Knowledge Partners


 Basiz Fund Service    Economic Laws Practice    Avalon Consulting  

 Spark Capital    Tatva Legal   

December 14, 2003

It's not always cheaper to build start-ups in India


With people like Sequoia Capital partner Michael Moritz saying things like "We can barely imagine investing in a company without at least asking what their plans are for India", it certainly seems like the "build in India" mantra has become mainstream in Silicon Valley.

"Startups funded today should be built entirely abroad-from product design to product development to quality control to (in some cases) even sales and marketing. For every employee you have in the United States, you can have five in India," Ravi Chiruvolu, general partner of Charter Venture Capital, had said in his Venture Capital Journal column in March. "It's such an important a strategy that if a company presents a business plan saying it needs 40 employees-all in the US-to help develop and bring its product to market, we'll pass in favor of a company that can do the same thing with just five employees here and the other 35 in India," he had added.

But now, Chiruvolu, is singing a different note: one of caution.

"Talent is not as cheap as we had thought. Basic office infrastructure is not quite as easy to obtain. Business partnerships are fraught with government and political loyalties and traditions. Even office leases can become complex entanglements," he says in his latest column.

More extracts from his column that explains the cautionary note:

Building a business from scratch in India is not for the nave or gullible; nor is it for the passive investor. If building a startup anywhere takes courage and commitment, in India you must double that and find a good tour guide....

We estimate operations to be "turnkey" at more like six months. Moreover, despite our intuition, certain costs are actually higher than even in the United States. Bandwidth in India can cost more than four times that of the U.S. And similar to the Valley in 1999, there's a shortage of labor in Bangalore, which can be dramatic...

The talent would rather take half the salary and work for a known quantity like Intel, Motorola or Cisco than take double the salary to work for a startup. We worked around that by hiring 25 employees for one of our Indian startups by first recruiting them to work for one of our more established companies, then contracting with them to provide the engineering talent for the startup. Salary alone does not mean everything to the locals. As educated as they are, titles are still very important and brand recognition in terms of recognition by family members is critical, as is company stability. Workers will even receive favorable car and home loans from their bank if they work for a larger company. In one case, we had to pay our respects to a local bank manager to make sure our employees would be given the best loan rates.

He also cites the nightmarish experience that Ishoni Networks went through--during which members of the management team and board of its Indian software development subsidiary allegedly set up a rival company and tried to bankrupt Ishoni, steal its employees, and acquire its intellectual property on the cheap.

So, is Chiruvolu, giving up on India? Not at all.

The lesson is that moving R&D to India should not be done solely to save cost, he says. "It needs to be a strategic decision that fully incorporates the risks, fixed costs and inefficiencies that will plague ventures in the short-term. You may wind up paying five times the price for certain things and still not getting what you want, but that's the cost of doing business in markets we either have yet to fully understand". "The price of new market entry may be high (expensive tuition), but the opportunity costs of not developing competencies where 40% of consumers are and where the bulk of growth over the next 20 years will be, could be greater still," he adds.

Click Here to read the full column.