Big Bang 2020: Birth of the Trillion Dollar Technology Megalith

Will it be the Web Services bellwether Google or Microsoft, IBM, HP, TCS, Infosys or a new entity we have not heard of as yet, that will breach the trillion dollar market capitalization mark? Will we have to wait till 2020 or will it be as early as 2015? Microsoft leads to race today as the world’s most valuable software technology firm with a market capitalization close to the $ 300 bn mark. Google has been the notional leader though, with its growth from the garage to $ 170 bn market cap within a decade. So will it be Google then?

Possibly, and possibly not. Google has rushed in to fill a void as a search engine pioneer and quickly grew into being a web services supermarket. It has you and me in its pocket. But does it have the rest of our known world, enterprise applications, infrastructure and the rest of the commercial software world eating out of its hands? Guess not, and but who are the leaders in this space? IBM, HP, Microsoft, TCS, Infosys, Accenture and their like. I will call them collectively as the “vendor” firms here.

I have theorized on this and I can say with a degree of confidence that the trillion Dollar Technology firm will execute significant hold on the consumer services as well the enterprise applications and technology markets. With organizations trying to evolve leaner means to succeed using technology as an enabler, providers will have to innovate and imbibe the global ethos completely. The Trillion Dollar organization will not be the so called “flat” organization of today, by its capability to execute from 30 different locations in the world. It will be truly global because, weaved into its 30 or more offices infrastructure will be a matrix based two dimensional or multi-dimensional excellence framework, across technologies, services, domains and functions, which will enable it to bring together a team across various geographies based on identified competencies to deliver on any project. It will not be like embedded work out of China, Software Engineering out of Ukraine and BPO put of India. This approach is not actually about going global, this is plain tactical and regional. It becomes strategic only when we can merge them into one seamless execution whole, leverage competencies from where they lie, and scale the model to a requisite size to deliver for a project.

With free float of all major currencies it is implicit that a correction will happen. Wage growth rates of companies that offshore will show a southward trend, while the same for vendor countries will see double digit growth annually. “Vendor” countries will see technology and infrastructure investments from “client” countries which will put an upward pressure on local currencies. Some of these inflows can be managed through macro economic policy making, but the days of nappy feeding technology exporters are far behind us. I will not extend this theory to conclude that outsourcing will stop. It will not. The “Vendor” countries will be the first movers still in the “level” playing field, because over the past 20 years of outsourcing they will have developed the scale and specialization to execute business out of any corner of the world qualitatively better and with a reasonable amount of value arbitrage. Enter then, the truly “Global Corporation”. By 2010, some major consolidation within the IT services niche will happen, and in-organic growth will see at the very least 2-3 IT “Vendor” firms breach the $ 250 bn cap mark.

Riding a parallel growth track will be companies like Microsoft, Google, Apple and a few others who will be doing great things with technology, wireless, web, robotics, bio analytics and generating newer revenue streams. Google and a few others will evolve newer ways of monetizing web assets that they have acquired judiciously over the years. Somewhere down the middle of this, the “vendor” firms, driven by growth pressures and shareholders will find themselves hurtling towards the technology leaders. The “quick on the feet” technology innovators will meet with the Globalization honchos. From the resulting big bang, one or perhaps two Trillion Dollar Megaliths will emerge, all encompassing, in your personal computer, phone, credit card, corporate networks and your grand child’s robot Barbie mate.

Interesting theory isn’t it? Meet me in 2020, and I will “I told you so” you.

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VC Investments in India: Catching the Silicon Valley Flu

Is the much touted transformation finally happening?

The Ernst and Young VC Insights Report 2006 ranked India at number 5 amongst the top destinations of Venture Capital. India has attracted VC investments worth $ 1.1 bn in 2005 and have just followed up with another very successful 2006. Most of the very successful technology VC’s like Sequoia, NEA and USVP have already raised or are planning to raise India based funds. Organizations like the TiE are providing adequate platforms for the young entrepreneurs to network with VC’s and snag big ticket investments. There are signs of success already doing the rounds mostly in the hot Web 2.0 space. Are we looking at a base transformation here?

Before I start putting together this paean, let us do a reality check. The fact is that bulk of the $ 1.1 bn figure was utilized for buy-outs and mid-stage funding of IT Services firms. This is the low hanging fruit. The IT services market has matured and despite persistent threats of the market over-heating and bubbling over, the players have been able to stay ahead of the curve. Some of them, like GlobalLogic and Symphony have established themselves in their own niches (offshore product development services) and have grown dramatically in the past. Still others, have re-invented themselves, got acquired or have pursued strategic acquisitions in foreign stores. As dynamic as this sector may appear, the VC community don’t seem too excited. The reason being that consolidation is already overdue in the industry with mature players looking to either grow through acquisitions or simply capitalize. The critical “Exit Strategy” that most VC funds seek seems to be absent with most players in the segment. We are not going to see a large number of players rushing to NASDAQ for a listing in the short while. Nor are we likely to see a bright and “green in the head” start-up grow and get acquired in the next 5-6 years. The fact is that the VC community was not a very pro-active participant in funding the IT Services off shoring boom, and at this stage, when the industry is pretty much on its own feet, it is not likely to meddle too much with the dynamics of the sector. Examples like Global Logic, Virtusa, Symphony Services, Persistent Systems will abound, where VC’s have opened their purse strings to do aggressive funding, but these set of companies really belong to another planet, the OPD planet.

The story on OPD started, when VC’s stated asking their portfolio companies to look offshore for specialized product development services. In most of the cases the firms needed the required run-way in the seed stage, when burn-rate of cash was high. So they start talking to this “peculiar” breed of service providers who apparently started with the motto of serving ISV’s. I use the word “peculiar’ because, some of these companies were talking about taking complete ownership of product development. Symphony for one, had the courage to tell the ISV’s in America, “Product IP and Marketing are core, Product Engineering, Innovation support and sustenance is context”. IT services had never seen such an interpretation of offshoring. The Implications of this pitch rang heavy in terms of the sheer scale of delivery and specialization in that the client expected out of OPD partnerships. Buoyed by this trend, VC’s started asking their portfolio companies to seek partners in India, then, as if to get a “double-bang” for the buck, they also started adding these OPD firms to their portfolio. Most of the funding that happened in the OPD space was early to mid-stage. The players in this segment already had ISV clients and had longer term contracts that provided them with flexibility on what they could do with the freshly induced funding rounds. So you had, VC’s prompting their portfolio technology companies to partner with OPD firms within their portfolio. This was not a very obvious trend at first, but is increasingly evident as time goes by.

Now, the Million Dollar question? If one can develop products in India for one’s own portfolio companies, what should stop the VC’s from catching a flight evaluating proposals of home grown firms having a global product delivery plan? The success of the OPD firms was significant in the sense that, the industry understood that contextual IT services is not the only thing you could outsource to India. One could actually have products developed from white-board to market in India. Expatriate techies out of the Silicon Valley who had worked in Networking, Storage and Telecommunications space took up the mantle first. They approached VC’s with seed funding proposals based on an idea, 100% of the execution go which would be driven from India. Pune is dotted with such firms that have extremely successful products out in the market today. Much in the model that Israel grew as a destination for Storage and High tech funding, I will not be surprised if product innovation and leadership in certain niche high tech segments is lead by India, fuelled by the new investment interest from the Silicon valley in particular.

The Web 2.0 boom did not leave India untouched. Norvest, Kleiner Perkins and a few others have got their exalted hands wet in the India Web.2.0 race. Leading the pack are travel portals like Cleartrip.com, Travelguru.com, Naukri.com and the real estate portal 99acres.com. There are others who are catching up as I write. Suddenly the leading VC firms are getting enamored with 38.5 million internet penetration number and the broadband adoption that has been growing steadily over the past couple of years. My feeling is that, one cannot go wrong with the investments that have thus far happened. The only worry is, as usual, of overdoing it. Although the buzz thus far is that most of the investments are happening because of the lack of more qualified “mainstream” opportunities, purely from the risk/returns perspective the investments made till now are on the right track.

So, with all the new product development for global markets and the investment in the indigenous Web.2.0 space, is India finally likely to break the mould of a back-office destination for the US? Time will tell.