Indian software product firms, dwarfed by their mammoth counterparts in the services sector, have long been struggling for a global identity. But with the growth in domestic demand, lower costs of setting shop, better availability of talent, improved connectivity and emerging success stories, the number of start-ups have doubled in the past five years. The number of firms in tier-II and tier-III regions have also doubled in three years.
According to a recent Nasscom study, the Indian product sector that has been growing at a CAGR of 22% for five years is now worth $2 billion. It has added 1,100 new firms in the last five years, taking the total to 2,400. In the past three years, 330 firms have sprung up in tier-II and-III towns. Vayavya Labs, which operates in Belgaum, Karnataka, has recently raised funds.
?Three things are essentially happening here. The domestic market is opening up, driven by a demand for SAS-based products by small and medium businesses. The international market, as seen in the case of companies like Zoho and FusionCharts, is becoming a very compelling reality. Challenges in finding good product managers are also increasingly disappearing. The number of exits lined up in the space are also a good indicator of how things are going,? says Sharad Sharma, chair of the Nasscom product forum.
Till as recently as FY10, the product space was said to have been a no-go area with several firms shutting shop. In August last year, consulting firm Browne&Mohan had reported that over 121 product firms had closed in FY10, hit by delayed investments in telecom and poor performance in value-added services. Revenue for the industry had slipped 13% to $1.64 billion, compared to stunning growth of 40% and 48% in the previous two years.
The Browne&Mohan report also stated that 320 product companies had been forced to turn to pure-play services firms in FY10. However, entrepreneurs like Paras Chopra, the 23-year-old co-founder of Wingify, feels that the tide has turned. ?We are seeing both large and smaller services firms turning to products. Several companies, which were till now doing outsourced development work, are working on their own products. Venture capital and private equity interest has also picked up,? says Chopra. Wingify, which allows marketers to create real-time variations of their products, was recently identified as one of the top ten start-ups in the software products space by Nasscom.
In September, Bangalore-based InMobi attracted $200 million from Japanese internet company Softbank, in the largest deal in the mobile internet space. CustomerXPS, a technology start-up, raised $4 million in it?s first round of funding from JAFCO Investment in June. Agile Financial Technologies, a BFSI product firm, raised a Series A funding of $5.7 million in May.
The recent success of Indian product companies is also responsible for an explosion of entrepreneurial activity in the space. Unlike the services sector, where TCS was a long-standing template for other companies to emulate, the product space has had few examples to take from. However, things are changing with genuinely global names emerging now from unexpected corners.
?Unlike earlier, there are hugely successful precedents in the form of companies such as InMobi, Snapdeal, and Flipkart. Companies that have proved that they can take on giants like Google are having an an enormous impact on other entrepreneurs,? says Nasscom?s Sharma.
One of the key factors driving products in the sector, feels Aloke Bajpai, chief executive officer of travel portal iXigo, is the growing maturity of the users themselves. ?Users earlier had lower expectations from products they used, but now that has changed. It has becoming a less forgiving market, and companies are forced to evolve much faster, with product cycles shortening rapidly,? he says. Ixigo, a four-year-old firm, had raised $18.5 million from SAIF partners and MakeMyTrip a little over a year ago.
While the outlook is positive, issues in scale distribution threatens to impede growth. To reach smaller towns, these companies still need to rely on a feet-on-the street approach, which most start-ups find prohibitively expensive. Early-stage funding also remains a challenge.
Says Sharma, who is also part of the Indian Angel Network: ?Till January, we had done 18 deals in our existence of almost four years. And this year, we have done 13 deals and expect it to be higher next year. There is an improvement, but it is not enough.?