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American-style start-ups take root in India

India has built a reputation as a notoriously tough place to do business, one that has stymied even giants like Walmart. And unlike Silicon Valley, where a decent idea can attract funding, investors in India are much more reluctant to risk their money on start-ups.

Despite such challenges, some American technology entrepreneurs are seeking to pursue the country's untapped opportunities, even without the clout of a multinational corporation backing them.

Peter Frykman, 30, of Palos Verdes, Calif., found his network of support at Stanford University, where he was a doctoral student in mechanical engineering. With the help of an angel investor in the United States, he created a pilot study in the Indian state of Tamil Nadu in 2008 for his agricultural start-up, Driptech, which makes affordable, efficient irrigation systems for small-plot farmers.

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The idea for Driptech had its origins in Ethiopia, where Mr. Frykman traveled with a team in 2008 as part of the Extreme Affordability program at Stanford, in which students tackle real-world problems. But he found that for all its flaws as an investment destination, India had much less political risk than African nations and had better infrastructure. The nation also had more subsistence farmers than all of Africa.

(Read more:India clears Tesco's $110 million investment plan)

In 2011 Mr. Frykman moved to Pune, India, after Driptech closed a funding round led by Khosla Impact, founded by the venture capitalist Vinod Khosla. "It's kind of unusual to start a company and then realize that the biggest opportunity is in India," Mr. Frykman said. "We sort of did it backwards."

India may be home to many of the largest outsourcing consulting firms, and tech-oriented cities like Bangalore have attracted global technology giants like Microsoft. But attracting American-style entrepreneurism here has happened in fits and starts.

American-based venture capital firms and the Indian units of American venture capital firms, like Sequoia Capital India, invested $172 million this year through mid-December, excluding joint ventures. That fell from $250 million in 2006, according to Venture Intelligence, a research service based in Chennai that is focused on private equity. In the latest World Bank rankings on the ease of doing business, India slipped three spots, to 134th out of 189 countries.

Some 42 venture capital firms based in the United States, however, have either opened offices in India or opened Indian units since 2006, according to Venture Intelligence.

Despite the challenges, the sheer potential in a country of 1.2 billion people with a stable middle class is enough to tempt entrepreneurs and multinationals alike to explore opportunities.

"In the earlier years after I moved to India, around 2008-10, there was astounding growth in the mobile market, with 20 million new subscribers being added to the telecom network every month," said Valerie R. Wagoner of Modesto, Calif., 30, chief executive of the mobile marketing firm ZipDial in Bangalore. That monthly growth was nearly equivalent to the population of Australia.

(Read more: India tops China as most attractive investment destination)

Ms. Wagoner was working for eBay when she decided it was time to shift her focus to her passion: emerging markets and technology. She did extensive networking in India with executives at mobile payment providers and joined mChek in Bangalore in 2008 as head of strategic initiatives. In 2010, she founded ZipDial, whose investors include 500 Startups, a Silicon Valley seed fund; Jungle Ventures of Singapore; and the Indian firms Blume Ventures and Unilazer Ventures.

The frustrations of doing business in India include bureaucratic hurdles in licensing and making other filings, and pressure for bribes, which Americans cannot legally give. Many start-ups avoid these hurdles by catering to private clients and by making products that do not need governmental approval.

Entrepreneurs have also had to adjust business plans quickly to get around complications. Sam White and Sorin Grama, co-founders of Promethean Power, won second place and $10,000 in a business plan contest at M.I.T. in 2007 with the idea of using solar technology for rural electrification in India.

"India was the last country on my list to even visit — never had any interest," Mr. White said.

Mr. Grama, 44, a Romanian-born American citizen, and Mr. White, of Boston, both eventually moved to Mumbai in 2012. They ran into problems from the start in trying to make a cost-effective solar milk chiller for villages where milk was collected for dairies.

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In 2010, they spent six months building a prototype, only to have the managing director of Hatsun, India's largest private dairy, point out that the 2,000-liter thermal battery that was used to store cold thermal energy was too big for any shed found in the villages.

Finally, they let go of the idea of being a solar company. Instead, they developed a thermal battery that is able to take advantage of the intermittent power on the grid. The battery releases a cold fluid that chills milk quickly.

Now the company has Hatsun as a client and has attracted funding from clean technology investors like the Quercus Trust, angel investors and grants by the National Science Foundation and the United States-India Science and Technology Endowment Fund, which was founded by the two nations' governments.

"Eighty percent was our own mistakes — we would have faced them in any country," Mr. White said. "But we always learned from those mistakes."

A common complaint among the entrepreneurs was the difficulty in finding and keeping good employees. Even by Silicon Valley standards, Indian tech employees are restless. "The job market is so hot it's not uncommon for a young person to think they can build a career by quitting within three months to get a pay raise somewhere else," said Ms. Wagoner of ZipDial.

(Read more: Wal-Mart cozies up to China as it shelves India)

The tech companies have to offer salaries at the market rate or higher to attract job seekers, who prefer the stability of a conglomerate over opportunities for personal growth. In fact, Mr. Frykman said the "lack of coolness" associated with a start-up was one of the biggest surprises he encountered. For this reason, Indians are less eager for stock options than their counterparts in the United States.

To increase Indian employees' exposure to such incentives, Ms. Wagoner has made stock ownership plans part of ZipDial's compensation package and will give additional grants to people without their asking if she thinks they deserve them. "I believe it is very important that people who are taking a risk in building a company see the benefits of that," she said.

Entrepreneurs, for their part, have embraced another Silicon Valley trait and learned to try again after failure. Rahoul Mehra, 42, founded Saf Labs, a biotechnology trading company in Mumbai, with his wife, Glennis Matthews Mehra, a 39-year-old neuroscientist. They originally wanted to run all operations out of New York, where they lived. "In doing business with India, we never intended for us to move to India," he said.

But in 2008, two years into the business, which they had financed on their own, Mr. Mehra realized that deals would not be properly managed unless he was in Mumbai. Dr. Mehra reluctantly followed with their daughter, then 2.

The business managed to turn a profit and attract a private European investor so the company could expand into biotech services. But in 2012, after the Indian government delayed biotech funding for its new five-year plan, Saf Labs' business was drying up. The Mehras realized they had to move away from the Indian market and focus more on international opportunities.

Now they are negotiating a sale of the company and using their experiences to market advisory services for Indian companies that want to expand overseas or foreign companies looking to enter India.

Other entrepreneurs, too, have begun exploring expansion to other emerging markets: ZipDial has already entered Southeast Asia. Driptech has sold its products in Africa, and Promethean Power is moving into Pakistan, Africa and Latin America.

"I don't know who said it, but there's a saying that what you're going to find in India are little islands of excellence: people — despite the country, despite India — who are succeeding," Mr. Mehra said. "If you can connect those dots, you can make a real go of it here."

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