Why doesn’t Indian startup ecosystem churn out product companies?

Look at most successful Indian startups or look at a broader area of ventures (including initiatives by large businesses) in general; Tech or non-tech - what is clearly evident is the abundance of success stories in the services sector and an equivalent dearth of product based businesses.

In fact, if I were to think up successful product venture from India - only 2 names come to my mind: PureIt from HUL in the consumer products space and Slideshare in the web space. (I am counting out Zoho here because the company is based out of the US and use India only as a ODC - essentially turning India operations as mere services arm.)

A quick Google Search on the subject will reveal few reasons for this; for example:

• Lack of deep pockets of Indian VC's to fund serious research and hence Indian entrepreneurs can’t afford to take big bets
• Failures are not welcome in India
• Lack of 'optimism' in the Indian consumer - hence very sluggish adoption of new 'products'
• Aping the west culture where only 're-engineering' of already successful products in the west are welcome in India

I believe there is one more reason which is not highlighted anywhere [except here] - the meteoric rise of Indian IT Services industry. Yes - a mushrooming services industry in India is a bane for 'product innovation'.

Product startups have a higher risk associated than services who are much more agile in changing their offerings to suit the market. If you are working on a product, you first need more time to reach the markets and you may have to wait for several years till its usage picks up.

Services are much easier to plug and play - you innovate on a services model, launch it quicker, if it doesn't work, you switch it off - but you can switch it on again quickly if ever the market re-emerges. This also makes services a much lower budget investment than products.

Now as services startups started growing more and more aggregate investment is going the services way. Even large business houses like the Tata's have concentrated on building a software services business and have hardly invested in 'building products' (TCS B@NCS - the core banking product was actually acquired post development from an Australian company FNS).

Now the causality is being tilted on its head and people (even successful entrepreneurs) are arguing that “small” budget investments are what are needed for Indian ventures. This perspective is literally a killing blow to product businesses in India.

Small budget funding is required for Indian ventures – agreed. Especially service based or those requiring only ‘local innovations’ like new delivery channels or new ways of using new technologies. Case in point are customized T-shirt websites which are sprouting in every city and town in India.

But these should just be (in an ideal scenario) 50% of the venture ecosystem. There are other kind of ventures, especially those which trigger sweeping changes in the way we work – Google for example! Or CISCO or Nortel - they require years of incubation and untiring commitment – high power brains – and sometimes expensive equipment too. All these need money – lots of it!

The other side of the story is the Indian domestic market being extremely price sensitive. So what do you do to spark a ‘product innovation’ revolution in India?

Will try to explore some thoughts in the next post ...

Update: Related Post http://www.livemint.com/2009/12/09230031/In-India-a-developing-case-of.html