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Startups – new problems of governance and ethics

On March 14,2017, Chennai police arrested an Indian startup founder and CEO on charges of defrauding a supplier of Rs.17.2 million. The available information revealed that the startup had not paid one of its suppliers for its advertising services for over 1-1/2 years. When the startup announced plans to shut down (CEO called it “rebooting”), the supplier filed a “criminal complaint” against the founder CEO as well as co-founder with Chennai Police. The police was still on the look out for the co-founder who appeared to have gone underground.

The news of arrest fueled by electronic media news and blogs spread like wildfire in the startup ecosystem. Most of the opinion and claims based on half-truths, blamed the supplier for the overkill. It was believed that supplier used its political and police connections to escalate the dispute from “civil” to “criminal” in nature thereby resulting in the immediate arrest of the startup CEO. The doubts were also raised on the legality of the arrest process in view of the person arrested being CEO of a “limited liability” business. The supplier’s camp had pointed out the startup was well funded having raised its “C” round of $13.5 million only in May 2016. It was believed the startup had money but was not paying its dues – amounting to intention to cheat.

More than a hundred Indian startup CEOs across India, including the biggest startup poster boys and unicorns petitioned India’s Home Minister. They submitted a jointly signed statement pointing to the impact of such arrests and asking for fair and speedy trial. They specially talked about the dampening effect on the morale of majority of startups who anyway operated in a “not very conducive” business environment – almost bordering on being hostile. A website (help-yogi.com) was setup where the well-wishers can show some love for the CEO.

Meanwhile, the arrested CEO had been twice denied bail while his co-founder is still missing. It appeared a long haul for the CEO as the law in India took its own sweet time to dispense justice, if at all. Meanwhile a few questions arise that we must find good answers to.

One, what was wrong with the startup actions if any? There was no documentary evidence suggesting the startup disputed payment because of any performance deficiency on part of supplier. The startup CEO had only three weeks before acknowledged availability of funds and his intention to use it in new avatar after current operations were shut down (referred to as “rebooting”). Were investor VCs aware of the problem (thru their periodic reviews) and advised the CEO on it? Do VCs have a role at all in guiding the investee on corporate governance or business ethics?

Two, was the police action beyond reproach? What guided them to register a “criminal case” where most of the times payment disputes fall under “civil law”. Was there undue influence on police to take such action?

Three, were supplier’s actions proper? Was it fair to use the contacts in government machinery (as alleged) to escalate the matter and get the CEO arrested? What can frustrated small suppliers do when payments are not made to them in time as agreed or are delayed forever? Does the lax justice delivery system in India justify supplier’s unconstitutional actions – like using local politician to mediate or indulge in laughable activity of sending across voodoo dolls (as alleged)?

Finally how can we create a better business environment within the startup ecosystem despite the business and legal environment that we know exists in India? Some suggestions have been made recently such as – a credit rating agency for startups, mandatory external supervisory boards for every startup (of certain size? Only the funded ones?) and more transparency and standardization in startup operations (employment conditions, shutting down ops, sexual harassment at workplace etc.)

If you have still not got it, the situation mentioned in this blog relates to Stayzilla and Jigsaw Advertising.

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Baby steps to an Indian Microsoft

A country well known for its software services now has an opportunity to build world-beating software products.

At a recent corporate awards ceremony, Tata Consultancy Services (TCS) was crowned as the company of the year. Piyush Goyal, the Minister of State for Power, Coal and New & Renewable Energy hurriedly stepped up to the lectern after the award was given. He told the assembled glitterati that TCS had promised to give the All India Institute of Medical Sciences (AIIMS) a modern, nay, world-class hospital management system by March 31. In the tentative clapping that ensued I heard a big snort from my right. The scepticism of the gentleman sitting next to me was rooted in the belief gaining ground that bespoke software systems were outdated and presented a sub-optimal choice.

The predicament of enterprise technology clients stuck with archaic bespoke software systems is no longer common. Bespoke software systems fell out of favour 20 years ago. Firms switched en masse to on-premise enterprise software products. They were cheaper, easier to upgrade, and yet extensively tailored to their needs. This shift in the late 1990s created two sets of players: product vendors like SAP, and implementation consultants like IBM Global Services and Accenture. Soon, Indian IT services players like TCS, Infosys and Cognizant muscled into the game and grabbed considerable market share.

Lost in this success story is the narrative about Indian enterprise software product vendors. For instance, iFlex built a great enterprise software product for banks, which Oracle snapped up for a billion dollars in 2005. Kochi-based IBS is a leading product vendor for airports and airlines, and is now big enough for an IPO next year. PARAS, a hospital management product from Bangalore, is grabbing the industry limelight by winning global deals involving hundreds of hospitals.

If the Indian IT industry has benefited from the shift away from bespoke systems, why did AIIMS miss the bus? In general, why has our public sector been so slow to buy enterprise products? Government officials are not to blame for this. Unfortunately, our IT services firms became protectors of status quo in the government sector. While it helped them milk their fading bespoke systems for longer, it also created crumbling government systems and robbed the nascent product industry of a big market. Luckily, the new government has started fixing the issue.

The Growing Shism

Another breed of enterprise product vendors is emerging. Companies like Workday and Salesforce personify this new wave. They offer on-demand products. These require less customizations and work on cloud-based data centres. So, as Workday says on its website, they are a “fraction of the cost of upgrading from their incumbent vendors”. Naturally, customers love these new-generation products. They are called Software-as-a-Service (SaaS) products. And they are growing like wildfire.

A schism has opened up in the Indian IT industry over SaaS products. The implementation consultants don’t like them, as they need only minor adjustments. They look at them with a jaundiced eye of a traditional bespoke darzi [tailor] looking at readymade clothes. Going from stitching custom pants to doing length adjustments for readymade ones is a gloomy shift for IT services providers. But it’s a boon for our software product start-ups.

In fact, Indian SaaS product start-ups are on a roll. They are even getting begrudging respect from Silicon Valley. When ZenDesk, the SaaS market leader in customer service desk management products, did its roaring IPO earlier this year, it listed six key competitors in its SEC [US Securities and Exchange Commission] filing. Four of these – Kayako, Freshdesk, Supportbee and Tenmiles – are Indian! Indian SaaS product players are becoming global category leaders. Zoho, for instance, sells a CRM (customer relationship management) product at $12 per salesperson per month and is the market leader in this mid-market segment. It is flanked by Salesforce in the enterprise segment (at $60 per salesperson per month) and a raft of players, mostly Indian, in the SMB segment (at $3 to $4 per salesperson per month).

This availability of, say, CRM software product at every price point is a big new story in the IT industry. Unlike cars or smartphones, we have never had different software products to cater to every price segment. SaaS has changed this. As a result, everybody can now afford a software product. Hopefully, this time, government policy will build on this new generation and not let incumbents hold things back.

My Cup Runneth Over 

Two other pockets of explosive growth are exciting. One is the much-discussed rise of the digital consumer in India. This has led to the birth of Flipkart, Ola Cabs, Stayzilla, Newshunt and others. The other pocket is less sexy but it’s even bigger. It has to do with software infrastructure.

Old software infrastructure is being replaced at a pace previously unseen and is creating lots of product opportunities. Data explosion is driving endpoint data protection and governance products. Video explosion is driving dynamic ad insertion products. E-commerce growth is driving a new generation of search infrastructure products. Corporate mobile use is driving new agentless Bring-your own-Device security products. Social media is driving real-time social media analytics products. Now here is the punch line: in each of these categories, the emerging global leader is an Indian company! This is an unbelievably powerful development. For instance, Druva, a Pune-based start-up, is the global market leader in endpoint data protection and governance and is set to do an initial public offering in the US in 18 to 24 months.

Daring to Dream

Behind this optimistic turn of events is a new type of a technology entrepreneur. He (and, sadly, its mostly he so far) is unshackled from the restrictive dream of being the world’s back office. He doesn’t think in terms of labour arbitrage. He is a missionary, a creator and disruptor of status quo. And he has a blazing desire to change the world.

Team Indus embodies this spirit. This team is a motley group of passionate technologists that aims to land a robotic craft on the Moon by December 2015. This is literally a moon shot. Not altogether surprising to many of us, this team has emerged as one of the top three teams in the prestigious Google Lunar X-prize!

There are other moon shots in the works. Some are pivotal to developing our defence, aerospace and electronics industries. Others are about building highly affordable software products that will bring competitiveness to small businesses, teaching effectiveness to schools, productivity to health-care centres and new skills to farmers. Let’s not blow this chance. Let’s give these efforts the policy oxygen they deserve.

The country that gave zero, calculus, yoga and chess to the world is dreaming again. It wants to retake its rightful place in the world. It’s not satisfied being a back office for everybody. It dreams of powering the future with its ideas and inventions. It dreams of being a product nation!

This article was first published in Business Today