The Seeds of the Next Silicon Valley

How Indian tech companies are helping to incubate startups

At the Indian Institute of Technology (IIT) campus in Kharagpur, near Calcutta, a small team of engineers is beavering away on what they hope will prove a killer competitor to the BlackBerry. At IIT Bombay, an earth sciences professor is about to launch a company that will tap the vapor of geothermal springs to drive turbines, generators, and power stations -- the first company to do so in India. Across the country, at IIT Madras, students and professors have spun off a startup that's working on a no-frills network computer aimed at the Asian corporate and government markets that will sell for just $100. "We dream of building billion-dollar-product companies here," says Ashok Jhunjhunwala, an electrical engineering professor at IIT Madras. "We believe we have laid the foundation for them."

No one knows how many of these products will take off. But the odds are that some of the fledgling companies will make real money. Dozens of such projects are now taking shape at India's elite IITs. In the same way that Stanford University and Massachusetts Institute of Technology helped spawn Silicon Valley and Route 128 in the 1970s and '80s, Indian institutions are encouraging professors and students with business ideas to take the plunge. The schools are providing initial office space, labs, and seed money to "incubate" startup companies. Some are also building tech parks to attract companies willing to collaborate. Since India began opening its economy in the early 1990s, the six (recently expanded to seven) IITs have created some 50 new companies. The pace has accelerated in the last three years.

That's a big change from the early days. When they were conceived in the 1950s, the IITs churned out top-notch engineers to meet an almost insatiable appetite from the country's steel, construction, power, chemical, defense, and textile industries. The schools so excelled at the task that they became a world-famous source of engineers, particularly for the U.S. But actual involvement by the schools in startups was almost nonexistent. Now students and professors alike are busy trying to become entrepreneurs in commercially applicable areas where IITs are strong, such as telecom, microelectronics, computer sciences and software, heat transfer and, of late, biochemistry and biotechnology.

The big challenge is finding funding. IIT Kanpur, for example, has a budget of just $1.15 million to sprinkle around a half dozen projects. IIT Madras has teamed up with institutions such as ICICI Bank Ltd. (IBN ), State Bank of India, and other local state-run sources to raise up to $230,000 for each of its 16 companies. And IIT Kharagpur is creating its own fund. "We have plans for a $230 million venture fund that we will raise from our alumni, investors, financial institutions, and the government," says Partha Pratim Chakrabarti, dean of sponsored research and industrial consultancy at IIT Kharagpur. All these efforts are necessary because Indian startups aren't much on the radar screens of American venture capitalists, who invested only $240 million in Indian companies last year. They invested $20.4 billion in the U.S.

Funds are rarely available for companies that don't have a track record of sales and customers. For example, Midas Communications Technologies Ltd., an IIT Madras spin-off that makes broadband and wireless telecom equipment, finally raised $10 million from American venture capitalists Argonaut Private Equity in July, 2004, seven years after it was founded. Midas' sales are expected to top $104 million this year, 50% higher than 2004. Its success is a boon for IIT Madras, where the electrical engineering department helped develop the technology for Midas products. Midas and other licensees of the technology paid the IIT $3.5 million in royalties last year.

Of course, applied research and business incubation at India's top technology institutes remain a far cry from their U.S. peers. But dozens of IIT spin-offs are a start. If India's software and tech stars can start to attract more venture funding, the breakthroughs of the future may come just as much from Bombay and Madras as Silicon Valley and Boston.

By Josey Puliyenthuruthel in Madras

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