[Photograph courtesy PIB]

“Can't India top the list of start-ups?” Prime Minister Narendra Modi asked during his second Independence Day address to the nation from the ramparts of the Red Fort in Delhi. He announced a new campaign 'Start-up India; Stand up India'

NR Narayana Murthy, in his characteristic honesty, asked a pertinent question recently. A couple of decades ago, I would have been one of the graduating students whom he was addressing at the Indian Institute of Science (IISc), my alma mater. To paraphrase him: “Why has there been no earth-shaking invention or technology from India over the last 60 years?”

This is made more intriguing by the fact that Indian students in general, and particularly those at the Indian Institutes of Technology (IITs) and IISc, are as bright, if not brighter than, the students at any top university in the USA. Murthy’s claim is that we have lost the “magic of the sixties” and that we have to recreate it.

I dare say that I know something about the magic of the sixties—although second-hand—as I wrote in the Acknowledgements section of my recent book, Nimble. In that section, I acknowledged my due to my father-in-law, Professor S Nagarajan, one of the sharpest literary minds, not only in India, but also across the world. After completing his Ph.D. in English in a record time of less than two years at Harvard University in 1961—the first Indian to do so—he boarded a Pan Am flight to India a few hours after his Ph.D. defense. To what was he returning? He came to a then un-famous university called Poona University, which did not at that time even have a Department of English. He and a peon cleaned and dusted the office allocated to the new department, and carried in desks for the staff. And over almost two decades, he polished that department to become one of the finest in the country. I asked him many years later why he returned to India when with his Harvard degree, the best universities across America would have welcomed him. His answer: “There was magic in the air in India then.”

Over time, however, even for the idealistic Nagarajan, the magic faded. For those of us who caught some glimpses of the magic as we worked on exciting new subjects like artificial intelligence in the late 1980s, it had become a dull glow. For today’s youth, the magic does not have even the sheen of patina-covered brass. So, while there has been a defensive reactionary furore over Murthy’s question, I personally feel that more than being just a critique, his question calls for a search: How can we recreate the magic of the sixties?

Since Murthy mentioned invention, I will focus my discussion on innovation in India. Many persons reacted angrily to Murthy’s comment, arguing that he was not taking into account innovations such as the Tata Nano, the Mangalyaan space programme, or the numerous frugal innovations that Indian organizations have made. Others indicated that Murthy was being too IT-centric and was not taking into account the kind and variety of process innovation being achieved in several industries, for instance, the advances that Indian pharmaceutical companies have made in the generic drug-creation process. There is a definitional bias in Murthy’s question, which I will come to shortly. But that apart, the question is well intentioned and calls for some serious soul-searching.

Too Much Valley Kool-Aid

One of the solutions that Murthy proposed was this: “There must be free flow of ideas between our intellectuals and foreign scholars.” This is precisely where Murthy’s bias in defining “innovation” comes from—and this is precisely where the problem for Indian innovation lies.

The free flow of ideas between Indian faculty, researchers and inventors on the one side, and their counterparts in the West on the other is not a problematic issue really. The problem is that the flow of ideas is one-directional. Ideas from the West are absorbed and spouted in India as if they were divine truth, but there is absolutely no flow of ideas from Indian scholars to the West. Companies—including Infosys—would rather follow the Harvard professor Clayton Christensen’s model of “disruptive innovation” than the IIM-A professor Anil Gupta’s “honeybee model of innovation” that may be better suited to India. Would the late CK Prahalad’s “bottom of the pyramid” model have been as successfully accepted if he had not been a Harvard-trained professor at the University of Michigan’s Ross School? I studied Physics at Bangalore University where I did two courses on Astronomy, and then went to IISc. But I never was taught about Meghnad Saha, the brilliant physicist whose theory of “thermal ionization” set the course for later astrophysicists. Saha’s work is considered as seminal as Niels Bohr’s, but how many of us have heard of Meghnad Saha, who struggled in an ill-equipped lab in Allahabad University in the 1930s?

As Nirmalya Kumar points out in his book Brand Breakout, research in marketing has for quite some time recognized that apart from brand recognition, there is a powerful influence that affects sales—something called “Country of Origin” (COO). It matters tremendously to the prospective buyer where the product has been manufactured because the buyer’s perception of the country of the product’s origin dictates whether the purchase will happen or not. To illustrate, Kumar reports an interesting experiment: when a group of car company executives were asked to choose between buying a Volkswagen car made in Germany and buying the same Volkswagen car made in Mexico, they invariably preferred to buy the German-made car. With India’s image firmly established in the West as a poverty-stricken, rape-ravaged, corruption-cursed country, we can correctly guess how well ideas and products from Indian soil will be accepted in the West.

However, on the other hand, perhaps because of our colonial history, we Indians suffer from the same COO bias—we worship ideas from the West. I am not writing to push a nationalist sentiment—our preference for “phoren” ideas and “phoren” products is a straightforward fact that experiments like Nirmalya Kumar’s COO experiment verify. In fact, the understanding that innovation has to be “disruptive” and product-centric is itself a West-created myopia that Indians have wholly consumed and reproduce. Such a definition does not entertain the thousands of micro innovations that keep a company like Toyota at the forefront of innovation, or consider the myriad process-improvements Indian companies make.

Indian entrepreneurship—and I use the word in its generic sense to include faculty members in university labs who struggle with research problems—suffers from a case of having drunk too much of what I call “Valley Kool-Aid”. From the businesses we seek to create through the methodologies we use to decide whether to fund them to the entrepreneurial mindsets that we cultivate—all of it is modelled around the Silicon Valley. Simply put, we are high on Valley Kool-Aid.

Unfortunately, We Have No Valley

On the other hand, however, we do not provide the budding entrepreneur or innovator the ecosystem, the resources or the infrastructure that Silicon Valley provides its potential entrepreneurs. Here are some reasons why we have no Valley.

The Educational System

As is well recognized, our educational system is steeped in training implementers, not thinkers.

Like the colonial education system that was established to create millions of lower-division and upper-division clerks for the colonial enterprise, every year Indian institutions churn out millions of engineers who know how to solve problems that are given to them—like the ones that appear in the mid-term and final in-class closed-book exams that are used to evaluate them.

But innovation is about finding problems that need to be solved. Our best-trained students do not know how to recognize problems; they do not know how to structure them. So as entrepreneurs, they do the best they can—they take a problem that has already been structured in the Valley and tweak the solution this way or that, maybe modifying it a bit to adapt to Indian circumstances. Essentially then, they replicate Valley businesses; they do not create new ones. They replicate Amazon and tweak the service a bit; they copy eBay, but focus on a niche; and so on.

Educational institutions either are too lazy to change, or they love the old archaic colonial system. In one institution, where I taught a course on entrepreneurship, I had to write a note to the administration to justify why I was making students present business plans to a group of CEOs instead of holding a final written examination. The Dean proudly claimed he belonged to the “old school” that believed that examinations would test the student’s grasp of the matter. Examinations to judge entrepreneurial skills? Seriously? But that’s the way it is.

A Risk-Averse Ecosystem

Innovation thrives in a culture that is willing to take risks. For various reasons, however, in India there is a significant lack of appetite for risk. I can point to at least four huge killers of the risk-appetite in India: Indian families and culture, educational institutions, the funding-environment and the legal system.

Indian Families and Educational Institutions: In a culture where parents are closely involved in their children’s education, and more often than not fund the education through their life-earnings, there is naturally an expectation to choose the path of safest return on investment. This “safe” position used to be a government job in newly independent India, but today it is a software job in a multinational company. Students who want to be entrepreneurs cite the likes of Elon Musk and Marc Zuckerberg as role models, but Musk and Zuckerberg took risks that are unimaginable in an Indian family: Zuckerberg left Harvard without a degree; Musk dropped out of the PhD programme in Physics at Stanford in two days. Can you imagine an Indian family agreeing to such a decision? So the Indian cultural system with its financial pressures creates risk-conservative individuals. And the educational system—with its lethargy to move from “successful” rote-and-repeat models to more risky models that foster innovative and creative minds—dampens whatever little risk-appetite is left in the student. As a result, the wannabe entrepreneurs who graduate from Indian colleges and universities can only think of micro-tweaks of business models that have been successful in the Valley. How can we expect a Google or FaceBook or a Tesla from them? And thus Murthy’s comment that the successful Indian business model is based on re-engineered imitation, not innovation.

The Start-up Funding Environment: An important player that could have changed the risk-picture has also failed in India. And I speak here of the venture capital (VC) industry that funds entrepreneurship. Mahesh Murthy of Seedfund, a Bangalore-based early investor, wrote a very articulate piece called “Is Venture Capital Killing India’s Startups?” As Murthy says, the problem begins with the US-centric “8+2” or “10+2” investment model, which expects that investors in a VC fund can expect a return on their funds in eight to 10 years (with a grace of two years). This means that the fund has to find start-ups to fund, nurture them, help them grow and get them to initial public offering (IPO) stage in this short timeframe. The history of successful Indian start-ups—Naukri.com, MakeMyTrip.com, or Justdial.com—shows that it takes much longer to get to IPO status. Justdial took upward of 16 years to come to IPO, for instance. The VC fund, under pressure to satisfy its investors in a short timeframe, tries to make the company do something else after a few years so that it can sell the start-up to someone else. Alternatively, it prematurely sells the start-up off, when a few more years would have helped it cross the tipping point and become something big. But the third method that the VCs use is quite abhorrent ethically.

Mahesh Murthy says it best:

And the third, even more nefariously, is the circle jerk. A bunch of funds of roughly the same size all look at their portfolios around year 5—see a bunch of unexitable businesses and then proceed to give each others’ companies an up-round (A gives a 3x up-round to B’s investee, B gives a 3x to C’s company, and C in turn returns the favour to A’s investee.)

Net result? The LPs [investors] of A, B and C each think they’re doing very well indeed. But the startups and their founders are now left with new masters, a higher and even more indefensible valuation—and disaster is merely postponed and potentially amplified for the poor folks being led by investors in this dance.

And of course, finally, if none of these methods works, the VC fund uses the “kill the start-up method”, which simply closes down the company.

The government despite all its fanfare is useless as an investor—under government regulation, banks require loads of deterring documentation, and offer paltry loans. Worse, if an entrepreneur has started a company with his or her own funds, government policies ask the entrepreneur to show profits for the previous three years. Being an innovative start-up in this environment is a miracle. For the intrepid Indian entrepreneur, it’s Hope in Pandora’s box.

The Indian Legal System: From a VC’s perspective, the legal system in India is a huge deterrent to funding start-ups. On paper, Indian laws are as welcoming and supportive of risk-taking funding as anywhere else in the world. But when it comes to enforcement, we all know the effectiveness of the Indian legal system. Suppose a VC takes a risk and invests in a start-up, and after a couple of years, finds that the founders were unscrupulous—not only did they put their hands in the till, but they emptied it. What recourse does the VC have but the Indian courts? And we are all familiar with decades-long litigation and decades-long appeals. So, which VC fund would want to take such a risk with its investors’ money?

Conclusion

So what does this mean for Indian innovation? For India to emerge as a successful innovation hub, and for Indian innovation to impact the world in the way that Narayana Murthy suggests, we need to look beyond the Silicon Valley model of innovation.

Does that mean the Valley model is wrong? No. At worst, it means the Valley model is inappropriate for India, and at best, it means that the Valley model is not sufficient. Let me be clear: This article is not a nationalist diatribe calling for a home-bred-only model on innovation. This article is about looking for ways to recreate the “magic of the sixties”, and if that search means looking inward into India also for innovation models, we should not hesitate to do that.

Most importantly, I believe that the Indian entrepreneur needs freedom, which means, he or she must have the freedom to construct and choose from a set of entrepreneurial and innovation models—both from the West and from India, and if necessary, from elsewhere. Restriction of business models to geographic regions or definitional paradigms or innovation ideologies is anathema to progress. Like the Upanishads say, “Let good thoughts come to us from all sides.” That is true freedom—intellectually, entrepreneurially.