Source: www.readwriteweb.com

10 years ago, in 1997, I wrote an article called Playing Against 5 Aces for a technology magazine in India called Dataquest. The article looked at how the deck was stacked in favor of American technology companies, because they were playing with 5 Aces in the pack:

1. A large domestic market
2. Access to intellectual capital
3. Reliable, low cost telecommunications
4. A culture that rewards innovation and risk taking
5. A well developed venture capital industry

Against these 5 Aces, India had only one good card, which was low cost labor. It is interesting to revisit these 5 Aces ten years later in 2007 (well, 2008 now!) and see what it means for the state of innovation in India. In short, India is looking a lot better:

• Large Domestic Market. Getting better. India still lags the US in market size and customer willingness to innovate, but GDP growth is now in India/China. In the key area of wireless, Asia is a better market for innovation than the US.
• Access to Intellectual Capital. Yes the world is flat; access to intellectual capital is not an issue any more. Innovative ideas spread like wildfire through Blogs, Social Networks, Skype, etc.
• Reliable low cost telecommunications. Problem solved. That Telecom bubble sure enabled a great industry in India!
• Culture that rewards innovation and risk taking. Still a problem. There is a strange dichotomy here. Some large old world companies in India (such as Tata and Reliance) are incredibly dynamic and aggressive when many of their US counterparts seem to be only interested in using financial engineering to distribute profits tax efficiently. But in high tech start-ups? That’s another story, more on that later.
• Well developed venture capital industry. Problem solved, VC is pouring into India.

However, despite all these advantages and despite thousands of developers in India creating value for Western companies, where is India’s killer app? Where is the Microsoft or Google from India? Or being slightly less ambitious where is the Salesforce.com or YouTube from India?

Why does this matter for India? Look at the market cap of Google ($218 billion) vs Infosys ($24 billion). This is not bubble valuation. Both have similar and reasonably valued PEG (Price Earnings Growth ratio, the only rational way I know to compare two valuations) with INFY at 0.81 and GOOG at 1.30. Google has over 9x the value and is about 15 years younger.

When you read the Google story, you won’t see anything created in a Stanford dorm room that could not have been created in an IIT dorm room. What is really wild is that the barriers have come down even further since Google came to market.

The fundamental issue in India is the risk/reward equation. It is simply too easy for a young developer in India to get paid a lot by an outsourcing firm; then enjoy being headhunted every year for more money. Those of us old enough to see a cycle or two, can see the parallels between Silicon Valley 1999 and Bangalore 2007, when just being able to spell the words of a popular programming language on a Resume meant fame and fortune. It is possible that when this comes back to some reality the motivation to innovate will come to young Indian developers (yes young; breakthrough technical innovation tends to come from people under 30).

This has been the story for some time but it is changing fast right now and we maybe reaching a tipping point related to innovation in India. Three factors are rapidly narrowing the labor cost arbitrage – weaker dollar, rampant salary inflation in India and new technology that significantly reduces the amount of code that needs to be written.

At the same time, VCs are looking entrepreneurs in the eye and telling them that capital is not a constraint but that you had better find a way to get sustainable advantage and scalability that is not tied to linear growth in headcount.

Innovation is happening today in India. You won’t see a lot of it as yet as the interesting ventures are still fairly small and below the radar. But it is happening.

Today’s successful (meaning currently lucrative) innovation in India tends to be at the process and business level. These companies use technology extensively, they are technology driven and enabled, but the technology innovation is more incremental than disruptive and still uses lower cost labor as a core advantage.

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