May 25, 2012

"An Indian Facebook: A Distant Dream" - By Sanjay Anandaram

The recent Facebook IPO, which valued the 8 year old company with a 28 year old CEO at over $100billion, provided yet another opportunity for many to again ask: “When will India have a Facebook?” or some variation like “When will India build global products?”

While this makes for good discussion, some important points got missed. Namely that Facebook has been applying for a set of new patents in the past few weeks of which the top four published by the US Patent office include new ways of collecting messages from different devices and collating it with socially relevant conversations. And for the record, Facebook has over 800 patents.

While the Indian entrepreneurial ecosystem is changing for the better (pls refer http://startupjourney.blogspot.in/2012/05/it-takes-village-to-raise-child-article.html and http://startupjourney.blogspot.in/2012/05/entrepreneurial-ecosystem-what-is-it.html) with various elements coming together, it is instructive to keep in mind one very important gap – the lack of innovation - in the ecosystem. Innovation – not of the Jugaad or service process or business model variety - in turn emerges from Research and Development (R&D).

The Organization for Economic Co-operation and Development (OECD) defines R&D as "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications". Over the past 100 years, the role of R&D in the creation of the leading economies of the world has only increased. In the 21st century, this role will only accelerate.

The Indian picture on this front is dismal:

i) India spends 0.9% of its GDP on R&D with the private sector contributing less than 25%. The corresponding ratio for the US is about 2.7% with the private sector contributing more than the government - remember that the US economy is more than 8 times India’s and so the difference in absolute dollars spent is embarassing. The Indian manufacturing sector spends around 0.2% of sales on R&D while the pharma sector spends about 7%. The much vaunted IT sector spends a negligible amount, if at all. An estimated 150 R&D professionals exist in India per 1 million compared to 4300 in the US and 1180 in China.

A visit to any of the top institutes of our country will rather painfully showcase the fact that industry sponsored research at these institutes is almost always MNC sponsored research. The US produces close to 50,000 PhDs each year while India produces about 9000. The number of Computer Science PhDs awarded each year in the US is close to 2000 while India awards less than 200! That Indian industry doesn’t lay much store by R&D is evident. As the Prime Minister noted in a January 2012 speech at the 99th Indian Science Congress in Bhubaneshwar, “it is ironic that GE and Motorola have created world class technology hubs in India while Indian industry hasn’t.”

ii) It isn’t unusual at all for a startup in the US to be able to sell to large companies or to find much larger partners that help them get to market. Given the brutally competitive nature of that market, innovation is valued as a competitive advantage. The innovation and what it can do – save money, increase revenues, enhance productivity – is valued and dispassionately so, irrespective of the size of the company delivering the innovation. On the other hand, it is incredibly hard, if not impossible, for an Indian startup to partner with a larger company or to sell directly to a large Indian company.

iii) Indian startups too, having been born and nurtured in an environment that isn’t patient and supportive of innovation, are almost always oriented towards quickly spotting and efficiently capturing a new market opportunity. Highly entrepreneurial no doubt but hardly in line with producing “creative work that increases the stock of knowledge to create new applications.”

This article isn’t meant to be a diatribe against startups but to hold up a mirror to the state of innovation culture in India. It will take the concerted efforts, over many years, of the government, industry, academia, research institutes, investors, media, markets and of course startups to change the current culture in a meaningful manner. China has shown that it is possible to effect change.

Many years ago, when a friend interested in doing research left for the US, when I asked him why in my naivete, he replied “In India, R&D stands for Receive and Despatch, not Research and Development!” This Receive and Despatch mindset is visible in areas as diverse as mobile phones to IT services.

The serious ramifications of this kind of R&D is now all too obvious particularly in strategic sectors: - Defence: India is now the world’s largest arms importer making India incredibly vulnerable to external pressures. China indigenization policy is now in full force while we’re still floundering - Telecom: According to a June 2011 paper by Prof Jhunjhunwalla of IIT Madras, India’s telecom import bill in 2009-10 of over $20billion was second only to that of oil! The paper laments the lack of R&D, Design and IPR in India. Isn’t it strange that with over 800m telecom subscribers, we don’t have a single Indian telecom technology company or even an indigenous mobile phone company with some IPR? The entire telecom network of India runs on imported technology. Contrast this with the Chinese approach.

All of us interested in Indian innovation, in unleashing its entrepreneurial potential and in seeing an Indian Facebook emerge, need to sit up, take notice and act in concert.

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.

May 22, 2012

Starting Up Tips from Fmr GE, Wipro exec Vivek Paul

The Corporate Exec-turned PE Investor-turned Startup founder has some insightful tips in an article appearing in Economic Times.

Keep your own counsel
Before I joined Wipro, I used to run GE's global CT scanner business. I made a big bet on a breakthrough technology while at that job. Everybody I asked for advice told me not to venture into it. I listened to their reasons. I then gave a solution to every reason that was raised. By doing this, I became confident. What I learnt most through this was that you can seek suggestions from everybody, but keep your own counsel.  

Envision the future
My stint at Wipro taught me to envision the future. This is not because you want to live in a fantasy land. You can actually work backwards to figure out what you need to do today to build that future. You also need to inspire others. It is not enough that only you have this belief. Everybody else needs to have that belief. It is not just empty words. You need to translate this into action.  

Plan for success
Another lessons that I learnt was to plan for success, as much as for failure. When success comes your way, you should not feel that you were not ready for it -- that your system cannot match that scale, or you were not able to figure out how to hire so many people while retaining the company culture. It is about making sure that when success does smile your way, you are ready for it.  

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. Click Here to learn about Venture Intelligence products that help entrepreneurs reach out effectively to the investing community.

May 16, 2012

B-Plan or B-School?

Manish Sabharwal again - this time in Inc India
Soon after, I incorporated my company, India Life, and went off to Wharton to study management. I got professors from there involved in my business. Most people want to make it to a business school to get a lucrative job. They have the math all wrong. A business school is like intellectual wine-tasting. These places are the best incubators in the world; the alumni, the professors and the resources for developing abusiness plan are just amazing. I think people should go to a business school, write their business plan, find an investor and come out ready to execute. That’s what I did. I found the View Group at Wharton, and got USD$2 million to start a health insurance company. That morphed to pension fund management, and then, finally to pension fund administration, before becoming an outsourcing company that was bought out by Hewitt in 2002.
Aah, the MNC Life
As the clauses with Hewitt would have it, I spent the next two years in Singapore managing their Asia outsourcing business. Every Monday, we would be locked in a conference where everybody could say no and nobody could say yes. As soon as the lock-in period ended, I called it quits and relocated to Bangalore. After all, the king of a small kingdom is still a king. We had built and sold a company. That gave us enough credibility to start the next one. We knew what we wanted our next company to be—profitable, fun and good for India. Thus, was born TeamLease, India’s first temporary-employment company. We have hired someone every five minutes for the past five years. So we consider ourselves good for India. We are profitable. And we have had fun.
Power of Policy
In India, our primary and vocational education systems are messed up. People in the Northeast can speak English and are, therefore, hired at a higher salary compared to the migrants from UP and Bihar, who have been taught in Hindi. The children in these areas didn’t do anything different. These are implications of policy decisions, which allowed English to be taught in one state, but not in another.
The PE/VC Meter
In many ways, TeamLease was a child of India Life. In hindsight, we probably sold our first venture a few years earlier than we should have. But then, with external money, the meter was always ticking on us. That’s why we did things a bit differently the second time. For TeamLease, we didn’t take any external money till last month. We wanted the runway and space to craft this venture differently. We got senior people in much earlier. We decided to focus on public policy, which has been great for the company. People recognise us as someone who has the backbone to stand up. We also scaled up much faster since we were working with a good team of people. Most of them, we knew from the India Life days.
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. Click Here to learn about Venture Intelligence products that help entrepreneurs reach out effectively to the investing community.

Diligencing Investors - The Manish Sabharwal way

Manish Sabharwal, founder of education and staffing services firm Teamlease (who earlier founded and sold India Life) articulates in an article in Mint, how he went about choosing his latest set of PE/VC Investors.
Sabharwal and Reddy decided to raise Rs. 100 crore to start with. But since both labour and education are highly regulated, Sabharwal was cautious about finding the right financier. “We wanted a domestic investor because they understand India. We didn’t want a tourist investor from the US who would give us a high valuation but freak out every time an article appeared in the newspaper,” he says.

Sabharwal spoke to 5-10 investors. “I did my due diligence, about the personalities in the investing firm, talked to people at their investee companies, and other companies that they had dealings with. I tried to get a match of how long we think it’s going to take and how long they are going to give us.”

Venture Intelligence is 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.

May 15, 2012

Selling the White House - or Your Business

Ken Marlin, managing partner at an US-based boutique advisory firm has some tips in Inc.com on how to go about putting a price on the White House or your business. 1. Showcase What's Cool.
"You've got to know what's really cool about the property, or about the business," Marlin said. "And, that's what you have to make sure you highlight and communicate to potential buyers."
2. Create a list of the interested buyers
...you might find that potential buyers might want to acquire you for purely financial reasons. Others might want to acquire you strategically as part of a plan to continue building their businesses.
3. Get an auction going
Valuations are always tough when there is no functioning market, and thus no comparable sales to point to. So a smart entrepreneur, whether he's trying to sell a company or a piece of iconic real estate, tries to create one.Often, that means staging an auction. You don't need hundreds of potential buyers: just two, although having more is better."When we advise sellers, we tell them you want an auction. When we advise buyers, we say you want to avoid an auction," Marlin said.
4. Create bidding comfort for buyers. (No one wants to look like a overpaying fool.)
So your job as a seller is to give them a good-faith basis for your asking price or listing strategy. And, you need to negotiate in such a way that the potential buyer understands you could legitimately walk away.
5. Remember: You're trying to sell the future.
"That's what they're buying—the future. And a buyer always has a fear that you know something they don't–that you're selling at the top of the market," Marlin said. "They don't care about the past. From a business perspective, from a corporate perspective, you have to help a prospective buyer see the future the way you see it." The bottom line, Marlin told me, is that putting a price tag on just about any asset is, well, about much more than just the bottom line. So you'll do yourself a service by thinking long and hard about the people involved in the transaction. "Valuation and negotiation are as much about the human element as they are about math," Marlin said. "Probably more about the human dimensions. You can't just apply the math and say, 'My competitor sold for 12 times EBITDA, so multiply my EBITDA by 12.' It just doesn't work that way."
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. Click Here to learn about Venture Intelligence products that help entrepreneurs reach out effectively to the investing community.

May 08, 2012

"Entrepreneurial Ecosystem: What is it all about?" - By Sanjay Anandaram

In an earlier article, I had talked of the rapidly changing mindset of the Indian entrepreneur and how that augured very well for the Indian startup eco-system.

Eco-system is one of those words that gets bandied about casually, like “entrepreneur”, like “awesome”, like “great!”; an all encompassing god-word that hides more than it reveals. As with all words that tend to become buzzwords, gross trivializations have occured with this word as well.

An ecosystem in biology refers to a living community – plants, animals, humans - that interacts with a non-living environment – water, soil, energy – via a complex set of interactions. There are external factors like climate, time, rainfall that play a role. Internal factors like types of species, decomposition of material, availability of shade also play a role. Internal factors both control the processes within an ecosystem and are also controlled by them.

Now look at the entrepreneurial ecosystem. The living members of the community – entrepreneurs, startup employees investors, lawyers, mentors and advisors, accountants, bankers and others interact with each other and within a non-living environment of agreements, governance expectations via a complex set of interactions conducted via meetings, events and discussions. External factors like laws, taxation, availability of funds and exits play a role. Internal factors like kinds of startups, their rate of growth, maturity, capital consumption impact the interactions and the processes of interactions.

All too often, entrepreneurs say, Indian VCs don’t take risks, don’t understand technology and the like. Others wearily talk of the implausibility of an international startup from India. While both these assertions are right, they betray a lack of understanding of an ecosystem.

An ecosystem, as we’ve seen, is not just about the entrepreneur and the VC. It involves lots of other living players. In addition, there are the external and internal factors mentioned above that are crucial for an ecosystem to function.

The Indian market is still maturing – internet penetration, credit card availability, logistics, access devices, formats, familiarity, laws and the like are still a work in progress. Hence - customer (those who pay!) adoption cycles are long and expensive. The M & A market isn’t friendly particularly for young companies; Getting to an IPO is a marathon. And investors need to make a return on their investment in a reasonable time frame, usually 5 years or so. If it takes longer than this to exit and if exit valuations aren’t attractive relative to the entry valuation, investors will, naturally, be very hesitant to invest. Remember, investors are not in the charity business, they invest to hopefully make a lot of money! Exits in turn are related to the financial performance of a company which in turn is a function of the market and customer growth.

Data compiled by Venture Intelligence, the leading research company on the Indian VC/PE industry, shows that over a 12 year period (ie 2000 Jan to 2012 March), only 158 VC and PE backed companies had an exit, including partial exits. Of these, only 20 companies exited via an IPO while 138 saw investors exit fully or partially via M&As. The median age of the companies at exit was about 8 years, companies were about 4years old at the time of investment and had raised a little over US$6million at the time of exit. For example, Naukri was set up in 1997 and went public in India in 2006, MMT was founded in 2000 and went public in the US in 2010; JustDial was founded in 1996 and is likely to go public in the near future.

It would be almost cruel to compare these numbers with numbers and examples from a highly evolved ecosystem like the US and I will therefore desist from doing so.

Large established Indian companies generally stay away from M&As. The newer generation of Indian entrepreneur run companies like Naukri and MMT don’t seem averse to strategic investments and M&A but it would be fair to state that startup M&As are generally conspicuous by their absence in India. So how does an investor and the entrepreneur exit? While the entrepreneur may want to bequeath the company to his/her next generation, the investor unfortunately doesn’t have the same luxury of time, bound as they are by return expectations.

While recognizable sets of investors are lining up along different points of a startup’s life cycle – seed to growth – the pipelining of startups towards an exit is still a long way off. Market and customer growth, management talent, the right kind of intermediary support system – lawyers, accountants & bankers, creation of stock exchanges that can support small companies and the sophistication and risk appetite of public market investors, all need to come together for the entire entrepreneurial story to be told in 70mm! It is therefore good to see the SME exchange as a welcome incarnation of a 20-plus year old initiative, the OTCEI of 1990!

In short, building an ecosystem takes time, patience, effort and is an evolutionary process. We must appreciate this fundamental fact even as we put our collective efforts behind the entrepreneurship vehicle. It is the only vehicle that can create a Shining India.

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.

May 05, 2012

“It takes a village to raise a child” - Article by Sanjay Anandaram


The entrepreneurial ecosystem in India is changing and for the good. And I’m not referring to the increasing numbers of entrepreneurs from the educated middle classes or to the growing presence of angel funds or even to the opportunities thrown up by a growing economy. Having been part of the Indian entrepreneurial ecosystem for close to 15 years now, I can attest to a subtler, less visible and important change. While I don’t have “objective” market research data to support my thesis, I do have anecdotal evidence. And this evidence points to the fact that growing numbers of Indian entrepreneurs are seeking mentorship and advise.

Why is this important?

The act of seeking mentorship and advise follows from a realization – that I, the entrepreneur, don’t have all the answers; that I am willing to step out of my comfort zone, network, meet very many people -  who bring in different perspectives, knowledge, experiences, lessons, skills, and bare my soul – albeit in small doses – to unknown people, evaluate people and responses, decide who to zero in on to repose my trust, confidence and faith in my company building effort,  work hard towards creating and nurturing a long term relationship, take feedback – not always palatable – and consider parting with some equity for the advice received. This realization requires humility, a willingness to learn and confidence.

This is not easy to do for anyone. Particularly Indian entrepreneurs who’ve for the most part operated in silos, are inhibited in talking about their companies, its finances, their need for help and the like. Saying “I don’t know or I need help” aren’t among the more politically correct statements in India irrespective of the field of work! An African proverb says “It takes a village to raise a child” (Hillary Clinton also wrote a book with this title in 1996) and what that means is that the cumulative and ever growing knowledge of the community is what is required to provide security, learning, guidance and counsel to a child. In the same way, bringing up a startup takes more than just money, entrepreneurial passion and a market.  To create an environment, however, where thousands of startups are conceived, born, nurtured and successfully grown takes more than physical incubators, availability of money, regulation and policy. It requires networks of mentors and advisors and entrepreneurs who can share, guide, collaborate and learn. Mature and robust environments like Silicon Valley provide this most crucial of inputs and insights – from company formation, to strategy, to dealing with personal issues, to funding, to hiring and managing employees, to partnering, to finding customers, to marketing to technology to exits, through such relationship networks.

It is heartening to therefore see this realization in Indian entrepreneurs. It shows increased awareness, reduced fear and shyness, lessened anxiety about losing control and influence and an embracing of external learnings and insights. All of them have a dream and the desire to succeed but only very few will. Usually, those that don’t succeed realise that they’ve been chasing the wrong opportunity with the wrong business model and wrong team much much later in the game, if at all. What if they had been made aware of the pitfalls and dangers early on and been prepared to deal with them? What if they had had the benefit of experienced counsel from mentors and advisors? While having mentors and advisors is in itself no guarantee of success, having the right mentors, advisors and an access to this network can often times reduce the agony of late unhappy realizations of the state of the business.

Mentoring programmes are now available through several industry associations. Educational institutions too are realizing the value of such efforts. More and more functional experts, experienced corporate executives and entrepreneurs are getting involved with the startup ecosystem and are being welcomed.

Obviously, there’s a long way to go before these networks become mainstream and acceptable to all entrepreneurs. The benefits of such network associations can be enormous and can take companies on another higher trajectory altogether. It is only when accessing these networks becomes an embedded habit of entrepreneurs can we say that the Indian entrepreneurial ecosystem has truly arrived. We are well on the way!

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.