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Startup IPOs as financing rounds will end soon: NR Narayana Murthy, Cofounder and Chairman Emeritus, Infosys

What is needed from these service companies is to improve domain knowledge, technology knowledge, quality and productivity, and better customer orientation to gain bigger market share.

Developing this market for the most advanced and most competitive markets took some time.
Developing this market for the most advanced and most competitive markets took some time.

By Ayushman Baruah

N R Narayana Murthy, who cofounded Infosys in 1981, was the first to begin the startup culture in the country. The company went on to become one of world’s most admired technology firms. Today, India is brimming with a vibrant startup ecosystem that’s growing much faster than Infosys did in its early days. But the market dynamics are entirely different. Murthy talks about the growth rate of startups, the different market conditions, and relevance of IT services, in an interview with Ayushman Baruah. Exceprts:

It took Infosys 23 years to reach the billion-dollar revenue mark in FY04. Today startups are growing much faster?
I am very happy that today’s startups are growing faster than we did. That is good for the country, its consumers, and our entrepreneurs. Congratulations to them on reaching a revenue of $1 billion much faster than we did. There are several reasons. The Indian software services industry was the first to introduce the concept of remote large software development in the world for the US, European, and Japanese corporations. Developing this market for the most advanced and most competitive markets took some time. It is very instructive to note that the second billion dollar of revenue for Infosys came just in 2 years while the first one took 23 years. Also, most of the unicorns and startups you are commenting upon capitalised mainly on converting in-person purchases to online purchases. The market already existed and was not developed by the startups. They just converted revenue from one channel of access to another. A third important point is that the Indian software services companies were very profitable even when they reached a revenue of $1 billion. For example, Infosys had a net income of $270 million on a revenue of $1.06 billion.

Also Read| Infosys co-founder Nandan Nilekani says startups should aim for both growth & profitability

What would you have done differently if you had started Infosys in 2022?
Our vision was to become the most respected company in India. We put respect higher than revenues and profits. Of course, we knew being a respected company will result in better repeat business resulting in faster revenue growth, attracting good talent which would improve quality and productivity, and attracting high quality long-term investors. These good quality employees brought unparalleled business value to our customers from their innovation that resulted in better prices and higher margins. We were in several areas not just in India but the world. We were the first company to provide financial statements according the GAAPs (generally accepted accounting principles) of eight countries. We were the first-large scale software services company in the world to get certified at Level 5 of the Capability Maturity Model…We were the most profitable software services company in the world. I can go on and on. Therefore, it is fair for me to say that I would do the same thing today as I did 41 years ago.

Almost every startup today is eyeing an IPO, even without profitability?
I must admit that I am not conversant with the current trends. Therefore, my views may be wrong and should not be taken seriously. I am uncomfortable with using IPO as yet another round of financing and providing exits for VCs before the startup has reached a steady state in revenue and EPS growth. I would prefer a PEG of 1 (ratio of PE to EPS growth rate) rather than a high PE as higher PEs would mean it will take a long time for small, retail investors to get adequate return on their investment. This is a phase of euphoria and it will pass.

How can IT services stay relevant in the future?
As long as computers are used to automate functioning of an organisation, there will be opportunity for software development and maintenance. New operating systems, new databases, new languages, new communication systems, new devices and new user interfaces will require software services providers to upgrade the existing systems to handle these technologies. Similarly, as long as competition exists, organisations will have to introduce new innovations in business practices to create new differentiation. These new practices require development of new software systems or upgradation and maintenance of existing software systems. As long as new software products come into the market, corporations have to build a layer of customisation around the standardised package to create differentiation and this requires software development and maintenance. These responsibilities can be handled only by software services companies. Therefore, my view is that the opportunities for software services will continue to grow. What is needed from these service companies is to improve domain knowledge, technology knowledge, quality and productivity, and better customer orientation to gain bigger market share.

The attrition rates in IT services companies seem to be at an all-time high and not showing signs of coming down. Is there a solution?
As more and more captive units of foreign companies start operating in India, there will be fiercer and fiercer competition for talent. Further, these captive units being just cost centres and Indian costs being a fraction of the cost in the developed world, these captive units will give higher and higher compensation to their employees. However, Indian companies have a tendency to reduce every market to a commodity market by competing mostly on prices and not value to customers. In addition, Indian companies are profit centres. Therefore, their ability to match the captive units is hampered. Further, while the salaries of the senior management personnel in Indian software companies have increased by 20-70 times in the last 10-12 years, the compensation for entry-level engineers and junior staff has hardly increased. Some Indian companies have also created very sound training programmes for fresh entrants to become market ready. Therefore, there is a tendency for the talent to get trained in an Indian company and then shift to a captive unit. That is why the attrition rate is high among the Indian software services companies.

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