Month: April 2010

April is a month that I find very interesting and different for many reasons.

First, from a business standpoint, it marks the end of a financial year and the start of a new one. So, there is a time for some fresh thinking and big plans. There is also a bit of breather from the  treadmill of numbers as everyone catches their breath, and gets ready for the next, bigger and a more ambitious journey. So, it is the month of Big Thinking.

Second, it is the month of performance reviews and appraisals. So, there is expectation in the air all around. After having lived through 18 Aprils in my life as an Entrepreneur,  I can conclusively say one thing: employees get unhappy not because of the raise they got, but because there is someone else who get more than them! (As we all know, salaries in India are public knowledge – no one believes in keeping their compensation a secret.)

Third, the heat in India starts getting more intense. In places like Mumbai, the heat and humidity combine to make the outdoors a tough place to be. I feel it only on weekends, since for the most part, one is sitting in a temperature-controlled environment for the better part of the day!

Finally, it is the start of vacations for kids. I remember April for the exams getting over, and the report card coming in by post sometime late in the month. So there was an air of expectation. It will be different for Abhishek – his school (IGCSE) vacation starts in June and goes through till early July. Going to school in May is going to be quite an experience for him!

In India in the tech space, only a few companies end up getting funded. My guess is that out of every 100 companies that start off, less than 5 end up with adequate capital to build their business. So, what can be done to change this?

What many of these early-stage companies need is a combination of capital and management expertise. For this, they should be willing to give up a significant stake – provided they have not managed to raise capital for an extended period of time (say, a year). In this situation, the product/solution already exists. But it has not succeeded in the market for a number of reasons: the idea itself could be bad, the lack of money makes for decisions that are not optimal for the business, the company is not able to hire the people, or the business model itself needs some change.

In this scenario, what the company needs is a combination of cash and top-notch talent. Rather than go down the path of the “living dead”, the company should be open to bringing in an entity or a group of people which takes up 40-50% stake and can also help drive the company’s execution process. Money required will be about Rs 5-10 crore ($1-2 million). This will provide a lifeline for the company in the short-term, and an opportunity to succeed in the medium-term.

From what I know, there is no entity which can provide cash and management expertise for early-stage companies in India. Is this an opportunity worth looking at?

I was talking to a friend recently on the problems of early-stage investing in tech companies India:

• lack of  serial/successful entrepreneurs whom investors can bet on
• limitations of the digital (Internet and mobile) marketspaces (in terms of revenue opportunity) in India
• dearth of risk capital (from angels and VCs)
• not enough mentors to guide early-stage companies through the challenging initial years
• poor digital infrastructure (broadband, 3G) which limits scope in the domestic market

In this context, it is no surprise that the whole investment cycle has shifted: angels act like VCs, VCs act like PEs and PEs like banks. There are many entrepreneurs who start off, but end up in  struggle because of limited capital. So, can something be done about this?

I will outline an idea tomorrow.

Here are my answers to the two questions I asked yesterday.

If there was ONE thing you could Change about India, what would it be?

Middle India Apathy towards the nation. It is almost as if most of us in Middle India (young, educated in urban India) have switched off from trying to make a difference to what we see happening around us. It reflects in the voting percentages in urban areas, in the quality of candidates that we see contesting for elections, in the deteriorating quality of life in cities in India, and in the debates that we have for what India needs to become.

What is India’s Greatest Asset?

I also think that Middle India is the country’s greatest asset — if it can get its act together. The Rich don’t really care to bring about Change — they are beneficiaries of the existing system so status quo is good enough for them. The Poor cannot bring about Change. It is we in the Middle who are the country’s hope. We have the benefits of education, growing incomes, material benefits that are more than what our parents had. We need to get more engaged in defining our country’s future.

Here are two questions to think about and answer:

1. If there was ONE thing you could Change about India, what would it be?
2. What is India’s Greatest Asset?

Leave your answers in the comments.

I will give my answers tomorrow.

This is from a post I wrote last June:

A few days ago, Atanu and I spent a full day meeting with people who are in the education space. We discussed a diverse set of topics around education. What came out clearly was that there are two distinct approaches.

One approach is to work within the current system and see what best can be done.

….The second approach, advocated by Atanu, is to create a parallel system from scratch — encompassing K-12 and beyond. This thinking starts with the belief that the current education system is fatally flawed and there is no way to apply band-aid. What is needed is a new system, a new standard. And there will be early adopters among parents and kids who will be drawn to this new system.

My personal vote goes for the second approach. The world has changed a lot, especially in the past couple decades, and the simplicity that needs to be there in the education system has vanished. One hears of kids as young as two and three years going for coaching so they can get into the preferred school of their parents. IIT coaching now starts in the sixth standard. It is reaching ridiculous heights (or lows). And then look at  the quality of the product that comes out of this system.

This week’s links:

• Economist report on Innovation in Emerging Markets: “Developing countries are becoming hotbeds of business innovation in much the same way as Japan did from the 1950s onwards. They are coming up with new products and services that are dramatically cheaper than their Western equivalents: $3,000 cars, $300 computers and $30 mobile phones that provide nationwide service for just 2 cents a minute.”
• Weighing the Evidence on Exercise: from the New York Times Sunday Magazine. “The newest science suggests that exercise alone will not make you thin, but it may determine whether you stay thin, if you can achieve that state.”
• Key Business Metrics: by Fred Wilson. “Every business should have a set of metrics that it tracks on a regular basis. These metrics could include some of the accounting stuff we’ve been talking about like cash, revenues, profits, etc but it should not be limited to those kinds of metrics.”
• Organic Startup Ideas: by Paul Graham. “If you want to start a startup and don’t know yet what you’re going to do, I’d encourage you to focus initially on organic ideas. What’s missing or broken in your daily life? Sometimes if you just ask that question you’ll get immediate answers.”
• Smart Pricing: A Knowledge@Wharton interview with the book authors Jagmohan Raju and John Zhang. “We probably don’t even spend $1,000 thinking about how to price it. And if we don’t price it well, then where will the money be for developing the next new product or the next new idea?”

While in Singapore, I also gave a presentation at the SP Jain Centre of Management to students doing their MBA:

Here is the presentation I made as part of my keynote at the Mobile Marketing Association conference last week in Singapore:

The correct answer to yesterday’s question is $5.84 million. Here is the calculation:

• Tranche 1: VC gets 50% for $5 million
• Tranche 2: VC gets 25% for $4 million
• Tranche 3: VC gets 16.7% for $4 million

So, after Round 1, the VC owns 50%.
After Round 2, the VC owns (50% * 25%) + 25% = 37.5% (50%*25%) + 50% = 62.5% [PS: Apologies for this error.]
After Round 3, the VC owns (62.5% * 83.7%) + 16.7 = 69%

So, the VC has invested $13 million for a 69% stake over three tranches. Therefore, the blended pre-money (the value of the other 31%) is $5.84 million.