India has the potential to build a USD 100 bn software product industry by 2025 with resolute and purposeful action by industry and government.
• Over 50% of software product companies are completely self-funded or ‘bootstrapped’.
• Lot of senior talent from MNCs is starting software product companies – close to 40% of founders come from an MNC.
• Indian software product startups are experiencing ‘talent starvation’ at the entry level.
• 78% of Indian software product startups defy the universal logic of having founders with diverse skills, and instead have homogenous founding partners.
• The three most common product sectors that companies work in are Enterprise, SaaS and Consumer.
Why Product Industry Monitor Reports
Startup Outcomes Startup Density Feb 2014 • The industry needs to move from anecdotal data to scien5ﬁc data • Credible, regular, insighFul guidance on the industry through ‘Product Industry Monitor’ reports 2
First Product Industry Monitor Report
First Product Industry Monitor report is focused on the following: • Industry Demographics: locaKon, age, market sector, legal status, and number of employees and founders. • Founder Proﬁle: names, educaKonal background, experience, and role in startup. • Talent Management: pressure points in hiring, perceived reasons for diﬃculty in hiring types of talent, and pay scales. • Financing: sources of funding, total capital invested, valuaKon status, and equity share of founders. Feb 2014 3
Key Finding #1 -‐ Bootstrapping
• Over 50% of soYware product companies are completely self-‐ funded or ‘bootstrapped’ • Reasons could be: – lack of early stage ﬁnancing in the ecosystem. – conscious choice by entrepreneurs to seek external funding at a later stage, so as to beZer their prospect of higher valuaKon. • Whether the phenomenon is a result of external constraints or strategic choice of ﬁrms, it is important to recognize that bootstrapped ﬁrms form a dis5nct and important category within the Indian so?ware product industry, much like it is in Silicon Valley too • Bootstrapped ﬁrms, with a diﬀerent pathway to growth/IPO need to be nurtured and evaluated as a disKnct category, rather than as an aberraKon Feb 2014 4
Key Finding #2 – Talent
StarvaKon • The steady ﬂow of MNC R&D investment into India was expected to create knowledge spillovers and provide an impetus to Indian soYware product industry. • We indeed ﬁnd that a lot of senior talent from MNCs are starKng soYware product companies – close to 40% of founders come from a MNC • However, the same cannot be said of junior talent. The typical early startup in India struggles to hire technical talent for lack of brand and inability to match MNC pay scales • Basically, the propensity to take risks increases with age and experience. As a result, Indian so?ware product startups are experiencing ‘talent starva5on’ at the entry level Feb 2014 5
Key Finding #3 – Birds
of the Same Feather • Research has shown that funcKonal diversity among the top management team posiKvely impacts ﬁrm performance (Cannella, Park and Lee, 2008) • Therefore, the key to building a successful product company is to have a diverse founding team -‐ a combinaKon of technical and business skills • We ﬁnd that 78% of Indian so?ware product startups defy this rule. They have homogeneous founding teams i.e., all founders are technologists or all of them have training in business • Founding teams are coalescing based on familiarity between founders rather than diversity of skills • This might be a manifestaKon of a low-‐trust society Feb 2014 6
How old and how big
are the companies? • The average soYware product company is 2.5 years old, however some listed their founding date as recently as last month, some are 25 years old. • Most soYware product companies have only one headquarter (94%); others have secondary headquarters either in Europe or in the United States. • Most soYware product companies have 8 employees (excluding founders); some are as small as one, and some have over 120 employees. Feb 2014 8
Where are the companies located?
• SoYware product companies in the survey come primarily from four ciKes: – – – – Bangalore Pune Delhi/NCR Chennai • This may be due to #PNCamp being in Pune; more clarity on this point as response rate increases and a wider cross-‐ secKon is surveyed Feb 2014 Other-Europe Other-USA Other-India Hyderabad Chennai Mumbai Delhi/NCR Pune Bangalore 0% 10% 20% 30% 40% 9
What products do these companies
create? • The three most common product sectors that companies work in are: Agriculture Education Analytics Big Data – Enterprise – SaaS – Consumer Media and Advertising Healthcare E-Commerce Security Infrastructure Mobile Consumer SaaS Enterprise 0% Feb 2014 5% 10% 15% 20% 25% 30% 35% 40% 10
How many employees and founders?
• The modal soYware product company has 2 founders (40%); followed by one person and three person founding teams. More than 4 4 3 2 1 • Only 22% of the companies have a diverse founding team. 0% 10% 20% 30% 40% 50% Founding Team Diversity Diverse team Homogeneous Team Feb 2014 0% 20% 40% 60% 80% 100% 12
What the experience proﬁle of
founders? • Experience with startups is nearly balanced equally across: founders with no experience, experience as an employee, and as a founder. • Most, 69%, have some prior startup exposure. • Most have worked before (95%) • Most in mulKnaKonals, large domesKcs, and a signiﬁcant number in domesKc and overseas startups. Feb 2014 No prior experience yes, as employee yes, as founder 28% 29% 30% 31% 32% 33% 34% 35% 36% 37% No prior work experience Domestic startup Overseas startup Large domestic Multinational 0% 10% 20% 30% 40% 13
How old are the founders?
• Not too many dorm room startups. • Founders are older, most in their 30’s and 40’s (71%). more than 50 years 41 to 50 years 31 to 40 years • About 23% are in their 20’s. 21 to 30 years less than 21 years 0% Feb 2014 10% 20% 30% 40% 50% 14
What is the educaKon of
founders? • Many founders are engineers with only a BE or BTech (43%). • About 44% have earned an advanced degree, either a masters or an MBA. • A minority have a BA or BSc (12%) • About 22% of founding teams have least one member with a degree from IIT, IIM or NIT. Feb 2014 BA or BSc BE or Btech MBA Masters degree Doctoral degree 0% 10% 20% 30% 40% 50% 15
Talent that startups ﬁnd diﬃcult
to hire Feb 2014 Most difficult Product Mangament Sales Product Development/ Engineering Marketing Operations 0 0.5 1 1.5 2 2.5 3 3.5 4 4 5 Labor market lacks talent Strongly Agree Reasons for Hiring Difficulty Product Management • On average, soYware product startups have mixed experience in ﬁnding talent. • Some soYware product startups ﬁnd it easy to hire; others, diﬃcult. • On average, the easiest talent to hire is operaKons; the most diﬃcult, product management. • The key external reason is the percepKon that the labor market lacks product management specialists. • Overall, companies aZribute diﬃculty primarily two internal factors: the inability to pay compeKKve wages, and the lack of a brand reputaKon. Cannot afford to pay market wages Company lacks brand reputation Company doesn't have resources for perks Founders lack people in their networks 0 1 2 3 17
What do startups pay for
talent? • The modal pay for each of the talent areas seems quite consistent across soYware product startups: – 66% of startups pay between 25k INR to 75k INR for Engineers. – 56% pay between 50k to 1 lakh for Product Managers. – 56% pay between 25k to 75k for Sales. – 66% pay between 25k to 75k for OperaKons. – 56% pay between 25k to 75k for MarkeKng talent. • The widest variaKon in pay norms is in Product management, then Sales. • Most consistent pay norms are in OperaKons. Feb 2014 Pay scale distribution for Engineering talent more than 1,50,000 inr 1,00,001 to 1,50,000 inr 75,001 to 1,00,000 inr 50,001 to 75,000 inr 25,001 to 50,000 inr below 25,000 inr 0% 5% 10% 15% 20% 25% 30% 35% Pay scale distribution for Product Management talent more than 1,50,000 inr 1,00,001 to 1,50,000 inr 75,001 to 1,00,000 inr 50,001 to 75,000 inr 25,001 to 50,000 inr below 25,000 inr 0% 5% 10% 15% 20% 25% 30% 18
Where do startups get their
funding? • The primary source of funding for the majority of soYware product startups is the founder’s own capital. • 73% of the capital for a soYware product startup is self-‐funding. • The second largest is angel investment at 14.1%. • A small proporKon comes from venture capital (2.5%) and about 3% from debt ﬁnancing. Feb 2014 Debt Financing Private Equity Venture Capital Angel Investment Self-funded 0 10 20 30 40 50 60 70 80 20
Invested capital and ownership shares
• A majority (57%) of soYware product startups compleKng the survey have less than 1 crore invested in the startup. • Approximately 23% have between 1 and 5 crores; about 17% have more than 5 crores. • Only 27% of the companies have been valued. – 50% of these companies have a valuaKon is between 1 and 10 million USD – 34% of these have a valuaKon less than 1 million USD. • In 50% of startups founders have equal share of ownership. Feb 2014 more than 12 crore between 5 and 12 crore between 1 and 5 crore less than 1 crore 0% 10% 20% 30% 40% 50% 60% 70% 21
About the Authors •
• • Sharique Hasan is Assistant Professor at Stanford's Graduate School of Business. He specializes in the study of social networks, human capital, and entrepreneurship. He earned his doctorate in organizaKon theory and management from Carnegie Mellon University and his bachelors degree in Computer Science from Rutgers College. His research has been published in leading management, sociology and computer science journals. Srivardhini K. Jha is a Research ScienKst with McGill Centre for Convergence of Health and Economics and Fellow at iSPIRT. Her area of experKse is in strategic management of innovaKon. In parKcular, she is interested in exploring the structures, processes and organizaKonal arrangements that facilitate systemaKc innovaKon within ﬁrms as well as within systems of innovaKon, with parKcular emphasis on the emerging country context. She has a Ph.D. from IIM, Bangalore, M.S. from Stanford University and a Bachelors degree in Engineering from Bangalore University. She also has over a decade of industry experience in hi-‐tech companies, both in Silicon Valley and in India. Rembrand Koning is a doctoral candidate at Stanford's Graduate School of Business. He specializes in the study of social networks, innovaKon, and entrepreneurship. He earned is bachelors degree in StaKsKcs and MathemaKcs from the University of Chicago where he was a University Scholar. Fine print: This is based on a carefully designed survey of Indian so9ware product companies. The survey was administered from Dec 4th 2013 to Jan 14th 2014 in two phases. In Phase 2 the number of responses increased by nearly 50%. The results were strikingly consistent across Phase 1 and 2. The shi9s are so minor that the basic conclusions from the Phase 1 of the analysis remained the same giving conﬁdence in the overall integrity of this analysis. There were nearly 100 responses on most quesJons. Feb 2014 22
Future PIM Reports and Impact
• Product Industry Monitor Reports inform – BeZer policy making – BeZer funding allocaKons – BeZer mentoring/accelerator/incubaKon programs • Future reports will explore – M&A landscape for soYware products – Products, Business models, Strategy and InnovaKon in the soYware product industry – Track year-‐on-‐year trends on various dimensions of the soYware product industry Feb 2014 23