Code shift in IT sees product firms gaining traction

Software products appear to be finally getting their due in a country synonymous with software services.

With product-company start-ups witnessing a 100% increase in the past three years, Nasscom sees disruptive growth in this segment this decade, with annual revenue growing from $1.4 billion in 2007-08 to $12 billion by 2014-15.

“There are many captive companies developing software products for their parent companies. So, the capability has always been there,” says Sucharita S Eashwar, senior director, Nasscom.

The local software product industry has recorded an accelerated growth of 44% over the past three years, according to Nasscom.

“Things have definitely improved in the past few years. Last year alone saw some 100 IT product companies coming up in the country,” says Chandra Sekhar Pulamarasetti, founder and CEO, Sanovi.

Founded in 2003, Sanovi is funded by US venture capitalists and is probably the only company in India providing disaster recovery management solution for aligning DR infrastructure with recovery time and recovery point objectives.

According to Sudhir Sethi, chairman and managing director, IDG Ventures, venture capitalists (VCs) in India are bullish about software product companies. Around 200 start-ups from this space approach his company every quarter, he says. “Of the 16 firms my company has invested in, eight are product companies. This alone shows how much the market has improved for this segment.”

However, IDG prefers pre-revenue product firms — those having at least one or two customers — over start-ups, says Sethi. He predicts high growth for product firms, particularly in business intelligence analytics, security, healthcare and banking
verticals.

According to Nasscom data, the software products market in India is growing 2.8 times as fast as the global market as consumers increasingly seek localisation.

However, while India’s role in global technology intellectual property creation has grown steadily, several challenges have constrained the growth of home-grown software product businesses. The small base of the domestic market still acts as a hindrance for VCs to invest in product companies, which are absolute start-ups.

“Though more and more VCs are showing interest in Indian product companies, there are a few who still shy away from investing in them,” says Eashwar. According to her, VCs wait for the product to have at least one or two customers before putting their money in it.

Narasimhan (Kishore) Mandyam, CEO of Impel CRM, PK4 Software Technologies, feels the reluctance of venture capitalists isn’t entirely without reason.
  
“I run a product company. But I do not see the market improving in a big way in India. The size of the companies is too small to justify investments by VCs. After all, they are here to make money, and the kind of returns they get by investing in a start-up product company in the US is not here,” he says, pointing out that entry barriers are also high because of MNC presence.

“Why single-out product companies? I feel even if it is a service company, it is tough for a start-up to establish itself. I had one-two customers before IDG decided to invest in my company. So, the struggle is more or less the same for everyone,” says Bikash Barai, founder and CEO of iViZ Security, which offers cloud-based penetration testing for applications, helping companies test their information and network security preparedness.

Subash Menon, founder of Subex, appears to agree.

“Back in 1999, we did not get much support from venture capitalists. This was the reason why we had to go public in order to raise money. It was understandable as they felt India could not create a product because of lack of domain knowledge,” he says, adding, this perception has since changed with the success of a few companies.