IT services firms look at playing VCs to start-ups

Infosys and Wipro recently announced setting aside $100 million each towards investment in start-ups

Last month, a team from Wipro, India’s third-largest information technology (IT) services company, visited the Microsoft Ventures office here to assess software product start-ups.

While visits by IT services majors are frequent at Microsoft Ventures and several other start-up incubators, it was different this time. In a departure from the usual ‘finding an acquisition target’ or ‘forging a joint go-to-market’, the Wipro officials were scouting for start-ups in which their company could make strategic investments and create separate revenue streams, independent of its core services business.

Sources say Wipro isn’t the only IT services company eying a model of acquiring a minority stake in a software product start-up, keeping it at arm’s length from its core business and, possibly, playing the role of a venture capitalist. Mindtree is also among those trying to explore this model.

While Ravi Narayan, director of Microsoft Ventures, didn’t confirm the meeting with Wipro officials, he agreed an ‘arm’s length’ approach would be the way Indian IT services majors would engage with software product start-ups. This, he added, was because IT services companies had understood they were on a “treadmill” of posting revenue growth, which wasn’t in line with innovation.

“The fundamental nature of these services companies is they haven’t been able to get past this whole services DNA. As much as they try, it becomes all about adding another couple of billion dollars to the top line every year,” he said. “So, they could look at picking up minority stake in a start-up, using their solutions and going to clients. This way, they have the solution, but on an arm’s-length basis. This helps them create new revenue streams for their services sector model.”

Wipro refused to comment for this story, as it was in its ‘silent period’, ahead of the announcement of its earnings for the quarter ended September.

This venture-capital model is in line with those of global technology companies. It is only in recent months that Indian IT services majors — Infosys and Wipro — announced setting aside $100 million each towards investment in start-ups. The way these funds will be utilised hasn’t been decided yet.

“This is certainly a trend that has picked up in recent days. Last year, when we were looking to raise funds for expansion, a few technology companies had approached us. Now, we are approached every day,” said Nishant Singh, chief executive of Noida-based CRMnext. “This is what I call ‘lazy innovation’. A company with a size exceeding $1 billion finds it really hard to innovate. Also, as these large companies are sitting on huge funds, they can easily keep some money aside, plant it into 20 different planters and wait for it to grow.”

CRMnext, a cloud-based customer relationship management solution company, works with several IT services companies such as Tata Consultancy Services, Wipro, Tech Mahindra and Polaris Financial Technology.

Somakumar Kolathur, co-founder and chief executive of city-based design and innovation start-up Moonraft Innovation Labs, believes the trend is catching up fast. “I have seen such activity and I think it is a good model. Creating a product internally isn’t easy in a services company. You might miss a lot of things happening in the market. So, it makes sense for IT services companies to invest in an area, or a product company that is complementary. Initially, they can have a joint go-to-market and, if the company grows, they get additional valuation. I am seeing quite a lot of interest from IT services companies.”

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