Tuesday, September 18, 2007

U.S. Start-Ups Set Sights on India

SAN JOSE, Calif. -- Rehan Jalil founded his wireless-broadband company WiChorus Inc. two years ago and based it here in the heart of Silicon Valley. But when it actually starts selling its gear to phone companies next year, WiChorus won't be looking for customers in California or anywhere else in the U.S. The company's target market is thousands of miles away -- in India.

In a twist on globalization -- and a nod to India's fast-growing economy -- an increasing number of high-tech start-ups, like WiChorus, are basing their operations in the U.S. but setting their sights on Indian customers.

[Indian Connection]

Many of these Silicon Valley companies, often headed by Indian-born entrepreneurs, sell specially designed, low-cost products particularly suited to people in developing nations.

Examples include Bubble Motion Inc., based in Mountain View, Calif., which sells a voice-messaging service popular with non-English speakers who can't or don't want to type out text messages on a phone keypad. (Though some customers speak English, others are illiterate or use local Indian dialects that don't employ the Roman alphabet.) Biotech outfit ReaMetrix Inc., of San Carlos, Calif., develops low-cost diagnostic tests to manage ailments like diabetes and HIV infection. And Mobio Networks Inc. of Cupertino, Calif., is working with several Indian phone carriers to offer via cellphone free and low-cost entertainment, like sports information and gossip. All are funded by U.S. venture-capital firms.

Some of these start-ups are also targeting U.S. or European customers, or could do it down the road. But for now, most are following the made-in-the-USA, sold-in-India model, trying to tap India's rapidly expanding consumer market in hot industries like wireless technology and life sciences.

With these companies, "the market is Indian. The entrepreneur might be Indian," says Navin Chaddha, a managing director with the Mayfield Fund venture-capital firm, which is an investor in WiChorus. "But the problem is being solved in the U.S. for a market that sits outside the U.S."

Even though their products are destined for foreign shores, often these companies say they must be based in the U.S. to have access to specialized engineering talent, U.S. venture capital, or to protect intellectual property.

The trend represents the latest wrinkle in Silicon Valley's relationship with India. Engineers from the country have long migrated to the San Francisco Bay Area to get graduate degrees, find jobs and start companies. More recently, Silicon Valley companies have outsourced customer support and even some product-development work to India, though some have pulled back as labor costs there have climbed.

Venture capitalists also have begun investing directly in Indian companies, targeting the domestic Indian market. According to the National Venture Capital Association, a trade group, U.S. venture capitalists sank nearly $932 million into Indian companies last year, up from $583 million in 2005.

But WiChorus's Mr. Jalil, 37 years old, says many Indians prefer to work for bigger, brand-name firms and are hesitant to sign on with start-ups, which are seen as risky. He also says the U.S. offers a bigger, deeper pool of engineers with more expertise in a wireless technology called WiMAX and other arcane specialties critical to WiChorus's success. (WiMAX is similar to the Wi-Fi technology that creates Internet "hot spots" in cafes and airports, but operates over a much larger geographical area and can sometimes be accessed on the go, such as from a moving car.)

Many of Mr. Jalil's most-important employees are veterans of local high-tech companies, most notably Cisco Systems Inc. And his investors are big-name venture capitalists from Menlo Park and Palo Alto, which are both near his company's headquarters.

"Silicon Valley is the only place you could do this," asserts Mr. Jalil, an engineer who was born in Pakistan but educated in the U.S. He started WiChorus in late 2005 after leaving another wireless start-up, Aperto Networks, because he says he wanted to create lower-cost broadband technology for the developing world.

WiChorus does employ about 15 people in Hyderabad, a city in India well-known as a high-tech hub. But those workers mainly build network-management software, which Mr. Jalil calls "very specific, contained work," though it is critical to WiChorus's product.

WiChorus's 45 employees and assorted consultants in San Jose -- who work in cubicles and labs on the third floor of an office building with eye-catching, pumpkin-colored walls -- are the ones doing the hard-core product innovation, Mr. Jalil says. They include researchers with Ph.Ds from the University of California at Berkeley and managers like Sheldon Gilbert, the company's Massachusetts Institute of Technology-educated head of business development who founded another wireless-broadband company called Ensemble Communications. WiChorus's head of engineering, Kamal Avlani, spent 10 years at Cisco developing high-end routing devices for directing Internet traffic.

WiChorus is focusing on India first because WiMAX is sorely needed there, according to Mr. Jalil. The Indian government is pushing to increase broadband penetration but is now stymied by a lack of phone lines to offer high-speed access.

Of India's more than 1.1 billion people, only about 40 million subscribe to a traditional landline phone service, according to the Telecom Regulatory Authority of India. And not all of those lines are capable of transmitting data at broadband speeds, Mr. Jalil says. As of July, there were 193 million wireless-phone subscribers.

WiChorus says its gear can help offer Internet connectivity without the phone lines for as little as $15 a month. That may still be too expensive for the average Indian, who makes less than $900 a year, according to the World Bank, but it is affordable for higher-skilled workers. And prices could dip lower, just as charges for cellphone services have dropped in India over the past several years, according to Mr. Jalil.

Mr. Jalil says the reason that phone carriers using WiChorus's equipment will be able to charge so little is that the company has simplified products such as cellphone base stations (which serve as hubs to let the phones communicate), taking out nonessential features and functions. The company announced yesterday that it has received nearly $25 million in financing from U.S. investors that include the Mayfield Fund, Redpoint Ventures and Accel Partners.

Not everyone is convinced the new offshore business model is a good one. Rob Chandra, a managing partner at investment firm Bessemer Venture Partners in Menlo Park, says companies need more than great engineering talent to build products the developing world will buy.

"I am skeptical of companies that can know enough about what Indian consumers and enterprises need if the start-ups' management is sitting in Silicon Valley," says Mr. Chandra.

Mr. Jalil notes that most big Indian telecom carriers buy their core infrastructure from Western companies, like Finland's Nokia Corp. He is convinced WiChorus's technology is very relevant to India. "You can really bridge the gap between the emerging world and the developed world by bringing broadband connectivity," he says.

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