February 22, 2010

"Partnering - Big or Small?" - Article by Sanjay Anandaram

The startup was in a tizzy. One of its largest partners who sourced the startup’s products, bundled them with other offerings and sold them to customers had decided to make the products itself. The partner was much larger than the startup, had more money and reach. About 10% of the startup’s revenues came from this large partner, albeit at a lower margin than if the startup sold products directly. On the other hand, it did not have to incur additional sales and marketing costs. For the partner, the revenues from the startup were a tiny fraction of its current revenues but the market opportunity was large and fast growing. It was quite possible that the startup would be in direct competition with its partner before long. The startup was therefore understandably nervous – should it continue to supply the partner or should it stop supplying products? Should it aggressively cultivate other comparably large partners while continuing to do business with this partner?

All too often in business such situations arise. There’s nothing good or bad, right or wrong about these. It is just the way things happen. Startups are no exception. Many years ago, Ray Noorda the legendary founder of Novell had popularized the word “co-petition” implying that in business co-operation and competition could go hand in hand. Indeed, there are umpteen examples in automobiles, consumer goods and technology. But there are some fundamental points worth keeping in mind:

1. Co-opetition works among equals or comparable sized and capable companies. In cases where there’s a mismatch, the smaller company needs to have very unique and defensible capabilities – intellectual property or an exclusive license of some kind.
2. Where co-opetition works, the competing arms of the business are kept separate from the co-operating arms either through separate structures – legal or otherwise. Contracts are tightly negotiated.

This gives rise to an interesting dilemma. Should a small company partner with another small company or with a much larger company? The question to ask is what is this partnership with another small company really worth? Remember, two poor people don’t equal one rich guy! On the other hand, partnerships with a large number of small companies, each of which does small business but in the aggregate have an appreciable turnover, could be fruitful. But forging and maintaining these relationships is very tough since each small company is itself struggling with its own issues of growth, finances and people.

No doubt, partnering with a much larger company takes a lot of time and effort but once done, can be a source of profitable revenues for the smaller company. Again as in all partnerships, this too takes an enormous amount of nurturing to flower. Being dependent on just one large partner for business is fraught with its own risks as the loss of this partner can seriously damage the prospects of the startup. So it is prudent to have at least 2 large partners (ideally who compete with each other in the market) so they keep each other in check even if the startup cannot. This is of course, easier said than done (is there anything that’s done easier than saying it?!) but is a critical approach to pursue for a startup. Sometimes, a larger partner might want exclusivity, in which case depending on the situation and negotiation capabilities and leverage at the startup’s end, it is worth considering limits to the exclusivity – geography, time, products, non-competing channels etc.

As with most things in life, one doesn’t get anything without “asking” (to oneself or to another or both) for it. It is therefore important that startups consider asking themselves at all stages what it is they really want from the partnership. Is it just a stepping stone to many more partnerships? It is just an opportunistic measure to enter a market and secure some quick revenues? Is it a partnership that needs to be nurtured for the long term value and impact? The answer of course depends. Depends on the unique situation for each startup.

So what should the startup do?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

February 18, 2010

Profile of iMetrex Co-founder Rajeev Mecheri

Subroto Bagchi has published an interview with Rajeev Mecheri, Co-founder of building security technology firm iMetrex, in Forbes India magazine.

In time, they became the go-to organisation for every high-rise in town that required compliance with safety, security and energy management norms. In 2007, Siemens noticed their work. And Siemens also noticed that their building solution software was comparable and in some ways, actually ahead of what Siemens offered. It wanted to buy them out but with a condition: The brothers came with the business. Rajeev came on board as the managing director of Siemens’ Building Technology business for an agreed period of five years. This year, the business having fully integrated, Rajeev has decided to move on and brother Anand has stayed on as the chief marketing officer of the Building Technology business, located out of Switzerland. The acquisition is valued at a whopping $100 million. If you have not heard about it, it is because in Chennai, folks do not crow about such things. I wanted to know about the experience of selling his enterprise.

...“What did you learn from being part of Siemens?”
“I learnt about the power of a brand; the power of size. Only when you are large, you have the leverage, the negotiating power. Today, even as I leave, we have inked a deal to deploy a physical and logical security system involving 105,000 cards to be deployed across the world for Infosys. At iMetrex, all by ourselves, we would not have even bid for the business because we had no capacity to deploy such a solution across the world. On the flip side, in a large entity, you lose out on relationships. Employees tend to think of customers as quotations, invoices and account receivable and not as people with needs. Customer needs and not numbers are the end game and that requires empathy ahead of size.”

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 08, 2010

"People Growth in Startups" - Article by Sanjay Anandaram

The following was narrated to me over the weekend by a Professor of Finance and a former finance industry executive with experience in well known multinationals.

Upon asking his supervisor about his not being promoted even after performing well at his job and being recognized for it as well, he was told that he was asking the wrong question! His supervisor told him “You’re asking the wrong question! You should ask – what should I do to get promoted?” Quite naturally, this confused the finance executive and now Professor all the more. Upon enquiring, he was told by his supervisor that he was undoubtedly very good at his job but hadn’t demonstrated leadership by developing a competent second rung of leadership. “You should make yourself redundant by growing out of your job to be promoted” was the message from the supervisor; else, upon promotion, who would do the executive’s job at least as well as it was being done?!

The executive took the message to heart. In the next 2 years, he was promoted over 4 times!

Is the same promotion philosophy applicable in a startup as well? I believe it is.

A group of energetic, passionate and talented people come together to create a startup to realize their dreams. In the early days of the startup, when there’s ambiguity and amorphousness about the company’s structure, roles and responsibilities, it is understandable when the founders and early team members do everything and anything possible to get the job done right, on time. After a while, as the startup grows, a more formal structure comes into being. Roles, responsibilities, authority and reporting relationships come into being. More formal functions get created eg, finance, vendor management, engineering, product marketing, sales, marketing, human resources, IT and so on. Each of these departments needs dedicated attention within the overall canvas of the company’s charter. Each of these functions in turn grows in complexity commensurate with the company’s growth - sub-departments get formed (eg marketing might get sub-divided into functions such as product marketing, product management, online marketing, brand management, channel marketing, alliances and partnerships and so on); in addition, operations might get further sub-divided into geography, sector and function focused structures.

Each of these functions will need to be “owned” by a competent and capable teams. The initial founding team will need to create space for talent to come in and flower. This requires an honest appraisal of the capabilities of the team. Insecurity and egos can come in the way of allowing this to happen. Can the person single handedly responsible, in the early days of the startup, for generating sales of say, Rs 1 crore be made responsible for creating and managing say, Rs 50 crore in sales, an all India sales team dealing with multiple sales channels funneling multiple products and catering to different classes of customers?

In 1969, Dr Laurence J Peter and Raymond Hull wrote in their book The Peter Principle that "In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence." The humorously written book goes on to state that sooner or later employees are promoted to a position at which they are no longer competent (their "level of incompetence"), and there they remain, being unable to earn further promotions.

One way that organizations attempt to avoid this effect is to refrain from promoting a worker until he shows the skills and work habits needed to succeed at the next higher job. Employees should therefore not be promoted for their efforts but given pay raises. Training is to be imparted to employees to make them suitable for position. In India, it is hard to find experienced and affordable top class talent for startups and so training of existing employees is more important. The onus, unfortunately, therefore is on leadership to discover those individuals with poor managerial capabilities before they’re promoted! It is also important to keep in mind that many technical people may be very valuable for their skills but poor managers, and so allowing a good technical person to acquire pay and status reserved for management requires the creation of a parallel career path.

So, lets work hard to make our selves redundant in our current roles!

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own

"M&A: People Issues are Paramount" - Article by Sanjay Anandaram

At some point in their existence, many startups have to confront certain existential questions – about themselves and their future. Some of these typical questions: “Are we on the right track? Are we likely to reach where we wanted to? We need to grow fast but how? Should we acquire and grow? Should we be acquired”?

Three real life situations from my experience:

There was a term sheet on the table from the large well known public company to acquire the young VC funded startup. The price seemed right, the company was respectful of the startup, the products were complementary and the cultures seemed to match. The deal didn’t go through because the CEO of the startup couldn’t be accommodated in any worthwhile role in the large well known public company though all the other startup employees would’ve been absorbed. So the startup CEO rejected the offer.

The CEO of a startup that had raised venture capital financing was under severe pressure. He had aggressively promoted his company’s offerings in a bid to acquire market share and had tasted success but at a terrible cost to his cash position. He had a large number of customers but was barely making money on each sale. It seemed that the more he sold, the more he would lose! His customers had got used to a very low pricing and would leave if prices were raised. The startup was addressing a large, new, fast growing market but a very competitive one (there were at least 2 other funded startups). So he called the CEO of the market leader (another of the funded startups) to discuss a “strategic partnership.” Translation: he wanted to be acquired. The discussions did not make much progress as there was no agreement on the pricing and more importantly on the roles and responsibilities of acquired company CEO in the new merged entity.

The CEO wanted to grow fast. His company was number two in a fast growing market and had carved a space for itself. There wasn’t a big gap between his company and the market leader. One day, he received word that one of his overseas partners was considering selling out. The overseas partner was slightly smaller in revenues, had a set of well known customers, had recently turned profitable and had services that were complementary to the startup’s own. The CEO was excited as he considered the opportunity that would allow his startup to suddenly acquire an international footprint, gain an entirely new set of customers, acquire financial size profitably and get an experienced entrepreneurial leadership team in place for any international expansion plans. The best part, it appeared, was the team – they were known to this CEO for over 5 years and there was a sense of mutual comfort. Accordingly, the due diligence began in earnest. Financial statements were analysed, sales data was scrutinized, contracts were reviewed, business processes were understood, customer satisfaction audits were performed. Everything checked out and it seemed only a matter of time before the deal would get inked. However, the deal didn’t happen. These leaders had far more experience and understood their markets very well. They also became acutely aware of the constraints – having to follow new processes, had to get budgets approved, carry new business cards with new job titles and had to follow new reporting mechanisms. The leaders of the overseas company were hesitant to report to the CEO of the acquiring company since they considered him to be junior.

These 3 examples only illustrate the fact that most M&A deals collapse due to so-called “people issues”. While spreadsheets can be manipulated to show “synergies” and balance sheets massaged to show “accretion”, it is very hard to ignore the fact that mergers and acquisitions involve real people with emotions, egos and aspirations. Deals don’t get done by and between nameless emotion-less ego-less legal entities called companies (however much we may want to believe otherwise) but by and between people. The adage “If the chemistry isn’t right, the arithmetic won’t work!” is important to keep in mind as well. The most crucial step therefore is to therefore understand the motivations, aspirations, working styles, roles and responsibilities of people and accordingly tailor the deal rather than force-fit people into contrived positions and roles.

What do you think?

Sanjay Anandaram brings over two decades of experience as an executive, entrepreneur advisor and investor. He is a passionate advocate of entrepreneurship in India. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school. He can be reached at sanjay@jumpstartup.net