Given the path-dependent nature of hi-tech industry evolution, it is essential to understand the context of current industry evolution. Indian SPI has five stages of evolution. The Indian SPI is now entering Stage 3.


Software Product Industry Evolution


During the 11 years since 1999, the Indian SPI was an underground movement. Not many people, even in the IT Industry, were interested in this area. Yet, much was happening. The nascent industry was building confidence.

 During this stage, three success stories came to the fore that provided confidence to a broader audience that SPI can take root in India. In the Large Business Application Software (LBAS) segment, i-Flex showed the way. Its acquisition for over $1 billion dollars by Oracle was a big boost to Indian SPI. In the Small Business Application Software (SBAC), Tally sold to more than a million SMBs in India. This was a big milestone even by global standards. Tally joined a select club of software product companies in the world that have more than a million business customers. Finally, out of Kolkata no less, FusionCharts sold its charting software to over ten thousand businesses outside India without having any sales office or sales presence in the USA. This success galvanized the belief in India’s ability to be a player in the booming global SaaS market.

 Towards 2007, we saw industry leaders in Indian SPI come together, first to celebrate success, then to create media awareness of the Industry and finally, to create public goods necessary to take the industry forward.


The three success stories mentioned earlier – i-Flex, Tally and FusionCharts – acted as an impetus to the creation of SPI startups. Today, we have good SPI startup density in Bangalore, Pune and Chennai with NCR, Mumbai and Hyderabad also showing good momentum.

 SPI Startup density in India is now high. On Angel List, India now has 3.2 times more startups (2123 versus 651) than Israel, which is a shining example of the hi-tech industry.

 Given these excellent numbers, we don’t need policies to boost SPI startup rates. Instead, we need policies and institutions to reduce SPI startup failure rates and improve outcomes.


This is the stage where the SPI with a critical mass of companies needs to consolidate its position. This stage is typically characterized by a string of positive outcomes – substantial VC investments, M&As and IPOs – that give the industry a much-needed validation and a boost of confidence.

Conventional wisdom, not just in India but across the world, holds that 2123 Indian SPI startups listed on Angel List will have much poorer outcomes than the 651 Israeli SPI startups. This belief is supported by data. An iSPIRT and SignalHill analysis reveal that India has the worst multiple in terms of M&A exits. In Israel, the M&A exit value was ~7X of the VC/PE investment during the same period. In the USA the multiple was ~5X. In India, it was only 1.1X (and this too was inflated because it counted IT Services M&A exits as well).

At this stage of evolution of Indian SPI, we have startups but have poor outcomes for those startups. Therefore, the focus has to be on improving SPI startup outcomes rather than boosting SPI startup density. If this is not done, the exceptionally high startup failure rates will trigger disenchantment amongst potential entrepreneurs. This can bring the current momentum in startup density growth to a halt.

To improve SPI startup outcomes several areas have to be addressed. These range from addressing early-stage financing gap, to providing better playbooks to SPI startups, to having privileged access to strategic technologies, etc. These are covered in more detail in a later section.


The speed at which Nokia’s handset business deteriorated has shocked everybody. It went from being a market leader in smartphones to being unviable as a company in less than 20 months. Nowadays, Blackberry is undergoing the same tragic downtown in fortunes. In fact, this movie has been played several times before in the hi-tech industry. Back in 2001, Glenayre Technologies, a market leader in the two-way pager business, went from a technology darling to a basket case in under two years. Further back in time, in 1985, the famous Osborne computer had suffered the same fate. Its business collapsed in one year.

Why do some good firms collapse so suddenly? Nokia’s CEO Stephen Elop provides the answer in his now infamous 9th Feb 2011 memo. He said: “The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device but developers, applications, e-commerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyse or join an ecosystem.”

In many cases, the very success of a product firm results in a competitive response where the battle of products becomes the war of ecosystems. If a firm has not planned for this new kind of competition, it quickly loses its market position and fades away.

We expect that there will be about five software products companies with a billion dollar market cap (e.g. InMobiZohoQuickHealPubmatic, etc.) in the coming years. Of these, at least one of them will have to engage in this war of ecosystems in the coming years. We know that losing this ecosystem war has delirious consequences. In contrast, winning the war of ecosystems has big benefits. By turning a product franchise into an ecosystem, a company becomes less vulnerable and has better financials. There are other benefits as well. Microsoft claims an employment of 15m in its ecosystem.  SAP, Google and OpenSource ecosystems also report similar benefits.

There are significant challenges in creating ecosystems. These relate to three areas. First, there are no clear guidelines for performing correct and insightful modelling of software ecosystems. Second, conducting an ongoing health analysis of an ecosystem is still a daunting data mining task: what are the indicators to look at? How can data be found on the revenues of our partners? How many new entrants join the ecosystem every year? And how much do these really contribute? Third, it relates to the issue of Governance. This addresses the issue of how to govern software ecosystems to gain measurable success in terms of staying power, profit, usage and participation.

India has not yet built a software ecosystem though two local ecosystem building projects are underway. Both UIDAI and Akash Tablets are trying to build a software ecosystem around their offerings. This is a good for India to strengthen its ecosystem building muscles.

In time, we are confident that at least one Indian SPI firm will be successful in building an ecosystem around its products. Only when this happens, will it signify that the “next Google” or the “next Microsoft” has been born from India. Getting to this stage is something that (even) the Israeli hi-tech industry, despite its success, has not been able to do. What is working in India’s favor is the presence of a big domestic market in India.


This stage is characterized by outward investments to deal with transformative technologies and strengthening of the moat around the India SPI ecosystems. It is only at this stage that a truly sustainable India SPI would be created.