Sharad Sharma, Chair of the Nasscom Product Forum, wears many hats. The former CEO of Yahoo! India R&D is a part time investor and also the founder and CEO of BrandSigma, a computational marketing startup. Here, he talks about India's app ecosystem and the valuations of companies in the space.
Q. Why do we see so many app companies mushrooming in India?
A. This is a global phenomenon. It is very empowering for a two-person, three-person team to establish an app business. They have to worry about the app but very little besides because they can put it up on an app store or a marketplace and if the app is good, a lot of it acquires momentum.
The rest of the friction of business - which is to hire lots of people to take care of accounting, field sales, marketing - all that is required in a B2B kind of a business are not there in the app business. Indian product companies are doing well in areas where they can bypass the need for a field sales force. Second, most of the people consuming the apps are young people. The young entrepreneurs have a visceral feel of what their consumers will need.
Q. The fact that India graduates so many engineers - is that also a reason why we see so many app entrepreneurs?
A. That is definitely a factor. There are lots of people who have the skills to pull together an app, much more than a small country like Sweden would have. But there are other things pulling entrepreneurs to the country. A company called PicoVico has moved from Nepal to India. They moved because the founders needed other fellow entrepreneurs to learn from and continue the journey. Informal networks become very important.
Q. Is there a mindset shift from services to products?
A. Clearly. It is now established in the minds of most engineers coming out of colleges that IT services is the older story; products is the new story. I can sense that in every interaction I have with the younger student community.
Q.The valuations of app companies globally appear to be shooting up. Many of them haven't started making money. What explains this?
A. It is a question of supply and demand. If entrepreneurs grow and the supply side money does not, the investor becomes powerful. In the US, the supply is going up very rapidly because people have had exits which have been useful.
Second, the government there is canvassing for more money to come in for early-stage investing. Supply has kept up almost to the point that now the balance has shifted to the entrepreneur's side.
In the case of Alpha or Beta product companies, valuation becomes a function of the quality of the team and the potential of the idea to achieve scale. They have no top line and bottom line.
Q. What stake should an entrepreneur ideally part with when attracting venture capital?
A. During the first round of funding, whether it is angel or otherwise, you end up giving 20-30 per cent of the company. Giving more than that is adversarial for the entrepreneur.
Q. In terms of the number of users, what milestones should an app startup target?
A. If you get to 10 million actives, you can have a serious shot at being a major business. To be truly a major business, you need to get to 30 million monthly active users (MAUs). Then you are in the big league.