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May 21, 2007

Why doing R&D in Bangalore is becoming dumb and dumber

At least for start-ups - including VC-backed ones.

For over a year now, entrepreneur friends who are doing R&D for their product companies out of Bangalore have been pointing out how thankless it has become to hire and retain people there. Now, with a well funded start-up like Riya.com pulling the plug on their IDC, Bangalore seems ready to be officially declare a 100% MNCs-only zone.

Riya.com's CEO Munjal Shah has sparked off a very interesting discussion on this topic with his blog post.
Unlike Silicon Valley, however, the employees in India didn’t value stock options as much as folks do in Silicon valley. It was understandable, however, given they had never seen a friend hit it big or seen the Google like wealth effects which occur every 5 years in the Valley. Hence, they argued more for cash compensation. This combined with the fact that we were going after the best in Bangalore (the most impacted city in India) increased our exposure to wage inflation.

Bangalore wages have just been growing like crazy. To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart. He then jumped from 10% to 20% of his US counterpart in the next 1 year. During his time with us (less than 2 years) he jumped to 55% of the US wage. In the next few months we would have had to move him to 75% just to “keep him at market.”

Keep in mind that Riya are at the leading edge of this trend. We tend to only hire folks from IIT or other top schools. We tend to only hire the smartest folks from these schools. We only hire in Bangalore (just too hard to have three offices). We tend to only hire folks with a lot of experience. These are all characteristics that are critical for technology startups, but not necessarily for a big company like IBM or a services company like Infosys who can afford to train new graduates. I do believe that other startups in Bangalore will see the same issue in 12-24 months.

Extracts from the comments section:
Whatever has happened with Riya is not a new phenomenon...many other Product companies with their R&D centers in India and also startups with distributed "core" teams have faced the similar challenges and taken tough decisions Eg Pervasive, Apple, Accelrys.

Personally,I have decided that I'll never start a people intensive business in India. Hiring people is a pain - apart from the hiring pain, you have the salary pain and the infrastructure pain. And yes the job market does not understand stock options, but you don't have to go after the general job market, either. There are smart, ambitious and stock-option-friendly individuals here; they don't have IIT degrees, but they meet in shady bars and talk geek over kingfisher beers. I think I'll go find them now.


The question for start-ups is will the Bangalore disease - skyrocketing salary expectations, nightmarish traffic and other infrastructure bottlenecks, etc. - start inflicting start-ups in other cities as well?

The benefeciaries of this trend could be outsourced product development companies like Persistent Systems, GlobalLogic, etc.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.