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Emerging India: Passage to Bangalore: Hoosiers seek outsourcing and investment opportunities

February 20, 2006

Passage to Bangalore Hoosiers seek outsourcing and investment opportunities

BANGALORE, India-The deal was falling apart. Despite a week of flirtation and friendly negotiations, the two young Indian entrepreneurs rejected the offer from the group of Hoosier investors. Frustrated, the investors walked out of the hotel conference room.

The chance to speculate on an Indian software startup called Picsquare.comhad fizzled. But none of the six Indiana business leaders was demoralized. After all, they'd crossed the globe to pursue business opportunities in one of the world's hottest economies, and found an abundance.

Just a week on the ground in Bangalore had produced a dozen more potential IT and biotech deals, plus over a hundred new business contacts. And they'd barely scratched the surface.

"We're not discouraged at all. All the pieces are coming together right now," said Robert Compton, former general partner of the Indianapolis venture capital firm CID Equity Partners, who organized the trip.

"Return on investment is a function of how much money you put in, and thus how much you get out. [In India] I can put in a 10th of the money I would in Indiana. So it seems obvious to me which is the better way to go."

Last month, IBJ went along as a group of Indianapolis' most experienced new-businessdevelopment experts spent a week in Bangalore, a southern Indian city of nearly 6 million whose low wage costs and highly educated work force have made it a mecca for high-tech activity.

The group included private investors like Compton; veteran executives of local startup software companies; a new business specialist from a major life sciences firm; and an attorney with deep experience in technology, entrepreneurship and intellectual property issues.

There's plenty percolating in the local IT and biotech sectors. So why did the executives travel more than 8,000 miles to build their newest businesses? It wasn't just to set up low-cost Indian call centers, as many U.S. companies have done. It was to gain access to world-class technology talent, which in Bangalore costs less than one-third what it would in the United States.

They also want to tap into the enticing Indian market. Driven by technology, India's economy is growing at a blistering rate of more than 8 percent annually. Marketers salivate over India's hundreds of millions of newly wealthy consumers.

And after decades of tepid growth under the shelter of a formerly protectionist government, India is now starting to embrace entrepreneurship. Some investors believe Bangalore's own high-tech startups are finally ripe to produce explosive returns.

By harnessing these trends, Compton, 50, believes he can establish a unique business model with one foot each in Indiana and India. It's a plan the Hoosier group hopes will capitalize on the biggest strengths of both places at the lowest possible price.

Executives stateside will conceive, manage and market the high-tech startups. Teams in India will handle computer programming, maintenance and quality control. And with those teams on the ground overseas, the companies will be perfectly positioned to find other Indian deals. They'll also enjoy easy access to the burgeoning Indian consumer market.

"This is a great opportunity," Compton said. "We ought to seize it."

Enormous potential

The big picture is familiar to anybody who's read Thomas Friedman's book "The World is Flat," for months the buzz of business circles. India spent decades investing in math, science and engineering education. Its recent history has been all about liberalizing its formerly socialistic financial system. The nation's strategy is now paying off.

The Hoosier group wanted to see for itself how to capitalize on India's emergence on the world stage.

According to the Indian embassy, Bangalore today has more trained software engineers than does Silicon Valley. Many of those Indian engineers have master's and doctorate degrees-often from American universities. The trick is finding the right people in a country whose population tops 1 billion.

Then there are the logistics. Even with email and conference calls, it's difficult to manage people who work while you're sleeping on the opposite side of the planet. It's even harder to assess the viability of their business plans.

"The perception is that you can farm out code and save a ton of money. Maybe you will, maybe you won't. But the potential is there," said Dustin Sapp, who came on the trip and is co-founder and vice president of development for Indianapolis-based software startup Global Stay In Touch.

"I am not concerned with a lack of capability or lack of desire [in India]. I'm afraid my communication won't be good enough. You can't survive on instant messenger and midnight phone calls. You've got to come out here."

Outside the gated walls of the luxurious Windsor Sheraton and Towers hotel, where the group stayed, Bangalore's streets teemed with people. Every stereotype of old India was just a stone's throw away, from autorickshaws to makeshift fruit stands. Motorcycles often carried whole families-Dad in front, Mom in back and three kids around them.

Cows roamed freely in the heat. So did impoverished children, many too young to have lost their smiles. But they were all old enough to know a rupee's value, and they were always ready with a trick or a trinket to earn one. Muslim women draped head to toe in their dark burkas avoided eye contact. Proud Hindu women dressed in colorful saris didn't.

With just a week to spend, the Hoosiers hoped to quickly penetrate the clamor and dust. Somewhere amid the heaving crowds and the blocks upon blocks of crumbling buildings, Bangalore's best and brightest were waiting to do business.

For proof, the visitors had only to glance at the dozens of multinational corporation towers shining in the subcontinental sun, many of them nestled inside the Electronic City Industrial Park. All the U.S. heavyweights seemed to have built sprawling new corporate campuses in the city, from Citibank and Goldman Sachs to Hewlett-Packard and Intel.

India's potential was clearly enormous. But without a multinational's resources, could a half-dozen Hoosiers compete?

Parachuting in

Advance preparation was important. But networking during the trip was the key. Every new contact the Hoosiers met in Bangalore's budding entrepreneurial community led to at least three more. A good word seemed to open any door, especially if a trusted friend uttered it.

Compton first visited India last fall for a tour that was one part sightseeing and three parts fact-finding. He wanted to verify the truth of the globalization trends he'd been reading about for a few years.

"I decided this is such a tectonic economic shift, I have got to go see it for myself. And so I bought a plane ticket and went," Compton said. "What I saw confirmed everything I'd been hearing."

Bangalore sprawls on for mile after decaying mile, interrupted only by billboards, the walled campuses of multinational corporations, and the many supporting industries that cling to them like a throne on an elephant's back.

Sidewalks are a carnival of varied ethnicity, and people are everywhere. Despite admission charges, parks and relaxing botanical gardens are invariably packed. Tiny shanties house whole families. Rivers and roadsides are choked with garbage.

"I had read a lot about the infrastructure challenges in India. I don't think they're overblown at all. The challenges of airports, traffic, pollution and skyrocketing housing costs are very real," said Mike Fitzgerald, a former Roche Diagnostics official who was part of the Indiana contingent. "Time will tell if it's so much of a problem that you can't get business done."

To circumvent logistical hassles, Indians rely on creative solutions. Anecdotes abound about multinational corporations shuttling employees to and from the office on Internet-enabled buses, so they can work during the commute.

Many times throughout the week, electricity failed during business meetings. Indians hardly blinked. Within a minute or two, power would return, thanks to the backup generators most businesses consider a necessity.

"The Indian response to infrastructure problems is not to bitch about the government," Compton said. "It's to engineer around the problem and say, 'I'm not going to let this stop me.'"

Compelling costs

American executives are drawn to India by the chance to locate business functions in a nation whose talent is reliable and cheap, whose commercial laws are based on British tradition, and whose business language is the queen's English.

India's biggest question marks remain its marginal infrastructure and its lack of reliable middle management.

India has clear advantages over China, its main competitor. There, U.S. executives have to bridge a language barrier. And in China, intellectual property protections are spotty. That's critical when a company is writing proprietary software or researching new drugs.

"I think cost was and is the big driver [for India] at least to warrant consideration," said Fitzgerald, who now runs a consulting firm. "If you know exactly what you want and can articulate that, you could get something done for maybe 60 percent less."

"But to really get it right, you still have to pay a project manager," Fitzgerald continued. "That management layer, the few people who do it well, are in very high demand in India. They're probably the bottleneck in leads me to think they can't learn it. If I had to bet, I think it will happen faster than we expect. They're very quick studies."

Consider the example of Picsquare. Its founders Manish Agrawal and Kartik Jain want to bring a digital photography service like Shutterfly or Snapfish to India. Both men were born in India. They met at the prestigious Indian Institute of Technology in Mumbai.

Every year, 100,000 students take the IIT entrance exam. Only 2,000 are admitted. Agrawal was number 527 the year he took the test. Jain was number 840. After he finished his mechanical engineering degree, Agrawal went on to Purdue University, where he studied bioinformatics. While there, he took second place in a 2003 Purdue business plan competition for a molecular search engine called BioCube.

After Agrawal's return, the friends brainstormed. They formed Picsquare in October. By January, they had 450 users and were seeking $250,000 to grow the business. They live together in an apartment for $100 per month. While Picsquare takes root, they believe they can last for at least a year on savings. One day, they hope to be multimillionaires.

Until then, they say they're satisfied with more modest gains.

"The feeling you get, it's hard to describe in words, when customers tell you, 'This is good work,'" Agrawal said.

The Hoosier investors made Picsquare what they considered a good offer, only to be rejected. In retrospect, the Hoosiers realized it was because Picsquare had never negotiated with investors before and thus had unrealistic expectations.

"Ultimately, we understood these were two young entrepreneurs who need to get more rejection, so to speak," said Indian Math Online co-founder Suresh Murthy-the only Indian native in the Hoosier group. this whole process."

Close behind cost is the opportunity to sell to 300 million newly wealthy consumers. For the first time in India's history, the country's middle class enjoys a disposable income. Savvy companies will capitalize as demand rises for everything from cell phone ring tones to financial services.

"In the next two decades, incomes will begin to rise and India will create another market the size of the U.S.," said David Kerr, president of Carmel-based NoInk LLC, who also was part of the Indiana contingent. "If you can establish yourself in a market in the nascent stages of its emergence, it creates incredible opportunities."

Innovation equation

The Hoosier group also was there to explore Indian investment deals. The conventional wisdom is that Indians are great at executing others' plans, but that Americans enjoy an overwhelming advantage in the creative drive that's necessary to spur innovation and new companies.

Indian entrepreneurs now have an unprecedented chance to test their creative mettle and change the innovation equation. Last year, 20 of the world's largest venture capital firms backed Silicon Valley Bank as it opened its first Bangalore office. Compton believes they're on to something. Would-be Indian entrepreneurs are hungry for investments. Their appetite for advice is even larger.

"Right now, America still has a significant lead in our ability to conceive and build unique new products. We have a culture of innovation that their culture hasn't developed yet," Compton said. "But there's nothing in the psyche of the Indians I met that "I think that reality is going to sink in during the next few weeks."

Fortunately, another talented team with a cutting-edge pitch is always available in high-tech Bangalore. Picsquare was just one of a dozen startups the Hoosiers met or reviewed during the week.

Crest of the wave

Silicon Valley venture capitalists want to do deals in the millions. Most Indian entrepreneurs aren't ready for that. They need investments in the thousands.

That's what's so exciting to Compton, who's known as an angel investor because he uses his wealth and experience to back early-stage businesses.

For investments in five or six figures, he can mentor promising Indian prospects. And thanks to the years he spent as a professional venture capitalist, his address book is filled with the names of contacts at the big venture firms. Once the Indian companies in his portfolio ripen, he'll know whom to call for the next round of investment.

"The biggest issue for venture capital investing in India is there are so few players, and at the seed stage there's no one," Compton said. "If it were further developed, I would have been discouraged. It would have meant I was late to the game. We're on the crest of the wave of a market opportunity."

With a Harvard MBA and 13 years in the '80s and '90s at CID Equity Partners, Indiana's largest private investment firm, Compton has seen an abundance of venture deals over the years. One led him to become CEO of a medical-device maker called Sofamor Danek Group, which was acquired in 1997 by Fridley, Minn.-based Medtronic for $3.7 billion.

Compton stayed on to manage Medtronic's spine division until 2000. Since then, he's spent his time cultivating startup companies with his own cash and expertise. Many have been Indianapolis software ventures, such as Aprimo, Mezzia, NoInk, ExactTarget and Interactive Intelligence.

Like baseball, the venture capital business is a game of percentages. For every home run, investors expect to swing and miss repeatedly. To establish a new software company in Indiana, the cost is often well into seven figures. For the same price, an investor in India can back five or 10 startups. That's five or 10 more chances to swing-even if the game in India is cricket.

It's not that Indian technology startups will necessarily be bigger or more successful than their American counterparts. But at these prices, they don't have to be.

"I don't think you're guaranteed a larger return [in India]," said Nick Mathioudakis, a Baker & Daniels attorney who went on the trip. "But you're mitigating some of your risk, because you're not investing as much."

Over the long term, the success of Indian businesses creates commercial opportunities. Take Vivek Sreedharan, a 23-year-old software developer who worked for the Bangalore IT company HealthAsyst. He marveled at Bangalore's explosion of malls, racetracks, nightclubs, coffee shops and theme parks that didn't exist just a few years ago.

Sreedharan already owns his own car and home. When he visits his parents wearing new designer clothes, they tell him he should put his money in a safe bank account. They don't understand how the returns on his real estate investments far exceed a bank's modest interest.

"My dad bought his first car when he was 35 and his first house when he was 40," Sreedharan said. "So much change is happening in front of me."

Multiply Sreedharan's story by the hundreds of millions, and you'll have a sense of why companies are so excited about the Indian market.

Seat-of-pants development

When Compton visited India the first time, he brought along his friend and colleague Glen Tullman, CEO of Chicagobased clinical health care software-maker Allscripts.

Compton is a member of the Allscripts board. The relationship gave him access to HealthAsyst, Allscripts' Bangalore vendor. Thus one contact leads to another.

When the Hoosier group arrived in Bangalore last month, it had complete access to HealthAsyst's offices and software developers. What's more, HealthAsyst CEO Umesh Bajaj rolled out the red carpet, hosting a dinner on the wooded grounds of an expensive hotel. The branches of the grove's lush green trees were strewn with white lanterns. All 60 HealthAsyst employees were invited to enjoy the feast of spicy Indian dishes.

Bajaj was eager to pursue business with the Hoosier group, even though he had little experience with software ventures outside health care.

"This country was a closed country. On the economic front, we've become much more liberalized," Bajaj said. "Now you can change the spice, depending on which recipe you wish to make."

Compton's trip to India last fall inspired his two latest Indiana-based IT startups. The first is Indian Math Online, which he calls an outgrowth of his desire to improve the mathematical skills of his two daughters, 11 and 13.

Software tools already on the market were of questionable quality and didn't provide feedback to parents, Compton said. Impressed with the strength of India's mathematics curriculum, he decided to computerize it and deliver it via the Internet.

Compton's other startup is Global Stay In Touch, which allows users to send and receive voice messages cheaply via e-mail. Different versions are planned for various markets, such as business, military or family communications.

Those are just two of the startups Compton got rolling during the January trip. He had at least a half-dozen more in development. His plan is to finance each on a shoestring budget, quickly discover whether it has traction, then plow more resources into the most promising prospects. The rest of the Hoosiers who came along are either potential investors or managers of the ventures.

"The opportunity we see is to design unique new Web-based software products and have our developers in India build rapid prototypes we can then take to prospective customers," Compton said. "We'll get a quick read on if it's a product people want and will pay money for."

Perhaps the key to Compton's business plan is Murthy, the Indian native, who moved to the United States in the early 1990s and later joined Software Artistry, Indianapolis' first-ever public software company. Since then, he's been involved in several Compton-backed startups.

Murthy's family still lives in the Bangalore area. During the trip, he often was the point man, setting up meetings and capitalizing on his ability to speak Kannada-the Bangalore region's predominant language-to find people worth knowing. His understanding often bridged American and Indian business cultures.

By the end of the week, Murthy had established a team through HealthAsyst to help create Indian Math's software.

"The developers are cranking code as we speak," Murthy said.

Harsh advice

For the better part of a day, the Hoosiers listened to pitch after pitch from enthusiastic Indian entrepreneurs.

There was Aparoksha Technologies, which promised its voice-recognition software would allow call centers to gauge the emotions of customers on the phone.

Voicetech Solutions had what its founder called a "killer app." He said it would allow ATMs to eliminate telecommunications costs by transmitting information over the Internet. Ziva Mobile Search wanted to create a search engine for use on Indian cell phones.

The Hoosiers listened to each business plan, but not always patiently.

Compton in particular didn't hesitate to offer harsh advice. For example, he stopped Satish Kumar halfway through his presentation on Glopore IMS, a sort of IT help desk for small and midsize businesses and schools. Compton didn't think much of Kumar's business plan, and said so.

"You're a smart guy. You're an articulate guy," Compton told Kumar. "But I just don't see the value-add in this. How long are you going to flail away at it?"

Compton did like Kumar's background and experience. It included stints in Germany and Boston, as well as an MBA. Kumar seemed to take the criticism well, expressing interest in working for one of Compton's startups.

"I've been doing venture capital deals for 20 years," Compton later explained. "It's really a business of pattern recognition. You look for patterns that resemble things you've seen and done before successfully, and things you've seen or done unsuccessfully. So I can meet with somebody and in 15 minutes tell you if I recognize a pattern that won't work."

Another morning, the group heard a pitch from PolyCone Bioservices Cofounder Naveen Kulkarni said the drug-development firm would employ software and bioinformatics to predict the reactions of molecular compounds.

The Hoosiers perked up when Kulkarni mentioned the testing potential of India's enormous population of diabetics. But as he floated more and more concepts and 10-year cost projections, they began to question whether any of them were viable-and wondered whether PolyClone could focus enough on one to deliver.

"I see nuggets of very good ideas," Fitzgerald said to Kulkarni. "But I need to see really smart guys with a laser-like focus."

"You're trying to run a marathon as a baby," Murthy added. "First, you need to learn to crawl, walk, run. There's time later for the marathon."

The Indians were surprised by the blunt critiques. But they took the straight dope well. In fact, they seemed to appreciate the insight. Kulkarni, for example, had just applied for a $50,000 bank loan to underwrite his business. He was mortgaging his house to get the money. The Hoosiers' opinions made him think twice.

"We have not yet met with any other group of investors," he told them. "So we have not thought about these questions."

After meals with the young entrepreneurs were finished, Compton always insisted on picking up the check. He said he remembered his own days working in startups, when every dollar was precious.

Heading home

By the end of the week, the Hoosiers had identified Picsquare as the most promising investment opportunity. They chalked up their inability to strike a deal as a minor disappointment.

Murthy didn't rule out fresh negotiations, if Picsquare should return in six months bearing news of dynamic growth.

"There's a general acceptance among the group that traveled to keep an eye on these people and see how they progress," Murthy said. "You never know what comes out of these early-stage ideas."

After meeting so many eager Indians and seeing so many opportunities firsthand, the group was plotting plans for a return trip even before they left. They wrapped up the week talking about leasing office space, which costs a fraction of what it does in the United States. Doing business from a luxury hotel charging nearly $300 a night wasn't saving anyone money.

They also were debating putting someone in Bangalore permanently. The Hoosiers wanted a trusted partner to oversee the Indian Math development team and continue trolling for talent and deals. Murthy seemed the natural choice.

For the next several weeks, Murthy responded to the many questions the group received from the people it had met. The Indians all wanted to know how they might improve their business plans. Was there a certain book they should read?

The Hoosiers often found themselves playing the role of mentor. But one day, the tables may turn. They say they're more convinced than ever they must harness the strength of India's technology sector.

To remain competitive in a global economy, they have no choice.

"It's going to happen. It is happening, regardless of protectionist measures," Kerr said. "To me, it's the old adage, 'If you can't beat 'em, join 'em and figure out how to take advantage of it.'"
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