Need for Software Product Companies for India's Economic Growth

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Presentation by Dr BVR Mohan Reddy, Founder and CEO, Infotech Enterprises at NASSCOM Product Conclave, Hyderabad, 3rd Apr during his opening keynote address.

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  • Including the domestic market, the Indian IT industry is currently pegged at $118 billion.
  • Labour arbitrage has an upper limit, with IT services becoming more commoditized and highly crowded IT services market, we have to create the next big trendThe industry has seen rise of about 500 software product firms in 2013Israel, far smaller than India, has managed to report the second highest number of merger and acquisition (M&A) transactions in the start-up products space. And, the nascent but fast growing Indian start-up system wants to understand why. - http://smartinvestor.business-standard.com/market/Marketnews-230645-Marketnewsdet-Nasscom_shows_interest_in_Israel_start_ups.htm#.UzUUiGKSyBI
  • Combinatorial Innovation implies the process of innovation that often relies heavily on combining and recombining previous innovations. For example: an innovation that uses the combination of Cloud, Mobility, and Social Media. (Nexus of Forces). The broader and deeper the pool of accessible ideas and individuals, the more opportunities there are for innovation.
  • Existence of ‘soft infrastructure’, mobile proliferation, commoditization of computing hardware and the advent of cloud computing have made connectivity and computing capability nearly ubiquitous across India
  • Need for Software Product Companies for India's Economic Growth

    1. 1. © 2014 Infotech Enterprises. All Rights Reserved We deliver Global Engineering Solutions. Efficiently.April 7, 2014 Need for Software Product Companies for India’s Economic Growth
    2. 2. © 2014 Infotech Enterprises 2 Can India use the foundation created by the software services industry to go to the next level in terms of economic growth? – Software products offer one viable route Global Software Products Industry = $1.2 trillion India = $2.2 billion The Software Product Industry is a $1.2 trillion opportunity globally… … with India‟s revenues from software products at $2.2 billion in FY13 The Software Outsourcing Industry in India expected to rise to $99 billion in FY14-15 (FY14 estimate at $86b). With our leadership capabilities developed in the software services industry, India has a higher chance of succeeding in the Software Products Industry
    3. 3. © 2014 Infotech Enterprises 3 Software product revenues from India nearly doubled to reach $2.2 billion in 2013 and is expected to reach $10 billion by 2020 $1.3 $2.2 $10.0 $100.0 $0.0 $20.0 $40.0 $60.0 $80.0 $100.0 $120.0 FY2008 FY2013 FY2020f FY2025f Revenues CAGR 11.1% CAGR 24.2% CAGR 58.5% Software Products Industry’s Market Size ($ in billion) Source: NASSCOM, iSpirt  India has a potential to build a $100 bn software product industry by 2025, growing at a CAGR of ~59% – contributing significantly to the nation‟s current account  2014 will witness the emergence of “Made in India Software Products” on the global stage
    4. 4. © 2014 Infotech Enterprises  Meeting and exceeding personal expectations in today‟s experience economy is a top most priority for innovative CIOs and entrepreneurs  This in turn is driving the need for companies to produce ‘experience’ apps for their digital customers 4 Transition to an ‘Experience Economy’, ‘Disruptive Innovations’ in Technology, and the Rise of a ‘Digital World’ are helping unlock significant potential for Indian software product businesses 1. Transition to an Experience Economy Where were we? Time Where are we now? Agrarian Economy Industrial Economy Service Economy Experience Economy Focus With a rapidly changing mobile and social world, people demand the very best experience
    5. 5. © 2014 Infotech Enterprises 5 Transition to an ‘Experience Economy’, ‘Disruptive Innovations’ in Technology, and the Rise of a ‘Digital World’ are helping unlock significant potential for Indian software product businesses (cont’d…) 2. Disruptive Innovations in Technology Technology Innovations  Big Data  Mobility  Cloud Computing  Virtualization  Service Oriented Architecture  Open Source Delivery Model Innovations  Packaged/ License  Infrastructure as a Service  Software as a Service  Software Appliance  Software Enabled Solutions Revenue Model Innovations  License  Subscription/ On Demand  Transaction  Ad Based  Outcome Based Software Market Disruptions Technology Innovations Delivery Model Innovations Revenue Model Innovations Disruptions are happening at a much faster pace offering huge opportunities in the software product market
    6. 6. © 2014 Infotech Enterprises 6 Transition to an ‘Experience Economy’, ‘Disruptive Innovations’ in Technology, and the Rise of a ‘Digital World’ are helping unlock significant potential for Indian software product businesses (cont’d…) 3. Rise of a Digital World A nexus of converging forces, i.e. Social Media, Mobility, Analytics, and Cloud is creating a hot bed for new business opportunities Social Media • Address customers‟ social media requirements Mobility  Mobile-enabled business processes and platforms such as: m-Commerce, m- Banking, etc. Analytics  Data Explosion and the need for Real-time Insights, end-to-end Analytics Cloud  Cloud platforms, cloud- specific testing  Cloud-enabled solutions pay- per-use
    7. 7. © 2014 Infotech Enterprises 7 While India’s role in global technology IP creation has grown steadily, several challenges have constrained the growth of home-grown software product business Talent starvation at the entry level Finding/Retaining talent Large initial investment and uncertain future cash flows Over 50% Completely self-funded or „Bootstrapped”(a) 78% have homogenous founding partners Lack of original technology development mindset Low presence in global packaged software market Challenges (a) Low valuation of the startup: Around 50% of Indian product startups are valued anywhere between $1 million to $10 million, with nearly 34% of them valued at less than $1 million Very few exit options for the VCs or angle investors: In Israel the M&A exit value was 7X of the VC/PE investment during the same period. In US the multiple was 5X. In India it was only 1.1X
    8. 8. © 2014 Infotech Enterprises However, a maturing ecosystem has helped accelerate the growth of homegrown software product businesses over the past few years  Angel, VC investment boosting the product sector owing to the high potential  Tier II/III cities are rapidly emerging as viable product hubs. Ex: Ahmedabad, Trivandrum, Kochi, etc.  A number of incubation centers have been established across India, that are helping technology startups with funds and mentorship. (Approx. 40 incubation centers)  Startups are attracting talents by providing attractive roles, ESOPs etc  iSpirt has partnered with Signal Hill (US based boutique bank) to facilitate M&A activities in Software product industry and bring in the valuation boost. Example: Facebook’s acquisition of Little Eye Labs 7 7 43 32 48 2006 2013 Angel Funds VC Investors Number of active investors 8
    9. 9. © 2014 Infotech Enterprises  Fast growing domestic market requirements will aid the growth of India‟s Software product industry in the days to come o Small and Medium Businesses (SMB) market in India (India‟s growth engine) is huge and the current IT penetration is very low  India has a critical mass of software product companies (~3,500) which have entered the Maturity stage of the industry  Currently going through a period of ‘Combinatorial Innovation’ o A host of SaaS success stories by Indian Origin Companies are examples to this  New SaaS markets being created are very large, currently valued at USD 600 billion globally. Indian SaaS product companies are a part of this emerging market opportunity right from the beginning  Close to 40% of founders come from the R&D section of an MNC, such as: Yahoo, Intel, IBM, etc. o A lot of senior talent from MNCs are starting software product companies 9 Domestic market in India is unique in multiple ways – this is fueling opportunities for India-based software product businesses
    10. 10. © 2014 Infotech Enterprises 10 Why should India focus on Software Products and Expected Outcome for the Country  Rich leadership skills that the country already has in the IT sector  Entrepreneurial Aspirations that exist amongst India‟s youth particularly in the IT (software) space  Established vibrant software ecosystem  Facelift for the country – Labor arbitrage has a limit and the IT services space is crowded with the large organizations. Product startups will give the most needed facelift for the country  The product industry with a potential of $100Bn in 2025 could be the next big thing to drive the Indian Economy & to become the aspirational industry for the huge engineering population of India  With the developing favorable ecosystem we can foresee the increase in exit options for the VCs and Angle investors Leverage existing resources Expected outcome
    11. 11. © 2014 Infotech Enterprises  Incorporate the teaching of Entrepreneurship and Innovation into our educational system o India scored a mere 4.95 on entrepreneurship culture as compared to the highest of 7.67 (United States) o Additionally, we scored the lowest in comparison with 20 countries on Education and Training (at 3.49) compared to the highest of 6.58 in the recent G20 summit  Research work in Academia has to see light of the day with entrepreneurship  The key to building a successful product company is to have a diverse founding team – i.e. a combination of technical and business skills vs. a homogeneous founding team  Very early stage funding requires more support (prior to Angel Investing). Government through proper mechanism has to make small amounts (~5-10Lakhs) available to entrepreneurs. This needs to be a national Mission 11 Recommendations
    12. 12. © 2012 Infotech Enterprises. All Rights Reserved We deliver Global Engineering Solutions. Efficiently.www.infotech-enterprises.com Thank You 13

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