Technology, Venture Capital, Private Equity

Perspectives from an Indian VC

Archive for May, 2007

Manipal Education Group Acquires MeritTrac

Posted by Arun Uday on May 29, 2007

We have successfully exited from MeritTrac, an investee company of ours. Manipal Education Group, possibly the largest education group in India, has acquired controlling stake in MeritTrac. MeritTrac provides assessment and testing services to large corporations in India primarily for recruitment purposes. It focuses on corporate clients in the IT and BPO sectors. With all major IT and BPO companies hiring in the tens of thousands each year, we had foreseen the need for a specialized player in the evaluations space to aid companies in their recruitment process. MeritTrac seemed poised to emerge as a leader in this space and kudos to the mangement team of MeritTrac for their superb execution in defining a niche and going on to own it. Exactly the kind of plan a VC would like to fund and our beliefs have definitely been rewarded. Some shared learning from MeritTrac:
a. Focus pays: Like they say, there are riches in the niches. How many times have we heard that startups should have a clear definition of what they are seeking to do rather than trying to be all things to all people.
b. Be the spade supplier: Again, an old anecdote which says that the people who make best money in a gold rush are the guys who are supplying the spades. Classic case – Cisco, which supplied all the networking equipment during the internet boom and in the process became one the largest technology companies. Many a time companies are so focused on only the mainstream that they overlook lucrative opportunities on the fringes. Remember the dot com boom when everyone was trying to be an all encompassing portal and allowed Google to walk away with the search market. (Of course, tables have turned now and search has become mainstream and e’one is now trying to outdo G there. Are we missing other such opportunities on the fringe of search?)
c. Leaders are always valuable: If you are the leader in a space, it is extremely likely that you will be valuable to someone. A leader in a $100 million space is more valuable than a laggard in a $1 billion space.

All in all, personally, it is a v.good feeling to start my VC career on such a high note.

Posted in HSBC | 6 Comments »

Facebook entering a new phase

Posted by Arun Uday on May 28, 2007

The big news in the social net world last week was Facebook’s announcement that they were going to open up their platform to third party application developers. For those wondering what the big deal is (after all, almost all web sites these days provide APIs to interact with them), this is a little different. In this case, application developers can develop widgets that will work within the FB system. FB promises that this will be an open system and there won’t be any elaborate clearances that would be required. The third party applications are promised full access to the entire database and will be free to monitize their work in any manner they want.
There has been some amount of excitement and may be even hype around this announcement with some even suggesting that this could pave the way to FB becoming the new OS of social networking. Lets try and analyze this briefly. Read the rest of this entry »

Posted in Facebook, internet, social networking | 1 Comment »

Captives and India

Posted by Arun Uday on May 25, 2007

Venture Intelligence points to two somewhat related articles on captives / product development in India. One refers to the closing down of the Bangalore development center of hi-profile startup Riya.com. The other is a report by Forrester on the challenges being faced by captives in scaling up their India operations. In fact, the current issue of Business Today also has an article on the same topic.
There are various reasons attributed to the inability of captives to replicate the success of third party service providers, chief amongst which are issues like – wage inflation, crumbling infrastructure, attrition etc. But as an erstwhile techie, let me provide the “insider’s view” on this issue. In my opinion, the main problem is not so much issues like infrastructure, high costs etc. After all, that is something even the other regular IT Service cos have to grapple with. The main problem is that in the employees’ minds, the career growth in such places is just not as rewarding as that in other IT services cos – no onsite opportunities, limited scope for graduating from programming to middle mgmt and in many cases, being stuck with repetitive and low end work. Note that for most programmers in India, the aim is to “progress” from being a programmer to team leader to PM etc. However, in US, I have seen folks who are happy being programmers for their whole life. So, it has a lot to do with peer pressure. When an programmer in an offshore R&D center sees that his peer in other regular IT co keeps going onsite or meeting clients or is managing a team and no longer spending all his time coding, there is a sense of insecurity that creeps in. He fears – “Maybe if I continue to do this for long, I may end up damaging my long term career prospects because the moment I approach another co, the first question they would ask is – “Have you managed a team?” or “Do you have client facing skills” and I don’t have a good answer.” Unless startups like Riya and the rest understand the mindset of an avg techie in India, they will always end up with such a conflict of expectations between the co and the employees. Therefore, it should not come as a surprise to such captives or offshore centers of startups etc that it would take them a lot more to get resources on board as compared to the other regular IT service firms. The only way to make it work for such captives would be to provide additional carrots in the form of higher remuneration, or better work or periodic visits to the HQ etc so that the tradeoff from an Indian programmer’s standpoint makes sense as well. They cannot come with a Silicon Valley mindset and hope to make it work only by throwing more stock options. The scenarios in the two places are significantly different and that needs to be taken into account for making a success of it here.

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Aggregators – New King Makers

Posted by Arun Uday on May 23, 2007

“Content is king” – is perhaps the most hackneyed phrase in the media world. However, some time back, a Bear Sterns analyst came up with this v.interesting report, which said that content aggregators are the new king makers. I have looked at and also helped prepare a few aggregator business plans in the past, and here is some of that learning.
First Learning – Content aggregation plays make most sense when there are many players on both supply and consumption side. The classic case is that of a user generated content aggregator like YouTube, where there are thousands of producers and millions of consumers. An aggregator is an indispensible part of the value chain in such cases. Quite often, we see aggregators hoping to pull it off by striking deals with a couple of content producers like large studios and getting started. We are especially seeing this in the case of the innumerable IPTV/VOD/movie download service providers in the US. And predictably, most are skating on thin ice and having to change their business model (Akimbo) or struggling to survive (Netflix downloads). As an investor, I’d be wary of backing such an aggregation play. You are always under the risk of the large content supplier(s) either pulling the plug or deciding to do it themselves. You obviously also can’t hope to earn extraordinary margins in such a business since the content provider, who has the maximum bargaining power would take a lions share of the revenues.
Second learning – Build a brand. It seems obvious, but somehow, especially having seen some of the mobile VAS content aggegators here in India, I feel that their focus has hardly been in building communities (proxy for brands). An active community / brand could be a major barrier to entry especially when operating amongst large players on either side.
Third learning – Don’t just loosely aggregate. Add value. Contrive novel ways by which you could ease content discovery or help users make new connections or engage users in discussions. This is again best illustrated by the example of how YouTube managed to hold its own against Google Video. It was all the various bells and whistles – Play Lists, Recommendations, Ratings etc that YouTube built which eased the discovery of content and fostered the building of a community, which made it the most popular video aggregator on the planet.
OK, here’s a question – Which is the largest aggregator on the internet, which is the best example of having accomplished all of the above? Clue – answer starts with a “G”.

Posted in internet | 4 Comments »

Internet in India – Still “Nice to Have”

Posted by Arun Uday on May 21, 2007

Generally speaking, there are two kinds of products and services – the “Nice to haves” and “Can’t do withouts”. Talking specifically in the context of India, one way of looking at the market here is that it becomes attractive only when the product or service graduates from the “Nice to have” to the “Can’t do without” category. There are advanced markets in the world, where even the “Nice to have” consumer base is large enough to sustain businesses on those themes. But, India being a value conscious market, as an investor, I’d be interested only if I see that a product has the potential to become a “Can’t do without” in a reasonable time frame. And I feel, internet in India, is still largely a “Nice to have” rather than a “Can’t do without”. And here’s the reason why.
I am not really so worried about the infrastructure issues like relatively high h/w costs or the lack of penetration of bandwidth etc. There is ample evidence to suggest that such issues pretty much get addressed with time. Rather, if there is any one problem that’s really been a stumbling block for internet adoption in India, it is the lack of compelling applications for the domestic market. Some of the analogies that people typically give in connection with the expected boom in Internet in India are two similar waves in ICT sphere that we have witnessed in the past viz. – the cable and mobile revolutions. Read the rest of this entry »

Posted in India, internet | 3 Comments »

Barbarians drive through the gate

Posted by Arun Uday on May 17, 2007

The major headline this week in the PE world was the acquisition of Chrysler by PE firm Cereberus for $7.4 billion. It was not so much the size of the deal thats got people talking. While $7 billion may seem large,  my guess is that it wouldn’t even count amongst the top 10 largest deals of 2007. Rather, it’s the “fall” of an institution such as Chrysler, an emblem of American industrial prowess to “corportate raiders armed with money bags” thats really dented Uncle Sam’s psyche. Two points to ponder upon here. One is of course, the incredible power that PE firms wield today. But, more on that in a later post.
What I’d like to discuss here is the inexorable law of business lifecycle that all companies are subjected to. There was a time when it was said “Whats good for General Motors is good for America.” For decades, it was first on Fortune 500 list and was the symbol of American corporate might.  Today, it’s annual report reads like the script for a Greek tragedy – workers up in arms with management, huge financial liabilities and a share price thats on a free fall.  Chrysler, along with Ford and GM completed the triumverate of the Big Three of the automobile industry in the US. Now, the score card reads – One down two to go. It is interesting to compare the top 10 list in terms of market capilalization across time. Read the rest of this entry »

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Why I’d go long on Tata Motors

Posted by Arun Uday on May 14, 2007

So, Reliance has set some kind of a record by selling a million cell phones in a week. The Indian telecom story never ceases to amaze one. If there is any phenomenon that has caught the fancy of the international business community (investors and companies alike) in recent times, it’s been the mobile wave in India. It is common knowledge that India is today the fastest growing mobile market in the world, adding more than 7 million customers a month! It has made companies around the world stand up and take notice of India’s potential as a market, so much so, that India is now touted as the next major consumption led growth economy (see reports by Morgan Stanley and McKinsey for instance).
It is clear that the single driving factor that has led to this mobile wave in India has been the ongoing steep declines in the prices of both cell phones and calling rates. It helped that India being a late adopter of technology, was able to procure telecom equipment at a fraction of the cost as compared to developed markets since by then equipment manufacturers had already monetized their IP from other early adopters. As a result, telecom operators in India were able to beat down prices and deploy networks at a price at which it would appeal to the price sensitive Indian consumer. It now doesn’t matter that Indian ARPU’s are the lowest in the world. The numbers more than make up for the low ARPUs, as reflected by the healthy margins that Indian telecos enjoy.
However, it is not necessary to always rely on technology alone to drive consumption here. The innovation in packaging of shampoo into sachets by Cavin Kare, which drove sales in early 90’s is well known.

Read the rest of this entry »

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Your friendly neighbourhood VC

Posted by Arun Uday on May 10, 2007

I hope to write a little bit in future posts on some of the changes that are taking place in the VC world and how VCs and VC models are evolving in response to those changes. In this post, I’d like to talk a little on the location of portfolio companies that VCs like to fund.
I remember the first time I heard the term “Venture Capitalist” was nearly a decade back on a TV channel that was dedicated to technology (which has since gone bust), which telecast a talk show featuring Ajit Balakrishnan of Rediff.com. He was talking about the importance of an eco system and how KPCB, which he described as the pre-eminent VC firm had a motto that read – “We don’t fund companies which are more than an hour’s drive away from our office.” Then, at some point, that motto for most VC firms became “We don’t fund companies to which we can’t fly down to in a couple of hours.” And the latest we have, partners tarveling across the globe to sniff out interesting opportunities – think KPCB’s Ajit Nazare, who was an active investor in Infoedge. Personally, I feel, proximity to portfolio companies helps. Modern communication technologies notwithstanding, there’s nothing to beat a face to face meeting or direct personal interaction.
However, having said that, I guess there are a few things that have happened, which have led to VCs going beyond the hallowed precincts of Sand Hill Road and “venturing” into newer geographies (India and China being the most prominent ones). The most obvious one is that VCs are following the old principle of any business, which is to be where the market is. Blockbuster hits like Baidu and Focus Media in China or Bharti Telecom in India, which were all built with VC/PE money, demonstrate the potential of such emerging technology hotbeds as India/China. Read the rest of this entry »

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RBI tightrope

Posted by Arun Uday on May 8, 2007

I guess there would be few who would envy Mr YV Reddy’s job these days, given the various forces and counterforces he needs to balance. Ever since the inflation rate started its climb upwards, RBI has been tightening the liquidity screws to contain the rising prices. Bear in mind that inflation not only has serious economic implications, but with elections not too far away, there are also other political ramifications which put serious pressures on policy making. Raising interest rates was the easiest thing to do to contain inflation, for, debates raged on what kind of impact this increase in interest rates would have on our economic growth. With capital becoming increasingly expensive, it was feared that corporates would find it difficult to pursue aggressive CAPEX plans, which would hinder growth. Also, beyond a point, such increase in interest rates would also start becoming counter productive since it would have a negative impact on supply of goods resulting in scarcity, and hence price increase. Further, this and other factors have resulted in an appreciating rupee, which is scaling newer heights by the day. Its now the turn of exporters (IT cos amongst many others) to cry wolf, for whom a stronger rupee is a turn off, which led the RBI to again intervene and suck out some dollars from the system. Now, I read another article by yet another noted economist that since India is running a large current account deficit and is a net importer of goods, an appreciating rupee may not be such bad news after all. Geez, whats Mr Reddy to do now?? Of course, if I knew the answer I’d be the one hogging air time on TV channels versus Abhi-Ash who seem to be outdoing me when it comes to gaining television coverage these days.

Posted in economy, India | Leave a Comment »

What’s better than running Windows on a PC?

Posted by Arun Uday on May 7, 2007

Running two versions of the Win OS on the same PC. Thats what researchers in Microsoft’s Research Lab in Bangalore have developed – technology that allows you to load two versions of Windows on a single PC and even work off a single monitor. Guys, c’mon its hard enough to run one version of Win for long without crashing. How do you expect us to run two of them simultaneously? Also, I thought a similar end result could be achieved through virtualization s/w like VM Ware. Of course, it doesn’t split the screen into two. But, given the relatively low cost of a monitor, it may be a better idea to share a CPU and memory while having two different monitors (rather than two users constantly peeping into the other half of the screen to see what the other guy is doing).
On a side note, I’m happy to see desi folks working on innovative stuff. Keep trying dudes. Maybe someday, you will come up with something more appealing than two blue screens on a single monitor 😉

Posted in technology | Leave a Comment »