Is the Next Silicon Valley Taking Root in Bangalore?

By SARITHA RAI

BANGALORE, India, March 19 — Twenty young engineers, mostly from the Indian Institute of Technology, India's premier technology school, peer into computer monitors in the no-frills office of Read-Ink Technologies, a start-up company housed in a small building in the bustling Indiranagar neighborhood of this city.

Bangalore's flourishing outsourcing companies, including Infosys Technologies and Wipro, have attracted worldwide attention with their global clients and tens of thousands of workers. Less known are the many technology start-ups, like Read-Ink, that have taken root here in recent years.

The new firms are drawn by the region's big pool of engineering graduates, many of whom have expertise in esoteric new technologies. That advantage, coupled with labor costs much lower than those of Silicon Valley, is starting to turn Bangalore, long a center for lower-end outsourcing services, into a center of higher-end innovation.

Some of these firms are self-financed, others have capital from the West. Some are run by foreigners. Others are founded by Indians, including returnees from overseas.

Read-Ink, one of the self-financed operations, is developing an advanced handwriting recognition software that can read scanned forms, claim forms, medical records and even digital tablets.

Its founders, Thomas O. Binford, a retired computer science professor from Stanford University, and his wife, Ione, a former manager at Hewlett-Packard, arrived here four years ago with five suitcases. They say they are now close to signing up their first business customer.

The signs of this shift toward high-value work are becoming more visible. Executives at Silicon Valley Bank, which is based in Santa Clara, Calif., and provides consulting services to technology and venture capital firms, said they were seeing twice as many Indian start-ups looking for capital investment than even a few months ago.

"Our technology and private equity clients are leveraging India at an unprecedented rate," said Kenneth P. Wilcox, chief executive of Silicon Valley Bank and SVB Financial Group.

When the members of the Bangalore chapter of the Indus Entrepreneurs, a nonprofit network for entrepreneurs, collaborated with the venture capital firm Draper Fisher Jurvetson Gotham to sponsor a business plan competition last month, they were stunned to draw 125 entries vying for the $150,000 top prize.

At the same time, Bangalore is becoming a hunting ground for venture capitalists looking for promising investment opportunities, such as Promod Haque, managing partner at the venture capital firm Norwest Venture Partners in Palo Alto, Calif.

About 40 percent of Norwest Venture's portfolio companies, or about 20 companies, have development operations in India, mainly in Bangalore. "More and more people are figuring out that Bangalore is a critical step in making start-ups capital-efficient," Mr. Haque said, explaining that cost savings here can help stretch initial investment funds.

Mr. Haque is taking a hybrid approach to investment. He pairs entrepreneurs of Indian origin who have returned to India (many have spent time working in Silicon Valley and elsewhere) with Western executives who have marketing and management expertise.

One of his investments is Open-Silicon, a two-year-old silicon engineering company. Its chief executive is based here, but its headquarters and marketing chief are based in Sunnyvale, Calif. "Like Open-Silicon, which has most of its customers within a five-mile radius of its headquarters, many technology start-ups are servicing American and European markets," Mr. Haque said.

Indrion Technologies, another new Bangalore start-up, has six engineers working on embedded semiconductor solutions for sensor-control networks. Its co-founder and chief executive, Uma Mahesh, a computer science engineer from the Indian Institute of Technology, is optimistic that he can attract venture capital because innovation among India's new companies is "a very believable story for investors."

Perhaps not surprisingly, this increased start-up activity in Bangalore has caught the eye of influential American lawmakers. Many American political and business leaders have said they are worried about a technological brain drain from the United States to places overseas.

Representative Jerry Lewis, a California Republican who is the chairman of the House Appropriations Committee, said that he was trying to find a government agency to sponsor projects in areas like nanotechnology, semiconductors, energy and pharmaceuticals, and possibly to collaborate with agencies in India.

"We are figuring out what kind of support and funding is needed from the Congress," Mr. Lewis said in a phone interview, adding, "The issue is not so much about losing innovation leadership as it is about how to make innovations happen on a cheaper scale and how to make more of it happen."

That Bangalore can be an incubator city for start-ups is demonstrated in Read-Ink, which the Binfords have financed entirely from their savings and retirement fund. They live and work in the same building, saving on rent. The ground floor contains a kitchen and employee dining room as well as the Binfords' bedroom and employees' guest rooms.

Mrs. Binford also runs an all-night accounting back-office service for American customers. "It is a small service with seven accountants," she said, "but helps cover the costs."
Improving the accuracy of handwriting recognition beyond what currently marketed software products offer is a complicated technical problem. "Current products have an accuracy rate of 80-85 percent; ours will be a 5-7 percent improvement," said Mr. Binford, Read-Ink's chief technology officer.

But in getting there, the Binfords have struggled to recruit and retain the best engineers in a competitive market. They said they had deliberately stayed in stealth mode for fear of talent poachers.

There are other growing pains. Finding venture investors at the early stages of a start-up business can be difficult because the majority of investors prefer to make safer later-stage investments. There is also a lack of homegrown innovators serving as role models.

"The entrepreneurial heroes of the Valley are accessible to many people," said Sabeer Bhatia, who moved from Bangalore to the Silicon Valley and co-founded Hotmail, later acquired by the Microsoft Corporation.

Sridhar Mitta, president of the Bangalore chapter of the Indus Entrepreneurs, said, "We are not going to be another Valley anytime soon," but he added, "The city can match up with Boston or Austin as a competitive place to start up innovative product companies."