Geographies in Depth

This is how India can build its own Silicon Valley

Vehicles move along New Delhi's Connaught Place during evening hours, October 28, 2014.

How does India's start-up scene stack up? Image: Reuters/Anindito Mukherjee

Kartik Hosanagar
Professor, Wharton School, University of Pennsylvania
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As I write this article, I am on my way back to the United States after a productive trip to India. During this visit, I had a chance to meet with some of the entrepreneurs shaping India’s start-up scene.

There are three pillars that characterize a thriving start-up ecosystem: breadth, scale and depth. By breadth, I mean how many sectors of the economy the system spans. By depth, I mean how many players are in each sector. And by scale, I mean how large are the companies in each sub-sector. Thriving start-up scenes such as Silicon Valley have all three.

How does India stack up?

E-commerce, cab apps and food delivery hog the limelight, perhaps leading casual observers to question the breadth of India’s start-up spectrum. But the most striking observation relates to the number of sectors covered by India’s start-ups. Their range includes biotech companies like Mitra Biotech, software-as-a-service (SaaS) start-ups such as Freshdesk and Postman and fintech companies like Zerodha, among others. Whatever your sector of interest, you will likely find activity in that space.

But what we gain in breadth, we lose in scale.

Scalability remains the missing piece of India's start-up puzzle. Even some of the larger and more prominent companies in many sectors have barely reached around $10 million (67 rupees crore) in annual revenues after spending much more. Enterprise SaaS companies struggle to sell to Indian corporations, making the domestic market virtually non-existent. Selling globally from India isn’t easy either.

Similarly, in biotech, the domestic market has been a hard nut to crack. Most biotech start-ups are yet to achieve reasonable scale despite raising tens of millions of venture dollars. In consumer markets, there is scale in terms of number of potential users but the average revenue per user is low.

Moving on to depth, you can count on the fingers of one hand the number of start-ups in each sector. The lack of depth is partly due to the lack of scale. It is hard for a market to support lots of players unless there is scale. In addition, one doesn’t see enough specialists across multiple sub-sectors in India. If you just looked at advertising technology (ad-tech) in the US, you could break that market down into multiple large sub-sectors including ad exchanges, ad servers, demand-side platforms and supply-side platforms. Other sectors are no different. The market will have to mature considerably for such specialists to emerge in India.

So what can an entrepreneur do to address these scale and depth issues?

These problems are structural and innovations are needed to address the lack of widespread broadband availability and the inadequate access to digital payment platforms, for instance. The government and large corporations will have a major role to play in this. The success of services such as Reliance Jio, which seeks to roll out a pan-India 4G network, and the unified payments interface will be crucial. The tailwinds are certainly in India’s favour, given the many initiatives launched in the past 12 months.

Can India list itself alongside US and China as a start-up nation? The next few years will tell.

The India Economic Summit is taking place in New Delhi, India, from 6-7 October.

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