Pando

Here's why Accel just committed $305 million to startups in India

By David Holmes , written on March 26, 2015

From The News Desk

If you Google "startups" and virtually any city or nation in the world, you'll inevitably find true believers insisting that such-and-such region is the new Silicon Valley. Some writers still even refer to their pet region as "Silicon <insert naturally-occurring geographic phenomenon here>" -- though thankfully this practice has fallen out of favor. (No matter how excited you are about software enterprises in Panama, there is no such thing as a "Silicon Isthmus.")

But when it comes to India, Asia's third largest economy, the excitement from investors and entrepreneurs is real -- and for good reason. Last year, startup funding in India increased threefold to $5 billion annually. And according to the National Association of Software and Services Company, India is already the third-largest startup ecosystem in the world after the US and the UK -- not to mention, the fastest-growing. The number of startups in India is expected to rise from 3,100 to 11,500 by the end of 2020.

This week brought even more evidence of India's ascendance to the global entrepreneurial elite, as the prominent US-based venture firm Accel Partners* closed a $305 million fund devoted to early-stage startups in the region. This is the fourth major investment Accel has made in India since 2005, and their portfolio already includes some of the country's biggest and most important technology companies, including ecommerce giant Flipkart, which has raised a total of $2.5 billion in private funding and is now valued at over $10 billion, FreshDesk, an enterprise software company that has raised $45 million, and TaxiForSure, which was acquired by Uber's biggest competitor in India, Ola. Getting in early has paid off: Accel invested in the "deca-unicorn" Flipkart "when it was just run out of an apartment in Bangalore," according to Accel Director Steve Mnich.

The factors driving India's robust startup industry have been mounting for years. They include rapid growth in GDP (which has doubled since 2003), an explosion in smartphone adoption, and a young population consisting of over half a billion citizens under the age of 25. (That's even larger than the number of people in China who are under 25).

Indian startups are also working within a regulatory framework that's friendlier to businesses than any in years, thanks in part to Prime Minister Narendra Modi -- or as Pando's Mark Ames calls him, "big tech's favorite ultranationalist." (Ames and Yasha Levine have reported extensively on the darker side of Modi who, as implicated by Human Rights Watch and others, played a gruesome role in the mass killing and displacement of minority Muslims).

But while these industry pressures are over a decade in the making, and while observers have been talking up the economic potential of India for just as long, Accel partner Sameer Gandhi tells me the country has only recently hit a tipping point within the last 18 months or so.

"Coming up on a decade now, we’re probably at that point now where most people would look at it and say, 'It's still early days,'" Gandhi says. "But all of those factors we’ve been anticipating have been coming together. I would say it’s the first time we’ve been able to tell that story with real data points and convictions."

Investors like to talk up the positives of any investment, often disingenuously so, to the point where they paint entire ecosystems and industries as picture-perfect techno-utopias. But the challenges in India are very real, and Gandhi has no illusions about them.

"It’s a challenging place to do business," Gandhi said. "It’s got difficult infrastructure to contend with: Logistics, payments, basic things like power and water, are not trivial problems."

And clean water isn't the only struggle related to liquidity.

"It’s been a challenge to do exits in India," Mnich says, as the frequency of liquidity events is more limited in India. That said, he later adds, "They're making it much easier to have Indian companies list in the US. If you're a large company growing in India, you want to be listed on Nasdaq."

There are also psychological and social obstacles to India's rise as an startup hotbed, similar to the ones commentators like Richard Bottoms and digitalundivided's Kathryn Finney say exist in the US within minority communities looking to undertake the entrepreneurial lifestyle.

"Obviously there are big cultural differences [between Silicon Valley and India] too," Gandhi said. "The notion of, is working in the high growth private company startup viewed as being an acceptable career path? Is entrepreneurship a path?"

Because of these and other challenges, investing heavily in non-Western markets can be a risky prospect. But for Accel, the differences between the markets in the US and India can also provide some valuable lessons to take home when helping companies grow stateside.

"In India we see what an Internet population that’s driven by mobile connectivity looks like," Gandhi said. "It’s like a view into the future in some sense, thinking mobile first. The US grew up in the web and PC world and are now making the transition to mobile. [But] many people will only access the Internet or ecommerce via their phone. That’s an interesting way to approach the market."

Furthermore, because the region's technology industry is still very much in a growth stage, Indian startups that sell to other enterprises will likely find that most of their potential customers are based outside their home country. That's a huge challenge, but a rewarding one to tackle. Freshdesk, for example, has had "to sell globally day one, but in a way that would not require very intensive sales and marketing and technical support," Gandhi said. In helping these companies grow, he added, "You think of different ways to build products that are accessible to business and consumers."

And then there's the flipside of this notion: Building companies whose customers could only exist in India or a similar region because of unique political and economic circumstances. Gandhi cites Portea, a Bangalore-based direct-to-consumer healthcare startup that has raised $8 million to date.

"When you think about the availability of health care [in India] it’s not there for a good chunk of the population," says Gandhi. "In the US we talk about restructuring the system. There, we’re talking about building it." That wide-open market has allowed Portea to expand to almost two dozen cities without having to contend with insurance companies and other complexities that plague America's healthcare system.

The regulatory, cultural, and economic challenges of building a startup in India are still formidable. But over the last 18 months, Gandhi and Mnich say, the ecosystem has finally begun to fulfill the potential that optimistic pro-business advocates have been voicing for the past 15 years.

"For the first time in literally a generation, you have a majority government in India that I think understands the importance of the innovation economy and is starting to shed and move aside the roadblocks and regulations that really hamper a lot of investment in India," Mnich said. "Back when we first started investing in India, it could take 10 to 12 years to take any company to any kind of interesting scale."

Gandhi agreed, adding, "Now not only do we see companies of significant scale, but they can be done in 'Silicon Valley scale' in terms of the rapid stunning growth. That’s the excitement of why we’re in India and doing these things."

*Accel Partners is an investor in Pando

[photo by Rajarshi Mitra]