The alchemy of Bangalore

IT WAS THE SUMMER OF ’96. Kamal Sagar, Ravi Venkatesam, and Ranadeep Ray were not quite killin’ time, but were young and restless, and needed to unwind. The three graduates from the Indian Institute of Technology (IIT), Kharagpur, were reuniting over drinks. Sagar and Venkatesam had degrees in architecture and Ray in mechanical engineering. Venkatesam had grown up in Bangalore, and still lived there in an area called HAL (Hindustan Aeronautics).

Sagar, who was then working at the Poonawalla Stud Farms in Pune, wanted to launch his own venture, Total Environment, a company specialising in customised architecture. He asked Venkatesam and Ray to join him. The two, at that time, were more interested in launching an IT company, for which they had the skills but not the capital. “However, they [Venkatesam and Ray] felt we could build this construction business, and when we had sufficient funds, we could invest that money into an IT company,” Sagar recalls. What followed, after Total Environment’s incorporation in July that year, was three months of sheer tenacity and scouting for projects. It took four years for the company to break even.

But even as the construction venture was stabilising, Venkatesam and Ray decided to get into the IT space. In 1998, they set up Circle Systems and ventured into product development. Venkatesam wanted to create an online equivalent of Post-its or ‘sticky notes’. The startup was their springboard to create an e-commerce portal called Arzoo.com. But they needed $1 million (Rs 4.48 crore) to develop, build, and commercialise the idea. They struck gold when they met Sabeer Bhatia, the founder of Hotmail. Bhatia bought Circle Systems and they continued to work for the company.

Meanwhile, Total Environment, owned by Sagar and wife Shibanee, has grown to a Rs 200-crore company, retaining its focus on the design and construction of customised homes.

In many ways, this could not have happened so easily in another Indian city. Bangalore, today the country’s IT hub, has always welcomed entrepreneurs and fostered entrepreneurship. In the ’80s and ’90s, the cost of living was far lower in Bangalore than in any other fast-growing Indian city. The city’s demographic also had a high percentage of technical and technological manpower, given the number of high-tech public sector undertakings (PSUs) there.

“The entrepreneurial spirit is consequent to moving into Bangalore,” says Kanwaljit Singh, senior managing director of Helion Venture Partners. “The spirit is infectious and makes risk taking much easier.”

It is this spirit that drew IT biggies such as Infosys Technologies to relocate from Pune to the city. Wipro Technologies, Tech Mahindra, Satyam, and Birlasoft soon followed, making Bangalore the IT hub that it is today.

Infosys made Bangalore its headquarters in 1983, beginning with seven founders and wafer-thin startup capital. Today, it is a $6 billion global corporation listed on the Nasdaq.

MindTree was founded by a group of top and senior managers who quit Wipro in 1999, much as Infosys was created by ex-managers from Patni Computer Systems 18 years earlier.

But Bangalore’s entreprenuership extends beyond IT. In August 2003, Capt. G.R. Gopinath set up Air Deccan, India’s first low-cost carrier. In three years, he had scaled his business up to 45 aircraft, 25,000 passengers and 380 daily flights.

According to data from Venture Intelligence, which tracks venture funding activities in India, 208 of 594 investments between 2006 and mid-2011 were parked in Bangalore—the most of all Indian cities. The city also leads in deal size. The data shows that deals worth $1.03 billion were struck in Bangalore over the five-year period; Mumbai follows at $911 million.

HOWEVER, BANGALORE IN THE 1980s was hardly a place for organised business. Unlike Mumbai or Chennai, the city had no legacy of business families to patronise enterprises. Most of the wealth was in agrarian clusters across the state of Karnataka. Nor did the city develop on the lines of metropolises such as Mumbai, Chennai, or Kolkata, which were port cities where commercial activity dated back to 18th century merchants and traders.

“At each point in its history, Bangalore had an entrepreneurial class, despite the infrastructure for business activity being limited,” says National Institute of Advanced Studies’ (NIAS) School of Social Sciences professor Narendar Pani. “At each stage, a new entrepreneurial class came into Bangalore. It did not displace the old, but rose on the periphery of the previous set.” For example, the Peenya Industrial Estate came up in the ’80s as a hub of ancillaries that supported the local PSUs. But it did not disturb small-scale textile companies, unlike, say, in Mumbai, where organised retail was born on the ruins of the city’s textile industry.

Entrepreneurs also thrive because of Bangalore’s twin abilities to supply talent and provide a distinctly diverse demand. On the supply side, there are 167 engineering institutes in Karnataka approved by the All India Council for Technical Education. While the number may be not be large compared with neighbours Tamil Nadu and Andhra Pradesh, the presence of the IT and BPO industries makes graduates invariably stay in the city, adding to a growing and varied market.

Bangalore is also an amalgam of peoples. There was the late 19th century migration of Tamilians and British into the fortified military base called Bangalore. The city still cherishes its Anglo-Indian heritage, which was instrumental in the spread of English as a language. By 2003-04, the number of English-medium schools in Bangalore district was 58% more than the number of Kannada-medium high schools, says Pani. The language’s growth has been crucial, both in consumption that leans to the West, and in supply to the IT industry, which derives more than 80% revenue in English-speaking geographies such as the U.S. and the U.K.

By the ’90s, there was a stable foundation for the English-educated engineering and technical manpower in the city. This fuelled the IT wave and attracted more talent from across India as the industry grew. “The popular perception throughout is that English lives better in Bangalore than anywhere else,” says G.K. Karanth, professor of sociology at Bangalore’s Institute for Social and Economic Change.

While that might not be entirely true (cities such as Kolkata and Chennai are also home to a large number of English speakers), the impact of the language on everyday life in Bangalore is undeniable. Bruce Lee Mani, lead singer in Thermal And A Quarter (TAAQ), a rock band, says he can’t write or sing in anything but English.

“I grew up in an English-medium school—my thoughts are in English,” he says. “I can talk in any south Indian language and Hindi, but it doesn’t come naturally.” In 1996, the four-member band created a buzz at college music fests with their original English lyrics and tunes. The big break was opening at Deep Purple’s Bangalore concert in April 2001. Five years later, TAAQ opened for Jethro Tull.

But what really sets the city apart from its peers is that successive governments in Karnataka distinguished Bangalore by not politicising the diversity. In Mumbai, for example, the Shiv Sena’s and Maharashtra Navnirman Sena’s most recent political targets were migrants from North India. In comparison, governments in Karnataka have typically been embroiled in matters related to their own survival.

In fact, the state government hasn’t stepped in since establishing the first software technology park of India (STPI) in Bangalore in June 1991. This was a boost to the nascent IT industry that sought to capitalise on the unprecedented data communication facilities under a single roof. “The first STPI in India coincided with the politics of education in Karnataka,” says Balaji Parthasarathy, associate professor in the International Institute of Information Technology, Bangalore.

He explains that people from different castes and sub-castes, historically agrarian groups, were jostling for entry into urban professions. This accelerated the growth of educational institutions not just in engineering, but also medicine, law, etc. This became the skilled labour that coincided with the growth of the IT industry.

Small-scale ventures also proliferated in Bangalore thanks to large PSUs such as HAL and the Indian Space Research Organisation. For instance, engineering services firm Quest Global drew experience from the Defence Research and Development Organisation and HAL’s small projects in the late ’90s to diversify beyond oil and gas into the aerospace industry.

As PSUs grew, the immigrant families, along with the locals, became the growing middle-class consumer base in an environment where education standards were high—even global. Post 2000, the demand has become even more cosmopolitan with a healthy mix of joint and nuclear families. It is a young city with the demand pattern of a large metro.

There’s also a never-say-die spirit that insists on going on even when it’s clear that ground business realities will scupper an idea. One of the earliest passenger-car makers in India, Sipani Automobiles, was based in Bangalore in the early ’80s. Its small car, Dolphin, was launched before the Maruti-Suzuki 800. However, it could never sell beyond the southern markets. But that didn’t stop Sipani from making one more attempt to make a mark in the auto space—this time with a premium car, the imported and rebadged Rover Montego. That attempt also failed.

The failure of one auto venture in the city did not faze Chetan Maini. In 1994, he founded Reva Electric Car Co with the then far-fetched premise of selling electric cars in India. “Back then, I did not realise what RoI [return on investment] was,” he says. “I had to think of it later when raising money. It was a very strong instinct, to begin with. India was starved in the automobile space with little other than the Maruti 800.”

Maini, a technocrat, raised nearly Rs 14 crore from ICICI Bank and the Technology Development Board in the early stages. He scaled up enough to capture the interest of VC fund Draper Fisher Jurvetson (DFJ) and Global Environment Fund. Eventually, he sold Reva to automaker Mahindra & Mahindra in 2010, where he is now chief technology officer.

In the past decade, he sold nearly 4,000 electric cars, models priced between Rs 3 lakh and Rs 5 lakh, primarily in Bangalore and London, with hardly any ecosystem for these products. In the early ’90s, the city promised to be the playground for electric cars, he says. “When I did feasibility surveys across banks and different communities in India, the most positive feedback I got was from Bangalore. From a market perspective, Bangalore made sense. People were less dismissive and more encouraging here, compared with a metro such as Delhi.”

BUT ULTIMATELY, THE IT BOOM proved to be the tipping point for entrepreneurs in the city. The majority of industry body Nasscom’s top 20 technology service exporters from India comprise businesses that began as family-owned enterprises (Wipro Technologies, Tech Mahindra, Satyam, Birlasoft) or as part of conglomerates—Indian (TCS, L&T Infotech) and foreign (Siemens Information Systems, the erstwhile GE Capital International Services, Oracle Financial Services Software). But the likes of the $331 million MindTree, apart from BPO firms 24/7 Customer and MphasiS are Bangalore-grown startups that have followed Infosys.

“The reality is that Bangalore had a number of technology services companies to begin with,” says Sandeep Murthy, a partner at Sherpalo Ventures in India, who also manages investments for VC fund Kleiner Perkins Caufield and Byers. “The multinationals then followed, sourcing local talent. And now you have entrepreneurs here who want to source talent from the larger IT companies. Bangalore has grown because of its skills.”

Following the slump in demand for software in 2001, nearly 35,000 professionals returned to India, mostly from the U.S., according to Nasscom. Most of these U.S.-returned professionals settled in Bangalore thanks to the lower cost of living, good weather, and the presence of tech PSUs. Many of these new entrants started their own ventures.

The presence of this young, well-to-do demographic attracted entrepreneurs in the lifestyle and health care segments, who saw the ‘foreign-returned’ techie as their target.B

In Koramangala, a residential locality, 800 restaurants were reportedly licensed in one year. “Bangaloreans do tend to experiment,” says Shruti Shibulal, co-founder of Avant Garde Hospitality, which has started restaurants Caperberry and Fava. “I had wanted to start something on my own, particularly a restaurant, for a long time. It was a lucky that I met (chef) Abhijit Saha at the right time.”

She worked with Merrill Lynch in the U.S. till October 2007 and invested in Avant Garde Hospitality in April 2008 with Saha, the former executive chef at The Park Hotels, as an equal partner of the Rs 10-crore investment.

Saha had the confidence to travel the Mediterranean route. “When I did Mediterranean, I didn’t want it to be only about Italian dishes,” he says, referring to Fava. “I wanted a good representation from the European, West Asian, and North African influences,” he says. He is looking at those who might find five-star restaurants too expensive, but have a penchant for unique cuisines.

The blossoming of the hospitality business, which also attracts angel investors and VC funds, is the coming of age of one sub-culture in Bangalore. The city itself has been a large beneficiary of the liberalisation and communications revolution—a far cry from the ‘90s and what Prashanth Prakash of VC firm Accel Partners likened to the Wild West.

“Anything was possible,” says Prakash. “There was no financial services industry to hone your skills to get into a banking job. People in Bangalore had to discover a new thing, because there was nothing.”

In 1995, Prakash founded his first venture, VisualReality, a multimedia publishing company, after returning from the U.S. That venture gave way to NetKraft, which he co-founded with Atul Jalan in 1998 to provide offshore solutions for retail and health care industries. When the duo needed funding in 2000, Kiran Nadkarni, co-founder of VC fund JumpStartUp, pitched in from the U.S.

By the time the founders sold NetKraft to Texas-based Adea Systems in 2004, Nadkarni was about to launch his quick-service restaurant Kaati Zone. Prakash and Nadkarni switched hats. The former invested in Nadkarni’s startup. Not for the first time in a Bangalore startup, an entrepreneur got by with a little help from a like-minded entrepreneur.