India's university incubators: Learning curve

As a doctor from the prestigious All India Institute of Medical Sciences and one of the youngest people to clear the Civil Services Examination, Unacademy founder Roman Saini represents the depth of entrepreneurial potential in India's university system. His company, however, is on a mission to rectify what it calls a stifling nationwide classroom culture.

Blume Ventures provided $500,000 in seed funding to the free-to-use learning platform operator last year and quickly followed up with a $1 million booster shot alongside a clutch of local VCs.

Although it is not uncommon for bootstrapped start-ups to attract this kind of attention in India, Unacademy's emergence as a VC target is notable for simultaneously demonstrating the strengths and inadequacies of domestic educational infrastructure. The company markets itself with a particularly high level of scholastic credentials, but its road to commercialization has been conspicuously independent of India's fast-growing network of on-campus incubators.

Indian universities have not created people who can manage incubation processes because they have not looked at the innovation ecosystem around themselves as a potential source of income – Arpit Agarwal

Over the past two decades, government funding for university-linked incubators has coincided with an erratic pipeline of seed-level deal making in India. As a result, venture investors are tempering their expectations for the raw pool of talent offered by these incubators and acknowledging that the most prospective start-ups will come from a more diversified range of springboards.

"The government's heart has been in the right place as far as trying to create commercial ventures out of universities, but the process of venture creation has required more elements than they could create." says Arpit Agarwal, a principal at Blume. "Over the last five years, there has been significant improvement, but overall, not much company creation has happened at most publicly funded incubators in India."

Breeding grounds

India's efforts to indirectly support start-ups via a concerted university incubator funding program can be traced back to the 1990s and owe much to policies previously implemented in the US, UK and Israel. Since this time, the government has distributed about $750,000 per incubator in five-year funding blocks and created some of the most well recognized company creators in the country at schools such as IIT Bombay, IIT Madras and IIT Kanpur.

There are 23 IITs, or Indian Institutes of Technology, and with some 250,000 graduates worldwide, they are widely regarded as the backbone of the country's scientific intelligentsia. Seven out of India's nine current unicorns - start-ups with valuations in excess of $1 billion - were founded by former IIT students and it is estimated that about 70% of domestic start-ups in the $500,000-$1 million valuation range have IIT roots.

Nevertheless, the results of the Department of Science & Technology's campus incubation push are considered mixed. Between the mid-1990s and the early 2010s, about 80 incubators were sanctioned at IITs and other universities, making such institutions the predominant host for formal company creation laboratories nationwide. Venture investment activity during this period, however, has not paralleled the accumulation of infrastructure. According to AVCJ Research, early-stage VC investment fluctuated widely throughout the 1990s, peaking at an anomalous $540 million across 91 deals in 2000 before falling to about $29 million across 10 transactions only three years later.

"The incubator space is still relatively new in India, so it hasn't got that critical mass yet, and you can't always get incubator managers who have been involved with start-ups and exposed to the business community," observes Poyni Bhatt, chief operating officer at the Society for Innovation & Entrepreneurship (SINE), the incubator at IIT Bombay. "It's very expensive for academic-linked incubators to hire industry people, but if you don't get them, you don't get the best resources. Private incubators are also challenged by getting the right people to manage their entrepreneurship programs, but not to the extent that the academic incubators are."

Such staffing issues are commonly viewed as university incubators' biggest inhibitors in providing a viable stream of seed-level investment candidates. Due to their campus connections, incubators are overwhelmingly mentored by academics who tend not to possess the marketing and business acumen needed to round out a practical start-up plan. Also, these individuals may find it harder to harness and direct entrepreneurial talent at the junior undergraduate level, while older students are sometimes more committed to science than start-ups.

These weaknesses are essentially symptoms of the relative youth of India's program to meld academic research with start-up incubation. But the older ecosystems on which India is modeling its growth have done more than just introduce industry expertise to the mentoring teams. Rice University in the US, for example, typically measures its intellectual property (IP) revenues at its technology office in the range of $1-3 million.

Blume's Agarwal has been working in this space since 2007, including a stint heading his own campus incubator services consultancy called Academic Ventures. In addition to talent shortages among both mentors and entrepreneurs, he attributes stagnancy in IIT-linked incubation to a general shortage of high-impact technical research and faculty members' reluctance to plunge into entrepreneurship.

"The amount of translation of science and technology research that happens in the US, UK, or even in a small country like Israel, is much ahead of India, so not too many start-ups are being created," he says. "Indian universities have not produced people who can manage incubation processes because they have not looked at the innovation ecosystem around themselves as a potential source of income."

Cream of the crop

The prominence of India's academia-linked incubators - IIT Madras estimates that 56% of incubators are located on campus - is a factor that local VCs must consider since it influences the quality and character of seed-level deal flow. Although incubators associated with schools are usually limited to engaging start-ups with founders under their organizational umbrellas, they generally offer greater access to infrastructure such as office space, services including IP transfer and employees in the form of students.

Another advantage stems from the notoriously rigorous selection processes of Indian education institutions, especially at the IITs, where only about 1% of applicants are typically admitted. This is seen as effectively offering VCs a state-sponsored filter for identifying founders with a survivalist, entrepreneurial spirit.

But perhaps most importantly, the prevalence of academic incubators in India gives VCs more opportunity to tap into companies that are pursuing concrete innovations rather than "me too" business models based on existing technology. Rajendra Sonar, an associate professor at IIT Bombay and the founder of two machine learning start-ups from SINE, sees this approach as more challenging for entrepreneurs, but generally resulting in more sustainable business models.

"Creating IP based on years of effort is not easy for non-IIT and corporate start-ups," he says, noting that many of India's success stories have been copies of businesses that have already been proven in the West. "One of the bottlenecks for research-based start-ups is ecosystem - getting funding for product-based start-ups is relatively difficult compared to service-based start-ups."

As entrepreneurialism becomes increasingly popular and investment proposals multiply, VCs will need to recognize that a growing number of university incubators will not necessarily translate into original IP in the short-term. According to research by InnoVen Capital, Indian angel commitments increased 70% during the three financial years to 2016 to about $16.7 million. But the rise in seed-level deal flow that these numbers reflect represents a due diligence burden for investors.

"Volumes have gone up multi-fold, but with that you have to do more quality checks because the failure rate doesn't change," says Vikram Gupta, founder and managing partner at IvyCap Ventures, a firm which generates about 70% of its deal flow through the IIT alumni networks. "As the volumes go up, the amount of effort you put in has to go up to shortlist the right companies."

VCs have responded to this challenge in recent years by establishing special units to support academic incubators that may not be offering enough support to founders on the commercial and organizational side of start-up development. IvyCap, for example, has established an incubation services platform known as IvyCamp, which rather than directly competing with academic incubators, serves as a marketplace for rating and comparing incubators based on criteria such as infrastructure, staff and funding availability.

The Indian Angel Network (IAN), likewise, has set up incubation programs alongside partners such as the Small Industries Development Bank of India in an effort to reinforce the country's existing incubation network. Additional traction on this front has also included a groundswell of similarly motivated public-private partnerships and non-profit organizations such as Villgro Innovations Foundation.

Global Incubation Services (Ginserv), an off-campus start-up developer promoted by the JSS Mahavidyapeetha university network, has exemplified the growth of this space. It is now receiving more than 1,000 entrepreneur applications every six months and is planning a staffing expansion that would increase its accommodation capacity from 65 to 80 start-ups.

"We have been getting a lot of enquires from educational institutions asking us to help them set up incubators, so we do a lot of consulting appointments," says Vinod Shankar, chief operating officer at Ginserv.

The long game

One of the more incisive initiatives from an investor perspective has been the government's Biotech Ignition Grant. It focuses on seeding researchers not in isolation, but in proximity to the relatively few academic institutions that can support marketing-related development outside of the laboratory. The expected outcome of such programs is a deeper integration of industry and academia. This is seen as creating real potential for a Silicon Valley-style ecosystem, where universities and corporations benefit from a mutually supportive osmosis of expertise.

"Industry needs to engage more with academic institutions, but at the same time, academics also need to start a two-way interaction by setting up syllabi and courses that can bring in industry and business thinking," says Padmaja Ruparel, president at IAN. "That's starting to happen in some of the universities, but is a cultural change that will take a decade or more."

University incubator teams echo this sentiment with reports that the mindset on campus has made significant strides in the past few years. The change is often attributed to the success of companies such as Flipkart and Ola, which has convinced the otherwise conservative parents of undergraduates that entrepreneurship is not an option that should necessarily be discouraged. Meanwhile, professors, including IIT Bombay's Sonar, are now being allotted leave of up to three years to pursue venture creation.

Sustainability in this gradual cultural shift can be inferred by the natural emergence of regional specializations. As Bangalore takes the lead in IT and software creation overall, Mumbai has focused on financial technology and Pune has won a reputation for chemical engineering and renewables. The notion that these more focused hubs are being increasingly connected to competent company-making support is building expectations for a breakthrough of macroeconomic significance.

"India as a nation is still to come out with its own global products, but in the next five years, I'm expecting a Google or an Apple from India is going to drive the next wave of growth," IvyCap's Gupta adds. "Robotics, machine learning and analytics are all doing quite well at the IITs, so it's just a matter of having the right infrastructure and policies in place."

This view says much about the long-range vision of India's approach to start-up support. Since the government favors backing academic institutions over making direct industry investments, VCs have been given little to work with in the immediate term. The evolution of an environment where science-based IP can thrive, however, is representing a more compelling end game for patient investors.

"As far as number of startups is concerned, we are in the second place behind the US," says Ginserv's Shankar. "And I'm sure that because of what's happening in educational institutes with the setting up incubators and accelerators, we are bound to be number 1 within a few years."

SIDEBAR: India education - Export angle

A clear validation of the Indian government's approach to start-up support came last year when Innovation Centre Denmark (ICD) published a report highlighting the strengths of the country's academic incubation machine. The partnership between Denmark's Ministries of Foreign Affairs and Higher Education plotted a growing dynamism in the Indian ecosystem with the expressed intent of inspiring the educational institutions back home.

"I think the institutions here in India are doing quite well in terms of promoting start-ups," says Twinkle Jawrani, an innovation officer at ICD based in New Delhi. "Most of major institutions in India have an incubation set-up, and wherever an incubation system has not yet come up, it is in process and they still have some entrepreneurship courses running."

Deferred placement programs were flagged as one of the stronger on-campus incubation offerings due to the flexibility they provide students who wish to pursue a start-up opportunity and return to their studies if it doesn't work out. At IIT Delhi, this program is planned to be augmented by a six-month internship, expanding on the two-month summer practices offered at most other institutions.

Other initiatives that impressed ICD included the availability of a minor degree in entrepreneurship at the Society for Innovation & Entrepreneurship, the incubator at IIT Bombay and a sector-agnostic vehicle known as Start Your Business at Mumbai's S.P. Jain Institute of Management & Research. The International Centre for Entrepreneurship & Technology at Ahmedabad, meanwhile, offers students a 13-week "grooming program" aimed at troubleshooting last-mile hiccups in the process of translating raw ideas into businesses.

Although ICD saw headwinds in the form of prevailing conservative social conventions regarding education and career choices and the relative difficulty of doing business in India, it noted potential for a more innovation-driven economy than currently exists. It also found that the number of institutions focusing on commercially-focused, technology-driven ventures was higher than any other sector or business area.

This bent toward VC-compatible entrepreneurship has fed expectations that the number of start-ups in the country will increase from around 3,100 to more than 10,000 by 2020. Jawrani puts this trajectory - which equates to the establishment of some 800 start-ups annually - in the context of a national agenda fueled by long-term government and industry vision.

"A common observation made was that there's sufficient availability of funds from government and the private sector. It is one of the crucial factors leading to the growth in the number of start-ups," she says. "The government is equally involved in promoting the start-up culture by way of designing an effective policy framework, further adding to the growth momentum of start-ups in the country."

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• Topics
• South Asia
• Early-stage
• Technology
• India
• Venture
• seed
• Ivy Capital
• Blume Ventures
• Innoven Capital
• TMT