Friday, July 07, 2006

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.

Thursday, July 06, 2006

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.

Wednesday, July 05, 2006

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?
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.