Startup Funding: The Luck Factor – By Sanjay Anandaram

Are small and medium sized software cos. doomed?

The Indian software industry is set to take shape of "hour glass".

At the top of the hourglass will be heavyweights (like TCS, Infosys, Wipro, etc.), at the bottom there would be focussed specialists (like Sasken, iflex, Polaris and RelQ).

In the middle there will be none.

This is the conclusion of an interesting article in BusinessWorld on the future of small and medium sized (SME) software companies which contributed a third of India's software export revenues (of Rs.24,000 crores) last year. ("Grow up - or get out"; BW issue dated March 3, 2003)

Here, in short, is what the article had to say:

Last year, the top 20 software companies accounted for 63% of the total export pie. Also, the biggies (like TCS, Wipro and Infosys) grew at double the rate as the rest of the industry.

Even though, US companies are taking to offshore software development in a big way, there is also a "flight to scale". Most of the outsourcing business is going to the large vendors who, in the current environment, are willing to bid for even relatively small projects.

Case in point: Bank of America, which has decided it would not do business with any firm with less than $100 million in revenues.

Industry watchers quoted by BW feel the salvation for SMEs lies in becoming focussed players. "Smaller companies with a clear focus such as RelQ and ThinkSoft have grown by over 30%," says Kaushal Agarwal of Avendus Advisors. (RelQ and ThinkSoft offer outsourced software testing services.) The article also names companies like Polaris and iflex (which are focussed on the banking, financial services and insurance space) and Sasken (which is focussed on telecom) among the likely survivors.

Sanjeev Mohapatra of Texas Instruments (India) corroborates this analysis and says that the large players do much of his company's outsourced development, because of the lack of focussed SME service providers. "Even now their selling pitch is: 'We have 50 engineers with C++ skills'. If I am looking at just staff augmentation, then isn't it obvious that I will go to big companies which can scale up quickly," he asks.

The article does point out that there is price to be paid for being focussed. "After all, some specialist companies, especially in the Internet middleware, have been badly affected by the downturn. Aztec (Software) saw its revenues drop by 70% last year, while (telecom-focussed) Future Software's revenues fell by 15% to Rs.65 crores," it says.

Despite this 'danger', Avinash Vashista of NeoIT (an outsourcing intermediary) says there is simply no choice. "The writing on the wall is clear. If you are small and have no clear focus, you are not going to survive."

Let me know if you have any thoughts on this topic.