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India is poised for success because of the 3 D’s: Highlights of #InTech50 2014: Day 1

InTech50 is a joint initiative by iSPIRT and Terrene Global Leadership Network.  InTech50 is a showcase of some of the most promising software products created by entrepreneurs from India.  This is the 1st InTech50 and is going to be an yearly event.

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The inaugural edition of InTech50 saw great participation: 50 Top Indian product companies showcased their products to 25 Global CIOs, 25 CIOs from top Indian companies, 25 top investors, angels and accelerators from US and India and several visionaries and media across India and US.

Piyush Singh and Sharad Sharma co-chaired InTech50 2014 and put together an excellent program for 2-days.  Day 1 was all about content-rich talks and panel discussions from visionaries and experts to inspire and guide the product companies. Day 2 was dedicated to the 50 InTech50 companies to pitch their products and was also interspersed with highly relevant talks and panel discussions.  This post covers Day 1, Day 2 is covered here.

Opening Session

Sharad Sharma shared some very interesting statistics in his welcome address:

  • 40% of Indian startups are in Bangalore
  • 40% of Asian statrups are in India
  • By next year, India will be the 2nd largest hub by number of startups.
  • 82% of Indian startups focus on a global market.

Read more statistics in the InTech50’s booklet.

Sharad mentioned that there are three broad areas where he sees growth in the Indian Software Product companies.

1. Software Infrastructure: This includes things such as security, BYOD, cloud, app management.

2. Decision Infrastructure: Analytics, Big Data

3. Innovative Applications.

One of the initiatives of iSPIRT is to educate small Indian businesses about SAAS potential and products. Today, this knowledge is lacking and these businesses are not informed buyers. So far, 60,000 small businesses have been trained by iSPIRT on SAAS.

Another iSPIRT initiative is working with the corporate development teams in large enterprises to foster M&A of startups.

Welcome Address

Dr. Srivatsa Krishna (IAS, Secretary for IT, BT and S&T, Government of Karnataka) enthralled the audience with his presentation on “Why India Rocks”.

Dr. Srivatsa shared interesting facts that to establish his premise of Why India Rocks.

  • Indian IT Industry contributes to 8% of GDP and 25% of exports.
  • 80 of 117 CMM Level 5 companies are Indian.
  • IT revenues grew from USD 100 million revenue in 1992 to USD 100 billion in 2013.
  • 100 Indian companies have more than $1 billion market cap.
  • 150 of Fortune 500 companies have R&D centers in India.
  • 400+ of Fortune 500 companies outsource work to India.
  • Literacy in India has crossed 80%
  • By 2020, there will be 20 lakh IT professionals in Bangalore.
  • Along with IT, Gaming and Movies is also growing big time in India. Labs in Bangalore created substantial portions of movies such as Skyfall and Life of Pi.
  • A huge Media City is being planned in Bangalore where most of the post-production work of movies is envisioned to happen. The Media City will do to the digital movie and entertainment industry what Electronic City did to the Indian IT Services Industry.
  • What started as labor arbitrage in the initial days of IT industry has now grown up in the value chain. Mu-Sigma is an example of a world-class product company from Bangalore that has now more than 4000 employees and is the 2nd largest big data analytics company in the world.

Bangalore is already the IT capital of the world. The next step is to make it the Innovation and Startup capital of the world.

Dr. Srivatsa mentioned that the government is being a catalyst and enabler. Along with the big cities, Tier 2 and Tier 3 cities such as Mysore are also being developed.

One of the initiatives is to offer land for free if the company creates jobs. For every 1000 jobs created, the Govt. of Karnataka will give 1 acre of land free on a long-term lease.  There are also exemptions from outdated labor laws and special tax breaks are available to encourage the Software industry.

On the flip side, he also mentioned that there are challenges such as being ranked 132nd in the world to do business, long time taken in courts to enforce contracts etc. The good news is that that government is working harder and faster towards making it better.

Opening Keynote

Kiran Karnik, Member, National Innovation Council, Government of India, visionary ex-President of NASSCOM, and the prestigious Padmashree award winner, delivered the keynote.IMG_3011

Mr. Karnik said that Innovation and Software Products are the two main areas that will drive growth for India.

According to him, India is poised for success because of the 3 D’s:

1. Democracy: Though there are some bottlenecks with respect to government speed and enforcements, it is trying its best to promote the industry and is improving day by day.

2. Diversity: Most of the innovations happen when there is good diversity – e.g. bay area and east coast of USA.  India also has a varied diversity and the cross-pollination fosters creativity.

3. Demographics: The largest chunk of the population of India is young and this human capital is a great asset.

India has the unique combination of cheaper, better and quicker.  Some other countries have one or two of these attributes, but India has the unique advantage of possessing all three attributes. The Indian work ethic is now famous in the world.  While this is giving an edge to India currently, our future depends on how we innovate and differentiate.

The Indian IT Services industry has done tremendous service to the country and has created a very good foundation of talent and branding. The product companies should now leverage this and take us to the next orbit. The future of India is in Software Products.

DNA of product companies is different from services companies. Not just in India, but world over, due to the different goals and business models. It is difficult for service companies to become product companies.  Startups are ones that will make disruptive products. Startups should target global markets, but they should also leverage the local markets for validation, testing and getting the product right.

Highlights And Takeaways from other sessions

Product successes are happening from India and we will see many more in the coming years.

During the early stages, startups must incentivize early adopters by giving them special deals such as co-development, deeply discounted prices, royalties etc.  From the early days on, it is best to build the product along with a live customer.

Companies should keep an eye for serendipitous events and leverage them.

Shoaib Ahmed of Tally said that they resisted the urge to take to services. They remained focused on being a product company. According to Shoaib, the key reasons for Tally’s success are the mantras of “Customer First”, “Partner Growth” and “Building a Reputation”.  They also leveraged inflection points in their industry – for example, when VAT was introduced in India.

 

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Product Design and User Experience

Karthik Sundaram, from Purple Patch, shared his insights on product design and user experience, emphasizing that products should pay close attention to the 4Cs of great design:

1. Clarity.

2. Context (of the user).

3. Confidence (make the useful feel confident to use the tool easily)

4. Cheer (make it an enjoyable experience.

The current trends are predictive design, self-service design and ubiquitous design (across all devices).

The mindset should change from ‘What can the product do?” to “What can it do for the customer?”.  If focus is lost from the customers’ needs, the product will become irrelevant. For example, Netflix and Amazon were disruptive to Blockbuster and Barnes and Noble because they made it that much easier for the customer.

Rishi Krishnan, from IIM Indore, gave his insights on how to make product innovation work.  According to Rishi, if the following three attributes are satisfied, the chances of success increase by a large amount.

1. Painpoint. It has to solve a real painpoint for the customer.

2. Wave. The currently talked about area, which is doing the buzz.

3. Waste. Areas where there is lot of wastage are prime candidates for companies to optimize.

One example he gave was of Vigyan labs in Mysore. Vignan labs are working on controlling power consumption in data centers.  They are satisfying all the above three attributes and hence he sees a very good future according to him.

Rishikesha gave another example where he contrasted Ace Commercial Vehicle (4 wheeler for last mile transport of goods) and Nano car, both products from Tata Motors. Ace has been a tremendous success, while Nano is not. And the primary reason is that customers drove the requirements for Ace, and customers were involved at each stage from conception to delivery. Market input is key. Product managers should know how people use their product and in what context. Concepts such as lean startup are very relevant for startups.  You need to do rapid experiments to validate your assumptions. Experiment with business models too, not just technology. For example, Google does around 20,000 experiments every year – only 500 of them go live.

Mukund Mohan, from Microsoft Ventures, educated the audience about the cultural differences between Indians and Westerners using vey effective role plays. For example, how Indians expect the product to speak for itself, and focus more on the product features rather than customer needs. One of the key takeaways is to understand the customer in their context, understand their pain points and establish a personal connection.  First ensure that the counterpart is interested in doing business with you – that is the first step before looking into the merits of your offering.

Valuation

Rob discussed several technical terms and valuation methodologies, making the audience realize that it is a non-trivial and complex subject. The key takeaway is that the VC financing terms are more important than pricing. Make sure you consult a professional and understand the financing terms before you sign up with investors.

Try to create a competitive process for the VCs. Having multiple VCs interested leads to a bidding process and gets the best deal for the entrepreneur.

Investment is a relationship game.  Find a VC with whom you can gel well. This is going to be a long-term relationship and it is very important that you like each other. This is the most important consideration and the not the amount of money being invested or the amount of dilution.  If possible, find an investor who has got reserves for follow-on investments. This will be useful if you need more money as the investors also want to protect their prior investments in you and will be more open to invest if they can.

Another key takeaway is to not raise money when you are desperate. Better to raise money before you get to that state. And maintain your momentum during the fund raising process to show continuous results. Find VCs whose strategy and success fits your business. Understand what is important to your prospective investors.

Manjunath Gowda sold S7 Software for US $8.5 million in 2010. S7 Software was in the space of Software Migration and built tools and provided Software Migration services. While pitching to BlueCoat – a US based company, BlueCoat expressed interest in acquiring S7 Software to become their India R&D center. The valuation was very tricky and Manjunath was recommended different models by different gurus – such as discounted cash flow analysis, multiple of annual revenue etc. Manjunath quickly realized that these models were not relevant in his situtation. Manjunath found out the real reason why BlueCoat was interested and what BlueCoat would have gained from the acquisition – in this case the engineering talent of S7 Software. Once that was clear, the valuation focused on benefit to BlueCoat and not on the standard textbook models.  To paraphrase Manju – ‘Similar to how beauty is in the eyes of beholder, valuation is in the eyes of the buyer”.

Kumar Rangarajan from Little Eye Labs, the current rock star of the Indian Software Product ecosystem (first Indian acquisition by Facebook), gave an inspiring speech about their entrepreneurial journey and how they were focused on their vision and were flexible to adapt and planned for acquisition as their exit strategy.

Please continue reading the highlights of day 2 here.

 

 

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How Startups Compete with Friction in Product Design

Startups need Traction. A startup which doesn’t get discovered doesn’t go anywhere. This is all the more critical for platform businesses which rely on their users to create value and network effects. In the specific case of platform businesses, Traction dictates the value that is created. A social network without enough users or a marketplace without enough activity isn’t going anywhere. Traction essentially refers to the additional value that is created on these businesses by the users using it, value created through interactions between users.

Often, one of the core principles of building for Traction is removing Friction from the product experience. Friction comes in the way of users using the product and, hence, in the way of value creation. Friction may result from anything that acts as a barrier to a user for using the product. Friction may be created by design (e.g. users are curated before they get access) or by accident (e.g. poor product navigability).

Traction and Friction don’t go well together. We’re living in an age where frictionless is increasingly synonymous with desirable design.

But Friction continues to have an important place in the world of platform businesses. Getting Friction right is critical to the success of an internet startup. Through this essay, I’d like to explore some of the top design considerations while building for friction.

As with all design considerations, the ultimate goal of a platform startup (marketplace, community, social network, UGC platform etc.) is to facilitate interactions.

Hence, as a rule of thumb:

Friction is a good thing if it facilitates the interaction instead of coming in the way of it.

Let’s dig further!

The Traction-Friction Matrix

This is pretty much how the traction-friction trade-off works out:

Traction 1

High Friction-Low Traction: There are two reasons your startup may be in this quadrant: by design or by accident. You’re either curating who gets access or you’re suffering from really bad design.

Low Friction-High Traction: Again, a startup hits this quadrant for one of two reasons: frictionless experiences by design or lack of checks and balances.

High Friction-High Traction: This is a great place to be and ultimately successful startups migrate to this quadrant after starting off in one of the quadrants above.

Low Friction-Low Traction: This is clearly the worst quadrant to get stuck in for too long.

 

Movements in the Matrix

1. Pivoting around Friction:

 

2. Avoiding friction altogether: CraigsList pretty much allows anyone to do anything, except for a few categories that it polices and a few categories where listing are paid.

 

3. Embracing friction with scale: Quora has been increasing friction as it scales. Anyone could ask a question in the early days but asking a question now requires the user to pay forward in points.

4. Relaxation of norms:  App.net started off with high friction with a $50 subscription fee. However, it has gradually reduced friction to allow for traction.

5. Scaling the country club: Several invite-only platforms have successfully scaled with this model.

 

 

Design Considerations For Friction

As mentioned earlier, Friction, like every other design consideration, should lead to smoother and better interactions between users on the platform. With that as a guiding principle, let’s look at a few case studies where Friction works well.

Interestingly, two platforms in the same vertical and category often compete and co-exist by being in two different boxes in this matrix, as the examples below demonstrate.

Friction as a Source of Quality

Some platforms risk losing activity (interactions) when there is a lot of noise on the platform. Women tend to avoid dating websites which attract stalkers and men with poor online etiquette. Clearly, noise leads to lower probability of interactions.

Some dating websites invest in incentivizing women to join the network. An alternate model is to increase friction on the other side and curate the men that get access to the network. Sites like CupidCurated have taken this approach as a way to differentiate themselves from existing dating sites which relied on incentivizing women.

High Friction-Low Traction: CupidCurated

Low Friction-High Traction: Match.com

Friction to Create Trust

Some interactions may require a minimum guarantee and an environment of trust. Hiring a babysitter is different from asking a question online. False positives can cause much greater damage in the former case.

In such scenarios, Friction in the form of curation of babysitters provides a critical source of value. In contrast, the Friction-less Craigslist is hardly the destination for finding babysitters online.

High Friction-Low Traction: SitterCity

Low Friction-High Traction:  Craigslist

Friction as Signal

In both examples above, Friction not only controls who gets access to the platform, it also creates some form of signal about those getting access. Curation of babysitters yields exact parameters which would be used by parents for making a decision. Hence, Friction also helps with signaling.

Interestingly, financial markets work with signaling too. VCs, in private markets, are responsible for due diligence and determining whether a startup is worth investing in.

Crowdfunding tries to disrupt venture capital but most current models (like Kickstarter) merely unlock new sources of funds, they don’t necessarily provide the expertise curation and signaling that a VC fund would. Startups like RockThePost are working on the Country Club model and allowing only heavily curated startups to raise money through their platform. In this way, the platform is placing a bet on the fact that signaling and curation need to be part of the platform, to credibly provide an alternative to venture funds.

High Friction-Low Traction: RockThePost

Low Friction-High Traction: KickStarter

Friction on One or Both Roles

Most platforms support two distinct roles: consumers and producers. In all the examples above, Friction was being applied to only one side. This is the model used in most cases. However, where there is  high overlap between the two roles i.e. the same user produces as well as consumes, Friction can be applied to both roles. Quibb is an example of a network that applies Friction across the board. It works for Quibb because users want to be part of an exclusive community, to benefit from superior quality interactions. But more often than not, applying Friction on both sides comes in the way of creation of network effects, as demonstrated in the next example.

High Friction-Low Traction: Quibb

Low Friction-High Traction: Reddit

Friction as a Barrier

For all the hype and fanfare surrounding App.net’s launch, the platform has never quite lived up to its initial stand of providing an alternative to Twitter. There were two design considerations that were fundamentally flawed in this case:

1) Applying Friction to both producer and consumer roles. The core value of Twitter is the ability to build a following. By restricting who could access App.net, the platform limited its ability to deliver that value to producers.

2) More importantly, the source of Friction did not guarantee any form  of quality, trust or signal. Friction was created by charging an access fee. That didn’t help make interactions on the platform better in any way. If any thing, it just came in the way of these interactions. App.net realized it wasn’t getting anywhere and subsequently brought down the access fee, through a series of revisions, by 90%.

High Friction-Low Traction: App.net

Low Friction-High Traction: Twitter 

In summary, the following is a non-exhaustive list of design questions to consider while introducing Friction onto a platform.

A. Do you add Friction to one side or both sides?

B. What criteria are used to create Friction? Does it improve quality and add value?

C. Does Friction lead to higher likelihood of interactions?

D. Is the interaction high-value or high-risk? In other words, how important is trust, signal or quality as a source of value?

Tweetable Takeaways

Friction in design is helpful if it facilitates the interaction instead of coming in the way of it. Tweet

Two competing platforms can co-exist by varying the levels of friction in their design. Tweet

If you’re restricting access, it better provide additional value. Think SitterCity, not App.net. Tweet

Every element of platform design should be aimed at incentivizing interactions. Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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Why Business Models Fail: Pipes Vs. Platforms

Why do most social networks never take off?

Why are marketplaces such difficult businesses?

Why do startups with the best technology fail so often?

There are two broad business models: pipes and platforms. You could be running your startup the wrong way if you’re building a platform, but using pipe strategies.

More on that soon, but first a few definitions.

PIPES
Pipes have been around us for the last 400 years. They’ve been the dominant model of business. Firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe.

We see pipes everywhere. Every consumer good that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model.  Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children. Prior to the internet, much of the services industry ran on the pipe model as well.

This model was brought over to the internet as well. Blogs run on a pipe model. An ecommerce store like Zappos works as a pipe as well. Single-user SAAS runs on pipe model where the software is created by the business and delivered on a pay-as-you-use model to the consumer.

PLATFORMS
Had the internet not come up, we would never have seen the emergence of platform business models. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other users (consumers) to consume. This is a massive shift from any form of business we have ever known in our industrial hangover.

TV Channels work on a Pipe model but YouTube works on a Platform model. Encyclopaedia Britannica worked on a Pipe model but Wikipedia has flipped it and built value on a Platform model. Our classrooms still work on a Pipe model but Udemy and Skillshare are turning on the Platform model for education.

BUSINESS MODEL FAILURE
So why is the distinction important?

Platforms are a fundamentally different business model. If you go about building a platform the way you would build a pipe, you are probably setting yourself up for failure.

We’ve been building pipes for the last few centuries and we often tend to bring over that execution model to building platforms. The media industry is struggling to come to terms with the fact that the model has shifted. Traditional retail, a pipe, is being disrupted by the rise of marketplaces and in-store technology, which work on the platform model. 

PIPE THINKING VS. PLATFORM THINKING
So how do you avoid this as an entrepreneur?

Here’s a quick summary of the ways that these two models of building businesses are different from each other.

USER ACQUISITION
User acquisition is fairly straightforward for pipes. You get users in and convert them to transact. Much like driving footfalls into a retail store and converting them, online stores also focus on getting users in and converting them.

Many platforms launch and follow pipe-tactics like the above. Getting users in, and trying to convert them to certain actions. However, platforms often have no value when the first few users come in. They suffer from a chicken and egg problem, which I talk extensively about on this blog. Users (as producers) typically produce value for other users (consumers). Producers upload photos on Flickr and product listings on eBay, which consumers consume. Hence, without producers there is no value for consumers and without consumers, there is no value for producers.

Platforms have two key challenges:

1. Solving the chicken and egg problem to get both producers and consumers on board

2. Ensuring that producers produce, and create value

Without solving for these two challenges, driving site traffic or app downloads will not help with user acquisition.

Startups often fail when they are actually building platforms but use Pipe Thinking for user acquisition.

Pipe Thinking: Optimize conversion funnels to grow.

Platform Thinking: Build network effects before you optimize conversions. 

PRODUCT DESIGN AND MANAGEMENT
Creating a pipe is very different from creating a platform.

Creating a pipe requires us to build with the consumer in mind. An online travel agent like Kayak.com is a pipe that allows users to consume air lie tickets. All features are built with a view to enable consumers to find and consume airline tickets.

In contrast, a platform requires us to build with both producers and consumers in mind. Building YouTube, Dribbble or AirBnB requires us to build tools for producers (e.g. video hosting on YouTube) as well as for consumers (e.g. video viewing, voting etc.). Keeping two separate lenses helps us build out the right features.

The use cases for pipes are usually well established. The use cases for platforms, sometimes, emerge through usage. E.g. Twitter developed many use cases over time. It started off as something which allowed you to express yourself within the constraints of 140 characters (hardly useful?), moved to a platform for sharing and consuming news and content and ultimately created an entirely new model for consuming trending topics. Users often take platforms in surprisingly new directions. There’s only so much that customer development helps your with. 

Pipe Thinking: Our users interact with software we create. Our product is valuable of itself.

Platform Thinking: Our users interact with each other, using software we create. Our product has no value unless users use it.

MONETIZATION
Monetization for a pipe, again, is straightforward. You calculate all the costs of running a unit through a pipe all the way to the end consumer and you ensure that Price = Cost + Desired Margin. This is an over-simplification of the intricate art of pricing, but it captures the fact that the customer is typically the one consuming value created by the business.

On a platform business, monetization isn’t quite as straightforward. When producers and consumers transact (e.g. AirBnB, SitterCity, Etsy), one or both sides pays the platform a transaction cut. When producers create content to engage consumers  (YouTube), the platform may monetize consumer attention (through advertising). In some cases, platforms may license API usage.

Platform economics isn’t quite as straightforward either. At least one side is usually subsidized to participate on the platform. Producers may even be incentivized to participate. For pipes, a simple formula helps understand monetization:

Customer Acquisition Cost (CAC) < Life TIme Value (LTV)

This formula works extremely well for ecommerce shops or subscription plays. On platforms, more of a systems view is needed to balance out subsidies and prices, and determine the traction needed on either side for the business model to work. 

Pipe Thinking: We charge consumers for value we create.

Platform Thinking: We’ve got to figure who creates value and who we charge for that. 

BUT… PLATFORM THINKING APPLIES TO ALL INTERNET BUSINESSES
If the internet hadn’t happened, we would still be in a world dominated by pipes. The internet, being a participatory network, is a platform itself and allows any business, building on top of it, to leverage these platform properties.

Every business on the internet has some Platform properties.

I did mention earlier that blogs, ecommerce stores and single-user SAAS work on pipe models. However, by virtue of the fact that they are internet-enabled, even they have elements that make them platform-like.  Blogs allow comments and discussions. The main interaction involves the blogger pushing content to the reader, but secondary interactions (like comments) lend a blog some of the characteristics of platforms. Readers co-create value.

Ecommerce sites have reviews created by users, again an ‘intelligent’ platform model.

THE END OF PIPES

In the future, every company will be a tech company. We already see this change around us as companies move to restructure their business models in a way that uses data to create value.

We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do.

Note: I intend to use some/all of the ideas here as part of an introductory chapter to the book I’m working on and would love to have your feedback and comments.

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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Bharat Goenka(Tally Solutions) talks to us about the company’s ‘stubborn’ decision to stay focussed on products

Bharat Goenka is the architect of what is arguably India’s most successful business solution — Tally.  Co-Founder and Managing Director of Tally Solutions, Mr. Goenka developed the famous accounting solution under the guidance of his father, the late Sri S S Goenka. Today, the product is the de facto accounting solution for many SMEs and Mr. Goenka serves as an inspiration for many aspiring software product entrepreneurs. In an interview with pn.ispirt.in, Mr. Goenka talks to us about the company’s ‘stubborn’ decision to stay focussed on products, the non-DIY nature of the Indian SME and the necessity for product companies to stay focussed on the product mentality.

Tally is one of India’s most successful product stories, and it definitely appears to have ticked all the right product story boxes: responded to a genuine market need, stayed focused and evolved with the needs of users. Given the benefit of 20:20 hindsight, would you have done anything differently?

The reality is that one doesn’t really learn from the past. We continue to do audacious things, we continue to get some success out of that as well as failure. Over our 25 year history, this has happened multiple times. Multiple times, we have taken a decision and it has gone wrong — but if the circumstance arose again would I take the same decision? In all likelihood, yes — I would have no reason to expect success, but I’d still have the optimism and think just because it went wrong in the past doesn’t mean it also has to go wrong this time. So although I would say it’s unlikely that one would have really done anything different, I can give you an example of a decision not working out for us. In 2004-2005, we changed the price of the software from 22,000 to 4,950 thinking that we would be able to sell software as a commodity. The reality was that for that time, it was difficult to sell software as a commodity in India in the B2B space. And so we suffered, massively. That proved our belief that we couldn’t sell software as a commodity, but it didn’t stop us from trying. We lost almost 50 crores in those one and half – two years, so I would say our single biggest mistake was that.

Tally – or rather Peutronics — was founded in 1986 at a time when much of the Indian software industry’s focus was on services. The decision to remain a product company when the tide seemed to be going the other way couldn’t have been easy – why did you make this decision?

Actually when we started off, virtually every company had a product. Whether it was TCS, Wipro or Mastek — everyone had a business product.  The shift to services took place in the mid-90s, particularly towards the edge of the Y2K environment. We were one of the few stubborn companies who believed that while there was a lot of money to be made in services, we would never be able to address a lot of customers. So the mandate with which my father and I started the company in 1986 was that we were going to change the way millions of people do their business. We were clear that by moving to services, we would never be able to achieve the objective.  We were unclear how long it would take us to get to a million — 25 years later, we are still trying to reach even the  1 million mark. But in 1986 we were clear that we want to be able to touch millions of customers. Therefore we remained focussed on our product line.

So what was that inspiring moment for you? Did you wake up one morning and decide that this was what what you wanted to do — to change the way these millions of customer did their business, or was it a gradual evolution?

In the months before we got the product Tally out, one was into the product mindset but for developing systems related products like compilers and operating systems. So I was preparing myself to do those kind of products. At that time, my father was searching for a business product for our our own small-scale industry business. He examined multiple products, but couldn’t make sense of any of them. He very famously said: “When I’m buying a car I want to be a driver and not a mechanic.” Similarly, he was looking for a product that would help him run his business — not his computer! Every product that he was looking at required him to change the way he thought about his business.   So because I was interested in software, he said these guys can’t do anything can you do something? So I was trying to solve his problem. After six months of development, I would say that it was his inspiration and thinking that formed the idea and belief that the product should be something that the country should also use.

The belief is that Indian SME’s need to be “sold to” – the job that’s conventionally handled by IT resellers who are critical to Tally’s business model. What are your thoughts on the changes that Cloud technology might bring to this scenario, with the whole “self-service” angle coming into play?

India is not a DIY country, and this is unlikely to change in the SME sector.

The way the market works in India is like this : SME’s expect people to come and sell something to them, even if it’s bottled water. You expect it to be delivered, and you expect to pay for it in a different way. In India, SME’s behave identical to the way enterprises behave abroad. Abroad, SME’s behave identical to consumers.  That’s why in most MNCs, you see that the SME and SO/HO market being handled by a common head while the enterprise head is separate, because they need to be sold to. In India — actually, in all developing markets — the SME and the enterprise behave similarly. In the west, the cost arbitrage of selling to a business is so high that the small business has no other option but to behave like a consumer. In developing markets, the cost arbitrage is low enough to send people to do the sales. And therefore, the buyer expects someone to come and do the sales. It is not about whether the visit is required because of the software complexity or the commercial complexity — it is an expected visit.

In your opinion, what are the three most common things that mislead or cause the downfall of Indian product companies today? What advice would you give them to overcome these?

I think it would boil down to one — which is to be clear about which business you’re in. Most people believe they are in the business of making money. Okay, even I am in the business of making money but my point is this: you can never be in the business of making money, you have to be in a business — money is an outcome of that. To explain it better, imagine that you are a software developer who wants to start your own product company. Capital costs are not very high — a single computer will cost about 20k, and assuming you develop the skill, it will some months to develop a software, and you’ll get your software out. You might put together an infrastructure, sales people etc and you’ll put up a monthly expenditure of about 25 – 30k. You start seeking customers — you  find me. You sell me your product for say 10k. In all likelihood, I bought your product because I like your software development style and perhaps your product solved two or three problems I had — but I still have twenty more. Now because I like your software development style, I’ll ask you to do more work for me. I might ask you to expand the product features, solve some HR problem that I have which this software doesn’t solve and I’m willing to pay you for it.

Your first ten customers will give you so much work, you won’t have time to go out and find your next 100. Or even if you find your next 100, they will give you so much work that you won’t be able to look for your next 1000.

So ultimately, you will still continue to successfully make money, but you will never be able to create a successful product company. This is the single trap that I see almost all product companies fall into today. They all make money, and that’s why they’re still in the business but they stop eyeing the fact that they were supposed to be in the product business and not the services business. Now imagine taking a strategic decision like this in the early days when there was no competition in the market– today you can take a decision to change over night. But in the early days, while we did do services for companies (if someone asked you to do something extra, you did do it) we refused to take a single penny for any services that we did. That forced us to focus on selling new licenses. Otherwise once you’re able to get money from services, there’s no requirement to sell new licenses!

In your opinion, what’s the reason behind Tally’s popularity? At the risk of being politically incorrect, is it because of its “accessibility” due to piracy? Or is it largely because it’s simple and user-friendly?

Pirated software doesn’t become popular — popular software gets pirated. We strongly believe in one thing: if my software is not valuable to you, your money is not valuable to me. So customers are able to see tangible value in our software after they’ve paid for it, and therefore they tell their friends to also buy our software. Word of mouth has been the principle pivot of popularity, and we’ve told people on a number of occasions that if our software has not been of value to them, we would return their money. Even after three years, people have returned and we have returned their money. In 25 years, this has happened nine times to us. But fundamentally, if our software doesn’t work for them, their money doesn’t work for us.

We see a lot of product start-ups coming up in both the enterprise and consumer space. What would be your advice to start-ups — where do you think they are lacking, and how should they go about correcting these issues?

I would ask them this: are they solving the problem for someone else vs are they solving the problem for themselves? If they are unable to be the most prolific users of their own solutions, they will find it difficult to put it elsewhere. It’s the problem of architects, right? The architect is building for you — so they build and go away, but you have to live in the mess. I think as a company we had the privilege of this insight from my father. My most famous depiction of his words was in this context: in the early days, I had asked me a question against a certain context and when I was trying to explain to him that it was very difficult to solve the problem in that manner in software, which was why it was done in a particular way he asked me “Are you writing programs to make the life of the programmer easier or the life of the user easier?”. The general tendency I have seen is that very few start-ups are willing to take the challenge of solving the complexity of the product themselves so that they give simplicity to the end-customer — and this is a fundamental requirement of the product.

The second problem that I find with product start-ups in the country is that most people design the software as if they are going to be present when the software is going to be used. It makes great sense for them to explain to someone how to use it, but if you want to be a software product company you have to design a product that can be used when you are not there. So, from a technical viewpoint fundamentally I would say that it is about being able to sit back and reflect upon these issues that impact your design. From a operational viewpoint, from day one you have to design as if you are not selling. It’s easy for you to design a product and for you to go sell it, because you’ll design your sales processes which are centered around your ability to sell. And this ability, because of your intimate knowledge of the product, will always be higher than someone else. So be able to design sales and service processes that are not operated by you will truly bring the product into the product category