Musings on Bengaluru and the Trends Shaping India's Tech Ecosystem

Bengaluru

It is nearly impossible to discuss India and technology without Bengaluru. Dubbed the “Silicon Valley” of India, it is the heartbeat of the tech ecosystem. Engineers across the country have made the pilgrimage to the capital city of Karnataka, helping make the tech hub what it is today. 

Bengaluru's story began with the establishment of major innovation-driven organizations in the city. This included Indian Space Research Organization (ISRO) HQ, as well as large private corporations such as HP, Infosys, Texas Instruments, and IBM. This provided the IT talent to serve as the backbone of Bengaluru’s growth, and start a talent flywheel.

As more of this talent moved to the city, larger multinationals began to tap in. Companies such as Google, Nvidia, Amazon, and Microsoft now all have presence in the city. Combining this with government support, the foundation for the Bengaluru that we know today was established. The natural progression of this development ultimately resulted in the most robust startup ecosystem in Asia. 

Flipkart, one of the most successful startup stories in India, was founded in a two-bedroom in the Koramangala neighborhood of the city. Ultimately, Walmart purchased them for a sizable sum, initiating what many consider India’s own ‘Paypal Mafia’. Since then,  44 startups have been founded by former Flipkart employees. Such network effects have propelled Bengaluru to its current status.

Now, Koramangala and neighboring Indiranagar are where many startups and VCs call home. Many venture investors and startups alike have their offices within walking distance of each other, and the coffee shops in these neighborhoods are consistently filled with chatter from both operators and investors alike.

However, despite all the positive signals, there are still some issues to navigate. While large corporations are still making their presence felt, VC funding has dropped considerably since 2021. A period of cheap capital via low interest rates allowed speculative capital to flood into businesses. While data can be tricky to peg down, some have Bengaluru exceeding Beijing and Shanghai in VC funding in 2021. A considerable feat for the city. Despite recent challenges, the long-term outlook remains bullish; the ecosystem, though nascent, is maturing rapidly.

One of the other more notable issues plaguing the city is its infrastructure. Traffic is horrible. Maybe the worst in India. Not to mention, sidewalk infrastructure is crumbling and its nearly impossible to walk around safely. Here are some photos from my walks that turned into pesky traverses. 

Along with a recent water crisis that has impacted residents, many are wondering how much more the city can physically take. Consistent and reliable infrastructure is important for any growing city, and right now there remain many questions about how Bengaluru will patch these issues. 

That being said, there is an undoubtable network effect within the city. Once reaching the level of inertia that Bengaluru has achieved, unwinding it is a tremendous task. This helps me to remain optimistic on where the city is and where it is headed. The palpable energy is certain, and as always, it's the people that make the place. And Bengaluru has some damn good people. 

India

I definitely came into India with some preconceived notions of the nation’s tech ecosystem. Some came from discussions with friends more knowledgeable than me, and others from things I had read online. 

Here are some of the most notable themes that I came across during my conversations.

Building in India for the World 

Building products and businesses in India to serve the global market is a consensus strategy amongst both investors and operators. There are several reasons that it makes sense on paper. 

One significant advantage is the cost arbitrage in labor; India offers significantly lower labor costs across all sectors compared to the U.S. and other Western markets. This opportunity allows companies in India to scale headcount affordably, potentially boosting productivity per dollar spent.

This is especially relevant for early stage startups, where cash burn is of utmost importance. As startups aim to find product-market-fit, they can afford to extend their runway much longer than U.S. counterparts due to the lower talent costs. Keeping burn low, but also not sacrificing on talent, can lead to good outcomes. 

However, I found a consistent remark across several conversations that would counteract the benefits of low labor costs. Many mentioned that Indian customers in both B2B and B2C models have a lower propensity to pay than international counterparts. While unclear to which degree this makes a go-to-market strategy more difficult domestically, it definitely negates some benefits of low labor costs. 

What it does introduce, however, is potentially creating a “stronger” product-market-fit for businesses that eventually want to go to market globally. The theory is that if a business can make the unit economics work and successfully scale revenues domestically, that it will have an easier time selling abroad. It makes for an interesting testing ground, where businesses can try out different strategies to see what sticks domestically, and then bring it global when they find something that works. 

This theory is definitely nuanced, as there are business models such as quick commerce that have been massively successful in India and failed horribly elsewhere. 

Although the discussion is largely anecdotal and subjective, the incontrovertible support for the 'Build in India for the World' theme lies in India's status as a free and open market. A massive difference from China.

 In China, there is an ever looming threat of entire verticals being derailed by the CCP. Not to mention the party’s influence on businesses such as BYD and Huawei to further exercise Chinese interests abroad. Both entrepreneurs building in China as well as international customers are taking on serious long tail risk by virtue of their ties to the heavy hand of Xi Jinping and the CCP. 

This is not the case for India, where the government has shown strong support for the entrepreneurial ecosystem (more on this later), and there are less existential risks that could curtail Indian businesses’ ability to bring products and services to market globally. India has catered itself as a great place to build amazing companies and products for the world to use.

Colossal Consumer Market

Everyone knows India is big. However, it didn’t quite click for me how big this place is until I arrived in the country. I had just landed in Mumbai and it happened to be opening day for the IPL, the professional league for the most popular sport in the country, Cricket. I decided to go for a walk around the city that evening and found nearly every pub, restaurant, barber shop, and everything in between was streaming matches. People were glued to their phones at bus stops and sitting on benches in parks. 

I assumed that a lot of people around the country were tuning in, but I didn’t quite realize how many. It was later reported that 168 million viewers tuned in to watch the IPL opening day for television, and another 113 million through digital streaming services (Jio). A massive total. To contrast, 123 million people watched this year’s Super Bowl between the Chiefs and 49ers, which was a record for most watched TV program in U.S. history. This was a stark reminder of the scale of India. 

While the domestic consumption market is already strong, one secular trend stands above the rest. The rise of “affluent India”. 

I had written in my most recent piece about the large swath of the nation that lives off a few USD per day. While this demographic group will hopefully see a rise in income levels due to the push to industrialize the country, the cohort that investors and operators alike are currently focused on is the upper class.

According to a Goldman Sachs report from January, only 4% of the nation’s working age population has an income over USD $10,000 (60M people). Using data from tax filings, bank deposits, and credit cards, GS estimates that this number is growing at a 12% clip annually, and will lead to a demographic size of around 100M people by 2027. 

This double digit growth rate is enough to attract plenty of eyes in the consumer sector. This rings especially true for “premium” offerings within travel, leisure, fashion, beauty, passenger vehicles and other verticals where discretionary spending drives the market. Premium offerings within the same sector, and even the same company, have already been growing at a faster rate than their more “economical” counterparts. Examples include Eicher in the two-wheeler industry and Nykaa in premium online beauty.

Given the demand from the consumer side, the expectation will be that there will be a whole new generation of consumer businesses that ascend rapidly in India. This is applicable to both consumer technologies (i.e. e-commerce, marketplaces, etc) as well as consumer packaged goods and retail businesses. 

Due to India’s multi-cultural population that speaks hundreds of languages, English is oftentimes the common tongue between the masses. For consumer companies that are trying to cater to the entire domestic market via English, they induce a second order effect, which is catering for the larger globe. Chances are most people in the U.S. will soon become familiar with several consumer businesses founded in India. Given the growth rate and scale, it is only a matter of time.

Government Support

India has made it clear that they want to be a technologically forward nation. This is evident through the rollout of two government supported technological initiatives; UPI and ONDC.

UPI, aka Unified Payments Interface, is an instant payments system and protocol that was introduced in 2016. It stands as one of the most significant public-private partnerships in the world, ahead of its time for digital infrastructure. The U.S. has only recently rolled out an analogous version in FedNow, finally enabling real-time transactions 24/7 for consumers and businesses.

The non-proprietary protocol nature of UPI has invited innovation from various sectors such as finance, e-commerce, and other sectors to come build on the platform. This has enabled immense accessibility for everyone across the country to interface with UPI, as the network is used for everything from P2P payments from taxi passengers to rickshaw drivers, bill payments for rent, and even new lending opportunities for a variety of financing options. 

Credit opportunities on UPI are expected to grow significantly over the next several years. While there are moral hazards to keep in mind, an opportunity for massive swaths of the nation to gain access to credit lines is an interesting proposition. With still relatively low credit card usage rates, this remains a massive opportunity for a variety of fintech operators and investors. Add in a mix of loyalty reward programs, card issuance, and buy now pay later (BNPL) companies, and soon it will become clear to the globe that UPI is the base layer for an era of new opportunity in India, but also the rest of the world. 

India has been keen on exporting this technology to other nations. A great example of India building for the world. Currently 11 countries have approved implementation of UPI within its borders, including Qatar, France, Singapore, UAE, among others. This will allow for more seamless cross-border transactions between participating countries, and represents progression towards digital public infrastructure that does not rely on external service providers. An interesting trend to keep an eye on.  

The other government supported technological innovation is the Open Network for Digital Commerce (ONDC). Created by the Indian government in 2021, ONDC is structured as a non-profit, open-sourced network that will facilitate increased transparency and connectivity between shoppers and sellers across the country. 

ONDC is not a platform or an app, but an initiative that leverages open source framework to allow entities to interact and transact.

This framework is Beckn, an open protocol designed to provide a common framework and set of standards within digital commerce. Analogous to what HTTP is for the internet, Beckn is the protocol that instills standardization for interoperability across digital commerce platforms. Beckn can also be applied to healthcare services, food delivery, ride-hailing, and other sectors. 

This initiative aims to dismantle existing market silos, allowing direct interactions among retailers and buyers, which could lead to better price discovery. Particularly, ONDC seeks to level the playing field for small and medium businesses by reducing entry barriers and enabling them to compete more effectively against larger corporations on price or quality.

This is in response to the platform-centric e-commerce models in the U.S., where smaller businesses often struggle against giants like Amazon. India is instead hoping a decentralized protocol will facilitate a more inclusive e-commerce environment. 

Although still in its nascent stages and facing numerous challenges, ONDC epitomizes India's strategic foresight in digital commerce. It is a bold bet by the nation, with a lot at stake. McKinsey believes that ONDC has the potential to increase digital consumption to $340b by 2030. 

Will India’s foray into uncharted territories play out in its favor? Only time will tell. But one thing is for certain, the ambition of the Indian government, its businesses, and its people can no longer be ignored.