IT & ITeS Enterprise in India: an Outsider Perspective based on trends in Investment & Technological Evolution

Why should an outsider perspective matter?

I tend to believe that way too many people have taken Steve Jobs maxim, ‘customers cannot tell you what they need’ at its face-value and in the process probably haven’t realized fully that the very user-experience guidelines Apple Inc., so vigorously pursued, propagated to the developer community made the tech-consumer an integral part of the technological evolution & hence an “insider” for all practical purposes – After all within six months of launching iPhone, Jobs recalled his earlier decree of ‘No third-party apps on iPhone’ :-) - I rest my case here.

Life, tech & the metaphysics of a cyber-quest

The exabytes of sheer information thrown up by an internet-query and the consequent collateral learning at times gives a radically different perspective of the principal quest &/or changes the very course of the search/ research.

That’s precisely what happened when I set-out with an innocuous query ‘Life+Tech’ to check-on how the marriage of life sciences & technology is working out as indicated by the quality of innovation and the investor sentiment towards this emerging IT subset globally and, if India is in-sync with these trends – I strayed off-course quite a bit soaking up some non-serious gyan on gamification, cross-application potential of game mechanics to health & wellness, dallying a while with the first ever ‘drug discovery’ game, Syrum & eventually decided that I’d do good to first understand how the IT & ITeS enterprise is poised in India & then go about speculating on where it could go from here, towards life-tech or some other direction altogether.

The quantitative & the qualitative sojourn

As I looked into the openly available, mostly undifferentiated data** & the trends, I used the following assumptions in order to get as close to reality as possible;

• Wherever the VC activity has been clubbed under PE, I considered all early-stage & some growth-stage deals as essentially venture deals
• Where I depended on individual alerts of certain deals, I considered funding up to series-C as venture funding & series-D too if that involved at least one VC 
• No acquisitions, Mezzanine funding rounds have been considered as Venture capital (which of course wasn’t much)
• Since I was looking into IT sub-category trends & the only categorization ‘Industry Codes (VEIC)’ by NVCA is surprisingly devoid of some well-understood terms such as “Cloud”, “Apps” etc., I decided to use my own simplistic terminology that’s hopefully self-descriptive

**My primary source for the data was Yourstory.in which derives its own info from Venture Intelligence alerts & reports. In addition to this I have also used, primarily for cross-verification of primary category figures, the MoneyTree reports by PWC & NVCA from data provided by Thomson Reuters ……. phew

True to my enlightened detour, the not-so-cursory analysis of the available information on IT & ITeS related investments in India in 2012 drew an interesting picture;

• Commerce sub-category (B2C e-commerce) hogged the largest share of 45%
• Services sub-categories (B2B BPO, Cloud, Edutech, IT Services, Telephony) cornered second highest 22%
• Analytics sub-categories (B2B Internet & Mobile Advertising; web-analytics) that are focused on the increasingly crucial data mining, analysis and consumer demographic profiling gathered 20%
• Product sub-categories (B2B Mobile apps; PaaS; Software; Health-IT & Gaming) managed only 13% share of investments, helped in a large measure by the Mobile Apps category

From the above observations it can be inferred that the investor sentiment in India is very strong towards Commerce, strong towards Services & Analytics and weak towards Products. This also could mean that the investment in IT & ITeS in India is driven more by the local than the global potential–while this statement may sound altruistic, the statistics seem to support it;

It’s an irony that my initial interest ‘Health-IT’ is very insignificant at 1% of funding – a cursory review of the ‘mobile apps’ companies also doesn't indicate any healthcare component being pursued – so much for my principal quest!

Takeaways for the investing universe, primarily for the VCs

There’s only as much space to jostle around on the e-com super express

• The e-commerce opportunity while looks tempting is surely reaching the tipping point wherein differentiation & achieving of critical mass is going to be a huge challenge
• Compounding this is the fact that the global biggies like Amazon, eBay et al that could’ve offered a superior exit option by way of an acquisition have started to get-in on their own (Junglee.com, ebay.in) – banking on the relative ease of establishing a virtual enterprise
• It’s also apparent that the likes of Amazon are now gearing up to ‘Walmartify’ their online shopping and go physical to enhance user experience! – If not anything, this points out to the cyclical nature of consumer preference of a buying experience & hence the caution one has to execute in putting too many eggs in one basket.

The Quants will rule and later they won’t & then again they would

• The monetization of analytics opportunity will surely out-pace e-commerce & services given the eventuality of any business is to understand consumer & maximize the consumers buying impulses.
• Quite interestingly the innovation quality of Indian companies in this domain seems to be pretty high – probably since analytics combines Math & Jugaad, skills Indians inherently seem to possess.
• I’d also think it makes business sense for the quant in consumer analytics context to be essentially an ‘insider’ &  hence Indian analytics enterprise could always showcase an edge, a value-add
•  Eventually, while the ‘insider advantage could work in favour of Indian analytics enterprise in the shorter term, the Math + Jugaad + Semantics combination could open the world to India in a big way, touch wood.

Hop onto the Gravy (app) train early on & dish out by the dime

• Mobile apps development is essentially a platform (OS specific SDKs et al) based innovation that enables small & Individual pools of expertise to emerge quickly & thus very amenable to garage innovation
• While building of apps is innovation per se’, it is more ‘applied innovation’  (owing to the afore mentioned platform technologies) & hence India won’t necessarily face a quality-of-innovation prejudice
• Added to this is the global trend of healthcare going mobile progressively, there’s an open opportunity of cellular network providers tying up with local app developers, for the service & transactional ease they’d bring in.
• Apps are evolutionary products with a limited shelf-life (before being reinvented in a different version) & hence inherently man-power intensive. Given this context & given the explosion of engineering education making available qualified young (& economical) tech work-force that can think in English, India has the potential to become the ‘China’ of mobile apps – if only the rough edges of campus-to-corporate transition can be smoothened out sooner.
• Using this & some of the 'local' advantages i mentioned under Analytics, I'd think there's no reason why Indian enterprise shouldn't give an India flavor to its Gaming?, after all, all nationalities like to play by their own rules :-) - this would also expose the average indian youngster to the game mechanics that from whatever I read, is poised to dominate every tangible domain in the years to come.
• And finally, a domain where VCs can play evangelists, stoke the fires of enterprise & seed the self-sustaining revolution of mobile apps – all with minimal risk & funding :-)

And hey, is Mobile Hardware IT too? – thought NVCA said so…

• Is it me or wasn't there really any investment into the super accelerating mobile handset Indian enterprise in 2012? Unless this is already reaching saturation which I seriously doubt, there’s still a good open investment opportunity. But of course given the capital intensive nature of these start-ups, the scope for venture funding may be low and only at very early stages, but if successful this could turn into a multi-X return by series-B funding itself.

After Thought:

What’s with financial analysts & their compulsive fetish for quarterly reporting? – I’d agree quarterly trends do matter in consumer markets, but I’m utterly confused about their utility in a long-decision-cycle B2B environment like investing – enlighten me folks, I’m all ears!

Modi's WIEF woes & Why I'm pissed!

Not sure who’s pissing me off more…

The holier-than-the-pope trio of desi professors that merrily went about occupying Philly then & now gleefully pulled down the chief guest from his pedestal at a forum that’s neither about social work nor about English literature

OR

The legions of Modi fans overtly smarting from this snubbing of their visionary leader and outlandishly branding Wharton as Islamist and the perpetrators leftist

OR

The WIEF itself, which doesn't seem to have a strategy of identifying and sticking with the chief guest for its annual jamboree, but nonetheless goes ahead professing to stimulate an energetic dialogue between India's current and future industry leaders and policymakers.

OR

I myself, with my frustrating indecision on where my sympathies largely lie!

Will Mylan's acquisition of Agila benefit Accel Partners?

Okay, the story goes like this....

Way back in 2007, Accel partners committed to invest & invested over the next three years 1.5mio USD in a Bangalore based start-up called Inbiopro. This investment turned into ~10% shareholding (guestimate) when Strides Arcolab acquired 70% stake in Inbiopro in 2010. It’ll be useful to slip-in here that somewhere in 2011/12 Strides separated out Inbiopro from Agila as a separate business entity called Agila Biotech.

Now, post the Mylan deal, Strides Arcolab committed to invest USD100mio into Agila Biotech, Given this impetus if Agila Biotech vigorously pursues the commercialization of its pipeline of 8 biosimilars, its valuation could go up to anywhere between USD200-500mio** in the next five years, depending upon how many registrations are successful. At which time if Strides again succeeds in finding a buyer for Agila Biotech (Mylan again, given its Biosimilar ambitions?), it is likely this will turn out into a USD20-50 million exit for Accel Partners, i.e from a decent 13x to a good 33x ROI.

My take away from this is, scout around for start-ups that have chosen 'quicker to market innovations' as their research focus, invest in them early on & work closely on the selection of a local partner & monetize during the multinational acquisition - Not a bad mantra for a decent-value exit in a market like India :-)

**The valuation guestimates are based on the expected worth of approvals (EU/ NA) which are primary assets in this context. 

What could VCs learn from the recent pharma deals involving biotechs with very early-assets?

My response on the blog post "Preclinical Biotech Structured Deals: Reflections on 2013′s Solid Start" by Bruce Booth - posted on 01/Mar/2013
---------------------------------------------------------------------------------------------

The news of structured-deals/ buy-outs of ‘tight/ single-EARLY-asset’ biotechs both pleases & scares me… pleases, as I feel this will trigger a healthy change in the way start-ups choose their programs & scary because I (CRO/ CMO) will now start losing clients/ programs much before the conventional PIIA - read-on…..

While I totally agree with the points you’ve raised & the surmises made, I’d like to add the following;

• This in some fashion is an endorsement of the importance of early venture seeding by the very same stakeholders that typically enable the high value exits for VCs, viz., the mid-sized/ big pharma companies.
• As you say, there seems to be a promise of reward for innovative organizations that know their science – however I’m not sure if there’s any message about preference for a single asset/ tight set of assets, It is rather a niche focus/ platform & this aspect I’d think always mattered to the investors.
• Do I also see some de-risking in the form of going in for companies who’s lead/ pipeline candidates are inherently safer (recombinant proteins; antimicrobials et al) & hence highly likely to breeze through Phase-I
• Interestingly, though the indications are rare/ orphan, the therapies themselves seem to be more maintenance than curative & hence more attractive to the investing company
• This lure of an early alliance/ deal may now encourage the new enterprises to come up with more compelling technologies rather than me-toos… & thus help put drug discovery enterprise model on a correction course
• Is this the emerging new avatar of the CVC? - CVC 2.0? (Perdona, Baron.... :-))

Now, having seen a lot of my clients getting lapped up by mid/ big pharma & their programs either killed, shelved in favour of the larger companies competing pipeline, I would be a little cynical till I see the next instalment is released/ option executed.

Finally I would like to ask if there is a message in here for the VCs? – towards an opportunity, a need to structure the initial funding deals differently so that they could still keep an option to enhance their share whenever such early alliances crop-up eliminating  avenue of series-B funding?

Post Thought:

Quite a coincidence that I was just reading an article in HBR (Mar 2013) titled “How Competition Strengthens Start-ups” by Andrew Burke and Stephanie Hussels of Cranfield University.  The authors postulate that exposure to competition in the early stages of a firm’s life increases its long-term survival prospects – competition in this context including competing against a lean-funding scenario & hence learning to stay creative, efficient & productive – Since for all four companies here the early pressure is almost eliminated of by the reasonable/ comfortable funds received (upfront instalment OR buy-out), I was wondering if that makes these companies less long-term in light of the above study.

Of course I do understand that it’d be foolhardy to apply an academic study arbitrarily to any context, particularly in life sciences, where the author’s themselves have made a provision indirectly through their statement “Of course, early competition has a downside: Some new businesses fail before they have time to build up the immunity we describe” which sure sounds like the business of designing drugs.

What when the boundaries blur between VC & PE?

My response on the highly thought provoking blog post "Venture Capital 2.0" by Drug Baron (David Grainger) - posted on 01/Mar/2013

---------------------------------------------------------------------------------------------

Once again a really thorough proposition by Drug Baron that leaves frustratingly little scope to contradict. For the sake of a debate I would still like to raise a few questions; make a few statements & generally try not to sound like mouthing a rejoinder in support of Venture Capital 1.0 - which it definitely is not! J

It is absolutely true that the VC model should periodically re-invent itself & evolve like the innovations of other kind it chases routinely – this, I believe is not just true of VCs focused on life sciences but for all others too. Also, after a quick read, I realized that one could misread the term “asset centric investing” if they do not go through what exactly Index ventures pursues through its IDDs – David, you may consider hyperlinking your statement “Asset-centric investing is only the first step on a road to improved returns for life science investors” to http://www.indexventures.com/blog/index/post/354.

Now, since the primary intent of the asset-centric-investing model appears to be de-risking venture funding to the LPs (and thus raise funds with less difficulty), the inferred premise(s) of this model appear to be as follows;

• That the early discovery prior to lead-validation should-not-be/ need-not-be venture funded

• That owing to the large investment & the inherent risk of failure, innovation (in particular drug discovery) is something better left to academic/ federal institutions & large pharmaceutical organizations that can afford the risk (did someone say, ‘risk is neither created nor destroyed, only transferred and hedged differently!’ :-))

• And finally that any VC backed biotech with a “pipe-line” hasn’t probably thoroughly screened the clinical & commercial viability of candidates including, probably in a few cases other than, the lead-program candidate for which it managed to tease out some funding?

No doubt this model makes absolute sense to the fund of funds or LPs on its focus on sheer reduction of risk to IRRs but not sure if this model helps generate & nurture novel enterprises & why should it? - now I do realize that the ACI model also believes that creation of an innovative enterprise is NOT the VCs responsibility (probably since they are using ‘others money’ for this noble cause? J) & more a responsibility of the struggling entrepreneurs themselves?

Without sounding too knowledgeable about it, I would like to believe that across the past few years, VC seemed to have played a role in keeping afloat the spirit of enterprise at the most critical & vulnerable early stages and thus helped, however minimally, in letting a lot of budding innovators take root & grow their enterprises into cash-cow organizations that’d offer a lot more de-risked alternative asset investment options to the LPs.

So while I generally & unequivocally support the need for yet another paradigm shift in drug discovery methodology & innovation models, I am not sure if a VC model de-risked to this extent almost morphing into a PE would help this innovation paradigm nor help create the much needed pipeline of early innovative enterprises that later mature into investable asset-centric organizations.

Post thought:

In the current context of drastically reduced spend on basic discovery by big-pharma, I see that most most biotechs, drug discovery organizations have started to reinvent themselves into “drug development organizations” and have quite voluntarily started de-risking by building a pipeline/ portfolio of in-licensed/ spun-off ~pre-validated drug candidates . So I guess without so much as a nudge, the enterprise out there is all ready for Venture Capital 2.0 – Now again that doesn’t say much about the survival chances of real innovation that not necessarily stems from the largest of organizations/ institutions….. after all, garage innovation in life sciences appears to be a distinct possibility in in these winds of open source drug discovery.

Dialog on Drug Baron's post "The Primacy of Statistics: In defense of the pivotal Phase 3 Clinical Trial"

The Primacy of Statistics: In defense of the pivotal Phase 3 Clinical Trial

By Drug Baron (David Grainger)

http://www.tcpinnovations.com/drugbaron/?p=319&utm_source=rss&utm_medium=rss&utm_campaign=the-primacy-of-statistics-in-defense-of-the-pivotal-phase-3-clinical-trial

My comment on the above post;

A very compelling argument indeed - One factor though I think needs to be taken into account is the type of indication for which the drug is being pursued.

While for the more prevalent indications such as metabolic disorders, cardio-vascular diseases et al where the sample size is large statistical rigor is highly relevant & decisive while approving the drug, can it be simultaneously argued that for orphan & other highly specific indications, where the sample is small, a solely statistical model will eliminate a lot of potential treatment options to statistical bias? – particularly since its being increasingly noted that an individual’s genetic make-up (presence or absence of mutations on a specific gene et al in the healthy or diseased tissue) can determine how the patient responds to the drug under evaluation? (case-in-study, Vemurafenib working for BRAFV600-Mutation Positive Metastatic Melanoma patients)  

Drug Baron's reply t my above comment:

davidgrainger Mod  Murali Apparaju • an hour ago

• −

Thanks for your comment. This goes right to the nub of the argument.

You are exactly right that the slavish adherence to statistics will deny people (particularly in small indications) access to medicines that do actually work. In the limit, unless you are an identical twin, you are the only person with your genotype and maybe the drug would work brilliantly for you and for no-one else. With statistics as the gatekeeper, you will never get access to that drug.

BUT the key point of the piece is to point out that without statistics there is no way to know if that drug really did work for you. There is no control. At present (and maybe always) there is no alternative to a statistical test to be sure that a drug works at all.

Unless you are happy to approve drugs that MIGHT work, then we have no choice but to accept that with a statistically significant phase 3 trial as the "gatekeeper" we will reject drugs that actually work, but which we cannot prove they work.

For me, I would rather have the current system - where drugs have to be proven to work - than the one that existed prior to regulators, when snake-oil salesmen could sell anything as long as they could assemble a compelling enough argument to persuade the purchaser. That was a bad model - but allowing drugs through that havent passed a statistical test simply because they may work in some people, and there arent enough people to do the proper test, is a big step backwards.

Yet I see that happening more and more, particularly in the orphan drugs space that you plead as a "special case" - which is precisely why I wrote this article!

Has the rise of an Indian sun in drug discovery horizon turned out a no-show? OR is it a mere eclipse?

Looking up on google to put together my next post, I typed out the text “Drug discovery prospects India” and the top most hit was that of a 2012 Current Science study that went on to explain how the authors figured that the prospects are poor for original drug discovery in India. Not quite the encouraging start I was hoping for.., I scrolled further down and I find the counter poser, a report by Kauffman, no less, that predicted a bright future for drug discovery in India way back in 2008.

While the 2012 article, incidentally by Indian authors, isn’t necessarily a very brightly designed study and the Kauffman analysis isn’t exactly reeking of academic rigor, together these reports do raise the pertinent question of, if the rise of the Indian sun in drug discovery horizon turned out a no show? or is it a mere eclipse?

To part validate the above hypothesis, I went about tracking the flow of funds into life science enterprises within India in the past four years – some observations;

• Considering the 2012 article slams the quality of innovation of Indian CROs,  the discovery services companies ironically cornered >40% of all the investment made in past three years
• The investments into medical devices & diagnostics pretty much followed the global trend which has been incremental over years  
• Manufacturing organizations, both biotech & small molecule attracted some investment, I’d guess a sentiment again aided by a hope of continued & incremental global outsourcing
• Drug discovery organizations receiving venture capital rank at the very bottom of the list at 8% (as against 30% globally)

Even a cursory scan of the existing drug discovery strategies within Indian firms throws up the following aspects;

• A lot of ‘me too’ approaches/ platforms, including choice of target protein that may have already lost out the race to the plethora of US/EU innovator organizations
• Continuing the above line, a lack of novelty of approach, something that’d make an investor sit-up and take notice
• Incomplete, inadequate composition of scientific-leadership teams  i.e. key functional leaders & a sound advisory board
• A surprising lack of in-licensed drug candidates in the portfolios vis-à-vis’ efforts on building novel molecules from scratch
• A similar lack of high pedigree academic partnerships, Indian as well as overseas
• Last but not the least, a surprising lack of any focused attempt to use make use of the India-specific advantages like drug discovery based on Traditional & complementary medicine et al

As with most SWOTs, all the above weaknesses can be worked on and converted into opportunities. Looking at the diaspora of top-notch Indian chemists, molecular biologists, bio-physicists, pharmacologists across the globe making highly innovative & astute contributions to the drug discovery, development & clinical evaluation, I’d readily dismiss any talk of Indians not being up to it when it comes to path breaking innovation – only there is a definite need to re-purpose Indian drug discovery enterprise model, if I may say so & probably this is true for most other domains even.

      

Now, who’ll bell the cat? I say why not the investing universe?  of all geographies and domains out there, Indian drug discovery enterprise is where there's a crying, albeit unacknowledged, need for some astute thought leadership and strategic oversight so as to build, nurture & steer the foggy but promising entrepreneur pool - and who better than the venture capitalist to assume this constructive role, shift the paradigm & eventually partake the fruit of success?

Food for thought.

AFTER THOUGHT:

It’s about time the IRR of an Indian discovery organization is determined by the sheer value of the IP & portfolio it generates and NOT on whether the company is incorporated in Boston, Basel or Singapore.