by Pradeep Chopra
Pradeep: From the investment point of view, how is a Software Product company different from an IT services company?
Sudhir: Software Product Companies are significantly different from IT Services companies in many ways. These include
- Higher return potential.greater valuation multiple on product revenue
- Higher risk
- Product business is Hits and Misses oriented
- Ability to scale revenue and non-linear profits from successful product is far greater than with successful service
- Relatively much longer wait to establishing market presence, brand name, revenue.initial 18 to 24 months may see investments taking place without any returns or proof of it
- India services brand is globally accepted; extremely early days for Indian software products.consequently related investments are higher
- Revenue predictability lower in product companies
- Skill requirement more rigid than in services
- Team (both investee and investor) culture is different
- Companies need to look beyond only India cost arbitrage in Products competition is truly global versus in case of services where India base is the single biggest advantage
- Channel investments are higher than in case of services partnerships-selling products through partners is more challenging in the initial days until the product and the partnership mature
- Product companies face greater risk of obsolescence than services cos.
Pradeep: What is your message to the young Software Product entrepreneurs?
Sudhir: My first message is that I would like to see more product companies coming out of India; we at IDG Ventures have funded 5 product companies in the last 18 months and expect to invest in more in the near future. In addition do not expect product companies to give results in a few months; product company build up is a long haul; be prepared for it
Pradeep: As a fund, what verticals do you focus in?
Sudhir: The key focus for us include
- Software products and Services
- Engineering and Electronics
- Telecom, Semiconductors and Embedded
- Digital Consumer (Internet and Mobile VAS)
- Financial Services
- Healthcare and Medical Electronics