Last year we wrote:

"The fundamental issue in India is the risk/reward equation. It is simply too easy for a young developer in India to get paid a lot by an outsourcing firm; then enjoy being headhunted every year for more money. Those of us old enough to see a cycle or two, can see the parallels between Silicon Valley 1999 and Bangalore 2007, when just being able to spell the words of a popular programming language on a resume meant fame and fortune. It is possible that when this comes back to some reality, the motivation to innovate will come to young Indian developers (yes, young; breakthrough technical innovation tends to come from people under 30)."

This has changed, thanks to the global financial crisis. The big outsourcing firms have hiring freezes, and some firms are laying off. "Big" no longer means "safe." Parents in India will need a while to accept this new reality. In America, many parents would advise their kids to go for start-ups when they are young and can afford to take a risk. In India, all the parents have to do is say "Yes" when their bright kid, who is no longer working for a big outsourcing firm, asks to live at home for a year with free food and bandwidth. Last year's article was written before the Satyam scam was exposed, and it rings even truer now that SWITCH has become WIT.

Three kids working together, living at home, with free food and bandwidth, can change the world.

This is a big change. But it is a below-the-radar change. We cannot see the impact yet. Hundreds, maybe thousands, of young developers will do this in India now. Most will not create a great start-up but will just keep their skills fresh and add to their CV. But one or two will do something totally awesome. The class of 2008/2009 maybe the best ever. Let's see.

The innovation we are already seeing in the market today has been despite these and all the other hurdles faced by entrepreneurs everywhere.

Zoho: Finally, the Indian Software Product Success Story

For a decade or more, entrepreneurs in India have dreamed of creating a software product powerhouse, moving away from the labor-for-hire services model to create products that are winners on the global stage.

I know firsthand from working with a few of these pioneers that it is not an easy ambition to fulfill.

India finally has a product success story. We have written about Zoho many times on ReadWriteWeb and included it in our list of top 10 enterprise products of 2008.

The bigger story is the impact this success will have on young developers in India. Role models matter. Kids in America want to become ski racers now that they have seen Bode Miller. It is said that Sachin Tendulkar has inspired a few Indians. In software outsourcing, Infosys was the role model. Today, that role model may be Zoho.

That Big Wide-Open SaaS Opportunity

Indian start-ups that dreamed of creating the next SAP or Oracle faced massive hurdles on the sales and marketing front. Sure, they could invest five times more in R&D with the same budget. But the reality was that R&D was a tiny portion of the budget. The big money went into sales and marketing. The R&D budget arbitrage was not enough to move the needle.

This is totally and utterly different today. We have written about the SaaS opportunity many times. This opportunity is totally location-agnostic. But it is also totally price- and cost- sensitive, and R&D is the biggest cost. Success stories such as 37 signals, Automattic, and Zoho did not win by hiring an enterprise sales force or buying advertising. They "let the software do the talking."

This is not just an opportunity for a few big winners. This is an opportunity for thousands of small companies to go after niche markets. The interesting thing about niche markets today is that they are inherently global and can be a lot bigger than people think. These small niche start-ups won't make headlines and probably won't get VC financing. But they won't need VC financing. What is fascinating about SaaS globally is how few start-ups have been VC financed. Most have gotten to profitability on tiny seed rounds or even with revenue financing from clients.

DimDim and the Cheap Decade

DimDim is another Indian company that made it onto ReadWriteWeb's list of best enterprise products of 2008. It is a classic SaaS story with an Indian twist. DimDim's proposition is as simple as the whole proposition of offshoring: it just costs less. In this case, it costs less than Webex. That's a popular story in a recession.

It is the same pitch that Zoho is making. Take a basic software service we all need -- say, CRM -- and offer something that is comparable to the market leader at a fraction of the price.

That doesn't sound so innovative; more like a classic "fast-follower" strategy, a better, faster, cheaper strategy. That is easy to want, but hard to execute. When you look at a story like Zoho's, you see a simple strategy but lots of small bits of innovation in the execution that make strategy real. Not glamorous, but effective.

Back in 2003, Forbes wrote an excellent piece called "The Cheap Decade." And as we argued here, the boom we went through from 2004 to 2007 was really just flim-flam, fuelled by incredibly cheap credit and blowing up in our faces. So the cheap decade may be starting for real right now.

Zoho and DimDim are perfectly positioned for the cheap decade. There will be others.

On page 2: the future; and what segments are currently hot in India?

HottestStartUps.In Shows the Future of the Start-Up Launchpad

When I was researching this article, many of my contacts pointed me to a website that runs a competition to find the best start-ups in India. Browsing through it was a fascinating glimpse into an economy of over 1 billion souls in the midst of an incredible transformation.

However, more than any individual start-up, what jumped out at me was that this was a far better launchpad for start-ups than anything we have in the USA. This competition satisfies the three golden rules, FTV:

1. Free for the start-up, so that even one with no funding can play.
2. Transparent; the judging rules are open and the process is independently audited; no suspicion of back-door influence.
3. Virtual; no need to be in a specific place at a specific time in order to fully participate.

Of course this has been made possible by sponsors who have actually donated money to further the cause of innovation; it has not been driven mainly by the for-profit objectives of the event organizer.

What Segments Are Hot with VCs?

VCs miss many great market segments, and entrepreneurs who chase segments that are hot at the moment are usually a day late and a dollar short. Nevertheless, it is interesting to see what is getting funded these days in India. Here are the spaces that have already seen a lot of activity:

• Micro-financing. To some, this elicits a big yawn and a "Yet another micro-financing site?" response. But the blow-up of big banks in last few months indicates that a fundamentally new model may be needed. And India, with its huge unbanked population and technically savvy elite, is where innovation is likely to come from.
• Mobile ad networks. I am a skeptic of these. Nobody has found a way to capture attention on a tiny screen without being totally annoying. Maybe somebody will. They probably will, and it will have to have something to do with location. But it is likely to come from Asia, where mobile is more widespread than in the USA. Mkhoj is a Kleiner-funded entrant from India in this space.
• Personal outsourcing. We wrote about this in our article last year as well, and some of the companies, such as iYogi (disclosure: I have an interest in iYogi) and TutorVista, are doing quite well.
• Better, faster, cheaper SaaS clones. Zoho (which is bootstrapped) and DimDim (funded by VC) will inspire investment in many other segments.

Here are some bleeding-edge segments in which investors are taking an interest and in which India may be well positioned:

• Voice recognition. Voice recognition is hard. It is even harder in multiple languages. The official census in India from 1961 recognized 1,652 languages! Voice recognition is still the killer app for the mobile phone, and it is growing at a crazy pace (with over 3 billion mobile users currently). Ubona looks interesting, with some serious IP but also a pragmatic local market-entry strategy. Mscriber looks like it has a good market strategy, too.
• Mobile payments. In India, people live on their mobile phones, and when you are talking about billions of users, the dollars add up, even if in very small increments. Obopay is one company in this space.

Best Exit: Naukri

Naukri, usually described as the Monster.com of India, may not have the innovation to make techies gasp, but VCs salivate at its return. Naukri rode the outsourcing boom perfectly, exiting via an IPO in November 2006 that was oversubscribed 55 times (ah, remember those days on NASDAQ?).

What Have We Missed?

In a nation of over 1 billion people, where technology is the best route to wealth, we are certain to have missed a ton of amazing innovation. Let us know what it is.

(Photo by Thomas Roche.)