Sanjay Subhedar, founding Managing Director of Storm Ventures, and member of the Governing Board, ISB was at the Indian School of Business, and during his conversation with C Chitti Pantulu, former Director — Marketing and Communications, talked about the start-up environment in India, innovation landscape and the e-commerce space.

The Interview

Chitti Pantulu: Innovation is coming from unseen quarters. From where you are, the Valley being the epitome of innovation, do you see India ever getting anywhere close to that?

Sanjay Subhedar: I believe that the US will continue to be the innovation hub for core technologies for a long period of time. The reason is that it has three elements that are unique to the US. They have a large defense department, with a big budget, and the defense department has the ability to fund a lot of things that it is interested in. So if you look at it historically: GPS, radars, lasers, DARPANET, which subsequently became the internet and World Wide Web was based on that, packet technologies, all of those came from research that the defense department or DARPA funded for its own purposes. So it is certainly an advantage that they have a lot of money to spend on fundamental research.

The second element is that in the US we have the 100 best universities in the world which attract the brightest students to continue their education here. To get a Ph.D. you have to invent something, you have to be unique. A large Ph.D. population at universities, working diligently to come up with innovation, while being funded through industry and through the defense department, makes the universities the university and that is unique to the US.

The third element that the US has is great middle management in successful companies. Great middle management is the one that can come in and take innovation and commercialize and scale it, make it affordable, make it reliable and so forth.

So you need those three elements for innovation to not just be in the lab where you create. I feel that the core technologies have done such a good job of delivering high amounts of storage, bandwidth, computer power that now we need applications to harness those core technologies. In those applications I think India can become an innovator.

To sum it up, it will not be core technologies but applications that will be disruptive to the way things are being done. Three areas where technology can and should play a bigger role in reducing the cost are healthcare, education and government. India can play a huge role because India has a big population, which is important. You combine that with good quality, because we have very good engineering schools and now a good number of great management schools. So that combination, and the English language instruction, give India an advantage in terms of people power.

We have in the US probably the 100 best universities
in the world which attract the brightest students to the Bachelors, Masters Programmes and the Ph.D. Programmes. To get a Ph.D. you have to invent something, you have to be unique.

Chitti Pantulu: Talking about this entire start-up environment, currently we seem to be at a very interesting phase, particularly in the ecommerce and mobility space. But the start-up environment seems to be undergoing some kind of turbulence at this point of time particularly in India, ecommerce specifically. Valuations seem to be on the down. So sitting where you are, what is your view on what is in store for this entire space?

Sanjay: This is an interesting question. I think that there are five or six so-called “unicorns” in India, something that has never happened before. The two companies that have a very high profile are Snapdeal and Flipkart. They grew very quickly, and clearly the investors put in a lot of money in them that allowed those companies to offer goods at very cheap prices to the consumer. But now they have started running into trouble and that is where I think scaling the enterprise is important. This is what Dean Raj Srivastava and I have been talking about. I would like to see ISB become known for building managers or helping managers scale enterprise. After the US the next big open market for any technology company is India. It is natural that companies like Amazon and Uber will want to succeed in India and they will invest a lot of money there. Amazon knows how to scale, how to do their logistics, how to do customer outreach and they know how to keep their customers happy. So for the “unicorn” companies in India all of those things will be an uphill task and if they don’t learn fast they may not be able to sustain the valuations. They have already had a downfall.

Chitti Pantulu: There is one other thing that I would like to know from an investor’s perspective. An interesting feature that one is seeing is the total breakdown of geography. What the Uber deal has actually shown is that the repercussions of amending one geography have an impact on another geography. Another aspect is that business models don’t per se seem to be unique to geographies anymore. Be it a Lyft in the US or an Ola in India, they are facing the same problems because of this M&A activity that is going on elsewhere. So what has changed fundamentally?

Sanjay: I think there is this thing called network effect and this network effect is very powerful. The idea is that when you are competing as a network, the bigger network will always succeed. And so you need to get big fast. Let us take an example. There are a lot of applications for you and me to do video chat or just chat but WhatsApp has become the most popular one. Now if you are on WhatsApp and many of your friends are on WhatsApp they are not going to sign up to a new other network because everyone is already communicating on WhatsApp. So WhatsApp becomes the dominating network. In any other technology there was always room for multiple players.

When you have an application or a business model that depends on the network and being part of the network is very valuable for each individual in that network, then being part of a network that is the largest becomes the most important thing. For example, Uber is a software company with no cars. So once I am in an Uber and I am traveling on business and I can use Uber in Delhi, Mumbai, Bangalore or in New York that is what I am going to use. I don’t want to use DIDI in China or Ola in India because I don’t have those apps. And if Uber has my credit card, my information and my preferences then it is easy for me to use that application anywhere I go. Therefore, Uber has an advantage just like WhatsApp has an advantage. So the network effect is very important.

I think there is this thing called network effect and this network effect is very powerful. So what happens is when you are competing as a network? The bigger network will always succeed. And so you need to get big fast.

Chitti Pantulu: One of the criticisms about the Indian e-commerce space was that perhaps it was hyper funded — particularly the Flipkarts and the Snapdeals, when they started off. If you have to be the biggest player in the network you have got to have big pockets and you have got to invest a lot of money. But at the same time the big money that has been invested in these companies has become the problem. Valuations have shot up and probably now are down, which people say is perhaps a realistic level. Where is it now?

Sanjay: I think historically if you look at any technology it gets over-funded. For example, let’s take a look at routers. Cisco is now the dominant player in routers but there was a time in the mid ’80s to mid ’90s when at least 200 router companies were funded by investors, including the VCs, because everybody thought that their company would be successful and everybody is trying to be №1 or №2 or №3. In that business there were at least 20 or 30 companies that went public, so they had a good exit and good returns for their investors.

So what is happening is that markets are going global. So you could have leaders in particular geographies and particular niches relatively speaking. But today in approximately 130 to 170 countries there is some uniformity across in technologies. Like you said earlier, the world has become flat and you have to compete at that level. To compete at that level you need a lot of capital. Everybody dreams that their company is going to be №1. They all strive and they all run. But there is only going to be one №1 and unfortunately it is not just capital that is needed to acquire that position but also the execution. The reality is if you don’t have good execution you can’t succeed.

Chitti Pantulu: How does India look given the kind of specifications that you have? Do you see enough start-ups thinking globally and do they have the technologies and the application kind of mindset that you mentioned?

Sanjay: 15 years ago our LPs used to say “why don’t you invest in India”? In those days, I am talking about late ’90s and early 2000s, the start-ups in India were doing business process outsourcing. What was a hot area was call-centres, then back office accounting, back offices for legal. In those areas it was basically labour arbitrage and there was no technology per se. As an early stage investor it was hard to figure out which of these outsourcers was going to execute well, scale up and be successful because there was no technology we could invest in, it was just execution. As a result, we just stayed away from that because when it comes to execution we can’t add value sitting 10,000 miles away. The next phase of start-ups in India was the domestic copies of successful business models in the US like Shaadi.com for harmony or Naukri.com, Monster.com or MakeMyTrip. Once again, they were addressing domestic markets and we just stayed away from that too. But this third phase I think is going to be enterprise businesses that will be started to solve problems for enterprises that will have global aspirations. I expect that over the next five or ten years we are going to see companies started in India that will become a global technology player. So this time I am hopeful and we are looking at deals, meeting entrepreneurs and trying to see if we can make investments.

Chitti Pantulu: Recently you announced $10 million SaaS fund exclusively for India. How do you see the prospects? And a related question is that particularly in this space you have the biggies playing. All these big guys with deep pockets are already there. Even smaller companies are going to them to get their business. So don’t you think it is a difficult scenario to be in?

Storm Ventures Launches $10M Fund For Indian SaaS Startups

Sanjay: Yes, this might present itself as a challenge but we deal with challenges all the time. We only invest in companies that are addressing big markets because if the market is big then there is an opportunity for our portfolio company to become a big player. By definition, if it is a big market that means there are successful companies already selling in that market otherwise you wouldn’t have a big market. So we always invest in young companies that are competing with the very successful older companies. What we are trying to do with new technologies and new business models is to disrupt the entrenched player and the entrenched leader and get market share away from them. So we are not afraid of competing against a Google or Intel or whoever that might be.

The next phase of start-ups in India was the domestic copies of successful business models in the US like Shaadi.com for harmony or Naukri.com, Monster.com or MakeMyTrip. Now there again they were addressing domestic markets and we just stayed away from that too because we did.

Chitti Pantulu: That brings me back to the first question about innovation as you mentioned. Do you see enough innovation happening and do you see Indian start-ups disrupting bigger companies? Will we be able to see a Google or Microsoft coming out of India, maybe in the next ten or 15 years?

Sanjay: I am not sure about something like Google or Microsoft because Microsoft had two businesses: one was applications like Word, PowerPoint and Excel and Google is a search engine essentially. But I can see something like an Uber or Airbnb coming out of India because Uber is not a technology, it is an application that connects people and does a very good job with a good UI. In that class of business model innovation I see a lot of opportunity for Indian entrepreneurs to come in and achieve something.

Chitti Pantulu: One feature unique to India is that perhaps we don’t seem to do well when we fail. People say that perhaps that has been one of the reasons why we haven’t seen so many kinds of trials coming out of India. Do you see that changing somewhere and how good is failure?

Sanjay: I think failure is very important in our business and we have to accept it, and we do. If you say failure is where you don’t get your money back I would say 50% of our investments turned out to be failures. But there is always a learning from that. So failing is a necessary part of any innovation, any progress, and we have to accept it and embrace it. In most societies, in most cultures, fear of failure is a human nature. But the environment has changed so much now and people accept that. My father worked for the same employer all his life. And I have worked for maybe eight or ten companies in my career. I think the next generation of young people will probably be working for 30 or 40 companies. And so, the pace of change is accelerating and change means challenges and failures. But I will tell you that a 3rd of our companies do some development in India either in Bangalore, Pune or Hyderabad. And every time I visit I go and talk to engineers in my portfolio companies’ back office teams, and these are bright people, I ask them the challenges they face for working in an entrepreneurial company that is based in Silicon Valley but has offices here in India. A common struggle is that portfolio companies are no-name companies and that is a big challenge in the marriage market. They are not Microsoft, Google or Facebook. So there still is a part of society that does not look too kindly if you work in an unknown start-up. But there are a lot of people graduating from engineering schools here who are starting companies. They are bright, they are passionate and not afraid of failure to the extent that when some of them succeed, the parents and other people say it is worth giving a shot.

Chitti Pantulu: To wrap up, you mentioned the network of universities. How do you see India and institutions like ISB? Do you think they are changing the game, do you think there is more potential or do they have to do something more than what they are doing?

Sanjay: I think India has some of the best undergrad universities. And when I look at where we are funding in the US, I would say that a third of our companies are started by Indians, meaning somebody who went to school here, did their undergrad here, came to the US for their Masters and worked there and wanted to start a company. So the undergraduate educational system in India is excellent and will continue to be for some time. And now the graduate systems; the IIMs and ISB, are certainly great schools. When we started 15 years ago the vision was to be in the top 100 and we have clearly achieved that vision and trying to get in the top 10 or 20. So ISB is very valuable because to scale these businesses, to extract the maximum value, you have to build big businesses that can work across multiple geographies, multiple countries and across very complex regulatory and government environments. And for that you need good middle and senior management. I am hopeful that ISB is going to train some of these people who will be tomorrow’s leaders in these companies that scale up.