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.