Why Indian Entrepreneurs Succeed in the U.S. and Less So in India
by Ignatius Chithelen*
Each year the best of India’s higher education system, the top engineering, science, medical and management institutes, graduate over thirty thousand high quality professionals. Many of them go abroad to pursue advanced degrees, especially to the United States where the universities offer generous financial assistance. Up until a few years ago most Indian students, upon completing their studies, worked for businesses in the U.S. that hire foreigners. First because they are cheaper and second because the foreigners usually stay with the employer, irrespective of working conditions, till they secure a permanent work visa, currently up to nine years of waiting for a computer engineer. The migrant professionals, including those directly recruited from India, are in turn looking for higher incomes, a more comfortable lifestyle and better career prospects than they find in India.
While working in the U.S., some Indian professionals gain enough confidence in their business skills to give up their jobs and risk setting up an enterprise. The rapidly evolving information technology business has been an especially fertile area. For instance in the late 1990’s in California’s Silicon Valley, well over one percent of professionals of Indian origin were estimated to have started their own companies. This vast move into entrepreneurship was fuelled by the frenzy to set up an Internet company, take it public and get rich quickly. Since the mid 2000’s, there has been another wave of Silicon Valley based Indian professionals turning into entrepreneurs, this time chasing the boom in social networking and other web based businesses. Indian professionals outside the Silicon Valley in the US have also set up several successful businesses, mostly in high technology, especially in the Boston to Washington DC corridor.
At the other end of the spectrum, and rarely publicized, is the existence of several companies started by Indians in the US that secure contracts set aside for racial minorities and women by government and quasi-government operations as well as regulated businesses like telephone and power companies. Claiming they are handicapped by ethnicity and colour, these Indian men and women, including from the upper castes and educated at top institutions in India and in the US, bid against African Americans, Hispanics and American Indians, some of whom may be more deserving of such contracts.
Indians have also set up enterprises abroad which are not based on skilled intellectual labour. There are then companies started by Indians from the traditional business communities and castes in a number of countries, including the U.S. and the U.K. While successful Indian entrepreneurs abroad get wide media coverage, the failure rate amongst start ups is very high, for Indians and non-Indians alike in the US and elsewhere. Some studies point out that the chances of a new enterprise succeeding are less than one in ten.
Even if the figure of entrepreneurship amongst Indian professionals in the U.S. is conservatively assumed to be a third of the 1990’s Internet bubble figure this is still a big number compared to the situation in India. Overall several thousand professionals of Indian origin in the US have started an enterprise. Successful companies founded by them in the 1990’s include Cascade Communications, TIBCO Software, Junglee and Sycamore Networks, and since the mid 2000’s, Flingo, Posterous and Lattice Engines.
Some Indian entrepreneurs in the US have gone on to become venture capitalists. They include Promod Haque, an electrical engineer from Delhi University and an MBA from Northwestern University’s Kellogg School. Haque has invested in more than 60 companies and created $60 billion in exit values since joining Northwest Venture Partners in 1990. Vinod Khosla, an electrical engineer from Indian Institute of Technology, Delhi and an MBA from Stanford University, was one of the founders of Sun Microsystems in 1982. Khosla joined venture capitalist Kleiner Perkins Caufield & Byers in 1986 where his successes include Cerent , which was sold to Cisco Systems for $7 billion, and failures include Dynabook.
As with entrepreneurs anywhere, the Indians in the US are motivated by the business challenge as well as the desire to become rich. An indication of the wealth accumulated by Indians in America, though of a far wider group than entrepreneurs, is a 2002 study by stock broker Merrill Lynch which estimated that over 50,000 Indians in the US then had a personal net worth exceeding one million dollars.
A striking aspect about Indian professionals turned entrepreneurs in the US is that many of them are first generation business men and women, coming from non business families as well as not born into the traditional business castes and communities. Their advanced skills and habits of hard work, when coupled with a perceptive grasp of potential demand for a product or service, give them a major edge in starting businesses based on intellectual content. Often the initial capital used to set up such enterprises is relatively small, in some cases a few thousand dollars.
Among the venture capitalists riding the recent social networking wave is Naval Ravikant, who grew up with little money in Delhi and then New York and washed dishes to support himself through Dartmouth College. In 2009 he co-founded AngelList, a website that has enabled over 200 start-ups to get funding by linking them to over 1300 investors, including major venture capitalists. Ravikant helped found successful websites epinions.com and vast.com and was an early investor in Twitter and Foursquare. “I’m always rooting for the small guy…call it growing up as a poor, fat, immigrant kid…” he told The New York Times.
In the US, the initial funding may come from several sources and in several rounds including from friends and family, angel investors, venture capitalists and investment banks. They all expect to get wealthy by exchanging their low cost private holdings for stock in an initial public offering, which on average involves a wait of about eight years from the start. So Indian as well as non-Indian professionals in the US leap from well paying jobs into the risk of starting an enterprise because they know that, if the business shows signs of success, there is a very high probability they can get wealthy as well as raise more capital for growth through a stock market listing.
India too has examples of professionals turned first generation entrepreneurs, including the huge success of Infosys Technologies and Biocon. But the proportion, and perhaps even the total number, of professionals starting enterprises in India is far lower than in the US. This is in a way reflected in the IT industry itself, the breeding ground for many Indian entrepreneurs in the US. Anecdotal evidence suggests that most such companies in India are controlled by business families and foreign entities, including Indian professionals turned entrepreneurs from the US.
One major reason for the absence of a vibrant culture of entrepreneurship among professionals in India is the relatively high level of unemployment and therefore lack of easy job mobility, especially for mid career professionals. This makes it difficult for professionals in India to find a job, or at least one paying the same wage and offering a similar career path as in the current job, in case they leave to start an enterprise and it fails.
A second big hurdle is the dominance of well entrenched families and related groups over most major Indian businesses as well as access to capital. Many foreign investors as well as publications like The Financial Times have recently started referring to these families as the Indian oligarchs, stressing the similarity with the oligarchs who control much of the Russian economy and who actively prevent local and foreign competitors from entering their businesses. Even with the liberalization and reforms of the Indian economy since the 1980’s, the same families remain in control.
The third major obstacle for entrepreneurs, with no ties to the Indian oligarchs or key politicians, is raising capital since a financing chain, with a stock market as pivot, largely does not exist for them. The Bombay Stock Exchange, founded in 1875, historically served in part as a mechanism for the subsidiaries of multi-national corporations to share some of their profits with the Indian elite. In 1994 the electronic National Stock Exchange was set up and it now links to over 230,000 terminals. It has some 2700 listings with a total market capitalization of over $1.5 trillion, with many major companies also listing on the Bombay Stock Exchange. Today, while most companies on the two exchanges are Indian owned, the ones that dominate major businesses are mainly controlled by the oligarchs, multi-national corporations and government owned entities. Even in the highly entrepreneur fertile IT industry, two of the three biggest public companies are family controlled, Tata Consultancy Services and Wipro Technologies, while the third is Infosys.
In India there are also socio-cultural reasons, reflecting the age-old caste based division of labour. Educated professionals, who are mostly from middle class, non business castes and communities, have the importance of getting and holding onto a good job for life ingrained in them since early childhood. Parents push them to study hard, do very well in the exams, get into a good engineering, medical, management or science school and then hold onto a steady job for life. In contrast, most wealthy business owners in India ignore this grueling, competitive path of seeking the lottery of economic well being through higher education. Instead, they focus on retaining and growing their wealth on grounds that if you have the money you can always hire a good manager or engineer or accountant.
Socio-cultural factors are not as big a burden on Indians in the U.S. One reason they have less of an influence is because the safety net of job security, as in a job for life, does not exist in the U.S. There is though in the U.S. greater job mobility for mid-career professionals and a business culture that celebrates both getting rich through entrepreneurship as well as failing in a business and applying the lessons learned to another successful venture or job.
Typically professionals in India with business ideas continue working at their jobs, rather than leave to start a venture and risk facing future financial ruin. Some of them convince their employers while a few may join another company which wants to pursue their business ideas. In return, some enterprising employees may be fortunate to get a bigger salary and bonus. But most of them get no major financial rewards, even if their business ideas generate huge profits, since they do not have the savings to hire good lawyers and wage a lengthy legal fight.
Since the late 1990’s several factors have made it more conducive for professionals in India to start an enterprise. The rapid growth in the Indian economy has boosted all businesses. On top of this, in the IT industry, demand surged due to widespread fear that computer systems worldwide would fail on January 1, 2000 - the so called Y2K issue which turned out to be a non-problem - and the outsourcing of the contracts to solve the problem, mostly to India. Then, after the Internet bubble collapsed in 2000, IT jobs were slashed in the US and there was another wave of work outsourced to India.
On the labour side, during and after the 2000-2002 and the 2007-2009 recessions in the US, the recruitment of fresh Indian graduates dropped sharply. As a result, thousands of fresh graduates, as well as unemployed Indian professionals in the US, returned home to India for jobs. Seeking to replicate what they saw in the US, some of them have helped start and fund new enterprises.
Over the past decade or so, while Infosys and other established IT companies grew rapidly, several Indian professionals also started new businesses and rode the outsourcing waves. For instance, MindTree was set up in 1999 by former employees of Wipro, from humble backgrounds, by raising funds from angel investors and venture capitalists. Based in Bangalore, like a quarter of Indian IT companies, MindTree went public on the National Stock Exchange in 2007 and now has a market capitalization of $360 million.
The entrepreneurial opportunity for professionals in India is very large given the wide range of businesses in which intellectual labor is the key component and the initial capital required for start-ups is relatively small. In addition to information technology, professionals have a clear advantage in areas like education, engineering and medical research and services, equity brokerage, money management, media and publishing and web based information, retailing, financial and other services.
India has major success stories like Infosys, founded in 1981 by seven IT engineers with $250 in capital. It now has a market capitalization of $37 billion, making N.R.Narayana Murthy and other founders celebrated billionaires. Kiran Mazumdar-Shaw founded the bio-technology company Biocon with $1,000 in 1978 to export a plant enzyme used in the brewing industry. In fiscal 2011 Biocon’s sales were $625 million. Shantanu Prakash’s founding of New Delhi based Educomp Solutions is another example of a professional seizing an edge in an intellectual capital based business and growing big, before some of the oligarchs entered the business. Shantanu started his company as a supplier of computer services to schools in 1994, six years after graduating from the Indian Institute of Management, Ahmedabad. Today Educomp serves 3.6 million students and educators across 6,400 schools in India, Singapore and the US and has a stock market value of over $1.1 billion.
Some of the founders of Infosys, as well as Vinod Khosla, are members of TiE - The IndUS Entrepreneurs – a loose knit worldwide networking organization of professionals and entrepreneurs of mostly Indian origin with chapters in several Indian cities. Other efforts to promote new ventures include the business incubator founded in 1999 at the Indian Institute of Technology, Mumbai. One start up it spawned is ThinkLABS Technosolutions which is using robotics systems in the education field.
A few companies like Infosys are offering stock options to retain key employees in India, some of whom may be tempted to set up competing businesses. While options may buy loyalty for the short term, any wealth it creates will free more professionals to risk starting their own enterprises.
There are major foreign venture and private equity funds operating in India, including Sequoia Capital and Warburg Pincus. Venture capitalists are estimated to have invested roughly one billion dollars in India in the year ending June 2010, according to Ernst & Young. But the bulk of such foreign capital appears to be going to businesses controlled by the oligarchs.
ICICI Bank, IDBI Bank and others like them are semi-government owned financial institutions which are the chief source of capital and loans for the major families, state run enterprises and multi national corporations. Through policy measures and political pressure, these financial giants should be pushed to seed more entrepreneurs, including professionals, help them raise additional capital by listing on the Over-the-Counter Exchange of India and thereby broaden and deepen a crucial part of the capital raising chain. The exchange, set up in 1990 to help entrepreneurs raise capital, failed to take off, currently listing only 62 companies. This is in stark contrast to the success of the National Stock Exchange, especially given that both exchanges were set up by ICICI, IDBI and others, under orders from the government of India.
Some professionals turned entrepreneurs in India are funding philanthropies seeking sustainable, long term solutions to widen the availability of good quality public education, from early schooling to post graduate levels. So while not a cure for India’s poverty, illiteracy and malnutrition, spread of entrepreneurship will be a force for positive change.
(c) 2011. A version of this essay was published in the Oxford Companion to Economics in India, 2012.
*Ignatius Chithelen is manager of Banyan Tree Capital in New York. Earlier he was an analyst and fund manager at First Eagle (SoGen) funds. A former reporter at Forbes, he has written for Knowledge@Wharton, The New York Times and Barron’s. His essay on Indian Entrepreneurs in the U.S. was published in both editions of The Oxford University Press Companion to Economics in India. A Chartered Financial Analyst, he earned an M.Phil. in Development Economics from the Centre for Development Studies, India, an MS in Journalism from Columbia University, New York and an MA in political science from Mumbai University.