BY: Knowledge@Wharton

Last year saw a sharp dip in startup funding in India. According to startup tracker Tracxn, in 2016 investments halved to $3.9 billion from $7.5 billion in 2015. Devaluations, shutdowns and layoffs plagued the sector, and profitability and business model sustainability became the new buzzwords in place of growth and market share. None of this, however, dampened the enthusiasm at the Wharton India Startup Competition (WISC) hosted by the 21^st Wharton India Economic Forum (WIEF) in Mumbai in January.

With a goal of celebrating and promoting entrepreneurship in the country, this year’s WISC received more than 500 applications from startups focused on a wide range of areas from sanitation to artificial intelligence. “What’s been most impressive about the applications is that they are not just ideas on pitch decks. Most entrepreneurs have demonstrated traction to validate their hypotheses and have a well thought out execution plan,” said Ayush Tapuriah, a Wharton student and director of WISC. He added that a majority of participants “have already closed in on their pre-seeded and seeded funding arrangements.” Talking about the 10 finalists, Bharati Jacob, jury member and cofounder/managing partner of early stage venture capital fund Seedfund Advisors, said: “I was very impressed with the quality of ideas, quality of pitches and the quality of entrepreneurs. The majority of them were different and not simply copy-paste models.”

The winner of the $12,000 Judges’ Choice award was Chennai-based Detect Technologies. An Internet of Things (IoT) startup incubated by the India Institute of Technology (IIT) Madras, Detect Technologies was formally incorporated in February 2016. Its area of focus is to enhance productivity in industries through artificial intelligence and non-destructive evaluation. The 35-member Detect Technologies team has developed GUMPS — guided ultrasonic monitoring of pipe systems — for industries such as oil and gas, chemicals and fertilizers. This product has been built indigenously at IIT Madras after more than five years of research and development, and enables continuous monitoring of pipes at operating temperatures. Daniel Raj David, cofounder and CEO of Detect Technologies, said: “Our solution can detect any corrosion in real time and, in turn, ensure high levels of safety and prevent loss of life and productivity and environmental damage.”

So far, the startup has received around Rs10 lakh ($15,000) from IIT Chennai. It is presently in talks for raising funds of around Rs400 lakh. Detect Technologies is currently piloting its solution with a few large oil and refinery firms in the country and expects to be operational by March. David believes that a high entry barrier product and a large, universal market are two key differentiators for his startup.

According to Seedfund’s Jacob, Detect Technologies stood out and emerged the winner because “its approach is very innovative and it has strong commercial benefits for users in terms of savings costs, improving productivity and ensuring safety. We have not seen something like this before.”

The $6000 People’s Choice award went to HelpUsGreen, a Kanpur-based social enterprise that recycles waste flowers from temples into patented products like organic fertilizer and incense sticks. Traditionally, these flowers are dumped into the Ganges River. The startup’s aim is to help make the Ganges pollution free and at the same time provide livelihood to rural families. HelpUsGreen and Detect Technologies also won WISC’s award of pro-bono legal advice from Khaitan & Co. All the 10 finalists were chosen for mentoring by Innoven Capital.

“Being a winner [of the WISC] is humbling and inspiring. To see that a group of esteemed judges shares our view [of] the disruptive nature of what we are building is quite rewarding,” said David.

The Power of Disruption

In fact, the ability to disrupt was emphasized in the forum’s opening keynote address by Kunal Shah, founder and chairman of FreeCharge, India’s leading payment app and mobile commerce firm. Entrepreneurs, he said, must work on solutions that make the previous way of working irrelevant. Citing the examples of railway ticketing in India, Uber and Truecaller, Shah said: “Everything is ripe for disruption as long as you have a ‘delta 4’ solution. Once a delta 4 solution is created, customers do not go back to the previous inefficient system.”

During a panel moderated by Kartik Hosanagar, Wharton professor of operations, information and decisions, participants discussed various issues ranging from the investment scenario in India to how Indian companies can stay relevant in the face of global competition.

Pointing to the ratio of GDP versus investments, Hosanagar noted that while the U.S. GDP is around nine times that of India, the capital that went into the venture capital space in the U.S. in 2015 was six times compared to India. Responding to Hosanagar’s question on whether India is overfunded, Rehan Yar Khan, founder of Orios Venture Partners, said he believed that the gap was because of “India’s faster pace of growth as compared to the U.S. and also because of the large number of white spaces here.” Khan added that “fundamentals like the rate of growth of consumers, the growing number of online users and increase in disposal income are all in place in India.”

Talking about profitability among Indian startups, Nipun Mehra, vice president of Sequoia Capital, said: “Competitive dynamics are forcing companies to spend more on customer acquisition. Firms are looking at the end-state versus the current state, and based on certain indicators they are willing to take an educated guess that there is light at the end of the tunnel.” Sumeet Thandani, founder of Presto, added that since India does not have any firewalls unlike China, Indian entrepreneurs have no option but to “up their game, focus more on quality and constantly innovate” in order to compete successfully with global players like Amazon and Uber who are investing heavily in India. Other important steps include developing domestic capital and focusing on localization, panelists added.

The panelists were unanimous that despite the slowdown in funding in 2016, there has been no bubble burst. “It’s a minor course correction and should be welcomed as a period of introspection,” said Sumit Mody, general partner at Health Passion Fund. Added C. Venkat Nageswar, deputy managing director-global markets at the State Bank of India: “2016 was a period of consolidation. We see tremendous opportunity in the coming years.”

The Need to Differentiate

The confidence in India’s growth story was reiterated at the Speaker’s Series on the concluding day of the two-day WIEF.

Delivering the inaugural speech, Adi Godrej, chairman of Godrej Group, noted that for the past two and a half years, India has had a “reforms- oriented and free enterprise-oriented government” and “several steps towards reforms and growth have been initiated.” Speaking strongly in favor of the recent demonetization scheme in which Rs500 ($7.40) and Rs1,000 notes were rendered as invalid currency, Godrej said that “while it may take some time to take effect,” he believes that “in the long term demonetization will have a very strong positive impact on India’s GDP.” The biggest reform, he added, was the goods and services tax (GST) which is slated to be introduced later this year. The objective of GST is to replace all taxes levied by the federal government and the states with one central tax. Godrej expects it to add “tremendous momentum” to India’s economy. “In fact, it is quite possible that India could have some years of double digit GDP growth,” he said.

Adil Zainulbhai, chairman of the Quality Council of India, debunked many myths associated with the public sector and encouraged professionals in the private sector to work in the public sector. Zainulbhai, who is also the chairman of media house Network 18 and was formerly with McKinsey for 34 years, said: “It is a myth that nothing gets done in the government and that bureaucrats don’t work. A lot of bureaucrats are very dedicated to making things happen. Once you get the people aligned, and all parts of the government are aligned, the pace and scale of impact is simply amazing.”

In a panel discussion moderated by Saikat Chaudhuri, Wharton adjunct professor of management and executive director of Mack Institute for Innovation Management, panelists shared their perspectives on the “New India.” Chaudhuri set the ball rolling by saying that “in order to realize the true potential of India, we need to do things differently — be it products, processes or business models – in a manner that is suitable to India but can also make a mark globally.” He also pointed out that India doesn’t need to go through the same cycles as the West but can leapfrog in many areas.

Harsh Agarwal, founder of AGacquisitions, a global hedge fund, added another dimension. It’s not always just about being innovative, he said, but also about doing things “right.” Pointing out that the financial services space in India is still very nascent, he said: “In our company, we gave our customers the ability to access new markets. By itself this is not a ground-breaking change, but given where the Indian market is and our learning curve as a nation, it did give a new perspective.” Commenting on the role of the government in fostering entrepreneurship, Agarwal added: “The most efficient way to deliver change at scale is to bring about changes at the policy level. However, once a new policy is formulated, there should be a 100% commitment to that policy and there should not be too many riders. One should not have to keep looking at the fine print.”

Karan Bhagat, founder, managing director and CEO of IIFL Wealth & Asset Management, discussed two trends that he saw emerging. One, there is a rise of “professional entrepreneurs” who have a large appetite for taking risks. Two, during the past 10 years, most small and medium businesses (SMEs) have seen their return on equity decline from high double digits to high single digits or at best 14% to 15%. This is forcing them to rethink their business models. Bhagat said: “Most of these are family businesses, and with the younger generation getting more involved these businesses are now becoming more service-based and productivity-based as compared to the earlier manufacturing and working-capital based entities.”

Manisha Raisinghani, cofounder and chief technology officer of LogiNext, a logistics and supply chain analytics startup, wants to see more innovation in the enterprise space. She observed that there are very few companies like Freshdesk, Zoho and InMobi which bring innovation to fix business processes and solve actual business problems. “India has seen a lot of consumer tech startups. We now need more action in the enterprise space,” said Raisinghani. She warned, however, that “in this space it is very difficult to get support by way of advice and mentorship, and proving valuations is extremely tough.”

Zorawar Kalra, founder and managing director of Massive Restaurants, stated that his “personal crusade” is to put Indian food on the global plate. “Every major city in the world must have a good Indian restaurant, and Indian cuisine must become a primary dining option.” Kalra pointed out that his firm relies heavily on technology, and every technology that they use is of Indian origin. “We find that the Indian software we use is far better than its global competitors. What’s more, it is also one-fifth the price.” Kalra encouraged Indian businesses to embrace their Indian-ness. “We only have to learn that we are capable of becoming global leaders. Once we realize this, we will learn to innovate and not depend on global solutions.”

Building Sustainable Organizations

In another panel discussion, the focus was on how sustainable organizations could be built in the not-for-profit space. Moderated by Harbir Singh, Wharton’s vice dean of global initiatives, professor of management and co-director of Mack Institute for Innovation Management, the panel comprised Pramath Raj Sinha, founder and managing director of 9.9 media and founding dean of the Indian School of Business (ISB), Wendy Kopp, cofounder and CEO of Teach for All and Shaheen Mistri, CEO of Teach for India.

Sinha listed three factors as critical for building sustainable and world class not-for-profit organizations: Strong emphasis on governance, finding scalable solutions and relentless focus on quality and excellence. Citing an example of strong governance at ISB, he said: “The institution is funded by a large number of philanthropists, but every board member has equal say irrespective of how much they have donated.”

According to Kopp, cultivating leadership capability is critical. “In business one talks of leadership development all the time. We need to do the same in social development, too. We need to aggressively recruit top talent and then invest in their development.” Social organizations, Kopp added, also need to build global networks. For Mistri, the secret sauce is having a strong purpose. “Constantly understanding why I do the work I do helps me to navigate the ups and downs of the journey,” said Mistri. “It is also important to believe that change is possible and that I can make a difference today.”

Going Digital

The event concluded with a keynote address on the digital future of the Indian economy by Arundhati Bhattacharya, chairman of India’s biggest bank, the State Bank of India. Bhattacharya supported the move to digital, be it in banking or in any aspect of the Indian economy, and acknowledged it as an enabler of growth. At the same time however, she stressed that even as India embraces the digital revolution, it is important for it to devise its own models and policies and not simply follow the lead of other countries.

Adoption of digital technologies by mature economies has to be seen in the context of their ageing population, Bhattacharya said. “Their aim is to ensure that productivity gains due to new technologies outweigh the contractions due to decline in population. But is that the direction in which we need to move?” She made an interesting observation: Unlike India, where 75% of the population is below 25 years, the country that works most in robotics has more sales of adult diapers than infant diapers. Pointing out that one million people enter the workforce in India every month, Bhattacharya added: “We need to ask ourselves how much of digital should we adopt given the labor intensive nature of our country.” She also emphasized the need to be aware of the impact of digital on social and individual behavior, especially the youth. “The decisions we take today will bind us to the outcomes in the years to come,” she cautioned.

Bhattacharya pointed out that there is a wide disparity in India when it comes it diffusion of digital technologies among different demographics, especially the elderly, the uneducated and the less affluent populations. “Universal digital education and accessibility to digital resources is crucial for a successful digital economy,” she said.

This article was originally published by Knowledge@Wharton in January 2017. Used with permission