August 13, 2012
Interviewed by: David Snow
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India Ecosystem for Innovation

Will India’s bustling technology scene give rise to the next Google? It’s the wrong question, say three veterans of the private capital markets. Mukul Gulati of Zephyr Peacock India Management, Sev Vettivetpillai of Aureos Capital (an Abraaj division) and Parag Saxena of New Silk Route discuss the nature of India’s venture capital and innovation ecosystem, and how it gives rise to crucially needed adaptations of Western ideas–sometimes called “Gandhi engineering” or “frugal innovation.”

Will India’s bustling technology scene give rise to the next Google? It’s the wrong question, say three veterans of the private capital markets. Mukul Gulati of Zephyr Peacock India Management, Sev Vettivetpillai of Aureos Capital (an Abraaj division) and Parag Saxena of New Silk Route discuss the nature of India’s venture capital and innovation ecosystem, and how it gives rise to crucially needed adaptations of Western ideas–sometimes called “Gandhi engineering” or “frugal innovation.”

David Snow, Privcap: We are joined today by the Mukul Gulati of Zephyr Peacock India Management. Sev Vettivetpillai of Aureos Capital, and Parag Saxena of New Silk Route Partners. Gentlemen, welcome to Privcap today. Thank you for joining us.

We’re talking about private equity in India, however I’d like to dig into the ecosystem for innovation in India. A bit more on the venture capital side, and I’m fascinated to hear what all of you are seeing that is unique in India, having invested there for many years.

And maybe we could start with an overview from Parag about the ecosystem that you work in to discover ideas and talent, and putting those together with capital and the expertise of your firm to build businesses.

Parag Saxena, New Silk Route Partners: So our firm basically focuses on businesses where somebody in our team used to be a chief executive or a chief operating officer, so we tend to invest in those businesses. And that helps us take businesses to scale. So for example, we have a small tower company, which we acquired when it had 200 towers.

It now has 4,000 cellular towers. And that scale, and it is only possible to do something like that and to think about doing something like that because we have three people that have a lot of experience in that business, two ex-Telecom CEOs as part of that.

But I think your question on innovation, generally, is one where you see it particularly, and I think Mukul might have some ideas in particular, because a lot of that is actually Bangalore based. Where people coming back and thriving off the IT population, you see a number of things there.

What I see looking, back into my experience of investing in early stage venture, going back to the very early 1980s in the US is the same kind of thing. There are still people figuring out how to do it. These are usually syndicated transactions, because in a venture transaction you’re actually looking for multiple people to come to the table with different talents.

You’re great at marketing, I’m great at R&D, he’s great at scaling up, so maybe all three of us should each own 20%, have the management company own 20%. It’s a very different business than traditionally practiced private equity, where it’s small companies that have been started by a family and you’re growing them.

It’s very different, and you’ll see that. So far you’re mostly seeing adaptation of western ideas to Indian, sometimes referred to as Gandhi engineering. So you have Flipkart, which is a version of, where they realize that the infrastructure for delivery, you can’t get a DVD to the equivalent of FedEx in four hours to somebody in your town.

So what do you do? And what Flipkart did, very smart, is to actually build that infrastructure for themselves, which is also branding, and you see their people, very distinctive uniforms running around delivering products. You see that.

So at the moment you see innovation, but as more and more global companies actually put real research, not development, but real research, as Motorola, General Electric, Google have done, you’re going to start to see true innovation. Because people that break off from that are going to think of an idea completely differently and build that. So next 10 years.

Snow: Mukul, from your base in Bangalore, what is your analysis of, and your experience of the ecosystem for innovation in India?

Mukul Gulati, Zephyr Peacock Management: From a conventional point of view, it’s lacking. Is lacking in Bangalore, and it’s lacking in India. I don’t see the next Google or the next Facebook coming out of India, because that ecosystem of investors, angel investors, entrepreneurs, universities, does not exist in India as you would have in Silicon Valley in this country.

But there’s a different kind of innovation that is coming out of India. The often used expression is frugal innovation. And two great examples of that is the electrocardiogram machine that General Electric built out of GE healthcare, where they would sell these heart monitoring machines to Indian doctors who would go to small towns, and there would be no power.

And the machines they imported from the west would not work. And they were too expensive. So GE created a smaller machine at 20% of the cost for the Indian market, which was sturdier and which could work on batteries. Guess what? Now they’re exporting back that machine to the United States.

Another example is Dr. Devi Shetty in Bangalore who does heart bypass surgeries for a tenth of the cost than you see in this country with the same level of success as the best hospitals in the United States, adapted to the Indian market.

And this is the kind of innovation that India needs, other emerging markets need that are more hopeful about. And we don’t need to create the next Google. We need to solve India’s problems, or Africa’s problems, or Indonesia’s problems. And I’m more optimistic that that will continue to occur.

Snow: What is your view, Sev?

Sev Vettivetpillai, Aureos Capital: I’m totally with Mukul’s point. That we invest in that sector which we refer to as the emerging sectors we invest in. They’re not sectors that are new to the world, it does exist. But in that market, for a specific time and goal, that’s an emerging sector which is demand driven, that is adapted to the environment, the culture.

If you have a population of 100 million and you’re tapping into that, that’s a huge scale of business you can make a lot of money out of. Now obviously as they grow, they will converge towards the general global sector point. But that’s the beginning.

I also don’t believe you’re going to get world technology that no-one has seen in these markets, because they have more pressing things that need to be done there first.

Snow: What has been the influence of the many Indian entrepreneurs, venture capitalists, and others who have either been educated or grown up in the West, and are moving back to India? How has that influenced the venture capital scene in India? Maybe starting with Parag.

Saxena: I think it goes back to what we just were talking about, that the first people to do those ideas, so if you look at firms which are successful in say, taking the ideal of the cloud and developing product for that, right? Or it’s done by a group of people that were California based and moved to Bombay, as it happens.

Or if you look at people that are in the Flipkart example that I used, that’s again a Silicon Valley firm that has an Indian partnership and said combination that got them to recognize that this is an exciting area. So you’re going to see the influence of people coming back.

And that’s a very, very important influence. And in fact, it extends beyond just people who are first generation, or the children are first generation immigrants. What I’m seeing now increasingly, and it’s really something I welcome, is I see from the US, white, Anglo-Saxon Protestant Americans looking for jobs in India.

Maybe it’s going to be a three year assignment for them, but it’s a fun things in sort of chasing something in an economy that’s slow, and it’s the trade off between do you want to work in something that’s exciting and growing rapidly, you really have something to bring to the table.

And I’m constantly meeting people, and I’m looking for people all the time in our companies, elsewhere. I’m looking for people. So I’m really in the flow of this, and I find that to be a fascinating phenomenon. When I went to the states, 1977, it was like automatic. If you could do it, you went, right?

Because the opportunity said 20 years later for me in India would be something negligibly different than what I started in, the forces of authority above me and the hierarchical nature of what existed would make it very, very difficult to be successful unless you had access to capital.

And that’s certainly wasn’t true then. Today, what I find interesting is I find we recruit young MBAs from US schools directly into our companies, or into our firm, right? And obviously there are many more jobs in the companies than in the firms. That to me is a very exciting phenomenon.

Snow: Mukul, do you agree? What is the influence that you’re saying of the reverse brain drain in India?

Gulati: I agree with Parag. My own example, I was educated and worked in the States. When I went back, but I think our learning’s been based on my own personal experience, and my portfolio companies, that I am reluctant to invest in situations where it is completely western.

The combination of local and western expertise, that’s how we started our business in India. We had a team locally, which was much more connected, much more familiar with how India does business.

Snow: And by, sorry, by completely Western, do you mean they’re Indian, but they have, they all come back and they try and recreate what they picked up in the West and in India?

Gulati: And some of the things are really important, and I think in many businesses, particularly in IT, western influences have been a real net positive for India, and its India’s competitive advantage vis a vis many other markets that India has these global connections and their dynamic connections.

With that said, that western approach needs to be married to how India does business. And those have been the best situations, at least based on our experience.

Snow: Sev, briefly, what are your thoughts on the ecosystem for talent in India? What is in abundance, and what is most lacking?

Vettivetpillai: I think India produces very high quality talent. The issue is that the practical application is an issue in that. I mean, I agree with both of my colleagues here. We’ve seen quite a number of that. I’ll go one step further, and I think in the next 5, 10 years, we’re going to see a lot more emerging businesses.

Indian, Chinese, Indonesian, name it, are going to acquire businesses in the west. The head office concept is not in the UK or in the US, it’s going to be in one of those markets. These are offices that are going to look to hire people from the UK in the head office, train them, and send them back and run their UK business.

The same way the UK business multinationals have been doing it for the last 50-odd years. I think that shift is going to happen in the next 10, 15 years, as we see more businesses in the UK and Europe are getting bought by emerging growth countries in that.

And simply because they are a bigger balance sheet, much stronger balance sheet compared to where a lot of these businesses are today in Europe. And that’s an interesting concept, because we did it. We came out across the UK.

We studied there with the hope that we would work in a company, and we’d get sent back. That reverse thinking is going to happen, in my opinion.

Snow: Well that will certainly give rise to some interesting cross pollination, and certainly some innovation as a result, I’m sure. Gentlemen, thank you very much for being on Privap today. It’s been fascinating talking about innovation in India with you.

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