So far, India’s over $100 billion IT industry has been built mostly on software services and back office projects delivered by TCS, Infosys andWipro for the likes of Citibank and GE, who have been outsourcing non-core work to save costs over the last two decades.

Now, the newly formed software product think-tank iSpirt says software products can be a $100 billion industry in India by 2025, an ambition that may sound too bullish on the face of it, but not overly aggressive if you consider the progress of startups including InMobi, Zoho, Druva, FusionCharts, QuickHeal and Eka Software. InMobi, for instance, has been growing its revenue by over 3-4 times every year, its founder Naveen Tewari told me. The startup’s ad network already has over 700 million users on its network – second only to Facebook.

Currently, these companies report over $2 billion in annual revenues, according to Nasscom.

iSpirt has released an interesting report today that covers some of the important details about the current state of India’s software product industry — where are the founders coming from, how are they building these startups, challenges in raising money, average valuation, etc.

First of all, it’s tough to raise seed money for a product startup in India because many angels and VCs are still shying away from making such investments. The report also highlights the rise of SaaS startups such as Freshdesk that are looking to tap into markets potentially worth over $500 billion globally.

But India’s software product startups face a massive challenge in terms of providing exits to investors. While these companies are around 2.5 years old on average, India offers very poor returns in terms of M&A exits, according to an iSpirt and Signal Hill analysis done last year.

“In Israel the M&A exit value was 7X of the VC/PE investment during the same period. In US the multiple was 5X. In India it was only 1.1X (and this too was inflated because it counted IT Services M&A exits as well). “

With more senior industry executives quitting their cushy jobs to become entrepreneurs, and even angel investors, things have started changing for the Indian product ecosystem. There are over 3,000 small and mid-sized product startups in the country now, and it’s easier to get seed funding for a product idea today than what it was until few years ago.

As pointed out earlier, Facebook’s acquisition of Little Eye Labs could trigger a better shift for M&A exits, but for now these acquisitions are too small in size.

The research was done by jointly by Stanford Business School’s Sharique Hasan, Rembrand Koning and Srivardhini K. Jha. To be sure, the research only covered around 118 product startups in India, but it does reflect where the ecosystem stands today.

Here are some of the top findings of iSpirt’s Product Industry Monitor report that reflect the current state of India’s software product startups and their founders:

• Average age of Indian software product startups is just 2.5 years.
• Over half of these startups are self-funded, bootstrapped, and get very little help from angels and VCs.
• Only 14.1% get any angel investment and even a smaller proportion (2.5%) get venture capital.
• Around 50% of Indian product startups are valued anywhere between $1 million to $10 million, with nearly 34% of them valued at less than $1 million.
• Nearly 40% of the software product founders come from R&D centres of multinational companies such as Microsoft, Intel, Yahoo, etc.
• Founders of around 78% of the product startups have similar skills and they don’t bring any diversity in terms of engineering, or sales capabilities.
• Nearly 40% of these startups have two founders, and around 69% of them have prior startup experience.
• Most of the founders (71%) are in their 30s and 40s.

The bigger question for the Indian software products startups is whether they can learn from the mistakes of the country’s over $100 billion IT sector, which seems to be struggling. Unlike software services, where companies such as TCS, Infosys have much longer runways before they are disrupted (because customers still depend on low cost outsourcing), products are a different ball game. The disruption can be much faster and ruthless.

To that, InMobi founder Naveen Tewari said the $100 billion target for product startups is in fact conservative because there are several problems to solve and markets to be disrupted.

“I believe that the target is a low barrier, it should be more because disruptions are happening at a much faster pace, offering huge opportunities,” said Tewary.

Original article posted here.