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?