Involve Investors Early In Business Plan Competitions

University and business school entrepreneurship events and conferences in India tend to be clustered in the winter season. Participating in business plan competitions and panel discussions on startups and ventures is par for the course for most venture capitalists around this time of the year. IIT Kharagpur, IIM Ahmedabad and IIT Bombay were among some of the institutions where I participated in entrepreneurship events this year.

The structure and format of the events can be critical to the value that entrepreneurs and investors derive from it. Business plan competitions are standard fare at most events, and serve a vital function in the venture ecosystem. Venture capitalists get to examine potential investment opportunities, and entrepreneurs get an opportunity to present their ideas and get feedback from investors. Business plan events are in many ways the most important segments, the raison d’être of the conference.

But if the process of selecting ventures is not designed and executed thoughtfully, the business plan competition can quickly become a waste of time for everyone instead of being a well-curated platform where startups and investors can talk to each other and form an initial connection.

There are a few simple things that should be done to make business plan competitions more productive for investors and startups. The conference organizers, typically the finance or entrepreneurship clubs at the universities, should work to involve investors as early as possible in selecting the startups which make presentations on the day of the event. Allowing investors to have a say in picking companies invited to present refines the selection process and ensures that companies which otherwise may fall through the cracks are not overlooked in the rough and tumble when busy students take up the responsibility of organizing an on-campus event.

IIT Bombay has taken the lead and incorporates investor feedback for startup selection. Others would do well do adopt this as a best practice.

Besides investor involvement, putting in place simple and thoughtful filters that self-select ventures of a certain minimum standard would greatly enhance the value of business plan events. Such criteria need to be designed carefully.

India’s venture ecosystem is still in its infancy. It is important to get the processes and systems in place correctly at the beginning to ensure that the right companies are able to get visibility.

As things stand today, there are many more companies that are looking for funding than there are entrepreneurship conferences that organize business plan competitions and startup showcases. There must be several companies that deserve the platform, but don’t make the cut because of thoughtless selection process design. Fine-tuning and standardizing the process across events will ensure that investors know exactly what to expect and the time investment and travel typically required to attend is worthwhile. For entrepreneurs, it would mean transparency and consistency in selection procedure along with merit being rewarded. Overall, events would be more interactive and productive for all participants.

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India Needs Infrastructure For World-Class Research

When Dr. Venkatraman Ramakrishnan was announced as one of the winners for the Nobel Prize in Chemistry last year, the nation erupted in celebration. The president and prime minister formally acknowledged and congratulated Dr. Ramakrishnan’s achievement. The media went into a tizzy documenting the life and work of the typically shy and introverted professor who suddenly found himself at the center of attention in the land of his birth. Encomiums poured in from all quarters, and Dr. Ramakrishnan was so overwhelmed with the reception that he actually asked people from India to stop contacting him with congratulatory messages and good wishes, to which some in India took offence. Dr. Ramakrishnan emphasized how it wasn’t important that a person from India had helped understand ribosomes, which are the protein-producing factories in cells, and it was significant because it was a fundamentally important scientific discovery. It was easy to feel the excitement he felt in doing his work from the choice of his words, and his almost blasé attitude towards winning the highest prize in his field made the honour seem incidental.

Venkatraman Ramakrishnan was born in India in 1952, shortly after Independence. He graduated from the Maharaj Sayajirao University of Baroda in 1971 with a BSc in physics. He then obtained a PhD in physics from Ohio State University in 1971, and went on to study and conduct research in biology at the University of California, San Diego and Yale University. Dr. Ramakrishnan switched from physics to biology late in his academic career, and his work on understanding the structure of ribosomes after completing a PhD in physics won him the Nobel for chemistry. Today, he leads the group working on understanding biological structures at Cambridge University’s Laboratory for Molecular Biology, the same laboratory where Francis Crick and James Watson discovered the structure of DNA in 1953.

It is instructive to ask the question why Dr. Ramakrishnan chose to the leave the country in 1971. If Dr. Ramakrishnan stayed in India after completing his studies at Baroda, he would not be able to conduct the cutting-edge research that he did in laboratories across the US and UK because India lacked the research infrastructure, even though a full generation had grown up since Independence was achieved in 1947. Moreover, it would have also been almost impossible for him to build a research career in biology after completing a PhD in physics. It is likely that Dr. Ramakrishnan would not have been able to do the work which ultimately won him the Nobel if he had remained in India. Science would have been poorer.

Nanotechnology is an enabling technology, and is based on the design and engineering of materials at length scales of below 100 nanometers to obtain unique and novel materials properties that would otherwise not be achievable. It’s common experience that a cube of sugar takes much longer to dissolve than the powdered form. Certain material properties are size-dependent, and it is this principle that is at the core of all nanotech innovations, which are rooted in breakthroughs in basic sciences and engineering.

Recently, clean technology has become an area which is seeing the widespread application of such novel materials, including nanomaterials. Venture capital investment in nanotechnology and materials-based technologies has increased at a rate of over 40% annually worldwide since 1997, according to New York-based research firm Lux Research. India received just 2% of global venture capital investment in 2008, compared to 10% for China and 4% for Israel, a nation whose economy and population is many times smaller. As Asian countries such as China and India industrialize, productivity gains and process efficiencies derived from advances in nanotechnology and advanced materials will be critical to ensure that the consumption of naturally-occurring minerals and commodities is optimized and waste is minimal.

According to numbers published by the Government of India’s Department of Science and Technology, investment in research and development has languished between 0.85% and 0.90% of GDP since 2000. Moreover, since 1998, private sector investment in R&D has grown substantially to contribute over 25%, while government investment has declined. This means that while tax receipts have increased in the period alongside the boom in the economy, the government’s research funding has declined in relative terms and the gap has been bridged by the private sector. The bulk of R&D investment has traditionally come from the government, and this imbalance is being corrected, but nevertheless there is a case for increasing government investment.

The substantial growth of the economy has not seen a commensurate increase in the establishment of more science and engineering universities and government R&D investment. Instead, we have seen a rationing of existing supply, with increased reservation of seats at the IITs and other centrally-funded universities, policies which can compromise merit and quality. We should be focusing on increasing capacity to such an extent that everyone has opportunity and nobody is left behind.

Nanotechnology also presents some unique risk management challenges for health, safety and the environment. These real and perceived risks must be duly evaluated within a well-defined regulatory framework, else nanotech might go the way of genetically-modified foods. International cooperation has been strong in this area, and India should work with the international community to formulate appropriate standards.

It is not just the dearth of financial capital which makes building nanotech and advanced materials businesses very difficult for entrepreneurs. Another severe constraint has been that of human capital – high-quality scientists and engineers, like Dr. Venkatraman Ramakrishnan, have frequently chosen to live and work abroad, given the lack of access to leading-edge equipment and low budgetary allocation for research in science and engineering. The Indian Institute of Science (IISc) and the Tata Institute of Fundamental Research (TIFR), two of the nation’s leading research institutions, were established by private trusts controlled by the Tata Group. Much before the IITs, the Birla Institute of Technology and Science (BITS), Pilani opened its doors in 1929 in the middle of the Rajasthan desert, offering courses in engineering from 1946. Indian science owes a lot to the vision of industrialists J.N. Tata, G.D. Birla and J.R.D Tata, who played key roles in the establishment of IISc, BITS and TIFR.

If India’s best brains choose to work abroad, that’s where they also create new knowledge and technology. A self-perpetuating cycle begins, with talent gravitating towards places offering cutting-edge equipment and infrastructure, sufficient research funding and a high-quality pool of human resources. For most of the 20th century, the United States was that nation, and the US continues to be the world-leader in technology development and commercialization.

The United States had a similar experience precipitated by the Second World War. Before and during the War, many leading European scientists fled the continent and made America their new home. Among them were titans like Albert Einstein and Enrico Fermi. Moreover, scientists from India and China also went west, with socialism in India and Maoism and the Cultural Revolution in China stifling the freedom and creativity of scientists like Dr. Ramakrishnan. The US became the destination of choice for the world’s top scientific talent.

Today, Indian scientists, who are doing some of the most important scientific research work in corporate and academic laboratories abroad, are thinking of returning to their home country. India must capitalize on the converging trends of recent economic turmoil in the developed nations, the rise of a consumer class in Asia and the movement of the center of gravity for economic growth towards the Asian countries. Unforeseeable events and good fortune have presented us with a golden opportunity, and it must not be frittered away.

China began changing its approach towards higher education in 1977, when Deng Xiaoping reinstated the Gao Kao university entrance examination system suspended by Chairman Mao. In the last three decades, China has become a hotbed of science and engineering research. According to data from the World Intellectual Property Organization, China was granted nearly 68,000 patents in 2007, while India did not even cross 8000 patents. China implemented over three decades ago the kind of reform India is attempting now under Education Minister Kapil Sibal, and the results are there for all to see.

India is not just a technology deployment market. We have a rich history and culture of scientific inquiry and achievement and there is no reason for it to be any different in the future, but India needs to proceed on a war footing if it is to realize its potential to lead the world in technology development and commercialization. Unlike any other country, we have the scientific and entrepreneurial talent, and what is required is consistency and commitment in government policy. World-class research conducted by universities, higher-education institutions and national laboratories is a key ingredient to catalyze businesses built around nanotechnology. Policy for nanotechnology cannot be constructed in a vacuum and should be designed keeping in mind the accompanying environment where the research, which is the bedrock of this emerging technology, is conducted.

This means ensuring that there are plenty of universities, and cultivating a culture of academic freedom and flexibility, the kind that Dr. Venkatraman Ramakrishnan enjoyed when moving from physics to biology. Errors made earlier which drove talent like Dr. Ramakrishnan’s away from the country must not be repeated. The existing environment has to be changed and it should be done not by piecemeal reform but wholesale liberalization. The government should be setting minimum standards for higher education institutions and playing the role of an incorruptible referee only. Once that happens, we will see a more thriving ecosystem of nanotechnology and advanced materials research, commercialization and entrepreneurship which will increase productivity, generate wealth and create employment.


Nanotechnology is the design and engineering of materials at a length scale of below 100 nanometers to acquire materials properties which would otherwise not be achievable. Nanotechnology is an enabling technology and can be best understood as value chain of nanomaterials, which are used to make nano-intermediates such as fabrics, coatings, memory chips and mechanical components.  These nano-intermediates in turn go into creating unique nano-enabled products as diverse as stain-resistant apparel, machine tools with extraordinary strength, aerospace components that are lighter and more durable and electrodes which multiply the power and efficiency of batteries used in electric vehicles.

Going by that working definition and standard, India does not have any noteworthy nanotech ventures. There are a few companies who claim to be manufacturing nanomaterials and nanotech-enabled products, but because of the hype associated with the sector, companies say they are in nanotech without really understanding the technology. Having said that, India does have a number of promising start-ups in the broader advanced materials space. I have personally seen some very talented teams and high-potential ventures at IIT Delhi, IIT Bombay and IIT Kharagpur in particular. Worldwide, the market size of nano-intermediates which allow for the development of unique nano-enabled products should grow from $29 billion in 2009 to $498 billion in 2015, a compounded growth rate of 61%, according to consulting firm Lux Research. In the nanotechnology value chain, nanomaterials manufacturing has been highly commoditized and has seen the entry of global chemical manufacturers. Building a nanomaterials business has proven to be difficult and start-ups in the US have learned the hard way. Increasingly, nano-intermediates seems to the space where new companies can create a niche by applying commodity nanomaterials manufactured by bigger players in innovative ways.

The big success story to come from the nano-intermediates space is US-based A123 Systems, a manufacturer of lithium-ion batteries used in electric vehicles. Founded in 2001, A123 took an innovation in battery electrodes developed in the labs of MIT’s Dr. Yet-Ming Chiang and applied it for lithium-ion battery packs powering electric vehicles, offering better safety and performance characteristics at a competitive price. A123 Systems received venture investment of about $300 million from firms like Sequoia Capital, North Bridge Venture Partners, Procter & Gamble, CMEA Capital and General Electric. The company went public last year, and jumped 40% on listing on the NASDAQ. Even now, A123 boasts a market capitalization of over $2 billion.

As Indian industry matures and becomes more competitive, Indian corporates too will look at adopting and assimilating leading-edge technologies in their products. It is also crucial to encourage market competition as a part of economic policy, because only then will larger corporates be driven to take risks and embrace innovation. It is no coincidence that sectors such as software, Internet and telecommunications, which see the the big chunk of venture investment and are among the more dynamic, innovative and high-growth sectors in India’s economy, are also the ones relatively less constrained by bureaucracy and red-tape.

India’s ecosystem for nanotech and advanced materials companies is still evolving, and is relatively under-developed compared to other sectors such as Internet and mobile value-added services, but given the latent talent in the area and the investor appetite for themes and sectors separate from Internet and telecommunications, nanotech and advanced materials should see more entrepreneurial activity and venture capital investment in the coming years, assuming prudent policy-making in higher-education and the liberalization of the economy go hand in hand.

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Aamir Khan and The Pursuit of Excellence

Film-making is very similar to entrepreneurship. The role of a film producer is analogous to that of a venture capitalist. Good producers, like smart venture capitalists, know that it’s not just about writing a check and it’s not just about big stars and quality music. In the same way, simply providing venture funding or throwing money at a start-up cannot ensure success, and it’s not necessarily a great thing for entrepreneurs to have lots of work experience and domain expertise in their industry. The actors and the director, like entrepreneurs, work to bring the script and business plan to life. More than anything else, making a good film and building a business from scratch both require oodles of creativity.

Aamir Khan, whose latest film 3 Idiots hit the silver screen recently, has built an awe-inspiring track record as a film producer, director and actor. Khan is consistently inconsistent in an industry known for its formulaic fare. Like venture capitalists, who tend to think and invest in herds, film producers tend to go with “what works” at the box office. Aamir Khan, as actor and more recently as producer and director, has broken new ground with every film, especially since the release of the Oscar-nominated Lagaan in 2001, defying categorization as an action, comedy or romantic actor.

Mr. Khan achieved considerable commercial success as producer, director and actor in a film about a dyslexic child’s travails with the schooling system, a subject unheard of in Indian cinema. When he has been associated with projects where the story is more formulaic, like in last year’s romantic comedy Jaane Tu Ya Jaane Na and action flick Ghajini, the treatment has been refreshingly different. Mr. Khan has mastered the balance between art and commerce, pleasing the critics and pulling in hordes of audiences at the same time. With 3 Idiots, the cumulative box office collections from his last three films are projected to exceed 5 billion rupees, or $109 million. By Bollywood standards, Aamir Khan is a one-person industry.

There are several lessons that one can draw from Mr. Khan’s success. The defining characteristics of his approach seem to be his selectivity when committing to a project and his insistence on working with high-quality people. Many venture capitalists tend to make more investments than they can understand or manage, hoping that a few might hit, a philosophy known as “spray and pray.” Producers and actors, too, have followed this approach. Nowadays, all actors like to profess the virtues of selecting the right script and focusing on one film at a time – an approach which, incidentally, was pioneered by Aamir Khan.

Through his cinema, Mr. Khan has also made subtle political and social pronouncements. His art has been imitating life in India, whether it was the anti-establishment stance and anti-right wing-extremist undertone of 2006’s Rang De Basanti, or 3 Idiots, which talks about how parents pressure children to achieve academic success and the mechanical approach to education at most Indian universities. Pursue excellence and success will follow, the protagonist in 3 Idiots reminds us.

Mr. Khan’s recent cinema has sensitized millions of parents to let their children become what they want to, rather than forcing them to be doctors, lawyers or engineers. The subtext of why parents would wish so for their children is, however, missing from the narrative.

In a socialist India with strict government control over economic activity, those vocations were likely the only ones which came with a certain guarantee to a minimum standard of living. Since the liberalization of 1991 and the boost to economic freedom given by the BJP-NDA government from 1998-2004, career opportunities have expanded dramatically. Today, young Indians can be productively employed as radio jockeys, artists or sportspeople. Popular attitudes haven’t caught up with the growth of opportunity and the majority of Indians continue to believe that what you study in college should dictate what you do in life. It is incomprehensible to the pre-1980s generation why someone might choose to study literature, or why an engineer might want to be a photographer. This stems from the perceived or real lack of economic opportunity in “unconventional” career choices, and the solution is economic liberalization.

Creating an environment that allows people to pursue excellence in a field of their choosing is what makes for a prosperous and happy society. The importance of effective policy design and implementation cannot be over-stated to achieve that end. In that context, last year’s Right to Education bill was a major letdown. It does not allow individuals and communities to run schools as they would deem fit, favoring needless government control instead. It focuses on rationing existing supply instead of sowing the seed for capacity expansion.

The consequences of such a policy are very damaging, directly affecting the quality of human resources available to startups and established businesses alike.

Since 2004, there has been virtually no progress on economic liberalization. Without it, India’s true potential will remain untapped. Aamir Khan has started a revolution of sorts in drawing rooms across the country by bringing attention to the state of the schooling and higher education system. The liberalization of the economy and the education sector must go hand in hand. Any other policy is a deliberate denial of opportunity to millions of Indians. Perhaps Aamir Khan would do well to make a film on this impossible topic, and then we can expect life to imitate art.

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Creating Social Capital In India

Venture capitalists add value to an enterprise at many levels and are not just financial investors. Good venture capitalists invest in smart entrepreneurs and big opportunities, and also bring to the table their network of relationships and connections. India is a preferred investment destination among emerging markets and has oodles of bright and hungry entrepreneurs who have built world-class companies across industries.

However, a culture of serial entrepreneurship and mobility of entrepreneurial talent across business sectors is absent. India’s social structure tends to promote business activity between people of the same community, and social class and family birth also influence one’s vocation, resulting in a dearth of what economists call “social capital.”

In the entrepreneurship and start up world, it’s common to hear people talk enthusiastically about “developing the ecosystem,” which is the same as creating social capital. Early-stage venture investing remains very risky and difficult despite the fact that India is burgeoning with first-rate entrepreneurs. I think this is because of the dearth of social capital – social networks in India are centered around family and identity. A culture of trust which encourages cooperation and profit-motivated, self-interested action has only just begun to take root.

Dynastic succession is one of the most pervasive and curious characteristics of Indian society, and can be befuddling to a casual observer. Whether it is business, politics, the fine arts or Bollywood, children inevitably do what their parents did, often with strenuous consequences for both the family and society. Some 3000 years have passed since the great war of Kurukshetra took place between the Pandavas and Kauravas to resolve a disagreement over succession and inheritance, and history continues to rhyme.

Lateral entry into a vocation outside the purview of one’s family and identity remains difficult. As Warren Buffett might put it, capital allocation in India is determined by the “lucky sperm club,” those who are born in certain families and communities.

Dynastic succession is not the most efficient way to allocate human capital. A poet who could have been an effective politician doesn’t necessarily make that choice, and a financier who could have made a better writer doesn’t pick that path. Talent ends up being sacrificed at the altar of societal norm, precisely because the opportunities for realizing one’s potential in “other” fields are very limited. In economist-speak, a Nash equilibrium exists and the net effect is that society becomes inertial and innovation is stifled.

The more social capital India can form, the faster the rate of innovation and idea exchange and ultimately, positive change – and this applies as much to politics and Bollywood, as it does to the startup world. We can be sure that such change will be positive because open and vibrant ecosystems allocate resources far more optimally and democratically than the almost-feudal system in existence today.

How can India create social capital? At the macro level, market competition creates social capital and trust. India is notorious among investment bankers for its low domestic mergers and acquisitions activity relative to the size of its economy, and it’s uncommon for small and medium-sized companies to sell themselves to larger competitors. Alok Kejriwal, entrepreneur and founder of Internet company, recently told me that the absence of markets that encourage M&A and dearth of liquidity events can be a serious innovation-killer. Entrepreneurs who can’t get a good price for their company won’t sell, and pricing is distorted because of shallow markets and an inertial system that rewards continuity rather than change.

Not being able to exit even if they want to means that instead of entrepreneurs owning their company, the company owns them.

The antidote is meaningful economic reforms, which reward productivity gains and encourage competition. India’s legal and economic structures promote inertia, rather than productivity and fluidity. Bollywood, which was recognized as an industry by the BJP-led NDA government in 1998, is one of the most visible and least talked about success stories to benefit from pro-market policy.

In the last decade, the film industry has become more organized and corporatized. Access to finance has reduced the influence of criminal elements and the infamous underworld. New talent has emerged and an industry which was once dominated by a few families is now far more democratic. Increased efficiency in movie production, distribution and marketing have grown the market for all and it has become possible to produce and release small-budget films which would have otherwise been commercially unviable.

This growth can be replicated in other sectors. The Congress-led UPA government has reiterated its commitment on this front, but the question is whether it will actually do enough, or hide behind the excuse of protecting India’s “mango people” once again.

At the micro level, the best way to create social capital is to pursue one’s dreams and ambitions, even if it seems difficult or impossible at first. Getting out of one’s comfort zone and trying new things, forming groups and organizations where none exist, and bringing together like-minded people whose values and ideas are aligned, though seemingly innocuous, can be deeply transformational. The generation of Indians that grew up through the watershed economic reforms of 1991 and the reform efforts of the NDA government from 1999-2004 is now coming of age. As has been captured by movies and popular culture, this generation is more confident, assertive and aspirational. Global investors and India’s “mango people” alike would be better off if they create social capital to dramatically alter India’s curious cultural calculus.

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Love’s Labour’s Lost

Part 1 – Much Ado About Nothing

Fortunately, not all talented Indians leave the country or are content with working in a cushy job at a prestigious firm. Some of them are crazy enough to start their own companies.

The India story has been driven by entrepreneurs from the start. At a time when it is impossible to talk about economic development without using the words “inclusive” and “aam aadmi” or common man, it is instructive to recall a few examples of effective Indian entrepreneurship from typical “common men.”

Reliance group founder Dhirubhai Ambani started his career working at a petrol pump in Yemen. Returning to India in 1958, Ambani found that there were government licenses, controls and rations for establishing and expanding business.

Mr. Ambani went about working the system in a way that is now the stuff of Indian corporate legend. Obsessively quality-conscious and unabashed in his desire to grow, he did not think profit was a dirty word like India’s first prime minister. Through ingenious and sometimes controversial financial engineering, Reliance paid zero corporate income tax till 1996. The Minimum Alternate Tax, increased to 15% in this year’s budget, was introduced in that year to get companies like Reliance to pony up tax.

From scratch, Dhirubhai built the first Indian private company to enter the Fortune 500. Against all odds, he created vast wealth for millions of Indians – since its public offering in 1977, Reliance shares have risen at a compounded annual rate of over 25%, beating even Warren Buffett’s Berkshire Hathaway record. Reliance has shaken up every sector it has entered besides its core petrochemicals business, be it telecoms, retail or entertainment, bringing down prices for consumers and growing the market for everyone. In a few decades, Reliance has become bigger than Indian business houses that have existed for centuries.

Dhirubhai was an aam aadmi, and Dhirubhai was an entrepreneur. The growth of Reliance has included Indians from all sections of society.

In the last decade, sectors such as telecommunications which have seen market-friendly policies being implemented have seen exponential growth. The vital role of prudent policy-making has been under-appreciated in the telecom growth story – for instance, in the 2000 government budget, import duty on mobile phones was slashed from 25% to 5%. The National Democratic Alliance government did not take the view that mobile telephony was a luxury good that should be taxed heavily. Instead, it allowed vibrant competition that has today ensured that every aam aadmi can afford a cellphone.

The positive network effect of cheap and ubiquitous telecommunications on the Indian economy is staggering and incalculable. Sunil Mittal, founder of Bharti Airtel Ltd. who started his career selling bicycle components, is recognized worldwide for the innovation fostered by his company.

Foreign investors from Japan, Singapore and the Middle East to Russia, Norway and the United Kingdom are scrambling to get a piece of India’s telecom pie, desperate to have every Indian farmer use their cellphone service. That India would have almost 500 million cellphone users was unthinkable in 1999. That it actually does, is not an accidental tryst with destiny but the product of prudent policy coupled with effective entrepreneurship.

More recently, civil aviation has also seen a revolution of sorts. Reforms in the sector and the mushrooming of airlines have brought down ticket prices for consumers and dramatically enhanced air connectivity, knitting India closer together. Like mobile telephony, air travel was once the purview of the rich. Today, as an advertisement for a low-cost airline poignantly portrays, almost every am aadmi can afford to fly.

The lesson is that promoting industry and high-technology through economic reforms should be high on the government’s agenda, rather than initiating venture capital funds for poultry and innumerable other welfare programs. The government should have a mindset of empowerment and skill enhancement, instead of making people dependent on handouts and freebies. Free markets alone can liberate India’s masses from perpetual poverty. India must not take economic growth for granted.

India has many entrepreneurs with the skills and aptitude of Mr. Ambani and Mr. Mittal, some of whom are probably working for Google or DuPont. Without appropriate policy, the danger is that potential entrepreneurs might just spend their careers as content professionals. That would make for an epic Greek tragedy for India’s aam aadmi or mango people, to borrow a phrase from a recent Bollywood blockbuster.

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Much Ado About Nothing

Reading the business press in India can be much like reading a Shakespearean tragicomedy. I recently came across a news item that talked of the agriculture ministry’s efforts to set up two billion rupee poultry venture capital fund. According to an agriculture ministry official, capital subsidy, in the form of venture capital, was better than providing interest-free loans to farmers in the poultry sector.

Elsewhere, an article published on the same day by a business newspaper spoke of how Intel’s latest Xeon processor was designed completely at the company’s Bangalore research center. Noshir Kaka, director at consulting firm McKinsey, says none of the major product companies who have an R&D presence in India can do without these development hubs. In fact, conducting cutting-edge research and expanding product development in India is high on the agenda of companies such as Google, Cisco Systems, DuPont, Renault and General Electric.

Such is the dichotomy of the Indian growth story. On the one hand, the government appropriates the vocation of venture capital to provide capital subsidy for the poultry sector, and on the other hand talented Indian engineers are noted to be busy at work developing next-generation technology for global corporations.

Indians create the fundamental technology for global firms which is re-imported back to India as a finished product, and the benefits of which are reaped in the long-run by the foreign shareholders of the companies, not Indian citizens. The global firms are enticed to set up shop in India usually with a slew of tax breaks, possibly contributing less to the government exchequer than Indian firms of a similar size.

Shakespeare would smile at this comedy of errors.

Not to be protectionist or to blame India’s engineers, because they are merely responding rationally to incentives. India has the capacity and talent to compete with the world’s technology leaders, but the government disincentivizes entrepreneurship.

Even though the Finance Minister acknowledged in his budget speech that the growth from 2004-2008 was driven by private investment, there was precious little to reward that achievement in what is considered to be the government’s economic policy statement.

It’s anything but easy being an entrepreneur in India, which ranks 122 on the World Bank’s Ease of Doing Business Index, behind both Serbia and Pakistan. Starting a business in India takes on average 12 procedures and 34 days costing 47% of per capita income, the World Bank says.

The average medium-sized company in India also has to pay some 60 different kinds of taxes. Many people would probably throw in the towel just picturing the administrative burden of the paperwork. The effective total tax rate on profit, including central sales tax, corporate income tax, social security contributions and excise duty, amounts to 71.5%, the World Bank notes.

Indian labor laws are antiquated, and continue to be a serious impediment to the growth of industry and manufacturing. Companies having over 100 employees can only retrench with government approval.

The Indian banking sector remains dominated by government-controlled banks, and financial sector reforms have been long overdue. The bank nationalization of July 1969, praised munificently by the Finance Minister in the budget speech, politicized control over credit and loans and cemented the government’s grip on the economy, strangulating entrepreneurs.

Despite the impressive growth of the IT sector and emergence of major manufacturing firms such as automotive components maker Bharat Forge Ltd., the stark reality is that the agriculture sector continues to employ 60% of the workforce while generating just 16% of GDP.

Six decades of socialist economic policy have kept farmers in a time warp. The more the plans fail, the more the planners plan. A country that creates cutting-edge microprocessors prays for sufficient rainfall every year, and political parties craft populist policies precisely because of the disproportionate number of people dependent on agriculture. Not that these policies really help the intended recipients, if history is any guide, but populism usually never fails to win elections.

One has to ask the question whether this condition is inescapable or self-inflicted. Is there a way to break this vicious cycle?

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Crouching Tiger, Hidden Dragon

The reports of the death of globalization have been greatly exaggerated, if investing trends in venture capital qualify as a compass for the future. According to a survey released June 10 by the U.S.-based National Venture Capital Association, half of the venture capitalists said they would increase investments in China and other Asian countries over the next three years, while 43% of those surveyed said they would invest more in India. (see the survey here)

Just 17% said North America would see more VC investment. A large number of VCs also expect an upswing in venture fund backers, usually financial institutions and wealthy individuals, coming from abroad. The overarching trend is clearly towards global investing.

Perhaps reflecting how the rest of the world views Asia, the survey has interesting choice architecture: India has been given a separate standing, while China and the rest of Asia are lumped together. It could have been the other way round, but isn’t. Putting aside compelling arguments derived from history and culture, the distinction also reflects the different economic growth models adopted by India on one side and the Asian tigers and China on the other.

Since Deng Xiaoping ushered in socialism with Chinese characteristics, Asia’s dragon has established itself as the epicenter of global manufacturing, winning accolades for its efficient factories and seamless infrastructure. In the 1980s, the rise and dominance of Japan was conventional wisdom, and China didn’t really dominate the public discourse. The Chinese state, rather than the citizenry, has catalyzed this transformation, driven by massive public investment.

India’s development has been more organic, with entrepreneurs usually growing their businesses despite the government rather than because of it. The founder-CEO of a leading India-based power equipment manufacturer once recounted to me how the government hindered his business and powerful bureaucrats extracted rents every step of the way, from the stage where the product left the factory in trucks to the point where it was loaded into containers at ports. The process made a business manager a “pehelwan” or a strong wrestler able to deal with any eventuality, he said. In China, he added, the government assists rather than hinders enterprise.

Indian entrepreneurs have to beat their competitors and deal with a government that is not the most enterprise-friendly. In an almost Hayekian way, some of India’s self-created barriers to entrepreneurship have made Indians entrepreneurs that much more hardy and competitive, mirroring the aspirational urge of India’s people.

Besides offering a large labor force of English-speaking people and a democratic system, India is also far more capital efficient than China. Since the early 1990s, India has invested about 25% of GDP and obtained an average GDP growth rate of about 6%, while China has invested over 50% of GDP and obtained an average growth rate of 9%.

India is a better capital allocator, requiring four units of capital to generate one unit of output, while China consumes about 5 units of capital to generate 1 unit of output. As economist Niranjan Rajadhyaksha puts it, capital efficiency is the reason why India has “few good roads but many world-class companies.”

For investors, return on invested capital is the metric to watch, and India widely outperforms China on this metric. To make itself an even more attractive investment destination, India has also started taking steps to reform higher education, a key ingredient to drive economic growth through technology and innovation.

China has invested relentlessly in education over the last three decades, and the seed for change was sown by Deng Xiaoping himself, who resumed in 1977 the Gao Kao entrance examination system suspended by Chairman Mao. University student enrollment has grown nearly 50% and the number of universities has doubled since 2002. In the meantime, India has only succeeded in creating special interest groups competing for admission into premier colleges based on identity rather than merit, and starved its citizens of world-class universities to the point that more Indian youth study abroad than any other nation.

Education Minister Kapil Sibal has spoken at length on re-organizing the higher-education institutional framework at all levels and reducing government control on education. He sounds like he means business.

From purely a development standpoint, India needs more investment from abroad in the form of both foreign direct investment and venture capital than China does. Global investors are eager, and Indian entrepreneurs have demonstrated that they are a cut above the rest. It’s now up to the state to ensure that it doesn’t fritter away the merit of the Indian entrepreneur.

The crouching tiger might spring a surprise.

Originally Published:

Harnessing India’s Technological Potential

Over the last decade, clean technology and nanotechnology have emerged as prominent investment themes in venture capital.

According to New York-based research firm Lux Research, venture capital investment in cleantech and nanotech has grown at about 40% annually since 1997. Rapid advances in the physical sciences and materials engineering have ushered in everything from hybrid-electric cars and lighter airplanes with substantially enhanced fuel efficiency to eco-friendly specialty chemicals and stain-resistant apparel.

As China and India industrialize, there is a glaring need for such innovation to ensure that limited natural resources are consumed with high efficiency. Venture capitalists have a key role to play in fostering that innovation.

VCs typically consider India to be just a technology deployment market. That view is too narrow: India has not just the entrepreneurial competence but also the scientific talent to invent and lead in science-driven innovation.

The American model for technology commercialization has proven to be highly successful. Corporate giants such as Hewlett-Packard, Genentech and Google took root at universities.

More recently, President Barack Obama unveiled the government’s biggest infrastructure investment plan since the creation of the U.S. highway system with energy efficiency as its cornerstone.

Prof. C. N. R. Rao, chairman of the Prime Minister’s Scientific Advisory Council and one of India’s most distinguished scientists, has worked tirelessly for the cause of science education and research, recently obtaining a grant of over $200 million from the central government for fundamental research in materials science and nanotechnology. When I met him in July last year, he lamented the lack of enthusiasm for science and technology in India, and commended China’s nationalist zeal for building prowess in high-technology.

There is no dearth of scientific ability in India, but Indians prefer to work in laboratories abroad thanks to the lack of cutting-edge infrastructure in their home country. What’s missing here are incentives for innovation and entrepreneurship.

The Indian government has promoted investment in renewable energy sources such as solar and wind, and these sectors are beginning to see some traction. However, India is still way behind both the U.S. and China.

Economist Joseph Schumpeter feted the entrepreneur as the growth-driver of an economy, the “wild spirit” who would cause creative destruction by innovation and disruption. A market-based mechanism must be adopted, but the government has a vital role to play in setting effective policies. The government should invest in basic scientific research and introduce reforms in higher education, allowing for the creation of more world-class universities.

Culturally, Indian scientists are hesitant to partner with entrepreneurs and external investors. For some Indians, the traditional concept of education clashes with the notion of commerce. Profit is still a dirty word in India’s academic circles. This malaise is partly caused by the red tape stifling Indian educational institutions.

Basic mechanisms for technology transfer are absent or deficient at leading Indian universities. When the appropriate systems are in place and research institutions are forthcoming, venture capitalists and entrepreneurs can license and commercialize technology, moving it from the lab to the market. Taxpayers get a return on their investment in the form of better products and increased productivity if investors and entrepreneurs are able to beat the odds and succeed.

Otherwise, research remains research. IIT Delhi and IIT Bombay have taken the lead by establishing sophisticated infrastructure for technology transfer and venture incubation. I’ve seen technology transfer offices at some of the world’s leading universities, and the offices at these two Indian institutions are comparable to the best. Others would do well to follow their example.

The next step should be the establishment of a national group to represent the voice of science-driven innovation, on the lines of the Indian information technology industry’s Nasscom. With prudent government policy and a thriving ecosystem, private capital can kick-start the transformation of laboratory inventions into marketable products.

India missed the information technology and electronics manufacturing wave. If India is to transform itself from an economy driven by agriculture and services to one with high-technology industry and manufacturing as its bedrock, it should put in place effective policies to ride the new Schumpeterian wave of creative destruction driven by physical sciences-based technology.

Originally Published –

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