Startups say bye-bye, dear Bangalore

HONG KONG: Late in April, celebrated serial entrepreneur Munjal Shah, CEO of technology startup Riya, took “a difficult and painful” decision: to relocate Riya’s engineering and research division from Bangalore — back to the company’s headquarters in Silicon Valley.

The single most compelling reason that underlay Riya’s decision to return home was the exponential rise in wages among the elite pool of talent in Bangalore that the company was drawing from. Shah told DNA: “This run-up in wages has destroyed the ROI calculation that is critical to the ‘India strategy’ of an early-stage startup like Riya.”

Wages in Bangalore for the profile of top-notch candidates that Riya wanted “have been growing like crazy,” notes Shah. He cites as an example the case of a Riya employee whose salary spiralled up in double-quick time. “It took five years of his career for his wage to get from 1 per cent to 10 per cent of his equivalent US counterpart.

But within a year after that, his wage doubled, to 20 per cent of his US counterpart. During his time with us — less than two years — his salary jumped to 55 per cent of the US wage. And in the next few months, we’d have had to move him to 75 per cent just to ‘keep him at market’,” says Shah.

The bottomline, for Shah, is about productivity vs costs. “Wages of engineers in Bangalore can rise all the way to US levels so long as the productivity is equal,” he points out.

“But even if a top guy in Bangalore can match the skills and intelligence of the guy in the US, he may be less effective for several reasons: physical infrastructure bottlenecks in Bangalore, for instance. He loses time in commuting, and his home broadband connection may be slow and unreliable, which impacts his productivity. And it comes down even to factors like food: each month, some three people call in sick because of food poisoning or there’s a bandh… This rarely happens in the US.”

Over time, these things add up, says Shah, whom Business Week magazine listed in 2001 among “ten fresh faces who may be moguls the next time you look.” (Shah’s first start-up, Andale, was built into a 200-person profitable auction information and tools business for over 80,000 eBay vendors.)

The problem of wage inflation in Bangalore is compounded by the fact that, unlike in Silicon Valley, employees in India don’t value stock option and instead want cash compensation, says Shah. “In Silicon Valley, you can get a person on board for probably a little less than market value by offering stock, but in India it works the opposite: start-ups have to pay a premium — in cash.”

Start-ups are also disadvantaged by the fact that unlike established big companies, they cannot afford the overhead cost of training a fresher, notes Shah, who graduated from Stanford University and University of California, San Diego.

Shah acknowledges that this wage inflation in Bangalore isn’t such a serious issue for biggies like IBM or Microsoft. “Many of them are no longer there for cost savings. They’re going to keep coming to Bangalore even if it doesn’t save them any money — just because they can’t find those engineers in any other area.”

He, however, points out that other start-ups in Bangalore that were hiring the same profile of talent as Riya would have a similar experience. “As wage inflation increases, and the arbitrage between India cost and US cost narrows across the board, it’s going to impact a lot of start-ups more and more,” he prophesies.

And it’s this that bothers the serial entrepreneur. “India needs more start-ups,” he says. “India needs its own Google, and perhaps another Infosys. But it may have less of those now because for start-ups, the economies aren’t working out.”

He recalls that when Riya was set up in Silicon Valley, “we knew that India would be a big part of our strategy.” But the decision to move back Riya’s engineering division owing to considerations of start-up economics has changed all that. “For me

personally, this might be the end of an era,” says Shah. “It’s clear that the primary business drivers of Bangalore are changing, and with it the city must change.”