Why IT companies Infosys, Wipro are betting big on start-ups

BANGALORE: Indian information technology companies are turning venture capitalists in their quest for fresh ideas and technology to help them compete more effectively in a fast-changing business environment. Like multinational technology companies - Cisco, Intel and SAP - which are active investors, Indian firms too are tying up with emerging ventures possessing niche skills or buying stakes in them, thereby gaining access to what could even be blockbuster ideas.

 The trend was exemplified earlier this month when Infosys said it has set up a $100 million (Rs 540 crore) fund to invest in startups, besides spotting and funding internal innovation. Similarly, Mahindra Satyam, which has a stated goal of growing faster than the industry, has a $50-million fund exclusively for investments in global technology startups. Wipro, too, is actively looking to partner innovative young companies or buy minority stakes in them.

According to industry observers, Indian IT companies have become serious and methodical about identifying suitable startup ventures with the intent of investing and have tasked senior executives with such mandate.

No specifics
For example, at Infosys, M&A head Deepak Padaki is in charge of the fund. "This has become imperative, because of the pressure from customers and competition (to innovate as well as be more efficient)," said Sumeet Anand, who is a founder member of Nasscom IP4Biz, an initiative to connect startup ventures and large businesses.

Anand also runs Kreeo, a startup that offers enterprises a social media platform for internal collaboration. "Also the DNA and culture of a product company is different from that of services companies." While software services companies all agree that aligning with startups are an important part of their strategy, they decline to talk about specifics.
There have been earlier attempts at funding internal innovation- OnMobile at Infosys or SatNav at Satyam - but directing the funding spotlight to external targets is new for the Indian IT services companies, which are faced with fundamental changes taking places at a fast clip in the technology outsourcing market.

To stay abreast of latest technologies such as data analytics, cloud computing or enterprise mobility, they must work closely with niche startups with innovative technologies that can complement their existing service offerings.

"We place a lot of emphasis on innovation and we're actively promoting it within the company as well, but there is only so much one company can do, which is why we felt it may be good idea to tie-up with start-ups," added Manish Mehta, chief vertical solutions officer and member of the executive management team, Mahindra Satyam.

Indian IT companies are following a slightly different approach to investing compared to global firms such as Intel and Cisco, said an investment banker who has worked closely with one of the large IT firms.

"Multinationals deploy surplus capital in an organised manner partly to promote newer companies and partly to promote the ecosystem. In the case of Indian IT firms, investing in ideas internally or externally gives them an option to enter a venture early, thereby also giving them a better chance to acquire it at a later stage," said the banker, requesting anonymity.

Sanjoy Sen, senior director at Deloitte India, thinks that finding an external target and incubating it also forces companies to go out of their particular culture as it brings in new blood. "This also helps in enhancing the risk appetite.

 But some software companies believe that innovation is best done from within and are adopting external funding mechanisms and benchmarks to encourage new ideas from among employees. For instance, Cognizant incubates ventures within the company in a model patterned after Silicon Valley venture capital firms. Cognizant Capital, the vehicle which vets and funds these ventures follows a tiered funding process -- early stage, mid or late-stage investments.

Similarly, HCL Technologies believes in funding ideas internally and the exercise has helped it increase non-linear revenues, said Krishnan Chatterjee, senior vice-president and head of strategic marketing.