Meerut

India's attempt to ignite a startup boom

July 29, 2013: 1:46 PM ET

It has come in fits and starts, but India is slowly building its own startup world.

By Anika Gupta

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FORTUNE – Most entrepreneurs remember vividly when they decided to strike out on their own. For Siddhartha Ahluwalia, the moment came over breakfast, in 2009. Then 22 years old and an engineering student at the Indian Institute of Information Technology & Management in Gwalior, he was interning at India's premier graduate business school -- the Ahmedabad campus of the Indian Institute of Management (IIM-A). An IIM-A student sat down at Ahluwalia's table and started to talk about his own business -- a tech platform that served TV ads at train stations.

"IIM-A is full of energy regarding entrepreneurship," Ahluwalia remembers. "You meet a lot of new entrepreneurs." The fired-up Ahluwalia enlisted three friends as co-founders, and they started work on an advertising platform for doctors' offices.

Ahluwalia went door to door in his hometown of Meerut -- an industrial city 50 miles from New Delhi -- trying to get doctors excited about the product. Ranked as one of India's fastest-growing cities, Meerut is frequently cited as a hub for future growth in India -- an international airport and a major Delhi-Meerut highway are in the works. More importantly for Ahluwalia and his friends, Meerut has several pharmaceutical companies and medical schools.

After receiving feedback from doctors, the team switched its focus from advertising to electronic medical records. They won first place in a business plan competition at an engineering college in a neighboring state. But then graduation hit, along with the harsh realities of the working world.

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"We were students, so no one would give us funding," he says. And then there was the matter of family. "In India, when parents fund a child's education, the expectation is that he or she will then get a job and settle down."

So that's what he did. Ahluwalia moved to Delhi and got an IT job at a company that created and managed operational software for companies overseas. He lasted for 11 months before the monotony of it got to him. This time, he went to a relative -- for many years, family savings have provided seed funding for most Indian startups -- and asked for an initial investment.

By April 2012, Ahluwalia was knocking on doctors' doors again, but this time, he noticed an attitude change. "A lot of media attention has been given to entrepreneurship," he said, noting that his parents, who initially balked at his plan, had turned into supporters. "Also, several companies had successful IPOs and exits."

Local success stories have boosted the credibility of entrepreneurship in India. In late June, RedBus, the country's largest online bus ticket vendor, was acquired by a joint Chinese-South African venture for around $125 million. The deal, which is the biggest acquisition to date of an Indian Internet company by a strategic overseas investor, validated the notion that Indian entrepreneurs could create valuable online businesses catering to the domestic market.

Entrepreneurship is a potential boon to a country wondering how exactly to employ its rapidly growing population, especially in towns like Meerut. According to the most recent census in 2011, Meerut has a population of 3.4 million -- but job opportunities lag consumption, as suggested in a 2011 Morgan Stanley report tracking Indian urbanization.

Startups -- particularly tech companies – have been touted as a possible solution, if an ecosystem is built to support them. India has a huge opportunity in terms of manpower. The country has an IT workforce of about 3 million and the second-largest number of engineers in the world (around 700,000 graduate every year), according to industry group Nasscom.

The rise of entrepreneurial support groups

One hot Sunday in late May, at a cavernous, underground office down the road from a gleaming metro station and a BMW dealership in New Delhi, 91springboard is hosting an entrepreneurship event. 91springboard is a co-working space, a former warehouse and a gathering place for budding entrepreneurs. The organization is the brainchild of three entrepreneurs who couldn't be more different from Siddhartha Ahluwalia in terms of experience and background.

Varun Chawla, 32, went to college in the United States and worked for Goldman Sachs (GS) for two-and-a-half years in New York City. He returned to India in 2005 but kept his bank job until 2007, when he quit to start a boutique advisory firm helping startups secure early-stage funding. Unfortunately, investment was limited, and business was slow. In two years, he signed 40 clients. He left that venture and started a couple more, all without success. Then, in 2012, after selling one of his companies to the online travel site MakeMyTrip (MMYT), he came up with the idea of starting a business that would target entrepreneurs like him.

"What are an entrepreneur's biggest hassles? Infrastructure is poor, networking is weak, and it's hard to get capital," he says. "We wanted to address those problems." His partners included Anand Vemuri, an engineering grad from Stanford who'd recently returned to India from California, and Pranay Gupta, an advisor to more than 80 startups. After an initial search for office space, they finally convinced one of Varun's uncles -- in India, the influence of family is never far – to let them rent his warehouse in Mohan Estate, on the outskirts of southeast Delhi. A large chunk of their initial investment -- drawn from savings -- went into painting the walls, installing generators to guard against New Delhi's many power outages, laying Internet cable, and making the space fit for human habitation. Along the way, they had their share of hassles -- at one point, Vemuri says, they had to deal with a contractor who was artificially inflating the price of construction material.

91springboard opened in January 2013 and is now at 50% occupancy with 38 tenant companies. It offers five different packages, ranging from a day package that costs Rs. 500 (~$8) for 10 hours of desk time to a resident package that costs Rs. 9,999 (~$200) per month for unlimited desk time and the services of a "live receptionist."

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Chandan Gupta, an entrepreneur who rents space at 91, says he looked for a coworking space for months. Spaces he tried to rent had issues with power outages and water logging; city authorities had even condemned one building. Another served as a part-time pet store. "I get value out of this space," says Gupta, who has created a mobile phone app that blocks spam.

Chawla says 91springboard will need to reach at least 80% occupancy to make a profit, but they're optimistic. They're already looking to expand to two more spaces and are planning to start an early-stage investment fund. As opposed to 2007, when he started his boutique investment business, Chawla says he now gets several inquires a month from startups. And he sees that trend continuing. "How long will GDP growth rely on FII or FDI?" he asks. "We need to get some internal growth going."

Sunday's event -- organized by a company called Nurture Talent -- opens with a drinking contest. Amit Grover, one of Nurture Talent's founders, says that this year, they'll organize 300 events for 25,000 participants, all on preparing participants to become entrepreneurs. Such efforts are a sign that India's entrepreneurial networks are maturing.

"The influx of people who have experience in the tech and startup world in the United States moving to India has helped move the ecosystem forward," says Pankaj Jain, who vets Indian startups for the early stage investment firm 500 Startups. Jain is one of the most visible of these transplants -- he came to India in 2010 to help launch Startup Weekend, an event franchise that brings would-be entrepreneurs together to create a business in 54 hours.

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A talk at New Delhi-based startup co-working space 91springboard

Over the course of three years, Startup Weekend has held more than 16 events, says co-organizer Yatin Thakur. "The focus is shifting towards smaller cities," Thakur says. In addition to events in smaller towns, Startup Weekend is looking at an event for women entrepreneurs. In India, entrepreneurship remains male-dominated. At the Nurture Talent event, more than 95% of the crowd was male. Indeed, most of India's startup success stories are online businesses, and men dominate the engineering world in India. At the Indian Institutes of Technology, India's highly competitive state engineering school, less than 10% of the entering class is female.

Money, money, money

Perhaps even more than infrastructure, the biggest challenge for entrepreneurs in India is scoring funding. When it comes to venture capital funding, India lags far behind Silicon Valley. According to Nasscom, the U.S. produced around 15,000 institutionally funded tech startups in 2012, Israel produced about 800, and India produced a paltry 150.

There are efforts underway to connect entrepreneurs with funding and resources. Nasscom recently launched a project called 10,000 Start-ups, with the goal of producing 10,000 institutionally funded startups in India over the next 10 years. The first round of applications ran from early April through the end of May. Nearly 4,000 startups applied either for angel funding, a spot in an incubator, or both. Out of these applications, about 70 entrepreneurs based in Delhi were invited for a meet-and-greet event with investors at 91springboard.

India has a fairly robust angel investment ecosystem -- about a thousand investors, according to Nasscom. In addition to high net worth individuals, two prominent angel networks, the Indian Angel Network and Mumbai Angels, have several hundred members between them. In the second quarter of 2013, according to industry site YourStory.in, there were 70 venture capital and angel deals worth an estimated $270 million in India. Out of these, 30 deals were at the seed stage.

The bigger problem for Indian startups is securing the funding that comes after the seed round. "The chasm has shifted," says entrepreneur Deep Kalra. "Now companies and funds are saying, 'These guys got early stage [funding], but have they grown enough?'" In 2000, Kalra founded MakeMyTrip, an online travel reservation site. He's one of the success stories, but it hasn't been easy. The company had its IPO on the Nasdaq in 2010. Since then, no other Indian tech company has had a Nasdaq IPO, but MakeMyTrip struggled after a dramatic downturn in the Indian airline industry.

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Kalra says the startup world is much more mature than it was when he started -- he is now an active angel investor in non-travel ventures and heads the Indian chapter of TiE, an organization for entrepreneurs. But India has a long way to go. Much of the problem, he says, lies in an "expectation mismatch." Investors expect to see the sharp growth that they see among American startups. In India, a lack of infrastructure means growth takes longer. "In India, it takes 10 years to grow a business that might take five years in the U.S.," he says.

But at least the media are listening. Shradha Sharma, a former journalist, founded YourStory.in in 2008 to feature the tales of entrepreneurs. She quit her job with a TV channel and started writing about new businesses full-time. She moved from Mumbai to India's IT hub, Bangalore.

Today, she describes YourStory as a "comfortable, sustainable" business with 25 employees. Their site profiles 10 to 15 startups daily, and in April they held what they called "India's first startup job fair." Around 50 companies paid Rs. 50,000 each (~$1000) for a spot at the fair. Nearly 4,000 job seekers showed up, threatening to overwhelm the venue.

"It was insane," says Sharma, who's now looking to recreate the event elsewhere. The enthusiasm for startups, at least, is so intense that it's almost become mundane. "In Bangalore, we say that in every second house you'll find someone who has a startup or has started up. It's become mainstream."

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