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An Entrepreneur's Lessons from the Silicon Valley

An Entrepreneur's Lessons from the Silicon Valley
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The Silicon Valley area, concentrated around the hubs of the cities of San Jose and San Francisco see more technology investment than the next 7 cities combined, capturing over 25% of global venture capital investment. India has two cities that have made it into the top 20 investment destinations (Mumbai and Bangalore) seeing approximately 2% of the VC investment in the world. While this is a positive outcome in the last few years, on a per capita basis Bangalore and Mumbai are only 43rd and 70th respectively.

Having had a set of experiences uniquely suited to analyze some of the patterns across India and the valley, This article explores just a few of the higher level insights that contribute to the success of the valley. I think the Indian technology circles have some unique advantages and these can be leveraged incredibly over the next decade as the strengths of the Indian economy and market grow. To be able to leverage this though, we must learn from the more mature markets of the world. To this end, Silicon Valley represents the most advanced technology market globally. While many of the challenges in India are unique, substantial number of the core frameworks are applicable across markets.

Academia as a feeder into industry

Across the valley, the ties between industry and academia are extremely strong. In fact a little known fact about the origin of Silicon Valley is that it emerged in a large part due to this connection. Frederick Terman is often regarded as the father of Silicon Valley due to his contribution whilst part of the faculty at Stanford to the formation of companies such as GE, HP and Lockheed was instrumental. Emergence of companies such Google, VMWare, Sun Microsystems and technology such as Spark and Mesos to name a few are examples of the continuing tradition of technology companies depending on and coming from academia.

 

India currently has a very low participation of research and academia involved directly in industry or contributing to technology that is commercialized. This is a cause for concern especially since even long term incumbents such as flipkart etc continue to avoid drawing from academia or contributing substantially to long term research. On the same vein, it is very difficult for companies just starting out to make core innovations whilst they struggle to gain a foothold. For a stable long term growth of the technology sector, experienced professors, Phd students and Post Docs who participate in industry by lending their expertise are needed. Fundamental technology is always more defensible and as a result once such people with an academic background get involved in founding start ups they would find that fund raising is far easier for them. Venture Capital firms (ours included) are always on the lookout for defensible companies and technology that is patentable/verified by years of research meets this high bar.

 

Scaling cautiously and purposefully

Understandably, a large number of Indian technology companies have sought to leverage the relatively cheaper labor available in India to build a competitive advantage. A large number of startups that seek to emulate companies from the valley have sought to follow the more labor heavy startups such as Ola (Uber) and Swiggy (Doordash/Foodpanda) and emulate the service driven model of past Indian software companies such as Infosys, Congnizant etc.

This approach is a model Indian startups have developed substantial competency in over the years. In most of these types of businesses, the core human contribution is largely replaceable; Drivers, Delivery folks and even software developers tend to hired in abundance with each individual contributor being responsible for relatively little value. The objective of these companies seems to be to execute as quickly as possible to gain advantages in the market they are in.

This goal is a noble one but the path to it is far from ideal. In pursuit of scaling an organization to such large numbers so quickly companies have to necessarily compromise on some important issues vital for the long term health of a company.

Hiring too quickly leads to a necessary relaxation of standards to meet large quotas. In doing so, the employees necessarily can’t be expected to take significant responsibility themselves leading to an inability of even senior employees often not being able to contribute in proportion to their time spent in the company. The culture of the company is the next to suffer. The company’s culture or character is what enables organizations to survive the inevitable dips in morale and outlook for the firm. The culture of the company is a product of the people, when hiring is done too quickly, it is impossible for a company to maintain a coherent culture.

In contrast, in the valley, a large segment of a company’s focus is on growing the talent of existing employees and consequently investing in their success so as to retain them. Companies scale very slowly initially, making sure that a very clear product market fit and company culture is established before growing substantially. Because the ask is so high of these initial employees, firms maintain a very high bar throughout the hiring process. Keeping the smartest people around leads to a cascading effect where more and more high quality people are attracted to the company and can be effectively vetted by the initial pool. Indeed making this investment has often led to the engineers, product thinkers and executives in these places to become much better over time. Companies have, as a result, remained leaner, more effective and are quicker to produce products compared to their indian counterparts. Flipkart for example has 35000 employees, around the same as Alibaba and more than 2.5 times the number of employees of Facebook but is valued at over 15 times less than either company.

Aligning employee incentives: Equity 

The alignment of employee incentives is essential in any industry where the core value of a company is derived from the human capital. Indian companies tend to be very cautious in giving equity or options to their employees; many large startups avoid doing so completely. Even the ones that do give equity, only offer it to very senior employees or people in very specialized technical roles. In Silicon Valley however, freshers right out of college are granted equity in even the largest companies such as Google and Facebook. Depending on how early an employee may join or their contribution, employees can often have even a percent or two of the company’s equity. This binding of interests leads to a much higher employee retention even as competitive pressures grow. Companies are therefore able to exchange equity for long term value, leadership and stability from their employees. Often Indian startups we have worked with complain of high degree of churn in their employees or difficulty retaining them. It is well known that a startup’s success often depends on the sheer will power and determination of the team to push forward and execute on the shared vision. Not aligning the team’s interests financially to the success makes the task of creating a technology firm tougher. The original task is hard enough as is. Attrition rates in India tend to be close to 30%[3] , almost 30% higher than the 25% attrition rate for startups in America. This results in fewer startups in India being able to draw on the the multiplier effect of their people providing leadership and experience over a longer period of time.

Otto Van Bismarck has a famous quote that “A fool learns only from his own mistakes. A wise man learns from the mistakes of others”. I would argue that the same is also true of the successes. As a relatively nascent market with incredible potential, India will continue to grow and make their own mistakes and unique frameworks for success. As the number of Internet users in India grows by hundreds of millions and new, innovative companies come to serve these users with uniquely Indian products; there are many models we can borrow from the places that have passed through these stages already.

I grew up in India, went to Stanford and have met and interacted with numerous VCs and entrepreneurs in the valley. While at Stanford I created a VC firm in India that most recently was one of the investors in Postergully (acquired). In the meanwhile I have been and early employee at Robinhood; a Fintech startup actively involved in democratizing access to financial markets.

Edition: December 2016

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