In search of the elusive billion

Bangalore-based mobile marketing company ZipDial (known for its offerings that don’t depend on expensive data connections) ensured that Indian startups began the new year on a high. On Jan. 20, it became Twitter’s first Indian acquisition. The deal, estimated to be valued between $30 million and $40 million (Rs 190 crore and Rs 250 crore), will enable the microblogging site to grow its user base in emerging markets, where smartphone and Internet penetration is low.

The acquisition marks another chapter in the nascent coming-of-age story of Indian startups on the global stage. Only last year, Facebook acquired Little Eye Labs (it develops performance analysis and monitoring tools for Android apps), Google bought cybersecurity firm Impermium, and Yahoo snapped up Bookpad, in the same space as Google Docs and Crocodoc.

While such deals validate the quality of Indian tech startups, they are nowhere close to commanding the fairy-tale valuations of, say, WhatsApp or Snapchat. Even when Indian firms have managed to break into the Unicorn Club (billion-dollar valuation triggered by venture capital funding before an IPO), they have typically been confined to the e-commerce or consumer tech space: The Wall Street Journal lists four Indian companies on its Unicorn list, led by usual suspects Flipkart ($10 billion), Snapdeal ($2 billion), and Olacabs ($1 billion), with mobile advertising company InMobi ($1 billion) the only business-to-business (B2B) or enterprise-technology player.

That skew could soon end as a handful of Indian B2B startups prepares to expand in the U.S. market. The road map has been laid by TiE Silicon Valley (TiE SV, the Valley chapter of The Indus Entrepreneurs, a global not-for-profit organisation that nurtures startups) in partnership with the Indian Angel Network (IAN). Their programme, called Billion Dollar Babies (B$B), kicked off in January, and the first class making the cut includes Seclore, Sokrati, Vinculum, and Druva—all of which consider the U.S. a strategic market. They were chosen based on traction at home, track record of having done business abroad, and venture funding till date (see table).

B$B is the first institutionalised effort to handhold young Indian companies in the U.S. So far, the biggest hurdles most of them have faced are cultural differences and difficulty in nailing the product-market fit. B$B will focus on those areas, says Venktesh Shukla, president of TiE SV. It will help the companies get a soft landing by connecting them with mentors/advisors, potential customers, and venture capitalists. To build familiarity with the Valley culture, one co-founder from each startup will be stationed in the U.S. till the programme concludes. Success will be measured by revenue growth rate, and early achievement will be assessed by engagement with U.S. customers, clear demonstration of product-market fit, and the ability to attract and hire talent.

VALERIE ROZYCKI Wagoner, founder and CEO of ZipDial, believes the overseas thrust is timely. While scaling up startups remains an inexact science, the presence of a virtuous cycle driven by two complementary factors—a large addressable market and the availability of funding to support growth—is considered key. E-commerce ventures like Flipkart and Snapdeal have drawn sustenance from this cycle. But for B2B companies, the domestic market alone cannot support exponential growth. “They must go global,” says Wagoner.

Lofty valuations also require generous VC funding. “You need VC money to outrun the competition and acquire market share,” says Wagoner. “That could be difficult to achieve at home.” Wagoner says Indian consumers are not connected enough to guarantee viral growth without user adoption and serious investment in marketing. “[Scaling up] requires big spend, but only a few investors will fund private companies in India,” she adds.

The U.S. market is ideal as sentiment around startups is booming there after a lull following the dotcom bust and the 2008 crisis. According to the National Venture Capital Association and PricewaterhouseCoopers, venture capitalists put as much as $48.3 billion into U.S. startups in 2014—a record of sorts since 2000, when investors poured $105 billion into closely held companies.

As a result, valuations are skyrocketing across Silicon Valley. For instance, mobile-driven ride-sharing service Uber more than doubled its billing in 2014, ending the year with a valuation of $41.2 billion. Data storage company Box went public in January and its market capitalisation has since surged to $2.7 billion, about 12% higher than the valuation at which investors TPG Growth and Coatue Management bought into the company last July.

Several experts feel the Valley is in a bubble, but the easy-money environment is ideal for startups from India, where funding remains relatively anaemic. A recent study by Nasscom and management consulting firm Zinnov found that software product startups have received funding worth $2.3 billion in India since 2010.

Saurabh Srivastava, India co-chair of B$B, stresses the importance of timing. “Ten years ago, this exercise would have been too early, as the services sector held sway at the time,” says the IT entrepreneur-turned-VC. (Srivastava is co-founder of IAN, the Delhi-NCR chapter of TiE, and Nasscom, the IT industry body.) But the ecosystem has matured and nearly 90% of the startups have moved away from that segment, he says.

“Indian companies that can leverage their skills to develop products for the U.S. are the [real] value creators,” says cloud computing and information security consultant L.S. Subramanian, also the founder of Mumbai-based management consulting firm NISE. “Infosys, HCL, Wipro, and TCS demonstrated this in the first wave of the ICT revolution. Indian startups must adopt the same approach if they want to grow fast and raise big money,” he adds.

It helps that the chosen four are no rookies and can plug into the existing ecosystem of U.S.-facing Indian companies. “[Some] companies have been selling to business customers in the U.S. for more than a decade, and that knowledge will be extremely useful now,” says Manu Rekhi, partner at Inventus Capital Partners, a cross-border VC firm and part of B$B. To add muscle to the programme, Rekhi has reached out to peers at Accel Partners and Helion Venture Partners. Interestingly, all three VC firms are invested in one startup or the other chosen for B$B. If these firms manage to reach $1 billion market value with effective handholding from their investors, it will not only ensure good exits but may also kick off a strategic trend leading to better success rates for Indian startups and, consequently, more funding from global investors.

MEANWHILE, the billion-dollar goal has drawn its share of sniggers. “Even in India, big corporate houses or institutional clients are not convinced that home-grown startups can churn out global-standard products,” says a Delhi-based education entrepreneur who didn’t wish to be named. “VCs are only eager to find a safe haven to park their money. Without big customers and big funding, valuations of these companies may dwindle.”

Co-chair B.V. Jagadeesh says VC sentiment is often affected by the lack of a strong exit market, especially for product/tech startups, but the scenario is changing. “Indian companies just need to invest enough time to build great products—they shouldn’t be in a hurry to exit.”

Asked whether Indian startups have the patience to hold on and grow in a mature market like the U.S., most startup founders refused to comment. Alok Kejriwal, the founder of Games2win who has already logged two successful exits, feels there’s no right or wrong time to exit. “It’s almost like asking ‘What’s the right age to get married?’ No one knows! What matters is being there [when opportunity strikes] and not want to time anything. Leave that to destiny and market forces,” he says.

Here’s an example that’s fast becoming a case study on the futility of trying to time the market. Phanindra Sama, co-founder and former CEO of bus-ticket aggregator redBus, sold the company to the ibiboGroup—the India arm of South African media conglomerate Naspers—for a reported $101 million. But the sale was described by many as “too early”. (Fortune India contacted Sama via e-mail but got no response.)

Sramana Mitra, a Valley-based strategy consultant and founder of virtual incubator 1M/1M, drives home the real pain points in the redBus case. VCs today are interested only in scale and growth rate, she says. To get a billion-dollar valuation, a startup has to tick both these boxes. “redBus raised around $10 million in venture capital and was doing around $10 million in revenue seven years into its lifespan. But it wasn’t growing fast enough, and the VCs ran out of patience. It wouldn’t have achieved a $1 billion valuation in a long time because of its slow growth rate,” Mitra argues. She adds that startups like Druva have a far better chance of achieving the mark as they are growing revenue at a faster clip.

As of now, B$B has not announced a time frame to assess the first class, adding to the scepticism. But Rekhi says TiE SV will invest as much time as it takes to make an impact. “Our goal is to bring out the full potential of Indian entrepreneurs,” he says. “If Israel and China can do it, why can’t India?”