Asked to name the country’s entrepreneurs, most Indians would probably reel off “Tata,” “Mittal” and “Ambani.” Although these legends’ companies indeed play a major role in the business world, many of today’s promising startups are being founded outside the space of large family enterprises, with an infusion of private equity or venture capital.

Although capital is harder to come by given the ongoing global recession, the funding situation is not as drastic in India as it has been elsewhere. According to statistics from Bain & Company, the Indian venture capital/private equity market totaled US$17 billion in 2007, and declined slightly to US$14 billion in 2008. Information technology-enabled services and telecommunications companies were the main targets in earlier years, but more recently the focus has shifted to the real estate and energy sectors.

At the recent Wharton India Economic Forum in Philadelphia, entrepreneurs and venture backers talked about their experiences in a panel titled, “India Innovating: Entrepreneurial Ventures Cross Domains,” moderated by Sri Rajan, partner and head of Bain & Company’s India private equity practice. They discussed both the challenges and advantages of developing startups in the subcontinent, offering examples from their own attempts.

Sensitive Types Need Not Apply

Asked what it takes to launch a startup in India, Dhruv Shringi, co-founder and CEO of Gurgaon-based travel services portal Yatra Online, responded, “You need to be flexible and have a thick skin.” Despite popular belief, he noted, the country is not a “low-cost place for doing business because of the inefficiencies” that have to be taken into account. “Getting quality resources and managing the infrastructure and environment around you [are important]. You have to keep modifying your plan.”

In an Indian startup, “you have to find ways of making things happen that are not prescribed in any business school book,” Shringi added. “[Being on the ground] is the best teacher.” In addition, for those looking to go into India to set up a business for the first time, Shringi advised finding “people who have management experience in setting up businesses, who have been there and come back. It’s not just lack of financial capital [in India], but also intellectual capital. Resist people who are in your own mode. Don’t always listen to venture capitalists about whom to recruit.”

Hiring and motivating the right people is always a challenge, and the difficulty can vary according to industry, said Param Parameswaran, chairman of Indigo Monsoon Group, an early-stage investment firm whose portfolio companies include online classifieds service “Especially when it comes to hiring for new media companies, the state of the workforce there is just less evolved. It’s not just about recruiting intellectual horsepower — you have to think about culture, accountability and internal customers.”

Chender Baljee, founder and managing director of Royal Orchid Hotels, based in Banaglore, noted the importance of perseverance even when it seems the challenges won’t subside. “To set up a hotel, you need about 104 clearances [from the government], which can take six to 12 months to obtain, if you’re lucky,” he said. Baljee also described the challenges of working with organized labor: “In difficult [economic] times, the activity of labor unions goes up, especially in service industries. The [employees] can walk out at 3 a.m. — and you can’t do anything about it.”

Any legal hang-ups can take several years to work through, Baljee noted. “We had set up one hotel, and to set up the next one we got land from the government, but it was challenged and went to litigation. It took 14 years to fight it. And there’s always political interference.” The bright side to all of this, he added, is that “so many people would be discouraged that you have an opportunity” to be successful if you can outlast the competition.

Parameswaran noted that he had not run into much government interference in his endeavors, but conceded that this varied with the industry a company operated in. “The government recently audited one of our companies — but that was simply because the name of it came out on top on Google,” he laughed.

Vikram Shroff, executive director of Mumbai-based agrochemical generics firm United Phosphorous Ltd., noted that such risks are really a key component of success. “Risk keeps you running. Find the most pessimistic guy in your company and ask him what the downside would be. Then put him in charge of overcoming the challenges.”

Jay Sidhu, CEO of private equity firm Sidhu Advisors and former chairman and CEO of Sovereign Bank (now part of the Santander Group), said that to be entrepreneurially successful, it is important to have the same kinds of values that help grow a small company into a large one. “You have to be clear about your vision. You have to be master of what’s happening both externally and internally, and you have to have the best people around you. You have to promote a culture where excellence thrives.” Sidhu’s firm has mostly invested in U.S. ventures, but he noted that he had a great aspiration to do something in India. “There is opportunity in India, but the country has to open up its markets.”

Advantage India

If the challenges are so daunting, why choose India as the venue for a startup? Sabeer Bhatia, co-founder of Hotmail (launched in 1996 and acquired the following year by Microsoft for an estimated US$400 million)and founder of Mumbai-based travel services provider, said low costs were the biggest factor in his decision. Costs went up between 2005 and 2008 — during India’s “bubble” — but “they’re all coming down now, due to the recessionary market,” Bhatia said. On the personnel side, “the human potential in India is tremendous, although it has taken a few years to get the right team together for most of our companies.”

Overall, Bhatia was bullish about the prospects for Indian startups: “You have to adapt U.S. or Western business models [in the Indian market]. It is unique; for example, Internet penetration is on the rise, but printer penetration is fairly low. So you can do something to address that issue. There’s also still a delivery problem, so e-commerce hasn’t yet taken off. People still don’t trust the Internet as much. But the opportunity is there — it’s a growing market in spite of the global slowdown.”

Shroff described his company’s success in providing a cost-effective version of the Breathalyzer to the Mumbai police, which generated a substantial amount of revenue for the city. “There are great scientists in India. If you provide them the right environment, they can create very cost-effective products,” he noted.

Providing services to the public sector can be quite lucrative, Shroff explained: “When you first go to sell your idea [to a government official], the guy is thinking, ‘Is he going to help me and take care of my headaches? Or is it a project I need to do because of some court order?’ Fortunately for us, we were providing a value-added service to them, so we found them to be very positive. After the success demonstrated by the Mumbai police, the police commissioner of Chennai called — he wanted to buy it as well. People don’t necessarily trust the government too much to do a good job, so if you tell them a private company is involved, the buy-in from the local people and nongovernmental organizations is much higher.”

Certainly there will always be some hurdles, Shroff said, echoing Shringi’s earlier comments about staffing. “Often in India, when setting up business infrastructure, ‘people do what you inspect, not what you expect,’ so your supervision level has to be a bit higher.”

Where’s the Innovation?

Parameswaran singled out Chennai and Austin, Tex.­-based as an example of a company that has truly created change in its space — online classifieds and local business search in India, with a guaranteed response model. “Small and medium-size businesses have been left out of media and advertising,” he noted. “Print, television and radio [are all] expensive. So how do they get sales leads? Through location and networking. So we figured we had an opportunity to provide SMS/mobile call sales leads. That was an innovation in terms of delivery.”

The second innovation, Parameswaran noted, was getting past the barrier to entry: “A small business wants accountability. You pitch guaranteed sales leads. You need to have a sophisticated back end to service that guarantee. You have to think by zone, not by the city as a whole.” The benefits of this strategy, he noted, are substantial: “When it comes to large corporates, the online advertising model has been beaten down. But small and medium-size businesses’ advertising is going up. With this approach, hopefully we can create new markets.”

Bhatia pointed to one of the companies he has invested in, Bangalore-based InstaColl, saying, “If there’s one company in India that has innovated, it’s this one, but it’s just taken a very, very long time. We’ve been working on developing an alternative to [Microsoft] Office [called Live Documents]. It runs on all platforms — PCs, Linux, Macs. It’s a full-featured product, 100% compatible with Office, not like Google Docs or other [applications] available online today.”

This company has 30 employees, he noted, “and they’re taking on [Microsoft], a company that has thousands of engineers working on this. From what we have seen so far, in terms of usability and functionality, the product is even better than Office because it fully integrates with web components. They’ve been working on this for the past five years. And that is really difficult to do in an environment like India, because people expect revenues immediately.”

Ventures Wanted

Rajan asked the panelists to quickly throw out some ideas for what kinds of businesses they stood ready to fund right away. Sidhu expressed a desire to fund a web-based bank. Yatra’s Shringi said he would be interested in a clean energy source — for airlines or other transport.

Parameswaran indicated that branded health care with improved logistics would be an opportunity in India. Shroff was bullish on nanotechnology, though he didn’t offer any specifics. Baljee pointed to the sector he was most familiar with — hospitality — and raised the idea of budget hotels in India. 

Bhatia reminded everyone of his longstanding test for the kinds of businesses he would fund: “Anything that makes something 10 times cheaper or 10 times faster!”