When Girish Mathrubootham founded customer engagement software-as-a-service (SaaS) company Freshworks in Chennai in 2010, the start-up scene was almost non-existent in the southern Indian city.
“Our initial challenges were very fundamental,” says the 46-year-old tech entrepreneur and angel investor. He even recalls some days in Freshworks’s $150-per-month Chennai office without water or power.
On top of this lack of “start-up friendly” infrastructure, Mr Mathrubootham says funding was hard to come by. Back then, Chennai had so few start-ups, he says, that it did not make sense for venture capitalists (VCs) to travel there from other cities, such as Bengaluru and Mumbai.
“VCs wouldn’t come to Chennai in 2011 because they couldn’t fill their calendar with meetings for the day,” says Mr Mathrubootham. More than a decade later, both Freshworks and the start-up community in Tamil Nadu’s state capital have come on in leaps and bounds.
In September 2021, Freshworks listed on the Nasdaq stock exchange at a valuation of $10.1bn, marking a first for the Chennai ecosystem and a milestone in the start-up’s rapid growth.
VCs wouldn’t come to Chennai in 2011 because they couldn’t fill their calendar with meetings for the day
Chennai has been nicknamed “the SaaS capital of India”, thanks to Freshworks and other software giants founded in the city, such as Chargebee and Zoho. However, even with the emergence of global names from Tamil Nadu’s capital, the city has received less funding and fanfare than other Indian tech hubs.
Despite challenges around talent acquisition, local entrepreneurs and investors say Chennai’s co-operative culture and strong engineering base make it ripe for innovation and future start-up successes.
Funding lags elsewhere
The origins of Chennai’s start-up ecosystem are often attributed to Zoho, a customer relationship management start-up founded in 1996. Among Zoho’s alumni are Freshworks’s CEO and co-founders of Chargebee, a Chennai-founded SaaS start-up that was valued at $3.5bn in February 2022.
“These successes opened up a lot of possibilities for large-scale VCs, like Sequoia and Accel, to look at southern Indian states and Chennai,” says Lakshmi Moorthy, the co-founder of nicheBrains, a digital transformation consultancy start-up.
Since 2012, VC funding into Chennai-based start-ups has increased ten-fold, reaching $724m in 2021, according to PitchBook data — which does not include Freshworks or Chargebee funding figures, since their headquarters have been relocated to the US.
By comparison, however, other Indian megacities recorded much higher VC funding than Chennai in 2021, including Bengaluru ($16.2bn) and Mumbai ($6.06bn).
Just two of the 46 Indian start-ups that gained a valuation of more than $1bn in 2021 came from Chennai, including microloan start-up Five Star Finance, according to Mumbai-based Orios Venture Partners.
“Chennai is often seen as lagging behind other hubs,” says Shyam Nagarajan, the founder and CEO of GoFloaters, a network of co-working spaces across 23 Indian cities. But with a “quieter” ecosystem, Mr Nagarajan says Chennai’s start-up scene has a strong culture of collaboration.
“Chennai founders are super helpful … the ecosystem gives you the breathing room to focus on problems and product development,” he says. This is exemplified by organisations such as SaaSBOOMi, a community of SaaS founders that host regular events.
Mr Mathrubootham describes SaaSBOOMi’s annual event as “like an Indian wedding”, with friends and relatives all happily sharing their insights and start-up metrics.
“Everybody is following a ‘paid forward’ culture. We are coming in to help the next generation of start-ups,” he says.
Since the 1990s, the set-up of large IT service centres of several multinationals, including PayPal, Cognisant and Tata Consulting Services, have contributed to Chennai’s strong engineering foundations.
“The entry of big tech companies in Chennai and nearby cities exposed local workers to global knowledge and gave rise to this new age of entrepreneurs,” says Mr Moorthy.
Despite Chennai lagging behind other cities for foreign tech projects, according to greenfield investment tracker fDi Markets, it has also been given a boost from its industrialised base.
Chennai is an electronics manufacturing cluster and is famously known as the ‘Detroit of India’, due to its large automotive industry including companies such as Hyundai, BMW and Daimler.
“Since 2016, a lot of industrial players across Tamil Nadu’s industrial belt began investing in technology, which Chennai got a boost from,” says Rajashri Sai, a serial entrepreneur and founder of Impactree, a SaaS platform focused on the UN sustainable development goals.
Ms Sai adds that government funding for start-ups, including the ‘Nidhi Seed Support Scheme’, as well as “engineering talent with a global perspective” are two additional benefits to the Chennai ecosystem.
Tamil Nadu is home to 576 engineering colleges, according to Guidance Tamil Nadu, the state’s development agency. Chennai is also home to the Indian Institute of Technology (IIT) Madras, which hosts a deeptech incubation centre focused on verticals including manufacturing, robotics and electric vehicles.
“IIT Madras is the backbone of the deeptech ecosystem in Chennai,” says Dhanush Ram, a Chennai-based associate at Speciale Invest, an early-stage deeptech VC fund.
Since being launched in 2013, IIT Madras has incubated more than 230 start-ups, including Agnikul Cosmos, a space tech start-up that designs, manufactures and tests orbital rockets.
Mr Ram, whose VC fund has invested in Agnikul, says the space tech start-up is an example of the ‘hidden gems’ in the Chennai ecosystem outside of software. In the next few years he expects many more deep tech start-ups in areas like spacetech and mobility to emerge from the city.
Despite positive dynamics, start-ups in Chennai still struggle to attract what Mr Mathrubootham terms “been-there-done-that” talent.
“Talent is the most important bottleneck for Chennai,” he adds, noting that experienced talent is very scarce. He says the decision to move Freshworks’s global headquarters to California was in part to find experienced executive management ahead of going public. “As a CEO in Chennai, it was hard for me to build the right kind of management team to take the company public,” he says.
Mr Nagarajan notes that it is also becoming increasingly difficult to hire top engineering talent in Chennai as local start-ups compete with higher wages from big companies and start-ups based elsewhere.
“If talent is getting paid for remote work in euros, you can’t match that with Indian rupees,” he explains. However, even with talent challenges, Mr Mathrubootham is positive about Chennai’s start-up scene. “In the past 10 years, things have taken a dramatic change,” he says. “There is now a thriving ecosystem.”
The interview with Freshworks’s CEO Girish Mathrubootham was originally recorded as part of Rising Ecosystems, fDi's regular start-up podcast.
This article first appeared in the February/March 2022 print edition of fDi Intelligence. View a digital edition of the magazine here.