India or China?

There are scores of articles in every major newspaper and every major magazine comparing India with China on various economic progress indicators. There are even books written about Tiger of India pitted against Dragon of China. To those who base their opinions on such reports, articles and books, it looks as though India is posing a strong completion to China, when in fact every measurable economic indicator suggests that China is clearly leading India on all fronts. Moreover the gap between these two countries is only widening with each passing year. And yet, many Indian commentators continue to complacently believe that India has some edge somewhere when in fact none exists.

The tone of these reports and analysis comparing India with China suggest that India is actually inching towards China. That is not the case. In reality China is leaving India behind by a bigger margin every year. It is becoming tougher and tougher for India to catch up. In the last few years, Chinese have built the biggest dam on the planet, built the longest bridges, built the fastest cities, built their own planes, submarines, ships, magnetic trains, and even the highest railways while India continued to lay another layer of asphalt on its decrepit roads after each rainfall.

India is not even showing a promise of catching up. None of its policies suggest this. None of its initiatives give a glimmer of hope. Even the Indian industry is not thinking big. It is still content to play a small game.

Indian commentators continue to tell us that all this China-leading-India comments are based in myth, because Indians have English which Chinese don’t have. Is English really India’s edge? Only when India looks at itself as servicing the West using its BPOs then yes, English gives India the edge. However, if the competitor is bent on actually creating its own technology product industry to take on the West, does English still matter? When was the last time a Japanese car company could not sell its cars because the makers were not good at English? When was the last time someone in Europe balked at buying a Sony Walkman because its makers couldn’t speak English? When it comes to China, how come their lack of good English not stop Huawei from becoming world #2 in telecom equipment? How come it did not stop Lenovo, Haier and ZTE from becoming leading global brands? Just to give a perspective to Indian readers – 2 telecom equipment companies of China, Huawei and ZTE put together made USD 30 Billion in 2008 while the entire IT-ITES industry of India put together made USD 58 Billion in 2008-09.

China is changing the rules of the games. It is taking on the West where the West has dominated so far, bringing the fight closer to the technology leaders, while India has conveniently told itself that it will not even play this game.

Indians are in self-denial. They foolishly believe everything Thomas Friedman tells them, and they are happy serving their European and American masters setting up BPOs, KPOs, LPOs, software services, helping them do their things in a cheap and cost-effective way, while Chinese are poised to take on these European and American masters head on. It’s as though the Chinese have completely overthrown their colonial inferiority complex.

For many years now, Indians gloated over the characterization that India is good at software services while China is good at manufacturing. This was a convenient characterization that only Indians believed because the books were written in English which only Indians could understand. Chinese blissfully unaware of what Friedman said were not constrained by this characterization and hence clearly violated all hierarchies.

Indians limited themselves to serving the West. When they looked in the mirror, they said, “I am an Indian. I am good at services. I should just stick to it”. That India is only good at software services became a cultural phenomenon with every major industry bigwig repeating it on various forums. Even Indian government fell into this trap where all incentives and subsidies were geared only to promote the software services companies. Go to a hardware park in India and compare it with a software park in India, you will recognize the step-motherly treatment meted out to the hardware companies.

India made no attempts at taking on China in manufacturing. Nor did they attempt to take on the West to go up the value chain to actually deliver technology and products. The Flat World theories told them that they can just concentrate on what they were good at, that is Software Services, KPOs, BPOs and LPOs, giving up on manufacturing forever thereby handing over the race on a silver platter to China, and giving up on technology products thereby continuing to serve the West.

China not only won the race in manufacturing and consolidated its position, it is now entering the technology product space, the domain held closely by the European, American and Japanese technology leaders. What more, it has started to beat these leaders at their own game. Huawei has recently won the contract to supply 3G equipment in Norway, the bastion of Scandinavian giants, Nokia and Ericsson. While India made feeble attempts with C-DOT and ITI who are not even able to sell into BSNL, China has launched not one but two major telecom companies – Huawei and ZTE, that not only sells within their countries, they sell to BSNL also.

CK Prahlad in his closing comments at Nasscom Summit of February 2009 advised that Indian companies should foster more startups because they are the ones which bring vibrancy to the economy. His advice comes late, and even when it comes, it falls on deaf ears.

Infosys, TCS and Wipro, the giants of Indian software services which the Thomas Friedman lauds, did not do much to sponsor or promote startups in India (barring few exceptions).

Meanwhile, China has launched extensive nationwide program to promote entrepreneurship in China. I was told that even a district head, equivalent to Indian District Collector, could invest up to half a million US dollars to a company that sets up shop in his district. Writing about China, a report says:

An analysis of documenting the tremendous growth of the Chinese entrepreneurial and cultural initiatives since the demise of Communist leader Mao Zedong reveals that this accounts for the Chinese economy’s double digit growth in the last couple of decades. [1]

It is clear to some countries that startups are essential for the growth in economy. Not so, thinks India. India has never believed in startups. They don’t think they add up to anything. The government is obsessed with giants because they look at them as employment provider – therefore the bigger the employer the better it is. Not a single major initiative has been taken in the last few years to promote startups in India. While the government boasts of loans to SMEs, when startups actually approach the banks, they feign ignorance of any such initiative.

All initiatives and decision making bodies in India are headed by people who have been good at software services and therefore there is not a single policy that actually aids home grown brands, products and technologies. STPI still thinks that software is exported only as floppy, ftp or a CD. If you put that software in telecom equipment, a mobile handset, or a DVD player, then it does not recognize it as software and hence are not given the incentives. If Apple existed in India, there is no category for recognizing it. The prevailing mood is clear - you serve a foreign master you get the incentives; you try to become a master you don’t get any incentives.

Also, there are not many places a startup can raise funds in India. That’s why most startups continue to be family-owned or family-backed. First generation entrepreneurs find it impossible to raise money. The number of VC firms in India is limited. Most government funds are small and therefore their mandate does not allow them to fund big ideas, while the miniscule few bigger size funds do not fund loss-making companies – which completely rules out startups.

China, on the other hand, is actively promoting startups through various forums and incentives. Though it is a communist country it hosts millions of entrepreneurs and VC firms which is aiding its economy.

China currently has over 200 million entrepreneurs and it houses 200 venture capital firms. The country accounts for 24.6% of the total entrepreneurship activities across the world, far ahead of Indian at 13.9% and the US at 14%, according to a survey by Global Entrepreneurship Monitor.

About 116 Chinese companies are listed on NASDAQ, as against 2568 US firms, Israel’s 63, and a handful from India, says the study. [1]

China is even popularizing entrepreneurship as a cultural attitude with various initiatives including TV programs.

…a Chinese reality TV show “Win in China” has received applications for entrepreneurial ventures from over 1,20,000 aspirants. Of these, 108 were chosen for prize money and working capital of $5 Million. [1]

Indians don’t know what to do. They don’t know if they are socialist or capitalist. The reality is that they are clueless – they are neither capitalist nor socialist. China is both socialist and capitalist playing these two cards really well. The only floating hope for Indians has been their mastery of English. And the following observation should submerge that hope as well.

To give competition to India and other cost-effective English speaking countries like the Philippines, millions of Chinese students are learning English systematically. “China will become the largest English speaking geography in the world by the end of this year”, Compton added. [1]

[1]: China is an entrepreneurship juggernaut, Times of India, 17 November 2009.

Bangalore- Startup City

For many months now some of us have believed that Bangalore is the most favored place for startups. Of course, we didn’t have any data to back it. When Vijay Anand of Proto.in, a good friend who spends most of his energies in promoting startup ecosystem in India contested that Bangalore may not the best destination for startups, I had a different opinion on it.

Some of us who have started out in Bangalore have a bias for Bangalore and that may have clouded our assumption that Bangalore is more suited for startups. Then, may be not! We now have some data coming from the recent TATA NEN exercise.

Before I venture further, let me clarify my position on this competition. I am a strong supporter of many startup events that happen in this country. I do my best to participate in them and promote them where necessary.

However, we have decided not to participate in this TATA NEN competition. There are few reasons for that. I believe the competition has some weaknesses. Here I list them.

#1. Not every startup got the same start in the competition. If the startups are chosen by voting, how can some candidates be fielded earlier and some later? It’s like fielding few candidates in a poll early on, and after people start voting, you add few more candidates later on. It just doesn’t make sense to do that. Someone at TATA NEN got the whole thing wrong.

#2. Polling a startup? How does that work? Startups are virtually unknown. Nobody other than the employees and few friends and family know about a startup. Only consumer focused startups tend to draw larger audiences while high-tech startups catering to enterprises may be completely unknown. So how can someone vote for a startup they don’t know about? It’s not the same as voting for HCL or Satyam- almost every engineer knows about them and hence voting can make sense. How does voting apply to virtually unknown startups? That’s when you start doubting the whole rationale of this exercise.

But TATA NEN exercise has given us some insights and observations. For the first time, it has pooled so many startups onto one forum.

1. Bangalore is number #1 startup city with 25% of the nominated startups. That’s 1 out of every 4 in the country – thus establishing our belief as a fact that Bangalore continues to be the most favored destination for startups.

2. Most common form of initial funding is personal savings. More than 70% of the companies start that way. Friends and family comprise 17%. VC funded companies comprise only 2%. Angel investments comprise only 4%.

3. About 42% of the entrepreneurs are in their 30s, 76% come from first-generation family backgrounds, and about 17% of them have studied abroad.

How can startups get right engineers?

Few initiatives like Pluggd.in, Proto.in, Headstart.in, NEN, are doing a wonderful job in educating engineering institutions in India to get exposed to the startups of India. They are taking initiatives to bring startups to the campuses so that interested students can be recruited by them.

While talking to one of the very energetic campaigners at NEN, I started giving my opinion on how and what they should be doing. I am penning down the points from that talk.

Startups are too busy and are not in a position to go to a campus for recruiting candidates. First, they don’t have time and they don’t have people who can spend a day on recruitments. Second, they don’t have money to travel to the campuses if they are in far off cities. Third, they will never get the kind of guys they want at the salary they are willing to give.

Instead, as a startup, I would like to receive a document which lists all the master’s and PhD students in an institute that has a small picture of the candidate, their contact details, and a 10 line biography, highlighting their project, their interest, area, and other technical and performance information. I can then choose the candidates that are of interest to me, call them up or send them an e-mail. NEN can also create a separate list of those candidates showing interest in working for a startup so that I don’t have to bother spending time telling the candidate what it takes to work in a startup.

I feel a sense of loss when an extremely talented and passionate engineer who wants to work on certain DSP design eventually takes up a job at a financial number crunching software company only because he did not get the right kind of job. Also, it is a huge loss to companies like us since after two years of working at that financial company his expertise in DSP design is of no interest to me.

Also, I believe that all engineering students, especially the masters and PhDs should have a LinkedIn profile which should be given in contact information. The LinkedIn profile should contain all the course details along with details of the project or thesis. That way, I can get to know the details before I decide to call him.

Some groups like Pluggd.in, Proto,in, Headstart.in, NEN are trying to solve the well-known problem facing the startup industry. Campus recruitments do not favor startups. Companies which take up candidates in hordes, like Infosys, TCS, get the preference to hire the candidates early on. So does the MNCs which pay really lots of money. Many students do not find the job of his choice. There may be some engineers who are keen on working on a particular domain rather than with a recognized brand. Such candidates may lose out since the startup may not show at the campus recruitments.

If a very talented RF engineer who has done master thesis in making better and efficient power amplifiers takes up a job at an insurance software company only because he has not found the right match, it’s a pity.

I look forwarding to seeing a web portal. At any point of time, I would like to look at a database of Masters and PhD students in India working in the fields of Electronics and Communications engineering and know what they are working on. If I find a candidate working on a nice project, I would like to contact him and see his interest in working with us. Such a portal can be used by startups and technology giants to list some problem statements that can be used by institutes to create projects that are more relevant to the mainstream businesses. Some of these projects can be funded by the industry as well.

I have hundreds of problems that I would like get them solved, in embedded systems, in RF engineering, in thermal engineering, wireless communications, etc. I would like to post those problems on a website. T he interested students can contact the companies like us and get the detailed problem description from us. Over a period of time, this interaction will influence the colleges to fine tune their projects to the needs of the industry. The industry can then hire the guys who are already working on relevant domain.

I look forward to seeing such a database of Master and PhD students, the details of their projects, and in the long run, I would like to see a portal which can contain the list of all such students working on those projects, including the problem statements from the industry.

Crisis or Opportunity?

The Wall Street as we know it doesn’t exist. This could be the onset of worst financial crisis in the last fifty years. The alarms are being sounded. It’s going to be gloomy ahead. ‘Brace yourself for the worst storm ever’. ‘It’s going to be another Great Depression’, and so on. Indians would love to believe it is going to affect them exactly the way it is affecting Americans. Flat world, isn’t it? We have believed in that myth far too long not to believe it now.

The news pours in from every quarter. It’s impossible to get away from it – every newspaper, every magazine, and every news report suggests the same. There will an economic slowdown. There will be layoffs. Startups need to conserve cash. Already cautious VCs of India become more cautious now.

I am supposed to be gloomy too. I am supposed to make negative statements too. I am supposed to say that, ‘Yeah! It’s going to be hard; it’s going to be tough; it’s going to be bleak!’

Yet, I don’t say that. I am a startup, remember. I am already in the deepest shit-hole possible. I am used to surviving in a very hostile environment. I conserve cash like nobody else’s business. I starve and yet put on a smile. I am used to it. (It’s been four years like that. I better be used to it.)

Unlike the pundits out there, I am not pessimistic.

Yes, it is a crisis. But I think it is also an opportunity in the long run; especially, if you are a technology startup aiming big sitting right here in India. Most of my competitors are based in US and Europe. The current crisis is going to hit those companies really hard who usually take lot of funds to bring a product to the market. Many of them will be cautious and conservative and therefore will shelve some of the plans on hand. The more ambitious and riskier they are, greater the likelihood of shelving them. Being a garage startup in India, we have a DNA to work on extremely low budget, spending cash very conservatively. I believe that it is an opportunity for many Indian companies who have started on this model to take on the challenge and launch products onto the world market.

Those high-spending startups may have to be cautious, because most probably they have been spending too much money unnecessarily. Whereas, we will continue to be aggressive and bold! At any day, we know that we will take only about 1/20 to 1/50 of funds what a typical heavily-invested company would take to launch new products. With some of the competitors folding and some being cautious, it’s definitely an opportunity.

Startups in India- think real. Go back to basics. Think of the real stuff for which people will pay real money. There are few basic things for which people actually pay money, like shoes, medicine, energy, TV, mobile phone, computer, broadband, communications, travel, marriage, etc. Make sure your company can make revenues, instead of creating just a perceived value. I would be cautious working on a service or a product that has a perceived value but no tangible value to the customer.

Ask yourself, will you pay for this service? And if you consider yourself a geek and an early adopter, ask your friend, mom and another fellow engineer if he would pay for this service? Get real, as real as you can be. For a moment, forget you can create value based on perception and hype. Don’t assume too many things to happen in the ecosystem. If your business model suggests that you will reap lots of money when there are lots of WiFi phones around in India to create ad hoc networks, you are assuming too many things.

If you are an investor, it’s actually the right time for you take that big bet. If you were afraid of those gorillas eating your startup’s market, this is time for you to take that bet. If you were afraid, how can this small startup in India make it big on the world market, here’s the time. While the gorillas are being cautious, you should run like a gazelle and get to that post.

Get your head out of those power point presentations and excel sheets. Take a tour of the companies that you want to invest in. Meet the team members; see the passion in their eyes. How long will you evaluate a startup based on titles and degrees of the team members? I would like to see my potential investors showing interest by coming to my office and see what we are doing instead of evaluating us just by the market projections based on a Gartner report. For all that matters, throw that market report into the nearest trashcan.

Tejas Networks, based in Bangalore, a technology product company focusing on optical networking equipment, got started in 2000, right in the middle of dot com burst. When they got started, there were nearly 200 startups in North America and Europe in the same space. While nearly 95% of them eventually folded, Tejas stood ground and eventually became a market leader in India, and is now poised to take on world markets.

The crisis in the global market was an opportunity for an Indian company. Here’s another opportunity for all of us. It knocks only once in a while.

It’s time for Indians companies to think big. Let’s make Ciscos, Apples and Nokias out of this place. Let us be brave and let us not be daunted. Let’s not chicken out. Let’s use this as the biggest opportunity that has landed at our feet. Let’s embark on this challenge. Let’s not shy away from taking the bets. Use the startup DNA to your advantage, use this time to launch the technology and products onto the world market. Let’s do it!

Assembly Line manufacturing from Ford

I took these notes down while watching a show on History Channel.

Henry Ford created the concept of assembly line manufacturing. The original components arrived onto a single line platform to make a complete car at the end of the line. This was a revolutionary way of manufacturing introduced to increase productivity on an unprecedented scale. However, the monotonous nature of the job took a toll on the workers. Henry Ford compensated for it by increasing the wages, setting a standard for America giving $5 an hour and introducing 8 hours a day. Eventually, the workers at his factory were richer than average Americans where they could actually afford the cars they assembled. Here are some highlights:

• One car was produced every 10 seconds.

• It took only 4 days to assemble a car from raw materials to the finished product.

• Henry Ford became the first “self made” billionaire of the mankind.

• Most other industries quickly adopted his assembly line manufacturing.

• During his time, USA produced 40% of manufactured output in the world.

• During WWII, the 32 million car American industry shifted to making war equipment.

• The assembly line production allowed women and African-Americans to enter jobs spurring hate crimes.

• During WWII, USA produced 90,000 bombers, quarter million tanks and jeeps- faster and cheaper than any other country in the world.

• At the end of WWII, USA productivity was 8 times that of Japan.

• However, Ford’s assembly line manufacturing had some deficiencies. Switching from Model T to Model A required one-quarter billion US dollars. Meanwhile, GM was able to make changes faster because they had smaller assembly lines.

Assembly Line work takes a toll at Ford

• There was emphasis on Quantity over Quality.

• Extreme fatigue for Workers.

• Mechanization went too far, human element was missing.

• Toyota introduced lean production. Eventually, Japan made more cars than USA.

Embraced by Toyota

• 1950, EG Toyota spent 3 months at Rouge Complex (Detroit). Henry Ford shared his assembly line technique with everyone. At that time, Toyota was doing 1000 cars a month. Ford was making 1000 cars a day.

• Toyota created lean manufacturing allowing workers to define their job giving scope for creativity. Every worker became an inspector. Productivity actually increased.

• Toyota expected its workers to be motivated, skilled and innovative – they developed their unique style called Kai Zan.

Notions in India on Startups

There is a prevailing notion in Indian startups that the minute you get heavily invested by a VC, you are successful. The fact that some VC has deemed your business worthy of investing is a good enough reason to feel that you are successful as a business.

Now, that you are invested, you feel a bit special. Since you are no longer scouting for money like other entrepreneurs you think you are now a serious company. That feeling is good enough to put a stop to all that hanging around with other pauper entrepreneurs. That also means putting a stop to attending the Barcamps, MoMo, Headstart events, etc.

I attended a NASSCOM event on products and innovations. In one of the panels showcasing successful product startups, they also invited social networking and other dotcoms. I was sitting there wondering – what is the common element in all these startups? Some of them were not innovative and some were not even making products. Why are they considered successful? The only thing that was common was that they all got funding recently by some big name VC in the order of few millions.

The fact that you got invested is a good enough reason to believe you are already successful. Even the VCs, the media and observers will believe that.

So what happens once you get invested?

There is another prevailing notion that once you get invested, somehow all your financial problems are solved. The new startups which get heavily invested start looking for a swanky office with nice carpets, interiors, woodwork, cabins and cubes. They go back to getting cushy salaries with luxurious perks. Overnight, you are no longer a poor boy. In fact, it’s like getting married to the only daughter of the Sultan of Brunei. You travel luxury class, stay at five star hotels, get into all kinds of forums, wear suits, and rub shoulders with biggies. You can now go about thinking about that new apartment, that new swanky car, and that investment into real estate that you have kept on hold when starting the startup. Now you go to work as if it’s a regular job, filling excel sheets, project plans, as you did before the startup. The hunger is already gone and now it’s replaced by satiety, too soon too fast.

I see a dangerous trend in Indian startups. I am not comfortable with it.

Startups in India see their first round of heavy investment as a major achievement in itself. They see it as an end in itself. They see it as a major milestone after which all problems are solved. This particular single-focus goal is detrimental to its long term prospects as a business. Usually the startups go through a process of exhaustion and starvation and the thought of a gush of money is a welcoming prospect, so much so that, their entire focus is now shifted to raising that money instead of concentrating on other business goals. Once that investment is made, you back to your old style of working.

I know of few companies in Bangalore which are setting very bad examples. These companies have ‘successfully’ raised many rounds of funding and yet, there is no product release or source of income. Most of the time is spent in partying and celebrating little achievements which have no consequence in business.

In a city of very few successful product making companies, to have a few bad apples will have negative effect on prospects of future investments. Unlike Silicon Valley which spawns thousands of startups which are VC backed, India produces very few. And if out of those very few we start seeing bad examples that sets a negative outlook on future prospects for Indian product startups.

Some VCs who witness these trends, instead of correcting them, are actually casting a blind eye, and are believing themselves into a delusion that everything is going alright, when in fact it is not. They cover up the inadequacies of their startups and keep promoting them in all forums and events as if they are best companies on the planet. The first round VCs think their startup is successful if it is in a position to raise the second round. And second round investors in turn believe it is a successful company if it raises the third round, and so on. Nobody is bothering to check if these companies are actually creating value as a business, in terms of market share, revenues and profit margins.

This trend of blowing up the VC money may work well in Silicon Valley where there are thousands of companies being started every year, and few bad apples will not make a big difference. In India, where there is dearth of startups and where a paltry number of companies get invested, this trend does not bode well.

A startup should have the same hunger even after they raise their round of heavy investment. That hunger should keep them going after pursuing the markets, getting the cash into the company. They should not squander the money. Instead they should continue to use the art of managing the cash flow wisely as they did prior to their investments. They should not let go of this innate strength all in one episode.

Indian startups need to set successful examples of using India as a cost-effective way to launch global brands of high quality products.

What is your primary objective as a startup?

In my conversations with many entrepreneurs during the events at Proto.in and Headstart.in, I have observed few things that I want to discuss here.

Should startups get disappointed if they do not get invested?

One top name investment banker once told me, ‘you are not an exception (referring to our state of not getting funded by a VC). Instead, you are the norm’. He added, ‘Silicon Valley (and few other areas, such as Boston) is in fact an exception. Most of the business in the world, Vietnam, Brazil, Russia, etc, start this way.’

I keep telling myself that ‘nobody will come to your aid. You are on your own. If there is no ecosystem, then create one. Don’t complain.’

There’s nothing romantic about running a startup. It is filled with many hard choices, misgivings, struggles, which you may or may not like. But as long as you are enjoying what you are doing, keep doing it.

While you are out there, struggling with the realities that are somehow so different from what people write about entrepreneurship and startups, please ask yourself the following questions.

As a founder, what is the number one objective for you right now?

1. Is it making the product and proving the technology?

2. Is it making the revenues to somehow survive?

3. Is it making your startup attractive to get funding by a VC?

4. Is it making a company that has a viable business?

I ask these questions because there is a danger that you may get caught up in the day-to-day struggle to miss out on the big picture.

These are my learnings as a startup IN INDIA. I stress on ‘in India’, because we are NOT Silicon Valley. And no matter what people, analysts or the media says, we are not one, and we are not going to become one right away (but the hope remains).

1. Is it making the product and proving the technology?

There is a chance that you may start believing that making the product (that you set out to build) is the ultimate objective. You start thinking, all you have to do is make this product, and everything else will fall in place.

Not always.

What if the product you set out to build takes five years, and by then the market is gone? What if the product you make costs you $2000 to make, but the customer is ready to pay only $200 to buy it? What if the technology that you think is so hot, is not something the world wants?

I see a great danger when you make this option – ‘making the product and proving the technology’ the primary objective. When you hit crossroads, you will not know what to do. [I agree that this is ONE OF the major objectives but it SHOULD NOT be the primary objective.]

As a startup, one of the essential and inherent strengths is your flexibility. You are flexible to change your business plan at any time, and that too quite quickly without incurring major losses. This flexibility should not be confused with shifting focus. With changing market situations, customer interactions, and other events that happen in the world, you should mould your business plan, and if needed abandon the original plan to quickly embrace another one while being consistent with the original intent.

Example, if your dream is to connect everyone on the planet with internet and phone connectivity, you may give up one technology to embrace another one, abandon one model of selling to embrace another, without diluting the original vision.

2. Is it making the revenues to somehow survive?

It’s very easy to make revenues. Think about it. You can become a coolie in a train station and earn money. It’s so easy to make money, if you are willing to work. You have to ask yourself, ‘is that how you want to make money in this startup?’

Not really.

If all you want is to make revenues, there are many quicker and easier ways. While going through the journey, you will go through many patches that are quite grueling, taxing you with many problems, financial and emotional. Many new avenues may come up which promise you quicker and easier money. Would you take up those new opportunities to get those much-needed revenues? Would you do it just because someone is paying you to do something else (which is not your original intent)?

You have to be clear on what you set out to do. That will help you in making decisions when alternative avenues arise. Some people think that you should do anything to make money – because you are in the ‘business of business’. I strongly differ with such views. What will take you far on the long and torturous path of entrepreneurship is your commitment to the original lofty goals that you set out on. Few others may have a different opinion on this – but I strongly believe that you should carry through your convictions before settling down on anything alternative. That way, your team will stick with you; some of those angel investors and VCs who have been watching you will come forward; that way your potential customers who are waiting for your product will have more confidence in you to trial your product.

[I am talking about perseverance, not stubbornness. Will write on that in future]

3. Is it making your startup attractive to get funding by a VC?

Would you run after certain milestones just to please a potential VC to get a funding? Would you get on board an executive who in your opinion adds no value to your company but would please a potential investor? Would you run after markets that you do not find suitable for your company just to please potential investors?

Not really.

This is the worst objective to have. You should achieve milestones for other important reasons than just to please a potential investor or VC. While you continue on your journey, you need to create value for the company, and for that you start achieving certain milestones. Those milestones are vital for you, your team and your company. They should not be specially designed to suit the likes and dislikes of your potential VCs or investors. They may have told you that they would invest in you if you achieve certain milestones. But what if you put all your energies in that direction only to find they no long show interest in your company? Is that milestone really on the path of your intended journey or was it introduced just to please a potential VC?

Your investor is a shareholder who will walk with you in your journey. He is a companion – sometimes a painful one – which is good because he will guide you to go in the direction that makes sense to all of you. However, his investment is not your goal or your destination.

You go with an investor and take his money when you reach an agreement on how you want to take this company forward. If you don’t agree, then you part ways as gentlemen do and still keep in touch. But you should be clear on what you want to achieve as a company and business before you start saying, ‘Yes’ to everything a potential investor wants.

[But once you are married to each other, you are both stakeholders in the company and hence you confer with your investors on what strategy you want to embrace. And once decided, whether you like it or not, you stick to it.]

4. Is it making a company that has a viable business?

While your vision is something grander and loftier, such as positively influencing every person on the planet, you should strive to create a full-fledged organization that makes a viable business. This must be your primary objective during the startup stage. As long as you know where you are going, and why you are going, and keep checking if you are going in the right direction, you will most probably make the right decisions.

You should try to create a viable business organization- it’s like a flotilla of aircraft carrier and surrounding warships, with planes, helicopters, etc, which makes it a self-contained armed force on the move. It has a mission and a goal- that are quite often loftier and bigger than any individual or single person’s dream or ambition. That mission and vision has to be permeated to all of your team members so everyone knows why we are going through these rough seas for months and years with no land in sight.

You need to put energies to hold the team together as a close-knit organization, keep the dream live, giving the team its much-needed small milestones to celebrate, adding value continuously to make yourself attractive for investments that come as fuel, courting customers and working closely with them to generate much-needed revenues, slowly growing making long strides in short periods, but at all times, trying to create that full-fledged company that is creating a viable business with a potential to scale and take on bigger markets, all the while keeping your eyes fixed on that vision to positively influence every person on the planet.

As long as you are clear in your priorities, you will take the right decisions when you hit crossroads, unflinchingly, without any trace of doubt.

Observations

Changing landscape

I am observing a major change happening in the last two years. I see that more and more people are getting onto the bandwagon of entrepreneurship, especially the young and first-generation entrepreneurs, and I see this as a good sign.

Is it because I have started to notice them or is it really the phenomenon sweeping across the nation [of course, confined to few cities only]? MoMo, Barcamp, Proto.in and Headstart.in, all started in the last two years. These events have created a forum and platform for many young techies to meet and exchange ideas, and in some cases, collaborate. The new entrepreneurs are getting to know the realities. They are getting to know the hardships, and yet the passion amongst them is only increasing. The number of startups is proliferating in India. The quality of the ideas is improving. There is a stronger sense of commitments from the teams, and many Indians are leaving their secure jobs, which is a good sign. [I do believe that we need many more. This is not enough.]

Even NASSCOM, the official spokesman of services industry in India, is lending its hand to promote product startups, with dedicated funds on the way.

Missing Angels

What is missing is the angel investors and their ability to take risks. I don’t believe the existing network of angels in India is effective. They have to do it differently, with different set of rules that are more applicable to Indian context. Many startups need angel investment – because they do not qualify for VC investments in the seed stage. And most VCs are still not equipped to handle seed and early stage. They will continue to invest in growth stage.

The founders should go back to their families and friends and pitch to them to get the initial capital. What they need is a little guidance on how to structure a deal with such friends and family investors. When there is nobody to invest, what do you do? Investing Other People Money (OPM) is not an option. You put all your money first. And then you go to those people who trust you and they happen to be friends and family. Pitch to them, and take investments, build your product, get that initial traction, and then may be, may be, you will get invested by those who do not know you, otherwise, go to the revenue stage working closely with some confidant customers. You can’t keep hoping that institutional investors would invest in you. There is a good probability they won’t.

Government could do something

My only wish to the government of India is – please make roads wider please. These cities are choking us. I don’t want to see ex-entrepreneurs who have made it big leave these cities forever. They form an extremely important element of the ecosystem.

Proto.in and Headstart.in

I was at Proto.in (in Chennai) on Friday. Vijay Anand asked me to speak on the topic “Startups: The Worst Case Scenario”. He wanted me to tell the entrepreneurs how ‘unromantic’ a journey of a startup can be. I had to address some of those myths and induce some dose of reality to wanna-be entrepreneurs. I realized that there were many entrepreneurs in the audience who had gone through the same journey and have the same experiences and observations about entrepreneurship as I did. I guess, what I am being asked to do is – ‘be the bad guy, spill the guts!’

I had to rush back to Bangalore that night because we showcased our product next day at HeadStart.in (Bangalore). Being a strong proponent of developing the ecosystem here in Bangalore, I couldn’t miss this event.

Vijay Anand and his Proto.in has already attracted lot of attention in entrepreneurial world with a strong focus on India. Proto.in intends to become one of the catalysts in promoting the much-missed ecosystem in India and Vijay is doing a tremendous job.

While the first three events were held in Chennai, Vijay wants to move this event around to other cities in India and even explore the neighboring countries around India. Bangalore, which according to me, is one of the best places for a technology startup with well-developed ecosystem (only in comparison to other cities of India) just could not sit idle. It had to spring its own event. And I believe the more the merrier. We have a long way to go before we can say ‘We have too many such events’.

HeadStart.in, which is organized by volunteers of Bangalore (which is the hallmark of Bangalore), spearheaded by Kallol, Aditya, Keshav, Arpit, et al has held its first session (along with an ACM event) at IISc, Bangalore.

There are some finer differences between the two events, and I am quite sure they serve their purposes.

The things I liked about Proto.in. The demos have become a serious affair drawing great attention. Also, the fact that nobody knows who got selected to demo makes it an interesting exercise. I like the short presentations they have. Vijay keeps the ecosystem together. He does not forget the old participants and he engages them and contributes to keep building the ecosystem.

The best thing about HeadStart.in is that it was held in Bangalore. It was high time. With such a great ecosystem, it had to happen sometime. I don’t think any city in India can beat Bangalore in terms of quality of its participants, panelists, etc. Though this event coincided with other major events, Headstart.in still drew the bigwigs of the industry. The panelists were experienced and are veterans of the industry. The atmosphere was electric as ever. The VC networking session in the evening was excellent. That’s what entrepreneurs want. Organizers ensured the media met those who demonstrated their products.

It was unfortunate that both events took place on the same dates. I wish it had happened differently. But I realize that the organizers of both events had their constraints, on when they can organize, and they could not change their dates. I look forward to next set of events where they do not coincide and where we will have much closer interactions and sharing of notes between the organizers.

Low Risk Low Gain India

According to a recent report [1], though the investments into India have increased substantially, a little of it actually reaches the early stage companies.

0ver 90% of the money is invested in late-stage initiatives by mature firms. Even the remainder mostly finances new firms replicating proven business ideas. As a result, very few innovative startups are funded. This will have a negative ripple effect on the quality of late stage opportunities in later years.

While US, UK and Israel spend nearly 30% of their investments into seed and early stage (29% in US, 39% in UK and 32% in Israel), India spends only 6.9%. China is better - it spends 12.5% of its investments in seed and early stage companies.

References:

1. Accessing Early-Stage Risk Capital in India, Rafiq Dossani, Stanford University, Asawari Desai, TiE Inc, Shorenstein, APARC, Standford, and TiE.

Ground realities from a technology product company in India

You may be one of those believers who think creating technology product companies in India is the way to go. You may believe its time for making such companies in India. You may believe that India has satisfied the minimum set of criterion to launch such companies. Yet, you face many obstacles; you have to put up with many disappointments, and brush off many discouragements to realize it. As a technology product company you have to take many bets. And they happen to be big bets if you are chasing bigger dreams.

As an entrepreneur of a technology-product company, you start out thinking one day you will translate your idea into reality. You believe you will create something that will have huge market for itself because of certain attributes you bring in to that idea. You start out thinking that someday you will create enough value, enough traction with customers, and will be poised to take on bigger markets. In that journey you will include the role of VCs because at some point of time you need the necessary monies to scale up to make a significant difference. You hope that someday the VCs will see this potential in your company to invest in your company. You hope that they may want to share the risks with you. You believe that if you achieve those important milestones and show them what you believed in was indeed true they will come to invest in you.

Here’s the reality. If you think they will invest in you when you productize your idea and make prototypes which actually work, then you are wrong. If you think they will invest in you when you get some partners to sign up and use your technology and product, then you are wrong. If you think they will invest in you when you get some customers to actually deploy your units in the market, then you are wrong. You need to stop deluding yourself. If you think they will invest in you when you show a huge interest in your product from your customers, and the only thing you need is money to translate those orders into a multi-million dollar business, then you are wrong. Stop hallucinating. They won’t invest in you.

Here I write some of the things acting against us right now (and to an extent, acting against many technology product companies in India).

We are young and also first-generation entrepreneurs

We are not ex-entrepreneurs who have already done it; we are not the grey-haired veterans with big titles either. We don’t think our age counts for our experience. We believe our actual experiences of having gone through the grit and grind of making a product in this unfriendly atmosphere counts for it. Our experience of forming alliances and partnerships with various bigwigs, to actually pull it off, counts for it. Our experience of knowing the customers’ needs, and then fulfilling them in the price points that is attractive to them counts for it. Our experience of holding a team of 20+ for over three years paying each 1/3 of salary counts for it. But for some reason that has no value. Did I also add that we don’t have degrees from IITs and IIMs?

We are ‘actually’ a technology product company

Many people just want to be called ‘technology’ companies but they are not. Even VCs know that. But everyone just pretends. Since everybody wants to be associated with that word, and it adds glamour, they just throw in that word. Many people just want to be called a ‘product’ company but they are not. Many VCs who speak incessantly on how they are going to promote and fund technology product companies end up investing in online travel portals, marriage sites, networking sites, and hotels. According to us, marriage sites and hotels are NOT ‘technology product’ companies.

We are a three-year old company

We have survived as a startup in India for over three years now, on our own. We have developed a product, launched it, deployed it, and we are now selling it, on our own. We have held together team of 20+ team for these three years, on our own. We make revenues on which we run all our operations. You would expect that such things will be seen as our strengths. The reality is quite different. Exactly those things are seen as our weaknesses. VCs ask, ‘How come you are not invested for over three years now?’ strongly suggesting, ‘Definitely, there is something wrong with you guys’.

Indian VCs firms are not VCs

VCs are characterized by the bets they take. Most VC firms, even those from Silicon Valley who set up offices here, become completely risk-averse when in India. They are not chasing startups but are funding growth-stage companies. They are not chasing technology product companies, but they are funding the run-of-the-mill, already-tried, clichéd ideas borrowed from Silicon Valley adapted to India. Once, during a discussion in Barcamp in Bangalore, a lady asked, ‘what does it take to make product-based companies in India?’ I answered, ‘Balls!’ And if someone were to ask me, ‘what does it take to invest in technology-product-companies in India?’ I would respond, ‘Balls!’ Most VC firms in India can be categorized as Private-equity players and not Venture capital funds.

Indian VCs do not look at our business

We are not Mobile VAS, we are not Mobile gaming, we are not Mobile search, we are not Mobile payment. We are a wireless infrastructure company which promises to provide broadband internet to millions. It’s a long haul. It is risky. It has many unknowns. And we don’t generate revenue quickly. Unfortunately, most VC partners in India do not come from technology product domain or anywhere close. Those who do are not in India. When you talk to VC firms in US, they ask you to talk to partners or other VC firms in India. So, it’s back to the square one.

When even a novice with a fresh high school degree can foresee revenues from the day one from a services company, it doesn’t make sense to invest in a company that takes three years to make the first buck. When it is far lucrative and safer to invest in real estate and hotels in India, it just doesn’t make sense to invest in a technology-product company. That’s the reality.

VCs find Indian entrepreneurs clueless

Many VCs find Indian entrepreneurs clueless. There’s great deal of truth to it.

But I also find many VCs in India equally clueless. VCs think Indian entrepreneurs have no idea where the market is going. They believe that Indian entrepreneurs need ‘hand-holding, mentoring, coaching’, and they come up with funny ways to promote this idea. Soon the Indian entrepreneurs start finding more people who want to coach them than people who want to sign checks.

Once I was asked to list the top three things I needed, I said, ‘Money, Money, Money’. Yes, that’s the truth. When I don’t have money even to survive, all these talks about ‘mentoring and coaching’ sound completely ridiculous.

VCs don’t build businesses. It’s entrepreneurs who do. A top-name VC partner based in Silicon Valley once told me – ‘After achieving success as an entrepreneur I started to believe I cracked the formula to success. Then, I tried the next venture to realize that I didn’t have a clue. Suddenly, a young guy comes up with a ridiculous idea and next thing you know it is a huge success. That humbles you down’.

A note on entrepreneurship in India

The state of entrepreneurship in India is quite different. In India it was always done by businessmen who already had some money and access to capital. And those few first generation entrepreneurs who actually succeeded, they did so in services model where there is always a hope for revenues from day one.

In Silicon Valley, the VCs already had examples to look for. They had the experiences of failed and successful companies to guide them. They had many veterans and ex-entrepreneurs from technology companies joining them to bring in the experience. Most Indian VC firms have people who are successful in services business or dotcoms. Nobody comes out of technology product making or anything remotely close to it.

I find the test of Indian entrepreneurship more grueling and the experiences quite valuable. We are the people working on the ground for three years now, meeting the customers, meeting folks who are shaping the market right at the forefront. We learn from the market and know the pulse. We are taking bets on the upcoming technology, making innovations to suit the price points of our customers, evolving our business plans when necessary to suit changing markets. And each of our decisions impacts the fate of our business – always on the brink of demise. When you survive for three years, you have already ingrained much strength that comes handy in the long run. There is an inherent strength that will go long way - that needs to be recognized.

Purpose of this article

We are not complaining. We don’t believe VCs should invest in us just because we believe we should be invested. We don’t have such expectations. We don’t think we lost out just because VCs have not invested in us as yet. I think the struggle gets a little longer, that’s all. We know we will do it, either way- with or without VC money.

It is just that I see too many reports, too many blogs, too many articles written about the extremely optimistic side of funding scene in India. They are mostly rosy, effusive, and mind-bogglingly unrealistic. Such hype allows for people to form false opinions and have unnecessary expectations. I wanted to present the real side of the story here, right from the frontline.

Just look at the recent VC investments in India. Nobody is actually investing in any technology product companies. Just look at each VC firm and see what their investments are. And if you are smart enough, you will see through chaff to realize that a company listed in technology space is just another me-too dotcom company that has used lot of jargon to cover up their ordinariness.

Reading these reports on funding scene in India is like reading reports about how India’s economy is booming, how its Sensex is rising, how India’s infrastructure is being funded, and so on. The reality is very different for most of us living in India. We continue to live in the same crowded streets, with the filth dumped next to our homes. We continue to drive in the same traffic where traveling 5 km takes more than an hour. Nothing has changed for us down here. All these reports do not mean much unless those funds eventually come down to make our lives a little better decongesting that traffic and cleaning up our streets.

Similarly, nothing has changed for us on the ‘investment-into-product-companies’ front either. All these reports of so much investments coming into India, so many VCs opening their shops in India, so many funds being allocated for investments in technology space, etc, do not mean anything. In reality, none of it has trickled down to us. Our life continues to be the same. Our struggle continues to be the same.

We are on our own.

Would Indian technology product companies succeed?

It is not a tried and tested model, but I believe that Indian technology product companies would succeed on a great scale (only if pursued beyond a threshold). There are very few examples, and I am just waiting for some of these companies to do good so that analysts and authors start writing stories about Indian technology product making companies on why it makes sense to invest in such companies in India.

We have already proven ourselves to be really efficient when it comes to IT-services businesses.

Arun Sarin, CEO of Vodafone, believes there is lot to learn from India. He is telling his managers, ‘go get me the secret of their low-cost business model.’ He does not think that this low-cost is just because of low labor costs in India. He believes it contributes to only one-third. ‘Two-thirds is just How They Do Business,’ Arun Sarin says. Comparing the mobile business model of Europe with India, one finds the Indian telecom companies to be ‘lean, mean and hugely cheaper, both in pricing and cost’.

Now, can I extrapolate this to technology product making companies as well? To be fair, I shouldn’t. How can one just extend the trends of a services business to some other industry?

As I said earlier, it is not a proven model as yet. But I am looking at few examples. Tejas Networks of Bangalore is one such example. Though it would not necessarily come into the category of ‘lean, mean’ but it is definitely cheaper, both in pricing and cost. It has started in a typical Silicon Valley model – funded by a big name Angel Investor who brought in many institutional VC firms based in US, founded by techies who translated a brilliant idea into a robust business model. Tejas should be going for IPO soon. If it is a huge success, it will benefit many other tech startups in India.

I work for a startup which started on a little different model - a ‘garage startup’ model where the founders put in all their savings and wealth, and even wealth of family and friends, and roped in some angel investors to make a product. The company is now making revenues and has its products deployed in markets in Europe. The cost and pricing is not low just because of low-labor cost, but is inherently low because of innovative methods embraced during the development activity itself. Working on a shoestring budget, the engineers were pushed into embracing low cost options in all phases of development. Innovation need not come only out of super rich and heavily funded labs of IBM. It can come out of a tech startup founded on dusty road in Bangalore which works on extremely low cash flow because of dire necessity. As they said long ago, necessity is the mother of invention. They were right. The products from this company while being of high quality are just one-quarter of the lowest product in the market and this low-price is not artificial – it applies even for low volumes and with high margins.

I have a belief that such technology startups can be made out of India and few years from now, it will be a tested and proven model. But for that to happen, one has to go through the grit and grind of ‘surviving and succeeding’ in India, which can turn out to be a ‘test by fire’ itself. When one survives and succeeds this test, they can succeed anywhere. I am just waiting for that new revolution to happen.

Why do we have so many jobs in Bangalore?

I want to provide a different perspective to this topic. I touched upon it earlier at ‘How many people report into you?’ Here, I want to linger on a little longer.

Software-services companies and MNC offshore units inherently introduce inefficiencies that are supposedly alleviated by increasing the headcount, which while benefiting the group does the damage of killing the individual. What do I mean by this? Let me explain.

A division or group in a software-services company makes more money when it has more number of people in it. Therefore, the division head, the project manager, and the project leader will all collude to ensure that headcount keeps increasing. This attitude is set in early on and at every stage. Those who resist will either have to conform eventually (so that they can succeed) or they will be weeded out. Over a period of time, what you have is set of successful individuals who have mastered the art of inflating the number of resources to do a project. Say, a manager X says he needs 8 people to do a certain job, while another manager Y says he needs 12 people to the same job. Invariably, the manager Y is selected for the job. Give this process few years- what you have is a set of managers who are all set to outdo the other in inflating the numbers. Only those who inflate the numbers with panache and flair succeed.

Now, what happens at the vendor who is outsourcing to these software-services companies? There is a competition within the vendor company too, between different outsourcing managers, to outsource more. Say, there are two outsourcing managers (OMs) outsourcing to two different companies. There are two factors that come into play here. First, the OM who outsources more work will prove that he has saved more for the company, setting a trend to outsource even more. This outsourcing comes at a price though. There is a homegrown antipathy towards such outsourcing since each job outsourced means one less job for the local guy. But the senior management looks at it from a cost-saving perspective and goes ahead to reward the guy who saves more (who would eventually become the senior management). More outsourcing means more headcount at the software-services company. Second, the OM becomes the champion of the software-services company. He develops a giver-relationship with the company he outsources to. Being the outsourcing manager, he is treated like a king at the software-services company. He is the messiah, the giver and friend, all combined. The software-services company people look upon him to increase their share of revenues from the vendor. He in turn likes the attention he receives and takes it upon himself to do better to earn their respects and obeisance. Also, their success is his success. He becomes their savior and protector, and in turn helps himself. There is a bond that is established between the OM and software-services manager which in turn helps in increasing the headcount at the software-services company.

As a result, you will end up with divisions of 400 people to service a vendor in US/Europe when the same work can actually be done by 100.

Now, let me also look at MNC offshore units in Bangalore. Though they are an integral unit of the parent R&D, these offshore units are usually given the step-daughter treatment. The best work is not given to these offshore units – only the non-critical portions and other support, maintenance portions are assigned to these units. (Only few MNC have actually started to treat their Indian counterparts as mainstream R&D centers). The decision power is not shared either – the heads at these offshore units are mostly paper tigers, with great titles but little influence. Those who work at MNCs share a sense of frustration for not being able to get the best work and for not being able to influence. That leaves most of them to inherit and borrow the practices of other software-services companies of India where they worked before- the usual routine of political maneuvering and one-upmanship. This one-upmanship usually involves having more people ‘under you’. The more people report into you the more powerful you are.

Added to this, the influence or the contribution of a group, including its IP, is measured by the headcount rather than the actual value it produces. So, in effect, a group of 3 producing a superior IP is valued lower than a group of 20 producing an inferior IP. Therefore, you are not rewarding those who produce a superior IP with less number of people, but instead, you introduce a mechanism to reward the mediocrity. The head of offshore unit, bereft of any key decision making power on the overall strategy and business of the MNC, cannot show progress either in terms of revenues nor profits. In absence of these parameters, he resorts to showing progress in increase of headcount. Hence, the tendency to learn and perpetuate the art of inflating the numbers!

[Please note that the inflation of numbers in these offshore MNCs is not as high as in software-services companies since there are more checks and balances.]

I refer to such inflating-the-headcount practices as ‘mediocrity-breeding’ mechanisms. These practices do not award the star performers. They do not allow good performers to feel proud of their achievements. Star performers get disenchanted. They tend to award those who deliberately and smartly inflate the headcount requirements which actually increase inefficiencies. These practices tend to become virtues in both software services companies and MNC offshore units. Such environment does not take care of two fundamental things an organization should do- challenge the employee, and take care of the employee. Higher salary turns out to be the only incentive, which can always be used by a competing company to lure any engineer. This also leads to unprecedented levels of attrition. Solution to every lagging project or bad quality product or inefficient program seem to be addition of more people, as if, adding more people is suddenly going to alleviate the situation. Most often, such addition compounds the problem it is trying to solve. However, a suggestion to increase the headcount is more acceptable than a realistic toning down of the size.

Over a period of time, you have Bangalore, with hundreds of thousands of jobs, which benefits the group as a whole but has already killed the individual spirit.

On Tax Holidays

Most of our IT software-services companies enjoy tax holidays. While this has been a good incentive that encouraged many such companies to proliferate in India, I think its time to take relook at this. Why should certain big companies, which have gone public, have a brand name, and are making colossal profits, be enjoying this tax holiday? Yes, I understand why it came into existence in the first place. We were not on a level-playing field, we needed support, encouragement to compete with global giants. But some of these tier-1 software-services companies have achieved the status of being able to compete with these global giants. Do they still need these tax holidays?

I propose that once a certain IT company reaches a revenue-mark, say $1B, combined with certain net profit-mark, say 20%, it should start paying taxes. Come to think of it, the government could use these funds in innovative ways. It could use some of these funds to create more technology oriented and product-oriented companies, like giving loans at cheaper rates, or investing in those companies on part-loan, part-equity model, creating zones and lab setups for such tech startups, or reimbursing money for patenting, or decreaing employee taxes to tech-startup in the first three years before it start making revenues, etc.

Hmm… we need bold, aggressive and innovative methods to go that next stage!

Infosys Results

Infosys has announced its results. It made approximately $3.2B last year with 72,000 employees. That amounts to approximately $44,000 per employee. That’s an improvement from the previous year where it made approximately $40,000 per employee. It plans to add approximately 25,000 people this year alone. Assuming a steady increase in the revenue per employee at the current rate of 10% per year, and assuming a steady increase of 25,000 employees per year, Infosys will be making $8.3 B for 2010-11 employing 170,000 people.

Total output of IT-ITES will be approximately $90B by 2010 (I am being optimistic compared to NASSCOM’s projections), where Infosys will be contributing 10% of it.

While this trend is encouraging, it is not good enough. I keep saying this- we need to look at better and efficient ways to bring in money into this country. Those companies need not be confined to electronics, computer or IT related. One could look at other companies that are based in technology and research. For example, Biogen Idec, a US based healthcare company which makes discoveries in therapies make $2.4 B with 3,300 employees. That’s approximately $700,000 per person.

Drivers for penetration of broadband in India

As I discussed in the previous topic, the drivers for penetration of broadband in India will be-

# Decreasing cost per line
# Decreasing operating expense
# Decreasing cost of PC (or similar device)
# Social attitudes and habits embracing broadband facilities
# More Indian content

Decreasing cost per line

The cost per line right now runs between Rs. 7,000 and Rs. 10,000 for DSL services. However, it will be much higher for WiMAX in 2007, and comparable in 2009. Till 2009 the major customers for broadband from WiMAX will be enterprises and SOHOs. The residential broadband users will not contribute much to the incomes during this time. However, the revenues from enterprises and SOHOs are substantial and are a market worth pursuing; hence we will see some deployments. Residential broadband services will start turning out to be lucrative only in 2010 when the existing network can easily be used for increasing the capacities to cater to homes. That’s when there will be huge change in the deployment models by the operators who will vie for the residential customers. Each operator announcing a better deal than the other will push down the prices and also increases the subscriber base.

The decrease in cost per line will come from two factors- decrease in the cost of equipment and from the inherent advantage of wireless when adding new lines. The base stations which cost $3000-$5000 now will start costing $600-$1000 by end of 2009. The CPE (Customer Premise Equipment) which costs $200-$400 now will start costing $60-$80 by end of 2009. The cost of a wireless network is high in the first stage of deployment, because of factors like taking up space for tower, erecting the tower, cabling, housing, and connecting the tower to the network, installing base stations, etc. However, once those costs are recovered from enterprise services, adding new subscriber will come at a minimal cost. In comparison to a wireline network where each additional subscriber may cost more or less the same, in wireless network, each additional subscriber will be minimally higher.

Decreasing operating expense

Look at who is going to provide the bulk of broadband services in India. They are all major operators who already have cellular and landline networks. While laying out the WiMAX networks, those operators will combine the operations with the existing operating premises thus incurring marginal increase in costs while deploying and managing wireless broadband services.

We will see more and more infrastructure sharing between various operators which was completely absent till now. Especially, in rural networks, this infrastructure sharing will turn out to be mere common sense. The operators who own the spectrum will resell the spectrum to other smaller players who will mushroom in various parts of India to cater to non-metros. The towns and villages may not be very attractive to some operators right away and they may like to sell this franchise or sell these frequencies to smaller WISPs and operators. Also, the coming of Virtual Network Operators will add to competition.

Decreasing cost of PC (or similar device)

PC (or a device similar to that) is already becoming cheaper. With projects like one laptop per person, and other initiatives, the cost of PC is going to be less than Rs. 5000 by 2009. Other concepts like Novatium, if they tend to be aggressive can also make a marginal impact on the penetration of broadband. Companies like Intel and Microsoft (or will it be Linux?) will need to come up with exclusive strategy for catering to this revolution (and I am sure they will).

Social attitudes and habits embracing broadband facilities

Every school in India is going to have a PC and also an internet connection. Those kids who never knew PCs will now be used to using them at these schools. These kids in turn will make way for their families owning a PC and therefore a internet connection. All government employees are now moving towards using PCs and broadband connectivity. Those people who have never known PC or a broadband connectivity are now moving towards embracing these technologies. No family wants to be left behind when it come to his/her finishing up his/her homework using Internet at home. Some of these social changes and habits will increase the penetration of broadband.

More Indian content

What will further fuel the penetration is the content which is more relevant to the masses of India. Subscribers would like to see more content tailored to their needs and desires. More Indian language content, more applications suitable to Indian social context will come up in the next few years which will in turn contribute to increasing broadband penetration.

Updates:

[12 Apr 2007] Manoj Kohli, President and CEO, Bharti Airtel, has this to say:

"All I can say is that by 2010 the market is estimated to have 400-500 million subscribers.

We are looking at a market share of at least 25 per cent, i.e. 125 million subscribers. We have stepped up our Broadband penetration plans and will continue to lead the wireless market share with our passion to deliver the best to our customers."

[12 Apr 2007] In a bid to catch them young, Bharat Sanchar Nigam Ltd (BSNL) is rolling out its broadband services to one lakh schools across the country by December 2008, as part of a project being embarked upon by the Ministry of Human Resource Development.

[03 Jan 2009] BSNL, Novatium launch low cost PCs.

Broadband Revolution in India

[This is based on the presentation I made in Barcamp Bangalore 3, March 31^st 2007]

Mobile revolution

We have seen the Mobile Revolution in India. It is still happening. There are enough indicators to suggest that Mobile penetration will exceed 400 million subscribers in India in the next few years. Let’s pause and go back a few years, say 2001. Could any analyst predict that we would have 200 million subscribers by end of 2006? Could anybody in the industry predict that we would be adding more than 5 million subscribers a month?

The growth of mobile penetration is mind-boggling and is quite dramatic. It came about because of some of the factors listed below. Note that it is always easy to look back and analyze why it happened. That’s what I am doing here.

Key Factors for this explosion

* Late start
* Cheaper equipment

* Pent up Demand

* Innovative and Bold Deployment Strategies
* Population

First, India embraced cellular when 2G systems were already deployed in most parts of the world. Having completely skipped 1G because of late start, India went straight to the superior 2G systems. Most of the lessons learnt by the European deployments could be transferred to India. Second, India embraced GSM nearly eight years after it was taken up in Europe. Most of the equipment had already become very cheap by then. This allowed for mass deployment in the country. Third, there was huge pent up demand for basic connectivity which was not served by fixed-line telephony. Fourth, India embraced certain bold strategies- like that of Airtel which has outsourced complete network deployment to Ericsson and management of networks to IBM; it has introduced pre-paid subscription like no other country. However, a note of caution here- they were quite stupid not to have implemented sharing of tower infrastructure right from day one. They seem to have woken up quite late on this. Fourth, with a billion people anything you do seems to pick up volumes. All these factors put together has resulted in mind-boggling and dramatic mobile penetration in India.

State of Broadband in India

Take a look at current broadband penetration in India? It’s a mere 2.5 million subscribers (or less). That’s less than 0.25%. Most indicators of technology penetrations, such as telephone, PC, mobile, broadband, have a direct correlation with increase in the GDP and per capita of a nation. However, India’s broadband penetration seems to be extremely low. Is it that we are going to skip broadband the way we skip 1G and the industrial revolution?

The penetration of broadband will increase in the next few years and will catch like a wildfire when suddenly the cost of adoption and network deployment and maintenance will turn out to be extremely low compared to the kind of market demand it has.

The drivers will be-

# Decreasing cost per line
# Decreasing operating expense
# Decreasing cost of PC (or similar device)
# Social attitudes and habits embracing broadband facilities
# More Indian content

Broadband Revolution in India

In effect, I believe that there is a very big room for growth of broadband penetration in India. With the decreasing cost of PCs to under Rs. 10,000 and then to under Rs. 5,000 soon, and with increasing in content for Indian masses, the broadband penetration will be going through a revolution, and I call it the Broadband Revolution in India. The cost per line will dramatically reduce from the current Rs. 7000-10,000 per line to around Rs. 1,500-2,500 per line by 2010.

The pieces of puzzle are falling into place. With advent of wireless broadband (such as WiMAX and WiFi), with decreasing costs of PC, we will see the penetration grow slow and suddenly, when the price points have achieved that critical milestone, it will take a dramatic upswing and go on an exponential path for the next few years. In my estimation, by end of 2011, Indian will have more than 35 million broadband subscribers and by end of 2013, we will have nearly 1 million subscribers.

My question to all of us

Indian telecom operators are smarter than the rest of us. They usually wake up quite early to realize the potentials of Indian markets. They will definitely get themselves geared up for this oncoming Broadband Revolution. However, will the Indian entrepreneurs, Indian telecom vendors, Indian VCs, Indian startups wake up to this? When Indian Mobile Revolution happened, it was foreign telecom vendors which benefited. They supplied the radio access network equipments, and they supplied the core network equipment. They also supplied the mobile handsets and PDAs. Indian telecom operators had no choice but buy equipment from these foreign players.

Operators like BSNL, Airtel and Reliance throw open tenders worth billions of dollars, and most of these monies are taken up by foreign companies. Almost no domestic company seems to wake up to capture some of this market share. We could give ourselves an excuse that Indian ecosystem was not conducive to create such suppliers in India. That we didn’t’ really anticipate or predict the oncoming Mobile Revolution to benefit from it. Will we give ourselves the same excuse for missing Broadband Revolution, or will we do something about it?

Happy Jobs

What is a happy job? A Clickjobs.com ad on TV goes this way:

“Mr. Happy Kumar is SO happy with his job that he can’t see millions of opportunities around him. Don’t make the same mistake. Clickjobs.com”

In this ad, Mr. Happy Kumar is smiling throughout the ad, he is not tantalized by offers like a big car, big pay check or a big position, and therefore this ad concludes he is making a mistake.

Then there’s another ad from Timesjobs on TV which goes this way:

“Salary is making you feel smaller? For better paying jobs, log on to timesjobs.com”

Is there anything wrong with these ads? Or is it just me who find them wrong?

What is a happy job? Most of us, who have spent long enough time in the industry, would agree that a happy job is the one which keeps you challenged and which turns out to be rewarding. We all keep looking for a happy job. If Mr. Happy Kumar is happy with his job, there must be a reason why he is happy. If he is not ready to look at another opportunity, and is smiling all the way to his work and is also happy at work, the job must be quite a good one. Why is it a ‘mistake’ that he is not looking elsewhere?

I would have understood if the ad was a little different. If it was Mr. Sad Kumar who is not happy with his job, and is NOT looking at millions of opportunities, then it would have made sense.

Most of the present generation engineers are turning out to be clueless about what they want. Except for some smart ones, most engineers consider a high paying job as the best job. There is already a big problem with the Indian young engineers, they hop jobs like anything. They are ready to take up a new job even for a paltry increase in the salary. Some of them are not just concerned what kind of work as long it is a high-paying job. Some ‘smart ones’ stay at each job for six months and then hop to another. They keep doing this to keep on increasing their salaries. Added to this is job hopping attitude is their appetite for investments into real estate and automobiles which tend to keep their hunger for increase in salaries ever higher.

Such ads are adding to fuel to the fire. Or are they targeting the right customers?

Is salary the only criteria for choosing another job? Should lower salary make you feel small? Only the guys at timesjobs.com seem to understand the real pulse of the young engineers.

Barcamp Bangalore 3: My observations

I was at Barcamp Bangalore 3 held at IIM-B during March 31^st and April 1^st (2007). One can clearly see the interest growing from the first event then to the second and now to the third. The turnout has been doubling every event and on Saturday there were 320 participants.

There was an interesting topic later in the evening on Saturday, delivered by Savita Kini. She asked ‘Are we ready to move from IT services to product making companies?’ And of course, this is a topic of my interest. Soon, it turned into a small debate with different kinds of views being aired.

I want to talk about some of my observations from this debate. First, I want to compliment Thomas Friedman, Nandan Nilekani, and all those analysts, writers and industry experts who have created a good myth surrounding our IT industry. They have done an excellent job. Because, there were some quite experienced industry folks in that debate who vouched that when work is outsourced to Indian IT companies or when MNCs set up offshore units in India, the wealth created by those units actually stays in India.

I want to dispel this myth here.

How do offshore MNCs and IT services companies create wealth?

When a IT services company such as TCS gets a job from company ABC, it pulls up N number of engineers, and what TCS gets in revenues is N times a certain fixed amount per year. Therefore calculating the revenues of any IT industry thus becomes very easy. The average $ per person is usually known – and it hovers between $30,000 and $40,000 (for top IT services companies). So, if Infosys has 60,000 employees, then its revenues should be $1.8 to $2.4 Billion. The same rule applies to almost every company. A good services company with 3000 people would be making approximately $90 Million. No additional revenues come from the actual sale of the product. Say, the product is sold 10 times or a 100,000 times, the TCS would still only get its revenues from the number of employees it contributes to servicing that product. None of the profits from actual sale of the products ever reach the Indian shores. The revenues (and the profits) from the sale of actual products go those countries where these companies are housed. (To US in case of Intel and Microsoft, or Finland in case of Nokia).

When a typical MNC puts its offshore unit here in India, the only motive is to cut down the costs. While going for offshoring, they decide on the non-critical work and send it to its offshore unit in India. If an engineer in US costs $120,000 to the company, his typical cost is less than $40,000 in India. Hence the cost advantage! However, no revenue that comes out of the products developed or services rendered by these offshore units actually come back to India. If ever they do, they only come back in increasing the headcount of its offshore units. When Nokia sets up a unit in India, the Indian unit will not generate revenues because of the units sold, but only because of the money pumped in to staff the engineers.

To think or believe that we are creating the wealth the same way those product making companies are creating is a myth that needs to be shattered.

In the colonial times, Indian babus were used by British to act as middle managers to the British bosses. The British, by paying a good salary to Indian babus, above that of the slaves or the natives, were able to keep these Indian babus happy, while they continued to reap the benefits of the toil of the workers. That’s why Indians were taken to West Indies, East Indies, Africa, Fiji, etc. The Indian elite babus who quickly learned English, Mathematics and other desired skills became extremely good middlemen (managers) who served British to help them continue their dominance over other populations.

Second, a lady asked if NOW is the right time to start product-making companies, especially since Savita listed so many challenges on her discussion board.

Shouldn’t we wait for the opportune time before we start product-making companies in India?

Frankly, I believe that any kind of analysis should be left to consultants, advisors, bankers and VCs. Entrepreneurs should just stick to DOING it. There’s no opportune time for doing anything, not even for war. By the time we in India actually solve all the challenges that Savita listed (which included like Education, Discipline, Mindset, etc), it will take an eternity. We don’t sit down solving the barriers and then go about doing it. We just do it and in the process hope the barriers go down. We are already late according to me (and Savita and few others). While Indians celebrate the fact that we are going to be the services hub the way China is now the manufacturing, thereby implicitly shrugging off the responsibility to foster other industries, China is already transforming itself into a global product making player. Haier, Lenovo, ZTE, Huawei, etc, have already arrived and many more are in the making.

According to one observer there is no market for products in India. Some of us had to cite some examples to wake him up to reality. That India adds 5 million subscribers in India per month. We need to look at some more examples. That India is adding thousands of cars per month. That India consumes food, clothes, electronics, etc, with great appetite. Isn’t it surprising to assume we do not have the necessary market when ever top brand of the world is making inroads into India to sell Indians goods and products?

According to some people participating in the debate, India does not have brands like Nokia and Microsoft, and hence cannot enter the global arena. The question is do we really need brands to enter the products-market? Does the brand come first and then the product or the product first and then the brand? While we Indians keep debating if there is a market or not, ZTE (China) is entering India with its own low-cost mobile handset and making inroads into India.

Third, when I said that one of the Indians attitudes is not going all the way, which I call last-meter problem, someone suggested it was the same with Microsoft.

What is the last-meter problem of India?

Look at an Indian road, the last-meter is usually left unpaved, and this seems to cause lot of damage to the road. That last meter produces all the dust, and is also the culprit during the rainy season. The erosion will eat into the paved road itself and very soon we need repairs. This seems to be the perpetual state of affairs in India- start- incomplete- repair. Not finishing up the job to its absolute completion is something like a disease that is all pervading. Half done, incomplete and shoddy jobs are seen everywhere. I call this the last-meter problem. We don’t go all the way; we seem to run out of gas during that last meter.

However, to say that this is the same with Microsoft is far-fetched. Agreed, most engineers seem to detest Microsoft for their monopoly. But, we have to admit that their products are definitely superior (to a layman user) in comparison to anything out there in the market. While an engineer may marvel at the open source and other competing products, Microsoft, by pursuing the common layman as its user has made excellent contribution to penetration of PC and hence Internet, and hence to dissemination of knowledge to every corner of the planet. For an idealist or an expert engineer, Microsoft may seem to be flawed or not perfect, but to an ordinary user its closest to getting the simplest software to deal with an otherwise complicated PC. The last-meter problem of India is not analogous to imperfect Microsoft products.

Overall, this barcamp was great. I got to meet some interesting people and its always fun talking about some of the topics that interest us the most.

Why we don’t have product-making companies?

I have already written an article called, ‘Why Product-making companies?’ Before I start writing on what we need to do, I would like to talk about some of the most important reasons that curtail us from spawning product-making companies. Some of them are obvious- history, post-independent economic policies, our social structure, etc. But I don’t like to list 10+ different reasons for each problem. I like to concentrate on 2-3 top reasons. Here, I list what I think is the top reason why we don’t have product-making technology companies.

Our obsession with stars and brands

I agree stars are important. It’s the obsession with those stars where I see the problem. We (as Indians) are obsessed with stars and brands. We don’t need to look deep to realize this about us. Our Cinema (unabashedly called ‘Bollywood’) and Cricket has many examples. The whole focus is on one or two individuals while the rest are completely unknown. It applies to our technology space as well. IITs are a brand. Therefore, anything to do with technology in India is referred to IITs while hundreds of universities and other institutes get no mention at all. If an IITian starts a paan shop, the heading goes, “The IITian left his cushy job to start a paan shop right across the street…” If they start some dumb political party, the article reads, “The IITians instead of going to US have sacrificed their careers to start a political party to better India…” A mere contraption of no significance from IITian gets the attention of starving media. This media is more interested in writing ‘This IITian has done…” than writing what he has actually done. The media is only feeding into our own obsessions. They reflect our sentiments- that of ordinary people, the families, and the societies.

The same is true of our software-services companies. Why we did not look at other important industries is because these services companies were hogging the limelight for more than 20 years now. In fact, they are hogging the complete light while the rest of the industry is languishing in the dark. Bangalore, which is supposedly the ‘Silicon Valley of India’ (which I don’t agree at all), has lavish office spaces (look at Infosys and ITPL) which almost resemble a developed world. These are the same office spaces which have been glorified by the likes of Thomas Friedman (who has added more fuel to the celebration of our mediocrity). On the other hand, the same Bangalore provides extremely worse conditions to the industrial sectors where hardware and manufacturing houses are located. I have visited some of these manufacturing places- they don’t have roads, they are connected by muddy paths which have huge cracks in the middle, they don’t have water or electricity and this place looks like a remote village of India in the 16^th century. The attention of whole of media, political administration, elite, institutions, investors, has been directed towards software-services companies while other industries do not get basic amenities. Software-services companies get lands at very low price; they get tax-holidays, exporting and importing is easy for them. Meanwhile, the manufacturing and other industry of India is putting with policies of old economy. Here is what I have to say to these software-services companies:

‘Thank you, you have done a good job of re-branding India. You have changed our image from being a land of snake charmers to the land of software programmers’. But my thanks stops right there. ‘You are also the culprit of taking away complete attention from other important industry. You rob us of passion of the young minds to make them Xerox machines. Your growth is welcome, but its avarice and appetite is overwhelming. We are not able to proceed to the next step. Our fear is we will get stuck right here’. There are examples galore where many countries got stuck to a label and that actually turned out to be their doom. South American countries which rode the wave of globalization have now realized that they got ‘stuck’ at being providers of raw material to the Western world. East Asian countries like Malaysia, Thailand, Philippines, etc, are faced with similar situation, where the competition from Taiwan and China has robbed them of their advantage of being the manufacturing houses. There is danger in being slotted that way. ‘We don’t want to be slotted that way.’

What our media, the analysts, the writers, etc, did in their over-enthusiasm and over-excitement is a great damage to India. They said, ‘Since we completely skipped industrial revolution, there was no need to go back to that.’ They insisted on continuing with services industry and professed it was good enough for India. They cited some examples (which are actually very rare) of product-making companies (like IBM) moving to take up services, and justified their jobs and their companies. The media lapped it up, furthered this notion, and made it a ground rule for India. Their message was: ‘If West has products and technology, China has manufacturing, we in India have services!’ The VCs furthered it, the investors furthered it, the entrepreneurs furthered it, and even the government joined hands. Thomas Friedman made millions selling the same idea back to India while making sure he and his country continued to dominate the technology markets.

Young minds of India, even those with passion and enthusiasm to create and innovate, get bogged down by the pressures- created by us- the media, the elite writers, the parents, the teachers. They end up taking up a career at Infosys and Wipro just because of its brand. Seven years of working there, he is not good for a product making company anymore. He is already institutionalized. Only few make it out of that vicious cycle only to face even bigger issues that confront them.

As a step one, we need ground breaking examples. To unshackle ourselves of this casteist mentality where in we accept our position in the hierarchy of technology businesses, where we get slotted into one type of industry by the virtue of what our ancestors did. These examples have to be the tough ones. They have to ride their boat against the strong tide. But they have to do it. I see some companies around me taking up this struggle, it’s a long way to go, but I also see that once one case gets successful, suddenly there will be new articles written and soon India will be seen differently.

The industry (even those involved in software-services) needs to consciously promote product-making companies. Is there a vested interest? Yes, there is. No nation, no industry, no man can make loads of money for himself while the rest around him are paupers. It just doesn’t work. Such disparities are not sustainable. One has to create an ecosystem. Those in the ecosystem need to be making loads of money. That money has to translate to the societies and communities that we live in. That’s when we can go the next higher level of making more monies. A society which has very few stars while the rest are all paupers is not a sustainable system. Even the software services companies will benefit if there is technology product making company ecosystem in India. Where would I want to outsource my work when we become a successful product making company? To other Indian software services companies, of course!

Why Product-making companies?

I insist on high tech product making companies for India. No matter what we do with our IT-ITES sector, we will not scale dramatically to be able to become an economic power. The GDP of India in 2005 is $720B of which the IT-ITES sector contributes less than 3.2% (it has improved in 2006 to approximately 4.5%). According to report from Goldman Sachs, Indian PPP measure of GDP will exceed that of US in 2038 and will be at approximately $23 trillion.

How do we get there from here? Do we just sit back and hope our current IT-ITES sector, which is primarily driven by services, will deliver us there or do we really take this as a dream and try to make it real or may be even make it sooner?

Only a technology-product making company can add the right kind of money into India at a faster and quicker pace using smaller manpower. Just look at some of the statistics here (mostly from 2005):

• Total output of Indian software industry for 2005 is $22.6 B (and for 2006 it is slated at $40B or little more).
  
• The number of people directly employed by Indian IT-ITES sector is 1.3 million.
• India is currently producing approximately 180,000 engineers for IT-ITES sector.
• The rate of increase in output of employees is currently at 5.5% increase from previous year.
• Assuming a steady increase for the next five years, the output in year 2010 would be approximately 220,000.

According to NASSCOM, India is poised to make $70 B in 2009 with a workforce of 2.2 million. This projection assumes that each employee with earn approximately $32,000 in 2009 while it is approximately $22,000 in 2005.

Now look at this for comparison:

• Microsoft currently makes $40 B with 60,000 employees while Nokia makes $40 B with 40,000 employees. (each employee approximately makes $600,000 to $1M).
• These two companies alone with a work force of 100,000 (in 2005) make more than the projected output for India in 2009 (with 2.2 million workforce).

No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens. And that can happen only with more technology-product making companies.

Case of technology-product making companies

How do you think most developed countries have been able to remain competitive? According to NSF (National Science Foundation, USA), “High-technology industries are driving economic growth around the world”. According to the Global Insight World Industry Service database, “the global market for high-technology goods is growing at a faster rate than for other manufactured goods”.

“Even during the recent, slow-growth, ‘post-bubble’ period (2000–03), high-technology industry continued to lead global growth at about four times the rate of all other manufacturing industries.”

According to NRC, Hamburg Institute for Economic Research, and Kiel Institute for World Economics 1996, “High-technology industries are R&D intensive; R&D leads to innovation, and firms that innovate tend to gain market share, create new product markets, and use resources more productively. These industries tend to develop high value-added products, tend to export more, and, on average, pay higher salaries than other manufacturing industries. Moreover, industrial R&D performed by high-technology industries benefits other commercial sectors by developing new products, machinery, and processes that increase productivity and expand business activity.”

What is the output of high-technology sector in each of these countries?

• In India, high-technology sector accounted for 2.0% in 1980, 3.7% in 1990, 4.8% in 2000, and 4.8% in 2003.
• In US, for 1980s it was 11% of total domestic production, in 1990s it was 13.5%, in 2000, it was 27%. In 2003, it is estimated at 34.2%.
• In Japan, it was 17% of total Japanese domestic production in 2000. In 2003, it is estimated at 15.7%.
• In EU, it increases from 9.5% in 1980 to 11% in 1990 to 13.2% in 2000. In 2003, it is estimated at 13.4%.
• Countries like Taiwan (28.5% in 2003), Ireland (more than 50% in 2003) and China (19% in 2003) fare much better than India.

The case is strong for technology-product making companies. So, what are we going to do about it?

[To be Continued]

On WiMAX

WiMAX has two variants- fixed/nomadic and mobile. They are two 'completely' incompatible technologies. They could have as well given them two different names. Don’t expect your devices to ‘smoothly’ upgrade to one or the other. Don’t expect your network service providers to offer both technologies ‘seamlessly’. No matter what they tell you, they are not compatible. At the most, they can make them work the way they have made GSM and CDMA work together- and you know how that works.

Fixed/nomadic WiMAX is interesting to emerging nations. Lack of copper and lack of long 'last mile' allows wireless deployments, and fixed/nomadic WiMAX is ideally suited to be the best alternative- to both broadband internet and voice telephony. Again, if you have DSL and it is working fine, then you don't need WiMAX no matter what they tell you.

Mobile WiMAX is interesting to developed nations. It comes as the best possible alternate to 3G cellular. I don't think it will come as a replacement of 3G. It will come more as a complementary technology. Mobile WiMAX will allow some operators to offload the bandwidth, allow dual technologies to efficiently manage their traffic and spectrum, depending on location, application and mobility (as three governing factors).

“How many people report into you?”

This is what a Project Leader asks another when they meet up at a general body meeting. It could be happening in any big software services company in Bangalore. You are measured by how many people report into you. If you have 12 people ‘under’ you, then you feel superior to another project leader who has 10 people ‘under’ him. ‘Growth’ is the increase in the number of people who report into you. A Division Head with 60 people under him feels more powerful, successful, and accomplished compared to another Division Head with 30 people under him. The number of people reporting into you is the direct indicator of your success. Soon, every Project Leader wants to ensure his team size increases. Every Project Manager wants to increase his team size. So on.

What you end up with is a mechanism which is continuously increasing the ranks of the company. Every Project Leader, Project Manager and the Division Head wants to project that he needs more people. When the mindset is to increase the team size, reasons come out plenty why you need them. Soon, you have an inflated industry, bloated companies, all perpetuating the notion that it needs more people.

A task that can be done by two people in reality is done by eight people. That’s because if you make it work with two people, there’s no reward for it. A services organization does not earn enough. However, if you make it work with eight people, then you are doing something good, because now you earn more for the company. So, in effect, you weed out those leaders who are capable of delivering the same task with less people, and promote and reward those leaders who do the same task with more people.

So, what do you end up with? Leaders, managers and heads who are adept and proficient in projecting more engineers for a task than what is actually needed.

And when this phenomenon happens in every team, every division, every company, what do you get? You get Bangalore! A city filled with thousands of software engineers who get jobs because someone up there wants to feel he/she has succeeded.

Entrepreneurs- Do you need VC Money?

I think VC money is just one piece in the big puzzle of making a business success in India. For the first generation entrepreneurs money is a big issue. But at the same time, the passion and fire to do it is so important that all other things, including the need for money, become secondary.

Let’s face it, we have lot of issues here that we can’t solve (as startups)-

1. We don’t have many precedents of great success stories. This doesn’t allow many VCs and Angels to take big risks.

2. VC firms in India dealing with startups are very few and most of them are not homegrown- I mean they themselves did not get started here. Most of them have come from abroad. They may carry with them an agenda or mindset which may not necessarily work for Indian startups- the challenges here are different.

3. There is no ecosystem here in India- which would have increased the probability of a startup’s success.

We keep hoping that some success stories will happen, so that VCs can entertain further more startups, eventually leading to creating desired ecosystems. We are a long way from making a Silicon-Valley-like-story probable here. It will come about only through some disruptive examples. And we, as entrepreneurs, all hope we are one of them. (That’s the hope which drives us!)

Instead of solving these bigger problems, hoping that VCs understand us, hoping that there is an ecosystem, etc, which are beyond us, I think we should concentrate on JUST DOING IT.

JUST DO IT! is our mantra. (from Nike Ad)

It takes lot of hard work to raise money, but it can be done. There are not many angel investors, granted, but it can still be done. Its tough to get a team in place without money, granted, but it can still be done. It may be tough to sell your product/idea to your customer, but it can still be done. Through dogged perseverance! And I think that’s the only way to go about it- in the present scheme of things in India. Some of us will fail, some of us will succeed. Hopefully, the next-generation entrepreneurs will have it better because of the successful examples we set.

I think there will be lot of time for us entrepreneurs to sit back and analyze - to reason what-we-did-right and what-we-did-wrong. But for now, I think the only mantra that works is JUST DO IT! Thinking too much about the right way to do it may not help. What is the right method to raise money? Boot-strap? Sell your Apartment to self fund? Borrow Money? Angel Money? VC Money? Who knows! Frankly I don’t have a clue what is the right method. We thought we knew the right method- because many ‘experts’ told us what it was. But it didn’t take off. Come to think of it, there are examples galore to justify all these methods. May be, any one of them is OK. May be, all of them is OK. Moreover, I think we wasted lot of our time trying it get some VCs convinced. In retrospect, I believe we could have utilized our energies in a better way. But then again, how else would we be so convinced that there is no VC money chasing companies like us?

What we believe now is this- Take each small step at a time, prove it, convince someone around you to pump more money and then go the next step. I have been told by some VCs that it is NOT the right way to do it. Then I asked one of them if he was ready to fund us so that we can do it the RIGHT WAY. Of course, you can guess what the answer was!

We are a two year old company with 15 people working full time and we are self-funded and angel-funded- and we are about to launch our product. We have a long road ahead but we believe we will scale it (with or without VC money/advice). One step at a time!

[Edited from a comment posted by me at Venturewoods.org]

Tips for Entrepreneurs

These are excerpts from an interview with Mahesh Murthy, entrepreneur and venture capitalist, and published on Rediff.com. [emphasis added]

[One what is needed to start and run a successful company]

The conviction that the whole world is wrong and that you are right. The ability to resist giving in to the temptation of listening to others or being ‘reasonable.’ And, of course, some foolishness!

[On reasons for his success]

Perhaps that I'm foolhardy, unreasonable and foolish!

[On importance of education for an entrepreneur]

The content of what you study is completely useless. In fact, if you do a typical MBA at a typical business school, you will almost never become a successful entrepreneur…

You are taught to be an 'employee' and not an 'employer,' and you are actually handicapped compared to someone who hasn't gone through the degree programme…

[On future of the Indian IT industry]

We barely have an IT industry, we have an IS (information services) industry and all we offer is lower-cost services.

There is very little technology we develop.

Over time, our stability and growth will not come from sweatshops like Infosys, TCS and Wipro, but from companies that create brand and market their own products, getting larger profit margins and a reputation in the process.

[On Innovation in Indian companies]

Well, we have the ability to innovate. Our brains are at least as big as anybody else's. But what we need are not brains but guts and support…

There is no route to be a global player other than to produce the best products in the world -- 'products', mind you, not 'services'.

[On lessons learnt]

No one knows anything, least of all any supposed management guru or consultant or expert. You can discover your own rules and create your own playing field. It is better to move in business as an innovative naive person than as a cautious experienced person.

[Message to entrepreneurs]

Don't listen to the Gartners, the IDGs, the BCGs, the KPMGs, the PwCs. They know nothing! Reject the job offers from the Goldmans and the Lehmans… Why do your B.Tech in Computers and MBA in marketing to become a banker?

Understand the gaps in the market. Create a product that can service those needs better than anybody else can, sustainably and do it at a really low cost.

And dream big. The earth's the limit.

Is the World Flat?

I believe that India can become a strong economic power only through driving, controlling and dominating technology. To be able to do that, India has to be in the driving seat, be able to make decisions on direction of technology and be in a vantage position to foresee and deliver technology to the markets of the world. We need to do what Western Europe has done during Industrial Revolution, and what the USA and Japan have done in the Electronic, Automobile and Manufacturing sector in 20^th Century. We have a unique opportunity here. Opportunity knocks once. Shall we embark on this adventurous ride or shall we miss it once again to be mere spectators and followers?

My previous article on ‘Why Infosys cannot become a product-making company’ was just a small part of the bigger problem-statement India has to deal with. India has to create its own technology ecosystem. To be in the driving seat one has to deliver the technology, goods and associated services from here in India.

Why I stress on such an ecosystem to be here in India?

Take examples of companies like Intel, Cisco, Siemens, Boeing, Toyota, and Tata. An ecosystem exists around each of them. The ecosystem consists of many other smaller or bigger companies that depend on each other. The larger ecosystem consists of academic and research institutes feeding these companies with new technologies and experts, a huge customer base in government deals or consumer markets, etc. Boeing in order to build planes supports and promotes ancillary industries- steel and aluminum, heavy electrical, communication equipment, chemical, tools, and so many others. Boeing by itself may be able to employ only 150,000 employees, but this industry in turn is helping many other industries.

Right now, some of these technology and product making companies use the services of many Indian companies- dealing with each of them independently to get the work done. The following picture illustrates this. Each of these Indian companies completes the project to enable this technology driver to make a product or develop technology. What an Indian company ends up is getting revenue for this project and also the experience of technology. Unless this experience is used to promote the same technology or product here in India, it is completely useless. This experience of working on a technology is extremely valuable and needs to be tapped into to generate maximum benefit. That can be done by creating similar technology and product making companies in the ecosystem which can generate the maximum value out of this experience.

Who is driving the technology in this picture? Who knows where and what will happen in three years from now. How many of the senior management at TCS and Satyam will be able to say with confidence what they will be working on and what they will be delivering three years from now? If indeed they know this, did they make the decisions or was the decision handed over to them from their client?

Thomas L. Friedman in his famous book titled The World is Flat has described the changes that are taking place in our world owing to fast communication and travel, bringing together diverse people of different countries (like India and China) to work together driving economic activity.

However, Friedman looks at it from an American (and West) perspective. His motivations are driven by what is good for America and the West. In some respects, his views seem to reflect that what is good for America is good for rest of the world too. Outsourcing and off-shoring are ‘in’ things. By stating this, he is preparing Americans and the western world to wake up to this new world order, embrace it, faster than what they hoped, and to take advantage of this new world order to perpetuate their economic dominance. In this new world order, countries like India and China may not be dominated like in colonial times, but will be ancillary partners supporting the plans of the western world helping them perpetuate their economic dominance.

Yes, the world is flat- it is flat for the western world, which drives the technology and the markets. For the followers and servicing organs like India and China, the world is still round. It is still complex, the boundaries still remain. Travel is still difficult and a good customer service is still far away. The cultural, political, religious issues continue to dominate the economic issues. May be, for a person living in Fremont (California), Bangalore is as near as Spokane (Washington), but for an Indian living in Tumkur, Bangalore is as far as Spokane. For most Indians the world order has not changed. Except for introduction of plastic (through sachets) and cellular phones to his village, the new globalization has not brought an American closer to him, the way it brought an Indian closer to an American. When an American picks up the phone to report a problem on his DELL laptop, he may be speaking to a considerate and American-accented Indian sitting in Bangalore, but when an Indian picks up the phone to report a problem with his water system, he is talking to a rude and apathetic operator. Not much has changed for this Indian the way it has changed for an American.

While it is extremely important for Americans and Western economic powers to wake up to this new flat-world order, recognize it and understand it so as to exploit and benefit from it, it is easy for Indians and Chinese to get misled by this interpretation into believing that the equations that hold good for an technology driver are also valid for him. That is not the case. While servicing these technology drivers in what is seen by them as a flat-world he is benefiting from it in a very narrow scheme of things. By not reaching the same level of being in the driving position he is losing out on the bigger scheme of things. This new flat-world order continues to keep the western powers at the helm using some select few developing countries as supporting and ancillary partners. It does not however bestow upon these select few developing countries the role of a leader. An Indian and Chinese should not get carried away by the interpretation of this new flat-world order into believing that he is an equal partner. He should not quickly conclude that he has an equal role to play in his respective segment (services- software or manufacturing). An inherent hierarchy of control still exists.

Many Indians, living in India and US, seem to like this new interpretation that indeed they are all on the level-playing field. This illusion seems to make them happy and they seem to join the bandwagon to champion this notion further. This is convenient for them because without having to be the leaders, they get the label as equal partners. This notion (of flat-world) is supported by everyone in the current industry. Software services organizations in India are happy, the new entrepreneurs promoting similar software services industry are happy. The VCs who promote this industry in India are happy. According to them- “In this flat world, India has a role to play. China has a role to play. We are all playing our roles. What is wrong with that?”

Take one consequence of this flat-world- Outsourcing of BPO has positive and negative fallout. While it is enabling many a youth to make a quick buck who otherwise would never been able to dream of making such money, it is also creating a youth which is confused, having the lowest sense of professional ethics, and seems to bring in a social structure which the Indian family is not used to. The question remains- is this a sustainable business? Outsourcing is a good stepping stone to something more sustainable, tenable and long-lasting. But what is that? Are we moving in that direction?

The world is flat, but the world is flatter for some than others.

I do not agree that the World is Flat for everyone. I think it is flat for those countries and companies who are in the driving seat. For all those countries and companies who are followers, the world is still round. Having multiple locations (in different countries) for a services company like Infosys, Wipro or TCS is not going to make this world flat for them. If indeed they believe this, they are fooling themselves. Putting offshore units in China or Vietnam is not going to take them anywhere. Boundaries exist in these parts of world which still stand.

R&D organizations should be made of closely knit groups. All my experiences working on multiple R&D locations (in different countries) were major disasters. The projects kept on getting delayed running into years and many of them seriously failed. Only those locations which kept their entire R&D team for a technology or product closely knit were able to deliver with success.

A software services company like TCS might be bagging many contracts from different companies in various domains. How many other companies in India get benefited from these contracts? How many other companies and industries does TCS spawn, help, aid or promote? How many companies depend on contracts that Infosys brings home? The outsourcing business is a like a pipe between the technology provider and the services company. It flows between the driver and the follower but no ecosystem get created. The technology provider at the driving seat decides who he will partner with for outsourcing. Such collaborations do not create an ecosystem in India. Once the cost-arbitrage is compromised, this technology provider may choose another partner for outsourcing and that could very well be in another country. For all we know he may even choose to stop this outsourcing business altogether.

Outsourcing across continents and countries is a gap filling exercise. New technology, like internet, has given us tools to try out different experiments and that’s what we are doing. The problems associated with long-distance and different locations will soon dominate and this whole exercise will be reexamined.

Champions of Indian services industry may look at examples like IBM, Accenture, EDS, etc, as role models. How many companies can you create out of India which can emulate them? Ten? Twenty? But that is not enough for us to become an economic powerhouse. NASSCOM predicts Indian IT-ITES will be a mere $70B industry by 2009. Is that good enough? We need to be thinking of making it a $500B industry. We need to be thinking of making technology producers and product makers in India who can earn large monies. We need a Nokia, a Boeing, a Toyota, a Oracle, a Apple, and a Dell. To conveniently skip this process terming it risky is a lackadaisical approach. Satisfying ourselves saying that we are services only will not allow us to scale as a nation. We need more technology drivers.

By employing 1 million engineers we may be able to take it to $40B. Using the present model of services, by employing 5 million engineers we may be able to take it to $200B in the next ten (or twenty) years. Now, Compare with this. Google with 6,000 employees is a $6B company. Nokia with 40,000 employees is a $40B company. With 1 million engineers we should be aiming at making $1 trillion. That’s when this country will be a developed nation.

Links:

Shashi Tharoor: Imperfections in Friedman's Flat World

Infosys: Think Flat Blog

Why CDMA will die!

I believe that by 2011 (in another five years) the market share of CDMA family in the world will be less than 2%. There are many analysts out there who do predict that CDMA market (CDMA, CDMA2000, etc) will shrink but their estimates are quite generous. Currently, the market share of CDMA family in the world is around 18% but is dwindling gradually (while GSM family currently holds 81% of the market). I believe that this decreasing rate will soon pick up pace to shrink quite drastically in an exponential fashion leading to its ultimate demise.

Some of the trends in various markets in the last few months:

▪ SK Telecom and KT Freetel (in S. Korea), who collectively represent about 10 per cent of CDMA subscribers in the world are not likely to migrate to CDMA2000 1x Release A- according to Morgan Stanley report

▪ Reliance and Shyam Telecom in India, China Unicom in China and AT&T in US are switching to GSM from CDMA.

▪ VIVO (Brazil), the fourth largest CDMA carrier in the world has openly discussed the potential of migrating to the GSM roadmap- according to Morgan Stanley report

▪ According to Telstra (of Australia), ‘CDMA is on the way out and other carriers will follow Telstra's lead because we have the second biggest network in the world.’ H3G, Australia’s only other CDMA network operator, is preparing to move away from CDMA as well.

▪ Alegro PCS (of Ecuador) plans to migrate to GSM technology from the CDMA 1x platform currently in use.

▪ According to a Credit-Suisse Report, "The share of CDMA subscribers in India would drop to 7 per cent by 2010, while that of GSM would grow from 75 per cent at present to 93 per cent.''

Isn’t CDMA a better technology compared to TDMA-based-GSM?

During the time (early 1990s) when 2G networks (GSM, TDMA, CDMA) technologies were being deployed, there has been much hype about various technologies and its advantages so much so that it became difficult to understand what is artificial and what is real. While it was clear to many theorists that CDMA as a technology was efficient in spectrum usage it was hard to determine its benefits in real world. Qualcomm solved many practical problems of CDMA technology to make it a practical technology. CDMA family as championed by Qualcomm is proprietary in nature and its business is based on royalty models. There is a limit to the progress made in a proprietary technology. With fewer players, minds and resources tackling the problems, the solutions are not easy to come compared to a collaborative technology. Though the evolutions of GSM (UMTS, etc) are based on the same technology (wideband CDMA) they are collaborative in nature and not proprietary. There have instances where a better technology has lost the race to an inferior technology.

When does a better technology lose race to an inferior technology?

There is more to business than a better technology. And sometimes a better technology may lose market while an inferior technology may grab huge market share. Some of the reasons are the following:

1. Timing

A better technology coming later may not find itself a place in the market because the older technology though inferior may have the market penetration which the newer technology may find difficult to replace. Example, Signal Processing based on Wavelets though proved superior could not replace the Signal Processing based on Fourier Signals for Digital TV because the technological breakthroughs required for making it possible came later (after adoption of standards).

2. Ecosystem

A technology has to have a good ecosystem which will keep innovating, drive the prices and costs lower, and increase the penetration into market. A good ecosystem will have many players working on the same technology- many startups innovating and decreasing the costs, big companies investing huge sums of money for development and deployment resulting in volume-based cost reductions, many customers and partners embracing this technology leading to market penetration.

3. Volume

Volume once it has reached certain levels automatically drives the costs down. Once the R&D money is recovered the volume-based business usually lowers the costs making it attractive to the customers fueling market penetration. A newer technology though superior may not be able shake such volume-based businesses.

4. Cost of Development and Deployment

The cost of development of a certain technology (during R&D and production) and the cost of deployment (cost in making it available to the customer) are important components in keeping a technology alive. Two competing technologies with different cost of developments will have different growth paths. A technology which offers superior user experience and features but with higher costs may find itself unattractive compared to a competing technology with inferior features but with affordable pricing.

Every technology faces competition- some survive and some die out. If a technology keeps improving itself, updating itself and is flexible in its business model then there are greater chances for its survival. However, a new technology though lacking all the above may still replace the older one if it introduces a completely new way of life which wasn’t available before (like the wheel or air travel). But be assured that it will face competition from a newer technology later in time and will be tested on the above parameters once again.

CDMA family is going to die out

Qualcomm’s CDMA is going to die out because it lacks in (2) Ecosystem and (4) Cost of Development. It hasn’t been able to develop the ecosystem because of its proprietary nature. Its business model on getting royalties on various forms of its technology hasn’t been able to spur many new companies and startups that could have benefited in promoting the technology to create this ecosystem. Innovations could not happen at the same pace (that of GSM family) because it was closed to new companies. Research and Development efforts at various big companies were bogged down by patent infringements cases and other royalty obligations. Qualcomm went into war with many companies including its partners and customers.

The cost of development is also high because of huge barriers (to entry) making it less attractive for entrants including newer and smaller companies. The cost of development, owing to less innovations, lack of ecosystem, and royalties, is higher compared to developing GSM family equipment- both infrastructure and handsets.

I don’t think the ‘royalty issue’ raised by Reliance (India) attributing it to higher cost of handsets is the only issue in making this strategic decision (of slowly moving to GSM family). It’s not the handsets alone but the complete infrastructure (and upgrades) which is expensive in CDMA family. Qualcomm gave lot of concessions to operators during deployment phases but expected to recover them through amortization that included sharing of profits from the operators. Once the operators started to feel the burden they became uneasy.

On the other hand, GSM family benefited from incremental innovations and marginal differences in each stage of development of the products resulting in a compounded effect of lowering the costs at all levels. The cost of developing infrastructure equipment and handsets is reducing drastically in the GSM family. Over a period of time, this difference in development costs, which did not seem obvious because of many incentives during development and deployment, became apparent as the operator started feeling the pain. Moreover, the user experience was lacking in CDMA family compared to GSM family. The operators who saw these trends started looking for alternatives (in this case, opting for GSM family). However, these operators may not switch right away because their skin is already in the game. The bigger operators can make the switch sooner and faster though incurring some losses, but the smaller ones will find it difficult to switch right away. The opportune time for this switch is when an operator has to overhaul its network (like moving from 2G to 3G, etc).

What is the future of Qualcomm?

I think that Qualcomm will transform itself into a 3G/WiMAX company contributing to advancement of these technologies producing chipsets for handsets, etc. It is already making strides in HSPA technologies and its recent acquisition of Flarion will also give it an added advantage in contributing towards OFDM based technologies. In my opinion, Qualcomm should just join others in promoting WiMAX instead of trying to create another market backing Flarion-based proprietary OFDM technology. There is another hurdle that Qualcomm has to cross to be able to make an impact on WiMAX (if it indeed joins WiMAX). It has to put efforts towards an effective and successful integration of Flarion, its people and technology, into the existing organization. Many great companies have floundered with acquisitions, and a cult like following that Qualcomm promotes may find it extra difficult in integrating Flarion into its fold to make any effective contribution.

Notes:

▪ CDMA family includes CDMA, CDMAOne, CDMA2000 and other evolutions like EVDO, 1xRTT, 3xRTT, etc, and are based on Qualcomm’s CDMA technology. This is currently deployed by operators like Verizon and Sprint in US and Reliance and Tata Indicom in India.

▪ GSM family includes GSM, GPRS, EDGE, UMTS, HSDPA/HSUPA and is deployed by operators like Cingular and T-Mobile in US and Airtel and Hutch in India.

Some Links: [1], [2], [3]

Indian Ecosystem – Wireless: An Overview

This is my opinion of a desired ecosystem for my industry. Note that I have concentrated only on that segment of wireless industry which concerns me. Wireless Industry itself has many segments and I have not covered all of them. For example, I did not cover the Applications for Wireless Operators segment which is a big and upcoming industry in India.

The above ecosystem is my wish list. I have color coded various units based on their maturity and availability in India. Dark Green suggests that this unit is quite mature and is available in India. Dark Red on the other hand suggests that it is in nascent stage or completely missing.

Unless such an ecosystem is developed in India, it will be difficult for us compete with global players on equal footing.

As customers, Enterprises, Consumers and Operators are all Dark Green because we have a thriving customer base in India. This customer base has buying power and is ready to purchase in huge quantities. At the same time, this customer base is very cost-conscious and will put lot of pressure on the seller to give the best at the lowest cost. A seller that survives this market can easily scale up and enter global markets.

As producers, we have some units readily available and quite mature, like Software design services, which is quite mature. We also have other units in good state, like Protocol Stack Providers, Chip Design services and Software Testing Services. Units which have just picked up and are able to contribute are Fabless Chipset Makers, Hardware Design Services, Chip Test Services and Packagers. The units which do not make any impact or completely missing are Handheld Device Makers, Network Solution Providers, EMS (Electronic Manufacturing Services), Hardware OEMs, Infrastructure Equipment Makers, and Fabs.

This ecosystem requires VC and advisor community as well. We have Private Equity which is quite mature, but the rest are all missing or completely non-effective. The latter group includes Angel Investors, VCs, Advisors, Mentors, Ex-entrepreneurs, Senior management, etc).

This ecosystem includes Industry’s strong relationship with research and academic institutions. While Universities and Management Colleges are barely OK in maintaining these relationships with the industry, Research Institutes and their relationships are completely lacking.

Why Infosys can’t be a product making company?

Before I answer this question (not that I have this beautiful and simple answer which suddenly solves the problem), let me talk about how we got here. Infosys is a great company. I admire Narayana Murthy for what he has done. He is like a WWI War Hero. He fought the war in trenches, faced the gas bombs and artillery shells. He created a services company and made an empire out of it. The fallout of building such an empire has been great for many other companies as well. MNCs started to look at India for outsourcing and nowadays Bangalore is compared with Silicon Valley itself (though that comparison is more hype than truth). Infosys is a great services company. Nowadays you can almost get any kind of software from this company, banking, finance, enterprise, telecom, satellite, wireless, nanotechnology, etc; you name it you get it. While making this superbly well-oiled machine for services (plus consulting and outsourcing), this company has created many war heroes who can fight a WWI with maximum efficiency and minimal cost.

In addition to Infosys, there are other great services companies, like, Satyam, HCL, Wipro, TCS, etc. The combined intake of engineers by these companies is pretty high. Some of these companies take 60-80 engineers from a single college. In the whole process, they create many engineers who are good at delivering services. Services companies have only two factors to play with- Utilization factor and Average Salary. The mantra is- “Keep most of your assets (employees, labs, and other resources) billable and keep the average salary of the employees to minimum”. Give this as a problem to any lay man and he will come up with almost similar strategy most of these services companies employ. You want your engineers to be on a project all the time. So, you scout for projects in all domains and put your engineers to work on them. Though a certain level of skill/expertise is required, you also figure out that most engineers can take up almost any project and work on it. You create engineers who are jack-of-all-trades. Then you also have a set of excellent managers who manage the gargantuan task of delivery (in time and with quality) using these jack-of-all-trades engineers. To keep the Average Salary low, one has to continuously recruit fresh engineers and move the experienced people out or to a management role. So don’t be surprised to see five-year experienced engineers becoming project leaders, and seven-year experienced engineers becoming project managers. Over a period of time, what you get out of such companies are excellent managers; managers who are proficient in delivery mechanism, who know how to thrive and deliver in a services environment, where the parameters for success are very different from that of a product making company. Those who do not succeed in such an environment will be weeded out slowly; or they force themselves to fit into such environments by working on their weaknesses and strengths to adapt to such environment. Give this process twenty years and what you have is hundreds of managers and leaders who are good at running services companies. This is like creating many Generals and Soldiers suitable for WWI. (Just for the sake of argument) Imagine WWI to be services industry while WWII is a product making company.

Now, how can these leaders be suitable for product-making industry (WWII)?

Just by infusing cash and incentives you can’t make product making companies out of this environment. To wage a new kind of war these Generals and Soldiers have to consciously adapt to new rules. Yes, they have the ability to adapt but will they do it? Why should they do it? Especially after winning the laurels and successes in WWI they are keen on keeping the warfare more WWI-like and reap rewards. It is not in their interest to change the rules of the game. Why should one change the rules of the game and turn out to be a loser?

Therefore, all the success stories we get to see are come from services industry. The ex-entrepreneurs are all from services companies and they tend to promote more services company. Books are written on how Bangalore is an ideal place for outsourcing, off-shoring and cost-cutting (by giving projects to services companies). The MNCs who open up shop in Bangalore tend to look at Bangalore as a cost-cutting center, relegating the kind of work they would have given to other services companies. The VC firms who only see such success stories end up promoting services industry. The partners at VC firms have been on board of such services industry and have now attained a flair for advising and helping such companies. Their affiliations and networking is in that industry and hence add value for such industry. Some of the ex-entrepreneurs who have joined this VC firm are comfortable in measuring, assessing and adding value to services industry. If you want to fund a startup that has big names in the industry, those big names come from services industry. The community of VCs and and ex-entrepreneurs consists of people who have waged this services war and have succeeded in this game. They tend to promote more of such industries. Familiarity is the key aspect. It breeds the same kind. So, what we have is a self-perpetuating environment, also called ecosystem, that promotes services industry. There is no room for product-making companies here.

If there are any product-making companies out there, they are exceptions. Such startups may find it difficult to get senior team members with product-making experience. Most of the potential team members with 8-12 years of experience are now managers in a services company. Are they valuable to a product-making startup? Even if they are, will they leave their cushy job and lifestyle to take on this new kind of warfare which they are not used to? Moreover, the startups in product-making space will not find advisors who are veterans of this industry. The VCs are not ready to fund such high risk companies who do not have enough exposure to this different game. Why should they when they have a choice to start another services company? Therefore, most product-making ideas do not take off.

You need precedents to create such an environment but how can you create such environment when you can’t even start off? That’s where it becomes very tough for someone to startup a product-making company in India.

Another analogy that I use is that of a space probe (like Voyager) launched into space. You have two choices. You can move to a planet like Jupiter and use its gravitational force to become a satellite of Jupiter and stay there forever, or use the same gravitational force plus an added thrust to move to the next planet. Most of the Indian companies tend to choose to stay at one level, that is services company, and do not want to venture further to the next level, that is product-making company.

Why do I stress so much on product-making companies?

It’s simple actually. [To repeat myself] In short, it [services-company] is not a scaleable business. If a services-company does $2 Billion revenues with (say) 50,000 engineers, to get to $20 Billion in revenue they need to hire 500,000 engineers. It’s not very practical.

Compare this with a product-making company. A small group of individuals can make a big difference and if successful can create mega business. And it’s not hard to think of a 50,000 people product-making company with $50 Billion revenues.

[Note that I took Infosys just as an example. I could replace it with any other services company and this topic still holds good]

Indian Venture Capitalists (VCs): Nothing venture about them

Venture Capitalists (VCs) are called so because they take risks (they venture). Silicon Valley has many VCs firms which take huge risks and bets. This capital inflow into high risk companies had directly led to the dominance of Silicon Valley. For example, there is a company that launches balloons and airships into sky to give subscribers wireless service and it has gone IPO. When I heard about it I couldn't imagine how this company might have got VC funding. Imagine their pitch to those VCs and imagine the balls those VCs had who funded them. Most of the VCs in Silicon Valley know that most of their investments fail. Very few succeed and those that succeed seem to compensate for all their losses. Usually, VCs have some kind of thumb rule that they use. For example, a VC firm X may believe that out of their 10 investments, 8 will fail and only 2 will succeed. Such risk taking ability makes them 'venture' capitalists (VCs).

In India, you do not see VCs taking those big risks and big bets. In my opinion, there are no VCs in India; we only have private equity players. Private Equity investors take a business that is doing OK and make it better. Usually most of their investments show positive trends and very few fail. There is nothing risky about it. The only risk they are talking about is if the returns would be lower than their expectations (like 20% IRR instead of 30% IRR). They are not looking at failure at all. If a VC tells you that he had only successful investments so far with pride, you better know that he is a private equity player and will never 'venture'. If a VC tells you that he needs to see some revenues before he can jump in, please be assured that he is a late stage investor or a private equity player. A VC in Silicon-Valley-sense takes a big bet- he looks at the idea, he looks at the team, and he gauges the market (which may not exist) to take a bet. Such risk taking ability spawns new ideas- revolutionary, radical and innovative, NOT conservative, run-of-the-mill and cliched ideas.

Just look at the deals made by top name 'VCs' in India in the last one year or so. You will see that most of them are actually private equity deals. Even those Silicon Valley VCs, once they come to India, seem to play a low-risk game.

When do you budge?

An entrepreneur believes in certain possibility and pursues it with faith, energy and passion going against many detractors. On the other hand, most of the investors and advisors will criticize many aspects of the business plan to push the entrepreneur to think more pragmatically. In the whole process, the business plan (or business model) evolves and gets refined. This refinement is extremely critical for the startup. Sometimes one has to abandon a highly cherished and long nurtured grand idea to embrace a smaller subset of the original idea so as to be able to survive till next year. [More than 90% of the startups do not survive to see the second year].

I like to categorize this process as convergent (practically feasible) or a divergent path (impractical for a startup).

But how do you know if you are going on a convergent path or a divergent path in a startup?

If you start with an idea of creating or doing something and if it takes, say, X effort to do it according to your initial estimation, you will know you are on the right path if you are able to find other accessory elements (from the ecosystem) by which your effort X actually gets reduced to, say, 0.8X or 0.7X, over a period of time. This shows that you are able to tap into the ecosystem and thus get to market in time using these accessory elements (like reusing components, taking testing services, using off-the-shelf components, buying available software, etc). Sometimes more money has to be pumped in to reduce this effort. You are on a convergent path.

But if you are increasing the effort to, say, 1.3X or 1.5X, to be able to achieve the original idea, then it means you lack the ecosystem. Then you run into the danger of shouldering the responsibility of actually creating the ecosystem. This is not possible out of a startup in Bangalore because it will not have funds for such a grand game. [There are examples of creating ecosystems, like Java, but that is done by people who have lot of muscle power having sustained losses for many years].

Startups have a place in the big scheme of business because they espouse a new technology or new business idea faster and quicker than a giant and implement it 'in time' to actually deliver the goods while utilizing the various aspects of the ecosystem to decrease the cost of the effort. If a startup's business plan starts to bloat by embracing newer methods and implementing newer plans to achieve the original idea, then it's a sure sign that it is going on a divergent path. A divergent path is out of the scope of a startup. [Iridium project which went on a divergent path was still practically feasible, though not pragmatic as a business idea, because it was backed by giants].

Ready to meet your first VC?

Look at your presentation once again and check if you are going to cover the following topic. Remember, a venture has four risks and you need to address each of them in your presentation. A VC is listening to you speak about your idea and is thinking about these four risks. He wants to know how much have you thought about these risks and how you have reduced these risks for him. This does not mean you mention these risks in your presentation, but you cover each of them in your talk. Have a clear strategy on how to address them in your presentation without actually referring to them.

▪ Market Risk

Will customer buy this? Does he need it? Will he pay this much? Will he go for an alternative? Is there a good size of market for this? Will he need it by the time this product is done? Is there a competition to the product? Is there competition to the technology? How will you overcome this competition and make a place for yourself?

▪ Technology Risk

Will this be achieved? Is this being tried out for the first time? Are there big obstacles in technology by which this cannot be achieved? Will it turn out to be exorbitantly costly to achieve this?

▪ Execution Risk

Is the team capable of delivering what they are promising? Do they have enough man power with right skill set to execute this? Will they run into problems like losing team members? Do they have a good product development plan where they know how to get the desired components and fit them together? Will they do it in time or will they overrun? Do they have senior people guiding them? Can they deliver?

▪ Financial Risk

They don’t expect you to solve this- but you need to tell them what funds you need at what time.

On why you won't get funded

Here’s a note to fellow entrepreneurs.

You won’t get funded

This is not to discourage you. This is only to make you more realistic. You will not get funded by the VCs in India. The news items that you see may prompt you to believe that there are many VCs looking for good startups in India. Examples: 1, 2, 3, 4, 5. Those news items are indeed true. But what is not stated in those news items and which will you will eventually realize after having traversed the path of entrepreneurship for one year and spent 20 lakhs or more is the following.

You will not meet their selection criteria

India is not Silicon Valley. And the selection criteria of most VCs are more suitable for Silicon-Valley-kind of companies. As such the concept of VC itself is very unique to Silicon Valley. Though it has been emulated in other parts of the world, the VC community still retains the flavor, culture and formulae it developed in Silicon Valley. Even those VCs who are based in India and focused on India are emulating these models developed for starting companies in Silicon Valley. They even chase after the trends that they see in Silicon Valley. Silicon Valley is benchmark for all these VCs. Even though they water down their selection criteria to a great extent to accommodate local companies, it never comes close to reality for Indian startups. Some of the criteria you may not be able to meet (I made up these):
1. The company should be within 15 miles of the VC firm
2. There should be a big-name ex-entrepreneur attached to the company
3. The company should be in a high-growth market and should be catering to that market through its presence

While these VCs are keen on taking risks in Silicon Valley they may not be able to do so in India.

Don't blame the VCs. They don't have enough precedents in India to allow them to take the risks they usually take in Silicon Valley. The same VCs which are focused on early stage and seed stage in Silicon Valley are taking up private equity deals in India. (Examples: 1, 2, 3, 4)

Why did their focus change when it comes to India?
'Not many precedents and no ecosystem' is the simple answer. If you dig deeper you may get more reasons. But I would like to keep this simple and crisp here.

You, as entrepreneurs, can't overcome these problems for them. Instead, what you have to do is make it on your own and set precedents so that startups like yourself may get funded in future.

Why is there no ecosystem in Bangalore?
'Bad roads' is my simple answer.
If you probe me further, I would say the answer is deeper- Each successful entrepreneur in India thinks he is an exception and quickly assumes that what worked for him will not work for others and hence his ability to take further risks (in investing) stops right there.

Though the first part of my answer sounds crazy there is some logic to this answer. An ecosystem is formed when ex-entrepreneurs live in the same city further promoting entrepreneurial activity. Ex-entrepreneurs are very valuable for promoting further entrepreneurship to take it to the next level. Though Bangalore has the best weather, it really sucks when it comes to commuting and travel. Many rich ex-entrepreneurs settle down in those places where there is less traffic. My answer to this problem is simple. Get rid of Defense establishments out of Bangalore, make wide roads, create big parking places, open big convention centers, close Brigade road for traffic and make a walking avenue out of it, keep pubs open late instead of closing them down and make this city attractive for rich ex-entrepreneurs to live in.

Now for the second part of the answer! Take Infosys for example. Here's a good startup. They have created lot of jobs but I do not credit Narayana Murthy and others for creating more startups. They think they are an exception. There are many such ex-entrepreneurs who are averse to taking risks once they become successful. My idea is not to accuse any of them. I would like to put the reality in front of us so that we don't have false expectations.

So what should an entrepreneur actually do?
First, don't expect anyone to make it easy for you. What you set out to do is not easy. And it will be a long arduous path. The key thing is to survive. And it's not easy to survive. Forget expansion, innovation and dominating the market; your energies, efforts and time will be spent in just surviving. But surviving is good. If you survive in India and survive long enough you have passed a big test. Surviving in India will also make you innovate. You will come up with some weird ideas to cut costs, come up with new methods and solutions because you have to survive. These methods, skills and ideas that you learn and come up with will be very valuable if ever you become successful. You will manage with small money and still produce big things.

Hopefully, in another ten years, we will have enough success stories and hopefully VCs will start funding tech startups. Till then, you are on your own.

How do you survive?
If you believe in your idea, and you are able convince yourself that this idea is worth taking a risk, that's the first step. Then you go about convincing others why this idea is good and worth taking a risk. If others get convinced, hopefully, you will have a team. Once you have a team, you go about making a prototype or creating a small company or team which can execute and you use this to gain traction with your customers, investors, partners, etc, to go to the next level. But how do you fund this whole thing? You can take a personal loan, say 5-10 lakhs, before you quit your current job. That's good for your expenses for 10-20 months depending on what your lifestyle is. The same could be done by your team. Otherwise, you talk and convince your parents, family and friends to loan you money or invest in your company. If you can't convince people around you, its tough to convince a VC or an angel investor. And remember this- you can't convince your people and investors if you are still holding onto a day-job.

Is quitting your current job so important?
Yes.
You can't create a startup working part-time. Those who do or did are exceptions. Assume you are not an exception. If you are thinking on making it happen working part-time, realize this- you have no ability to take risks. If you can't take risks, don't think of a startup and instead concentrate on your career to become a director or a VP. Buy a good property, build house, buy a good car, and if you still have free time, write blogs!

Don't analyze and evaluate. Act!
If you are making cost-benefit analysis, ROI, evaluating business models and other calculations to see if you should start or not, you are better off joining a consulting firm or a strategy department of a big company to write reports, or joining a VC firm as an analyst. As an entrepreneur you have to act. You have to put the things in motion, get it going, and deliver- whatever your idea is. You will have a life time to think and brood over what you should have done and what you shouldn't have. It's for VCs to analyze; it's for you to act. May be your idea is not a good business model and you will realize that soon. Meanwhile, give it a shot while you can. Else, you may regret this forever.

Is there any hope of getting investment?
Hope is what makes entrepreneurs tick. Keep that hope alive and keep working at it. Once you have crossed that first hill on your own, of having made the prototype, or having the first customer, or having garnered enough traction with customer, partners and investors, you may get funded by a big name VC. Meanwhile, keep up the good work through angel investment, loans, investments from friends and family, selling that piece of land, etc.

What have you got to lose if things don't work out?
You can always get a job. Your experience at a startup will only add value if ever you have to go back to employment. You may have a loan of 15-20 Lakh rupees. That's not a big amount for an engineer in Bangalore to clear off in few years. That is a small price to pay for the ride.