Steve Wozniak, the co-founder of Apple had made an interesting comment on the Indian startup ecosystem off late. He said that in spite of a number of startups and many large companies in India, there has been a dearth of world-class product or technology companies being produced from the startup ecosystem.
In a piece in a financial daily, Jayant Kadambi writes how he agrees with Wozniak on this front. He feels that there are very few semiconductor companies, electronics companies, pharmaceutical companies, hardware computer companies or home appliance companies that are truly producing the product themselves that have emerged from the Indian venture ecosystem to date.
The Indian startup ecosystem is young and still evolving. However, there is a lack of large, renowned product companies. Some of the major reasons for this occurrence has been listed below.
The problem with the financing environment in India
Compared to service sector companies, or software companies of all sorts, product companies generally require much more capital and have increased risk due to their longer development cycles.
Also, technology and the resulting product development takes far more time to mature than few months. It is more time consuming to change the hardware design or plastics (even with 3D printing) than change software code.
Plus, most product companies sell their products at a price that is generally directly correlated to the cost of production of the product.This results in lower gross margins when compared to software. Software, on the other hand, has no actual production cost and is sold at close to 100% profit on a unit economics basis.
The product innovation cycle, as well as the life cycles of products, need regular innovations and updates which again requires capital, at least when compared to a software or services entity.
Building a software product (especially a mobile application) or building a services business requires very little capital in its initial days.
It is beneficial and easier for the investors because they can provide a small seed capital round, have the entrepreneurs build the software application or cloud platform, check product-market fit, and then provide more capital in a series A or B round.
However, that would not be the case when compared to a technology-product company.
The product cycles are such that the design of the hardware or chip, the printed circuit board, the plastic housing, and the rest of the accessories take up months if not years. And all of that is a sunk cost in both time and money.
Finally, when the product is released as an alpha or beta, there is little margin for error and little room for iteration unless further capital is infused into the company.
Though the long product cycles and investments may be worth it, it is important for the investors to have a level of risk tolerance, confidence in the business and team.
The Indian venture investments term sheets specify a five-year horizon for the return of capital, which is usually adequate for a software play. But this is not so in the case of the product or technology-based company.
Indian entrepreneurs pitch businesses that fit the prevailing investment climate.
Until the Indian venture ecosystem increases the risk profile and investment horizon a few years, entrepreneurs would not be interested in technology-based product companies, not from the startup ecosystem.
Also Read: These Are The Top 10 Places To Work In India, A Lot Of Which Are Technology & Online Companies
