White Paer on Incubation Creating Incubation Ecosystem in India

1. Accelerating Product Venture Development in India
K. Jagannath Rao Email: jagan339@yahoo.com
Current Scenario
Successful Industries are the backbone of the country. In contrast to developed countries like the USA,
there are very few instances in India, where Product Ventures have transformed into large profitable
companies. A few exceptions are companies like Tata, Reliance & Godrej.
While the service industry & BPO has been a good starting point for globalization, high value global
products have the potential to bring in much more foreign exchange. Most of the Industries in India
(especially those in the software and services sector) have negligible R&D investments. Tax & Export
laws are friendlier to FDI (foreign direct investment). It is therefore not a surprise that “Service”
overrides “Innovation” with few instances of companies like Hewlett Packard, Intel, Nokia, Levi’s or
LG (which present a formidable brand presence as well) making it in India. This is despite the country
possessing a wealth of talent (which in fact the very same companies utilize to create their own products
and profit pools in their home country).
Taking the example of the a high growth market like the mobile phone, the country employs close to
10,000 professionals in the service industry in companies such as Nokia, Motorola, Samsung, Wipro,
Sasken etc. This brings in appx. Rs. 2250 crores ($500M) in FE. But India is also a big consumer with
120 Million phones being added yearly. The sale of these products in India generates revenue close to Rs.
36,000 crores ($8B) FE outflow. This outflow is more than 15 times the FE inflow even with local
manufacturing.
A change of focus to global product markets can come from established business houses who might
consider the M&A route or develop products with in-house R&D. There are several technology
development initiatives such as TDB, TPDU and Research initiatives such as NMITLI and Institutional
funding that are open to such companies.
Objective: When it comes to creating new innovative products, startup Ventures have inherent
advantages over large companies and these have been leveraged very well in the western economies. The
objective of this paper is to identify opportunity areas and suggest improvements that can help Product
Startup Ventures in India and help move from small scale sector to become globally competitive
companies and contribute to economic growth.
Sizing up the Venture Challenge
A venture is successful when Technologists, Entrepreneurs and Investors partner together to create and
sustain a profitable business enterprise. This usually goes through several stages as shown below, but
often out of sequence and with much more complex iterations.
Ideation/ Goto market &
Consumer Study/ Commercial Scaling Up
Prototype Product Trial
ization
Overlap
Debt,
Seed Debt, Round
Incubation Fund Roun
C,D
d A,B
IPO
Technologist
Ventur
e
Entrepreneur Investor

2. Startups ventures, as a result, face several technology, product, market and execution challenges:-
 Fuzzy Front-end: This is the early stage where the product/solution is not even defined.
Technology feasibility, Market forces, Uncertainty of actual opportunity, Product definition
and financial issues are debated going through several iterations until the product idea is
conceived.
 Cost & Value proposition: These are two central themes for any new venture. Innovation
around Cost, Biz Models and Value that drives Customer Acquisition are key parameters for
success.
 Seed team: Forming a strong team which executes & realizes the vision of the Venture is key
for success
 Scaling the Market: Timing and adapting to market needs including “crossing the chasm”
with ability to scale is an important part of the execution strategy and plan
 Funding: Access to various forms of funds at the different stages of the Venture is required on
a continuous basis
The above challenges could have complex interdependencies. In order to increase the success rate and
accelerate the growth of startup ventures it is essential to provide:-
 A selection process that identifies potentially successful ventures and identifies clear cost
points and time-lines for the venture
 An open friendly ecosystem consisting typically of Technologists, Investors and Supply chain
that Entrepreneurs can access with ease
 Incubators & Advisory boards that have low upfront costs
 Clear Performance measures and health monitors to navigate the Venture
Selection Process & Guidelines
A ratio of 100:1 (ideas to those that make it as a successful Venture) is quite common for new ventures.
It is therefore important encourage and reward ideation. In order to improve the quality of proposals
that go through a filtering process, a Startup FAQ & Biz Plan template (unique to the ecosystem) is
typically used. The selection process is continuous throughout the life cycle of the venture in the
form of gates as shown below. It is essential to ensure confidentiality of disclosures and business
competitions are not always the best way to accomplish this.
There are 2 main stages involved for the Venture: Analysis and Execution. Contrary to popular
thinking, a startup venture needs a detailed plan and execution process in order to be successful.
1. Analysis Stage: Inputs could come from in the form of ideas or as results of a prototype. Note
that this stage can very often take the idea back to the fuzzy front-end. Inputs could be an idea
or concept or Prototype/Biz Plan & Execution plan that is ready
2. Execution Stage: Clear plans are required for
 Biz Plan & Biz Model with end-end cash flow
 Detailed Cost & Time Estimate with customer acquisition strategy
 Detailed execution plan including dependencies and risk mitigation
 Gated Stages: Clear identification of business Gating points to determine Go-
Change-NoGo is required based on business projections & product metrics &
funding

3. Analysis Phase
Read the FAQ Submit On Selection Signup
and Proposal for With Incubator
Selection Guidelines Evaluation
Incubate
to BGate1 Product Trial BGate2 Launch Product BGate3
Commercialize
Start Progress Grow
Execution Phase
Venture Venture Venture
The recommended cycle time for Analysis Phase is 3 months and Incubation phase is 6 months. The
funding system should be able to allow exits at any of the gating points minimizing or excusing
penalties.
Open Ecosystem
An open ecosystem is one that is transparent and has several degrees of freedom. It encourages
entrepreneurs to access resources in a friendly manner. Such an ecosystem needs a board of
management to provide efficient connections and moderate issues. Some guiding factors are:
 Any individual or organization (either internal or external to the ecosystem) should be able
submit ideas/proposals to start a venture maintaining confidentiality.
 Enough promotion of the ecosystem itself is required to attract stake holders
 A cross functional expert committee needs to be appointed by the Ecosystem board. This
typically consists of investors, technologists, industry experts who evaluate Proposals
 Proposers of selected Ventures will need to become part of the ecosystem and take a stake.
It is important that each of the stake holders identify interrelationships within the ecosystem and help
the venture be successful with co-operative role play. For example, a Technology Provider (university
or industry) should provide expertise/facilities on an easy to use flexible basis. An investor (including
funding organizations of the government and industry) should play the role of funding various stages of
the venture. An industry partner could additionally consume the product as part of the B2B supply
chain and so on.
Entrepreneur Goals of Ecosystem Investor
(Internal/external) Advertised to markets/investment community
Open to Entrepreneurs anywhere (Internal/external)
Leverage E-Platforms for efficient Networking
Supply
Chain
Technica Busines
l s
Institutes
Incubato Industry
r Partners
Marketing
Organi-
Ecosystem Board of management zations Industry & Commerce
Quick turnaround to resources Regulatory ecosystem
Confidence Building to Progress Tax ecosystem
To next stage
The Governing Board could be domain specific and needs to be completely aware of resources in the
ecosystem (similar to the honeybee network) and becomes available to entrepreneurs helping the

4. venture along by providing confidence, guidance and acting as a moderator where required. The
governing board could be a PPP (Private Public Partnership) that has the ability to attract experts and
stake holders. It should have the freedom to execute be linked with organizations that can influence
tax and industry laws that provide impetus to the right type of industry ventures that will carve the
future of the nation.
Several organizations (such as Tie, Momo, Headstart, Gian, Honeybee network) perform this function
in a smaller scale and typically on voluntary basis. Such organizations need active support from the
government (similar to TDB from a funding perspective) and with other funding agencies and the B2B
supply chain (broadly referred to as Industry & Commerce in the fig).
Some examples of how this happens in the US are Stanford Technologies Venture Program,
Innocentive to sample a few. The Indian scenario may need more than such initiatives. Since
commercial success ratio is typically 1:10, for 10 companies to emerge every year, funds for 100
companies are required per year. With a gestation period of 4 years, a well managed ecosystem system
will become self sustaining in about 8-10 years.
Success factors: A rich ecosystem that is friendly and promotes the honey bee kind of network
balancing innovation with revenue potential, profit and global market growth. More impetus in the
form of equity based funds focused on Startups by creating high power governing boards that can
attract global investors (as a test of success) and influence tax laws are required.
Technologists
Since the venture may involve one or more technology elements, entrepreneurs need access to
technology experts who are willing to consult on flexible terms. This is especially relevant for
technology intensive ventures and requires co-operation from the industry, technology institutes or
individuals experts.
Success factors: Easy access to experts who can add immediate value and available on flexible terms
of compensation and equity including retainer models supported by the ecosystem in the long term.
Supply Chain
Creating a product/solution involves a series of steps that takes raw materials as input and assembles
these systematically as part of a product supply chain. The supply chain should be flexible enough to
allow ventures to create a prototype. It should be cost effective and efficient. It is important that the
Service & BPO industry that provides efficient manpower to companies globally be tapped as part of
this ecosystem.
The supply chain starts with raw material and can usually have many steps including components and
subsystems. The supply chain ends with the customer. This could be the end user or an intermediate
company that consumes the product created by the venture. It is important for larger companies &
enterprises (that have access to global markets) to partner and take advantage of the innovation,
flexibility and speed of such ventures forming a B2B chain.
Success factors: A Cost and Time efficient supply chain that can be leveraged is very important to be
globally competitive. The presence of a friendly customer or intermediate company that consumes the
product as a B2B model is probably the most important success factors for the Venture Ecosystem.
Investors
Investment community is the backbone of any venture. This consists of the banking system that
provides debt, venture community, larger companies that consume the product with an investment
stake or government institutions that provide funds to promote a particular technology or domain.

5. There are several government initiatives such as TDB, TDPU which provide entrepreneurship support
at incubation level. These need to become part of a larger ecosystem mentioned above in order to move
from small-medium sector to globally competitive product ventures,
Entrepreneurs require different type of funding (seed, angel, debt etc.) at various stages. Just as in the
case of a supply chain this starts with seed funding at the early stage and moves to debt at later stages
and ends with an IPO or Private Equity or Acquisition by a larger company in the product value chain.
Success factors: A focused investment system that provides the investment for a specific phase and
exits allowing other parts of the investment system to take over. This is probably one of the most
important success factors for the Venture Ecosystem.
Incubators
The purpose of an incubator is to create a concept product quickly as part of a startup friendly
ecosystem. Prototype should provide enough insight to refine the venture and attract both potential
investors and B2B customers.
It should provide all the vital life sustaining parameters that new ventures need at literally no upfront
cost. For a technology venture this typically quick access to technology, manufacturing, expertise and
other resources that are required to create a prototype.
Success factors: The ability to fan-out quickly and provide resources virtually at no upfront cost or on
equity basis and creating a prototype with a clear exit plan. Maintaining complete confidentiality is
very important.
Tax & Legal Issues
The tax system in India is export friendly and passive to the local industry with very little impetus for
local product development.
While the FDI (foreign direct investment) to the service industry (through EOU’s) provides foreign
exchange inflow, what is often overlooked is that India is also a big consumer of products as well. The
foreign exchange outflow at the product level can be comparable or in some cases even exceed the
inflow. This higher outflow can be prevented if products are developed and manufactured within the
country. This requires a long term strategy and plan from a taxation point of view.
Success factors: The tax laws at the least needs to provide a level playing field for local products &
innovation. These can be in the form of tax holidays for new ventures that are R&D intensive or by
providing import concessions at the raw material level for production of such products, and also
reducing taxation at various points of the supply chain including akin to STPI. This could also be in
the form of encouraging multinational companies to become IPO in the country and become part of the
local economy.
Performance Measures
Performance measures for the Venture should be defined right in the beginning so that the degrees of
freedom, latitude and goals are clear to all the stake holders.
Several companies (e.g. Motorola) follow a Product Gate System to monitor performance and provide
mechanisms to either (1) open the gate and continue (2) change the plan and continue or (3) exit, based
on clear performance measures. These could be adapted to the venture system as follows:
A. Ecosystem:
 Completeness of all stakeholders (investment, institutions, B2B etc.) with a continuous
improvement model
 Promotion & Awareness to entrepreneurship community

6. B. Technologists
 Availability of experts in Science, Technology and Industry experts
 Number of domains covered (e.g. bio-technology, telecomm etc.)
C. Supply Chain
 Completeness, Variety and Cost and Cycle time efficiency
 Co-operative system with willingness to take initiative and response to incentives
D. Investors
 No. of seed, angle, Venture, Banking and other types of participating investment
communities
 Investment Cycle time, Gestation period etc.
E. Incubators:
 Cycle time to (1) Start and (2) Exit
 Number on ongoing incubations
 Ratio of Incubation to Commercial Ventures Started
F. The Venture Itself
 Financial : IRR, NPV, Cash Flow +ve cycle
 Market : Cost Vs Value, Funnel Size Vs Order book, Pull Vs Push
 Product: Cycle time, Quality, Support, Customer feedback
Summary
Product development has a long gestation period but can provide much higher return value to the
country’s economy. Economics of a Venture Ecosystem should have a portfolio of high value products
& solutions that can sustain overall profitability. In a global economy, it is important to create globally
competitive products that can be marketed & sold globally. Compared with developing the same
product in the service industry low down in the value chain, a product venture can bring in much
more foreign exchange creating a stronger sustained economic growth for the country retaining
profit pools.
In order to increase the growth of such startup product ventures it is necessary to create an Open and
Rich Startup Ecosystem that is user friendly and well promoted. Such an ecosystem needs to be
managed by a Board that is driven by goals such as Globalization & Profitability. This will attract
Investors all around. The governing board should also have high visibility and be in a position to
influence industry and tax laws.
Conclusions
New Ventures have the potential to create globally competitive products that increase Foreign
Exchange flowing into the country’s economy. There are several initiatives required on the part of the
government, industry, universities, and the banking/finance organizations to promote such high value
Globally Competitive Product Development Ventures in India. Some of these steps are listed below.
 Create a rich ecosystem managed by a powerful governing board that drives Product
Development Initiatives that win in the global markets.
 Leverage web based networking (such as Headstart), off/online Social networking (such as
Momo, Pluggd.in) and Honeybee networking to catalyze connections in such an ecosystem.
 Modify Local tax laws to become friendly to new Ventures and provide a level playing field
with export oriented units and save higher foreign exchange outflow that happens at product
level.
 Encourage B2B partnerships of startups with larger companies to leverage products and win
in global markets
 Encourage Service companies (that typically do not invest in R&D) to partner with Venture
startups providing their services locally and also encourage to invest in such an ecosystems to
reap long term benefits.
 Extend tax concessions to EOUs only if they invest in R&D or in local ventures or have a local
IPO.

7.  Create an efficient supply chain that provides a flexible and easy to use interface starting with
raw materials and ending with a B2B model to larger companies that consume the product.
 Formulate a variety of investment options ranging from Seed, Angel to Venture and Industrial
banking, and Technology development funds so that Ventures that show promise of success
have access to funds on a continuous basis until global commercialization happens. This
requires more funds such as TDB/TDPU/TEPP to be created so that upto 100 startups can be
incubated per year (giving a chance for 10 be commercially successful). Incubation should be
done with Venture & Industrial financing organizations in the loop allowing any
organization to take the 1st step to fund the Venture post incubation thereby providing a
continuum.
 With the Incubator as the starting point for Ventures, these should be separately managed by
the governing board and not attached to any of the stake holders.
 Define clear set of performance measures for the ecosystem and for the Venture that while
providing all required degrees of freedom, monitors the health and performance of the system
with a goal for continuous improvement.
Background of the Author: K. Jagannath Rao was Director of Operations at Motorola India at Bangalore, India. Having started his
career at Bharat Electronics & CRL where he spent 8 years in R&D he subsequently joined Mototola and has been responsible for
creating several products & solutions at Motorola for over 15 years. He is currently advising several organizations in the Venture
startup space as a free lance consultant.