill only for services. With the pressure of open source, with the pressure of SAP selling for half a million dollars and now selling at $100,000, software is practically going to become free.

So I think Indian companies can have their (product) offerings bundled as a service. But, unfortunately, the domestic market is not sophisticated enough to understand the buying of services.

We don't want to pay Rs 500 for a TV cable service, and that is why the cable guy steals from Star TV and Star gets upset.

We want to steal electricity, we want to steal water, we want everything free. And we are paying the price for that. That is the bottom line. These are the two main issues in the domestic market.

Salvi: If you are an American company and you have a good product, and if you are selling to Microsoft, they are going to pay you very well for that product.

And if your first company is Microsoft or Sun, you can make a lot of money from those customers, learn a lot and then grow. We don't have that here at the moment.

Ice World : Does this mean it makes better sense to do product innovation here and sell only abroad?

Tushar Kothari: My perspective is (not about) getting beta customers in the US or about getting a good price. All of that could happen. But in order to scale up a business from zero to $20 million, you have to invest in sales and marketing.

And keep on investing. Most of us have crossed the barrier of getting the first or second customer abroad, but the issue is to understand from a company-to-company perspective how you scale up from $2 million to $20 million. The scaling up is where we are getting into trouble.

Ice World: What kind of help do small software product companies actually require? Can large IT companies like Infosys and Wipro help?

Adkoli: The larger companies do not have a culture of incubating smaller companies. Any one of the so-called billion dollar club members in India could easily take one of us under their wings and say 'I have a large office in Dallas, you can put your guy there and use it for free.'

It does not cost them anything. Starting from that level onwards, they can help us. These companies send their sales forces to so many countries. When they meet customers they may come across an opportunity for, say, PaceSoft.

They can very well come back to Neil (Salvi) and say, 'Look, here is a potential opportunity. If you crack the deal, we will do some revenue share or whatever.' But they don't do that.

Bakht: In America, there is an ecosystem of a billion dollar company supporting a $100 million company, a $100 million company supporting a $10 million one and so on. That ecosystem has not yet developed in India and there is a reason for that.

A shakeout hasn't happened in the Indian system. A lot more companies need to go under...Right now the companies that are going under are companies which are Rs 1 crore, Rs 2 crore or Rs 5-10 crore in size.

We need to have some newspaper headlines saying, "XYZ goes under," and that XYZ company should be a Rs 700 crore one. Then people will start to get worried. Today all large companies work on the premise that there is no tomorrow.

Salvi: One space where this (collaboration) is happening is 'embedded software.' If you look at embedded software, it is a little bit harder to write than normal software, and in the rest of the world people are learning this.

I am in embedded software. Companies like Intel, TI "� these big ones do a great job of helping us to go to the market because they see the Indian software product sector to be the only place in the world where you can build these products, given the cost of doing so.

That is the real success model that we could imbibe.

Ice World: Has anybody here had an actual experience of a big company helping you in some way?

Ajay Sharma: Well, we have gone along with Wipro. But if you partner with mid-size companies, like Sobha Renaissance, which is in the range of Rs 15-20 crore turnover, they are more interested in selling your product because they can sell a solution around it.

In the case of Wipro, it is more like opportunistic selling. If the pull comes from a customer, all of a sudden they will call and want everything tomorrow.

Mid-size companies are much more interested because they are able to generate more revenue around our product. In fact, with some of them I am now asking for corporate guarantees that they will sell at least so much amount.

Only then will I sign (the deal). I tend to use Wipro more as a brand to get other doors to open.

Bakht: I believe that the next wave in IT will be software products. Unfortunately for us, the Indian software industry's focus is now on BPO. Wipro is willing to pay for a Spectramind because it adds to its topline.

That is more important to its shareholders. It may buy my product, it may struggle with it for five years, and then it may add to its topline. He is looking at the next quarter.

Mahajan: The large companies are today in their own comfort zone. They have shareholder pressures and the quarter-to-quarter thing. Whereas, by nature, what we are all trying to do is a longer term activity.

By nature, it is a risky activity. I was in a meeting that Azim Premji had addressed. He was asked why Wipro wasn't in it (doing product development). He was candid enough to say, "We are plucking the low-hanging fruit."

In that sense, I like what Ajay is saying. A very focused, mid or small-size company that can make your product a substantial part of their strategy is the way to go.

But it is easier said than done. Ninety per cent of the partners signed up don't perform. And you don't know which ones will or will not perform....

Bakht: Till after you have invested a lot of time and effort...

Mahajan: Yes, and that is an opportunity loss. For 'push' products, you have to have a focused partner who has customer access, at least till you get to a stage where you are on the radar of the large companies.

Either you are a threat or you are significantly a portion of their strategy.

Bakht: Either the industry matures, or we have to mature ourselves. In the US, five $1 million companies getting together to form a single $5 million company happens all the time.

We are not mature enough to merge ourselves to have a Rs 30 crore company. In my opinion, that is a better alternative for us to go forward. But we are Indians, we have huge egos, we can't let go.

For us to look towards Nasscom or the Wipros of the world for help is not correct. 'Healer, heal thyself". We should merge 20 companies and make it a Rs 200 crore company...

Sharma: We have so many Fortune 500 clients, but we don't know what to sell to them once we have completed our (software) implementation. Like Deutsche Bank "� we earned $3 million over a period of two years, and after that we didn't know what to do with that relationship.

Bakht: Infosys, Wipro and TCS grab 27 to 33 new customers in a quarter. With my small company, I am grabbing about 15 a quarter. Even if I stand up on my head, I cannot better Infosys. That means at best I can grab 30-35 customers a quarter.

But scaling up will be limited unless you can offer something else to your current customers. I have sold 500 copies of my software. I cannot figure out what more I can sell them.

Unless you grab more business from the same client, you are not going to survive.

Mahajan: That's a very interesting point about cross-selling. We found ourselves doing that quite a bit of that "� and very successfully so. We have a project management suite and we expanded that into service exhibition management.

We found ourselves being in front of customers who actually needed some basic information about how to manage their own projects better. So we started a project management training and selling initiative and it is in our own interest to get more customers into the door for this.

In a sense, this kind of cross-selling means looking at what you are doing and what is synergistic to your business and adding that. We acquired a group of consultants who were actually under some other umbrella and rolled out that.

We are three years into it, we are quite happy with it. Our joint challenge, after going out of this room, is to ask ourselves: Am I going to refer customers to him, is he going to refer customers to me? Can we do that?

Bakht: I hate to burst the bubble again and again. The problem is Mahajan would like to help Anand, but your marketing executive doesn't even know Anand. He doesn't care about Anand's survival.

Transferring this passion to your marketing team ain't going to happen because you don't have that bandwidth. You have enough problems. You want your guy to sell for you 24 hours a day.

If he wastes even half an hour on Anand's stuff, why should he? But when you acquire Anand's company, or vice-versa, then it becomes a part of your management, part of your portfolio.

You have to generate business from that item and it is possible that you will fail, but you will invest resources in it. This loose confederation looks very good on the drawing board but the damn thing does not work.

Kothari: A Rs 100 crore turnover in any business will be far more successful (than several small ones). If you think that you can reach Rs 100 crore of business in five years on your own steam, then you should do it.

If you think that you don't have enough bandwidth to do it, then Anil's idea of saying that you should merge companies is not a bad idea.

Adkoli: I recently spoke to the CEO of a company offering a possible collaboration, and he said you are competing with us.

Kothari: They would consider you competition even if your revenue numbers are very small compared to a competitor who is 10 times your size. The US perspective about competition is not about size, but technology.

The day you build an IPR which is equal to his, he starts considering you an equal. In our case, I have the same broadcast traffics product which is available with two other companies globally, and none of them would want to touch us with a bargepole in terms of an alliance because they consider us competition.

Bakht: When Tisco exports steel, the US gets upset and puts an anti-dumping duty. From my perspective as a small company, I have companies like SAP, Microsoft and Oracle, all of which have been operating on a cash negative basis for the last 15 years.

To my mind this is the worst type of dumping. What will it do? It destroys the local industry. Everybody is getting market share at any cost. There were 100 ERP companies seven years ago in this country. Now the number may be five, seven, 10 "� and even they are struggling.