Lots of opportunities exist for innovation and entrepreneurship to thrive in India, especially in areas such as technology, health care, education, rural marketing and social services. Among the keys to innovation are the ability to imagine tomorrow’s world, to think in quantum leaps rather than in small increments, and being prepared to fail. While Indians have strong innovative and entrepreneurial instincts, they have much to learn from the U.S. about germinating ideas in university and corporate incubators and providing incentives to budding entrepreneurs.

These insights and more were shared at a panel discussion titled, “How Can Innovation and Entrepreneurship Help India Succeed in Global Markets.” The event was held on November 1 in Mumbai to coincide with the launch of the Indian edition of Knowledge at Wharton. The panelists included Sudhir Agarwal, Motorola’s director of sales for India, Nepal and Sri Lanka; Dipto Chakravarty, Novell’s vice president for engineering, identity management and compliance; Promod Haque, a U.S.-based venture capitalist specializing in the technology sector and a partner at Norwest Venture Partners; Rajesh Jain, a technology serial entrepreneur and managing director of messaging software firm Netcore Solutions; and K.S. Viswanathan, chief executive of sales for India at Wipro, India’s third-largest software services firm. R. Jagannathan, business editor of the Mumbai-based newspaper Daily News and Analysis, moderated the discussion. Edited excerpts from the discussion appear below.

Jagannathan: Mr. Haque, in your long career as a venture capitalist you must have seen all kinds of projects and ideas. Do you invest in innovative ideas, or merely ideas that make money? Is there a difference between the two? What makes something truly innovative? Is there a basic definition?

Haque: Perhaps there is a little bit of a difference [between innovative ideas and ideas that make money]. Our goal as venture capitalists is to produce a financial return by backing innovative ideas. When we look at any kind of an innovation, we look at the commercialization of that innovation, which therefore means understanding the market size and the ability of the team, or the team that we can perhaps put together, to reach that market.

Innovative ideas fall into various categories. Obviously, the category that appeals to us is the one where the ideas are innovative and unique, and they also have a good market potential, so you can back them and make money. But there are some ideas that fall into the category of innovative but are in a niche market. You can’t justify taking the risk of starting a business when you understand and realize the potential is limited.

Sometimes you find ideas that are very innovative but they’re too far away from commercialization. They are more like science or research projects — innovative but more “researchy” …. Those are usually in the domains of universities or governmental institutions and foundations that are not looking for a financial return but are nevertheless very interested in advancing that innovation further.

Jagannathan: Mr. Viswanathan, you work for a company that is fairly large by Indian standards (Wipro). How does your company create the process of innovation inside? How does it help your business?

Viswanathan: We have three types of innovation: technology innovation, process innovation and delivery innovation. We also have three levels of processes which enable some of these innovative ideas to take place. At the apex end, we have an IT management council, where normally all decisions about breakthrough innovations or quantum innovations are taken. Assessment of risk and process realization is also done.

To assist the IT management council, we have an IT innovation council, where we go through four gates before an IT project gets done. Anybody can generate ideas. They are evaluated by a team of four or five senior leaders. Any project that gets selected gets funding: the IT innovation council does that. We celebrate failures also, so that the continuous process of innovative ideas coming in is sustained.

Sometimes, innovation is driven by market or economic conditions. In the early 1980s, when Wipro was a successful domestic products and services company, competition was less intense. When the MNCs re-entered India in the early 1990s, they eroded some of the competitive advantage we had. At that stage we formed an innovation council to look at various global delivery models. For the challenges of hiring, retaining and recruiting talent, we formed a talent transformation council. Ideas got germinated, generated, gated, succeeded and started realizing revenue for us. Today 5% of our total revenue of $3 billion comes from innovation projects.

Jagannathan: Do you have some kind of an internal venture capital process to assess and promote such innovation?

Viswanathan: I would call it pseudo-venture capitalist funding. [Wipro’s Chairman] Azim Premji himself has said that so many dollars of revenue per year are earmarked for innovative projects, largely for quantum innovations and those that lead to process innovations. Then there is a gating process headed by a senior vice president [to decide] which projects finally get through. Finally, Mr. Premji commits the funds required to make it a process. It’s a fairly sizeable fund.

Jagannathan: Mr. Chakravarty, could you share with us some insights from Novell about how your company innovates? What are the lessons others could learn from them?

Chakravarty: Novell has been around for 30 years. Given globalization, our biggest challenge has been: how do you take advantage of the dual shores? We have as many engineers in India as we have in the U.S. It may not be 50-50 but it’s close. As we look at this service market in IT, it’s about sustenance, product maintenance, offshore outsourcing, but it’s also this leverage of time zones. We call it the “Follow the Sun” model. We have two shifts in engineering. So on the same product, we have one team working during the day, and during the night an identical team works on the same product set [across different time zones]. This way you mitigate risk, you preserve continuity and you deal with attrition in a fairly compelling way. My challenge has been: How do I preserve innovation on both shores so that when people are working on the right products, they can grow and contribute, rather than one [location] becoming a maintenance arm and one becoming an innovation arm.

R&D is really easy. You can create anything if it’s at the prototype stage, but to commercialize innovation or “productize” a prototype is the hardest thing to do. And our challenge is to balance innovation and sustenance. Most of the folks working on a product set won’t be able to tell you whether they are on the sustenance team or the innovation team.

Jagannathan: Innovation is not just about products or any specific service, right? There are many innovations that can be internal to the organization. Are there any insights there you could share with us?

Chakravarty: Sure. There is a process side to the innovation, and then there’s a product side. What I mentioned earlier was the people side, where you leverage people’s skill sets, leverage the labor force, and given their geographic locations, take advantage of the time zones. The innovation challenge [on the product side] has been in mature software for some of the products that have been around for 20 years, something like E-directory or Netware, which nobody — none of the youngsters coming out or into the workforce today — has heard of. But [this software] is in the sites. It just has to sustain, it has to continue to provide value.

So innovation becomes an everyday challenge. We’ve got to continuously innovate on the people front, on the process front and on the product front. Because very quickly we [could] leap on the process side and say, “Well, let’s get an expert consultant from outside who’ll come and tell us how to do better, faster, cheaper.” But when you look within, you’re able to do those same things. The challenge is: Can you do it quickly enough, and do you have the domain knowledge to do it?

Jagannathan: How do these issues play out on the retail front, Mr. Agarwal? We’ve seen your cell phones all over the marketplace. Motorola has made a comeback after being practically nowhere in the Indian cell phone market. On the one side, you have innovation on the product marketing front, but you also have a lot of people developing products and doing all kinds of technology work in India. How do the two things work, the creation of IPR (intellectual property rights) inside and your success in the market? Is there a connection between them, or are they two separate things?

Agarwal: They go hand in hand. I’ll talk about India, not Motorola globally. On product innovation, we’ve made tremendous progress in style and design. In India, people love to carry their phones in their hands. They show off their phones almost as a fashion statement. They don’t like to carry them in their pockets. That’s where Motorola is gaining a tremendous advantage. We’ve tried to innovate in terms of giving a face to Motorola in India. Until now, it was seen as a very Americanized corporation. We got Abhishek Bachchan (an Indian film star) as our brand ambassador, and that guy is rocking completely.

Besides that, we’ve done a lot of innovation in terms of distribution, in taking our products to consumers. Distribution in India is a very big challenge. You have more than 5,000 cities and 600,000 villages in this country, according to the census. Reaching out to these customers is the biggest challenge for any corporation, including Motorola. We did some innovation in that space. For example, we tied up with ITC’s e-Choupal (a program aimed at empowering farmers with real-time market information). We did tie-ups with rural retail formats like the Hariyali Kisaan Bazaar (retail outlets selling agricultural products). Today, besides tractor tires, batteries, pesticides, insecticides and seeds, you find Motorola phones selling on their shelves. So that’s been a great innovation for us.

The customers in those [rural] areas always felt that the products they were getting were not the right products, that they were not brand new products. They believed that people like us sitting in cities like Mumbai, Chennai and Hyderabad are all very stylish and loaded with money and change phones every six or nine months, but that the old phones go to those [rural] markets after getting polished.

One of the main thrusts for Motorola in India has been how do we make, affect and change the life of the common man, who gets two dollars a day to run his family, someone who gets probably $50 a month to feed 10 mouths. How do we improve the lives of those people? The thrust for us is to get technology to improve the lives of the people in those spaces. Don’t be amazed if we shortly introduce something which could be very affordable and accessible in the smallest of places in India.

Jagannathan:  Mr. Jain, you’ve been both a “netpreneur” and a developer of technology. You’ve sold a business and you’ve invested in several new businesses. What key insights could you give us about entrepreneurship in technology?

Jain: One of the first things you need to innovate is the ability to imagine tomorrow’s world. How is the future going to be different? The entrepreneur in some ways has to live in that future world. We don’t do enough of that in India. We tend to project based on what we’re seeing today. But just looking at the impact of developments today helps you imagine the future. For example, what happens if broadband comes, what happens if the mobile data infrastructure becomes even better than it is right now with 3G networks? Then what are the new opportunities which become available?

Second, what’s required is the ability to think big. We have a large domestic market in India. What are its needs and how can one go about fulfilling these needs, rather than just looking outside India? So it’s about products and solutions for the local market.

The third thing is the ability to be prepared to fail. What would you do if you were not afraid of failure? This is very important because otherwise we tend to think very incrementally. Of course, an entrepreneur is not necessarily a person who goes out there trying just to make audacious decisions. As an entrepreneur, you’re basically going out there every day to reduce your risk of failure. But, at the same time, you need to look at disruptive innovations rather than just think incrementally. If you put all of this together, you’ll see the world very differently and new ideas will emerge.

Jagannathan:  Are we actually innovative as a country or not? Mr. Haque, what’s your observation when you look at Indian entrepreneurs in Silicon Valley and here? Do you think Indians tend to be innovative? I know Indians tend to be innovative in areas that are extra-legal — which is the lead story in the first edition of India Knowledge at Wharton — but how are they when it comes to actually delivering things that are successful? Do you see any traits here that aid or hinder innovation among Indians and Indian companies?

Haque: I can speak more about the U.S. experience. We’re investing quite heavily in India, but we’re still learning about the Indian market. It’s fair to say that if you look at the technology sector in the U.S. market — where I spend most of my time — a good 40% to 50% of enterprises getting created today, whether in the software arena, silicon or even Web 2.0, are founded by Indians. A fair number of companies also get founded by the Chinese.

Indians tend to be entrepreneurial. In the U.S., policies and the environment foster innovation and entrepreneurship, and Indians have taken pretty good advantage of that. Given the right circumstances and the right environment, where entrepreneurship can be fostered, I don’t think there is any impediment to Indians being able to take advantage of them.

Jagannathan:  Mr. Haque spoke about how the North American environment fosters innovation and entrepreneurship. India, of course, has the largest actual number of entrepreneurs, because if you don’t have a job, you have to be an entrepreneur. You have to sell vegetables in the street or whatever else you need to do. But how good is the Indian environment for innovation when it comes to organized or formal business?

Viswanathan: Many Indians have innovative minds. We innovate mostly in terms of crisis, but there is a huge [flow] of innovate ideas. The question today is how do we harness and transform them? We worship several goddesses in the country. The question is: How do we translate Saraswati (the Hindu goddess of learning) into Lakshmi (the Hindu goddess of wealth)? So much of a knowledge base is available; how do we convert this knowledge base into capital? If you provide a more fostering environment, you’ll find more and more entrepreneurial talent coming in to make this happen.

The global service delivery models that IT companies like Infosys, Wipro or TCS [developed] to get a competitive advantage were fostered by innovative ideas. But how do we get faster innovation taking place? Strong interaction among academia, start-ups, industry and the government is required. A strong attack on generating innovative ideas for the lower end of the pyramid in terms of education, health care and agriculture is required. If innovation were to take place there, it would generate such a large [momentum] that the entire innovative capability of the country would just go up. ITC’s e-Choupal, which Sudhir [Agarwal] talked about, was innovation in agriculture. It has seen tremendous growth. Things got built around it, including Motorola cell phones.

Chakravarty: If I may add, to be an entrepreneur you have to have creativity. And you have to want competition. If you have creativity and you can deal with competition, you will succeed. That in a nutshell is one perspective of what it takes to be an entrepreneur and sustain entrepreneurship.

Agarwal: I have complete faith in Indians and India in terms of innovation and enterprise, but there are two problems. Number one, whatever happens does not get projected. It’s a very, very big struggle for someone to do something and get the right platform to showcase it. Number two, the average Indian is marred by [the struggle for] survival itself. So he does innovate, but [dealing with] the bureaucracy of the government, getting loans — those are big struggles for an average guy, and that depresses innovation. If government or corporations do something about it, you’ll see a sea change in India.

Jagannathan:  Why have we not seen any great social innovations required to move the people at the bottom rung of society up to a place where they are productive? We have not seen too much initiative from businesses. We have had extended arguments about quotas (reservation in college seats and jobs for the underprivileged) and other things, but no innovation has come up showing us how to do this.

Agarwal: It is happening if you meet people at the grassroots level, but the pace is very slow.

Viswanathan: Social innovation is happening. Look at health care services and see what Devi [Prasad] Shetty (a cardiologist) has done at, say, Naryana Hrudalaya (an affordable health care organization) in Bangalore or the Arvind Eye Clinic in Madurai, which [performs] cataract operations. I agree with Sudhir that these should get a little bit of projection and financial muscle.

Jagannathan:  Rajesh, do you see the government as a help or a hindrance in promoting entrepreneurship and innovation?

Jain: Given the way things are right now, the government is quite irrelevant, barring regulatory stuff, where you need to do your filings, setting up a company, etc. Other than that, for a lot of stuff that’s happening in India, your interactions with the government are quite limited. You have to live with the occasional nuisance, but barring that, the ball is now entirely in the court of the people, in the entrepreneurial teams.

What we need in India, and we are now starting to get, is capital. You also have a lot of people intending to start up technology companies, but the middle management in these companies which can come in and think scale is very limited in number. It’s not just about creating a prototype; it’s about, how do you take this to market? We are not seeing enough of this. A lot of first generation entrepreneurs who have been around for 10 years have tended to become venture capitalists rather than go on and become serial entrepreneurs.

You need that ability to think scale. But you will see even social innovations only in pockets. In India, we have challenges in education and healthcare. You need to replicate what has succeeded a thousand times in a short period, otherwise you lose yet another generation of young people.

Jagannathan:  What are the obstacles to the final scaling-up of a good successful story at the micro-level? You said money is not the problem. Then what is?

Jain: It’s people. In India, you have a lot of teams and ideas, but that needs to get combined with reasonable management expertise. The ability to execute, the discipline of taking an idea and not leaving things to chance are very important. Salaries are going up. There are plenty of opportunities right now, whether in telecom or retail. But the desire of people with 10 to 15 years’ experience to leave and join an early-stage company and take a risk — that culture needs to start changing. You need people who will say, no, I don’t want that Rs. 75 lakh salary ($170,000); I’m willing to live with the Rs. 20 lakh salary ($45,000), which is really all you need for a good life anywhere in the country. I should be willing to give up that money so that I can have the possibility of a Rs. 5-crore ($1.1 million) upside in the next three to four years.

Haque: I agree with him totally. There are two or three things that foster entrepreneurship, at least looking at it from the U.S. perspective. One is the formation of risk capital; venture capital to fund a start-up is risk capital. You could lose it all. In tough times, in down cycles, we have. So government policies, [such as] the capital gains tax rate in the U.S., are incentives for people to invest for the longer term. It is a huge attraction. It fosters the creation of risk capital.

At least in the technology domain, what needs to be done is for more people, especially seasoned managers, to step out of the comfort of working for larger companies, and take that risk and say, “Gee, what if I get involved with a start-up and I have equity ownership?” Unfortunately, in India thus far, employees do not appreciate the value of stock options as much as they do in the United States. It’s slowly changing, so I’m generalizing a little bit. But at least in the past it’s not been so, and you can see that when you look at some of these larger companies and how much employee ownership exists. It’s pathetic by any standards.

The situation in Silicon Valley was similar if you go back 20 or 30 years. Almost two years ago, I was at a church, and a gentleman came up to me at the end of the service. He somehow found out that I was a venture capitalist, so he shook my hand and said to me — and he nailed it —  “You know, Promod, 20 years ago, the conventional wisdom was that the only time you went to work for a start-up was when you got laid off by some other larger company. So you had no choice but to go find a job. As long as you were looking for a job and a small company gave you a job, you took that offer.” The reverse of that happens now. It is very common in Silicon Valley today — and it was much more so five years ago, before the dotcom bust, but it’s coming back — for seasoned employees to leave the comfort of their larger companies and actually take salary cuts, but wanting equity in the [new] company. That is real, true risk.

The other thing that impedes India to some extent — and I’m again talking about this from purely a technology perspective — and not other, broader markets, is that access to markets is somewhat difficult. Global markets for technology products are predominantly centered in the West. Look at enterprise spending [on technology]. I’ll just throw the numbers out to [illustrate] the extent of the problem. These are 2004 numbers, so they’ve probably changed, but enterprise spending in the U.S. was $490 billion. The [spending in] India was $17 billion and $22 billion in China. So where is the market? It’s in the U.S. And that’s just the U.S. Then you look at Europe and Japan and so on. It’s a trillion dollars versus $17 billion and $22 billion. One of the challenges that entrepreneurs have here is the access to those global markets.

But entrepreneurship is growing in India because you are starting to see lots of Indians from the U.S. and U.K. — predominantly from the U.S. — coming back to settle in India. We call it a “reverse brain drain.” Lots of experienced engineers, and even marketers and product management people are leaving the U.S. now and coming back to India. With them they bring a wealth of knowledge about global markets and the ability to tap into those markets.

One of the reasons we’re here [in Mumbai], investing, setting up an office and hiring people, is that we believe Indian entrepreneurs are now starting to make a mark on products for the global market, not just services. Firms like Wipro and Infosys have done a great job in penetrating the services market, and now you’re starting to see the emergence of product companies here. [It’s] very early, but it’s starting to happen. It will happen even more so as people from some of the more established companies like Wipro, Infosys, Satyam and TCS — managers who actually understand the global market from a services perspective — leave their jobs and step into these start-ups and say, “I know those customers and I can go sell these products.” I think the future is very bright.

Jagannathan:  Mr. Haque talked about how employee stock options (ESOPs) generate more entrepreneurship within a company. Mr. Viswanathan, what has been the Indian experience with employee stock options? Has that helped create more innovation internally? Is there anything you can tell us about Wipro’s experience in this regard?

Viswanathan: No, I don’t think ESOPs are used as a tool to get innovation going. In India, ESOPs are utilized by large corporations for retaining employees rather than generating new ideas. However, if there are projects which require an independent way of working, companies like Wipro, TCS and Infosys do give encouragement — not through ESOPs, but they ask these entrepreneurs to start a company, and maybe they give [them] a low stake of 10% to 15%. At least the capital inflow is ensured for them to innovate.

Jagannathan:  Mr. Chakravarty, does that hold for a large global corporation like Novell?

Chakravarty: In a global, multinational company, you try to preserve entrepreneurship within the corporation. You have something called the MBDI or major business development initiative. If you have a good idea, [you can] write it up in a business plan — it could be a couple of pages long or 10 pages long — and then present it. From the corporate funds, we will give you “x” million dollars to start your group, where you have to pretty much incubate your start-up within the big stable rooftop of a large corporation. You’re going to have 10 more pairs of eyes watching how you spend your cash than four board members from four different banks. So we incubate those and we have had some significant successes.

The most compelling products are the ones where the value proposition is so simple that it is right under our eyes, but we have not thought it through. You should be able to take that idea, turn it into a product and go to market with it. It doesn’t have to cost a lot of money. It doesn’t have to be a multi-tier, multi-platform, multi-anything. It just has to do one or two things really, really well, and better than anything else out there. If you pick your niche and identify where you want to do your heavy lifting, you’ve gotten your idea to the market. So we’ve had about half a dozen internally funded corporate venture initiatives in the last three years. Once the groups get big enough, they get spun off as a business unit, and a business unit can hire its own operations person, its own finance person and maybe a part-time marketing person.

Jagannathan:  Mr. Agarwal, do you see more innovation happening in industries and areas that are more open to competition? Do you see this in your industry, where everybody is trying to sell a cell phone at lower and lower prices? Are you under more pressure to innovate?

Agarwal: Competition does make you innovative: It’s a question of survival. But besides that, a lot is happening. For example, in our company, we have a very heavy culture of innovation. People compete with each other to provide something new to customers. I agree with Dipto [Chakravarty]. Like in his organization, [innovation] is fostered even at the global CEO level. They monitor the progress of [new] projects. They invest in them. So it’s the culture of the organization. Innovation is not related to the value of the products or bringing the cost curves down. It’s about providing more value to customers.

Jagannathan:  Mr. Jain, what would you say are the four or five things that could be highly disruptive in the next four or five years in India?

Jain: The key is to look at markets that can be used as a starting base for going out. The mobile internet is definitely one such area, where we’ve got a very good data infrastructure. We’ve got a large number of users locally. So we can win locally and then look at markets outside. [Another is] low-cost computing and software as a service for small businesses like the neighborhood kirana (grocery) stores. Can we automate those businesses, given that broadband is becoming more and more available at very affordable price points?

A number of companies are looking at the mobile payments space. Other areas would be energy. We have plenty of sun; can we do something about it? We definitely can’t afford oil at $60 to $70 a barrel at the pace we’re growing. How do you rethink education and healthcare, given the new digital infrastructure which is getting created? For example, in health care, could we look at PHRs, personal heathcare records? It’s an idea Andy Grove [Intel founder and former chairman, currently senior advisor] has talked about in the U.S. In India, we don’t have the legacy of various systems, so we can just leapfrog onto better systems.

And take education: We need to educate 200 million people. That’s not going to happen by finding three or four million teachers. What are the alternatives? How do you rethink rural infrastructure and rural services, considering that we still have 700 million people in rural areas? If we turn our sights inwards, a lot of new opportunities open up.

Jagannathan:  Would anybody in the audience like to ask any questions?

Question: Does secondary school education or college education help in creating an innovative ecosystem?

Haque: Absolutely. Secondary education and post-graduate education are extremely important, in terms of providing the basic infrastructure that gets used to create innovation. Let me just point to companies in the U.S. that have come out of universities. If you look at the whole medical devices space, it was fostered out of a lot of work down in Mayo and the University of Minnesota. You look at Cisco, [it was] born in the bowels of Stanford University. You look at Google, [it was] born in the bowels of Stanford University. You look at Sun Microsystems, it also came from Stanford University. We’ve funded companies out of Carnegie Mellon at the University of Pittsburgh. So yes, there is a tremendous amount of innovation that takes place. Out of those come some pretty interesting ideas, of which people like myself as venture capitalists will say, “Okay, we think these are very close to commercializing, let’s fund them.” But the breeding ground is really the universities.

Question: Is there a fundamental difference between the entrepreneur in India and an entrepreneur in China?

Haque: Yes. I would back an entrepreneur in India before I would back an entrepreneur in China. I don’t say that because I’m here in India right now in front of you. There are lots of businesses that get funded in China as well, there’s no doubt about that. The Chinese market itself is huge internally, and a lot of these businesses are directed at the local market. But it’s tough to do business in China. It’s a lot easier to business here in India than it is to do business in China. And I’m talking as someone coming from outside the country and funding businesses here. It’s very difficult to do that in China. I’m talking about the business climate.

Talking about the entrepreneurs themselves, is there a fundamental difference? I don’t think so. They are just as entrepreneurial as in India and vice-versa. Local customs are different, but the drive, the initiative, the reliance on internal and being capital efficient and so on, they’re very good.