Valuing a start up

Assessing the value of a start up is one of the most difficult things to do. Investors and investment bankers may like to give the impression that there is a method to it but the truth is that valuating an early stage company is an imprecise science, that depends on a number of factors some of which have little to do with the intrinsic value of your company and more to do with the environment.

So what do VC’s look at while valuing a company. Most investors give you similar answers –

Size of potential market – Generally the larger the better

Quality of the management team - passionate, broad based management teams with complementary skills and domain expertise preferred

Business model – Who pays and for what? How much will they pay? How scalable is the model? Does head count need to scale proportionately with revenue?

Competitive landscape – it is good to be first mover or at least early mover, however if it involves the creation of a new category or market or a radically new consumer habit then it can be risky. It’s nice if customers are used to currently spending money for the same purpose and your offering solves the problem better and you propose to earn revenue from existing spend budgets. It’s also good if this is a proven business elsewhere in the world.

Stage of company – the earlier the company in its life cycle the more risky it is however an investment in an early stage company can yield massive upside to the investors if it goes on to succeed. In spite of the fact that we were probably overpriced in our first round of fund raising, our investors earned a return of slightly under thirty times over a seven year period.

Quality of offering – This a tricky one. How good is the offering? Will it get traction among customers?

Cost structures and potential margins – How large are the margins likely to be when the business scales up? Will margins increase with scale - does the business have operating leverage?

Market structures and market power - Is there likely to be excessive dependence on a few customers? Can the business build up massive dependency for its services among its customers? Will there be switching costs for customers? Does the business build defensible intellectual property? Will there be barriers to entry for competition in the future?

Basically all these are surrogates by which investors can get some sense of potential return and risk – a peek into the future.

Yet there are external factors which will finally influence whether or not a VC will invest in a particular company and if so at what valuation.

At Naukri, in April 2000, we raised our first round of venture funding at a valuation of around Rs. 44 crores - we had achieved sales revenue of Rs. 36 lakhs in the year gone by and. Sounds insane – well it happened. It was a bubble investment – dotcoms were flavor of the month, investors were competing to give us money (we had two offers on the table and we had spoken to only four investors), the Internet was expected to change the world and everyone was going to get very rich very fast. Six months later as it became apparent that the bottom had dropped out of the dotcom market the company would probably have been valued at around Rs. 2 crores even though revenue was going to more than double over the previous year.

Most investors will deny it but there is some kind of herd mentality among many investors. They compete with each other and they talk to each other. So if one investor makes a certain kind of investment that looks like a smart thing to have done it spurs others on to make investments in similar companies. When dotcoms were in fashion in the late nineties everyone wanted to invest in the internet sector. The ensuing competition resulted in a de facto auction and pushed valuations sky high. And when investors decided that they wouldn’t touch dotcoms with a barge pole, valuations were in the basement for a long long time.

Bubble investments followed by a situation where companies were left with no hope of a second round, subsequent tranches were held back, they were merged, promoters were sacked and replaced by professionals - many simply shut shop. All in all it there was a lot of pain for everyone. Yet the intrinsic worth of the companies had not changed much from the time they received their first round investment till the time they were forced to shut shop.

Irrational exuberance followed by irrational pessimism.

Just as beauty is in the eye of the beholder, valuation is in the eye of the investor.

Lage Raho

My November column in Mint

So it is a slow down, perhaps even a recession, or if the prophets of doom are correct in their prognosis – it is that once in a lifetime occurrence, an economists delight – a global depression.
Whatever it is, the news is not good for those doing a start up. Not because growth will slow down to under seven percent. But because many start ups are doing innovative stuff where the revenue will come only a couple of years later and they need external funding till then. Funding that has become a lot harder to get as compared to a few months ago.
So as an entrepreneur doing a start up what are the things you could do to cope and ride through the situation? There are no "one size fits all" solutions – each company is different, each market is different. Having said that there are five things you could be doing.

Don’t panic : This is the fifth slowdown I am witness to during my entrepreneurial career over the last eighteen years . All of them have shared the following characteristics – a stock market correction, drying up of capital and credit, a demand slowdown and softening of business confidence. None has lasted more than two or three years. In India a recession means less than five percent growth for a year or two while a slowdown is six percent growth. These are healthy growth figures by global standards, however in an India that has gotten accustomed to nine percent growth it is viewed as a disaster if one were to go by media reports. Sure things are bad in the economy but we have been there before and come out of it. This too shall pass.

Recognise the problem early : Internalize the understanding that times have changed – the party is over. There are many start ups that will not survive the next three years. What you have to do is to ensure that your company not only survives but also grows and thrives. If you don’t recognize the problem early you will not be able to solve it. At Naukri we raised venture capital in April 2000 and the market began to correct almost immediately thereafter. We immediately stepped on the brakes and put all the money into fixed deposits in the bank – we did not spend it foolishly on big budget advertising. The rest of the market was in a state of denial for over six months saying that this was a temporary correction and things would be fine soon. It is because we recognized the problem early we were able to conserve our cash and ride through the meltdown. So assess your situation. Take stock of your cash availability, revenues and expenses. Assume you cannot raise any further capital for the next two to three years and then prepare a plan for survival and growth.

Take colleagues and employees into confidence : Having recognized the problem discuss the situation openly with employees. Let them participate in suggesting alternate courses of action. It helps to have many heads working at the problem. Also you get a buy in from the whole organization. When we tabled the situation the company was in, in 2001 senior colleagues volunteered a 30% salary deferment without being asked – it helped that we had a generous ESOP programme. If people love to work with you and they believe it is their company they will sacrifice without being asked.

Sharpen your value proposition and accelerate the sales programme : This is the single most important thing you can do in a recession. Push back the esoteric products that will bring in revenue after two years. Focus on creating immediate value for customers. Get the sales in today. And then go out and lead from the front and make sales calls yourself. This will not only give you deep customer insights to help you improve your offering continuously but will also motivate the sales team. And remember as the founder you are probably the company’s best salesperson. Build out the sales organization as you get sure about the value proposition you offer to clients.

Evaluate every expenditure : When cutting costs during a recession there are no sacred cows in a start up. Look at every expenditure. Don’t travel when things can get done by email or phone. Stay in cheap hotels when you do travel. Share a room with a colleague. Go by train if you can. Shift to cheaper offices if that is what you need to do. Do barter deals and alliances, wherever possible, if you need to buy something. Don’t spend money on advertising that doesn’t result in sales or enquiries. There are probably a hundred areas to save money if you constantly ask yourself a few questions. Do I really need this? Is there a cheaper way to achieve the same objective? Can I do this later? How will this improve sales? What difference will it make if I do not do this right now?

There is an opportunity in every slowdown. No doubt funding is difficult to get, customers negotiate harder and sales cycles become longer. However competition too gets adversely impacted – and that’s good for you. This is the time to get quality talent into the team – so raise the bar on hiring. More importantly if you spend time sharpening your value proposition and make it more compelling you will find that sales will happen and you have a good chance of sailing through the meltdown. So don’t quit - lage raho.

So Whats your Big Idea

My October Column in Mint

A few months ago I spoke at a conference on entrepreneurship at IIM Ahmedabad. In the audience were several students who were aspiring to be entrepreneurs. The most persistent question thrown at the speakers during informal interactions in the evening was “I want to be an entrepreneur – what business should I start?”.

Most of the speakers who were there found the question a bit absurd. Any business that you start has to be your idea – you cannot go haring after an idea that someone else has given you in a casual conversation.

So the question becomes - where do the best business ideas come from and is that where you’ve been looking? While good ideas can come from anywhere or anyone, the best ones come from observing and interacting with customers.

If you know your prospective customers well enough, if you have spoken to them, if you have been a customer yourself, if you have felt the pain – then perhaps you have gained customer insights which contain in them the germ of great business idea.

Great business ideas are those that solve a customer’s problem. Sometimes customers will tell you what problem they need solved. At other times they will not articulate it and you will have to dig deep. Many times customers will not even know they have a problem – you will have to get into their skin, join the dots and figure it out for yourself.

However you look at it – successful new businesses usually solve a problem. So the first test of a great business idea is whether you are solving an unsolved problem.

But apart from the unsolved problem test, a good business idea also has to pass three other tests before you can call it a great business idea - the right one for you to pursue.

The first test is the test of passion. Does the idea resonate with you? Have you lived with it long enough? Have you explored it from various angles? Have you discussed it with prospective customers? Does it capture your imagination? Does it motivate you enough to spend the rest of your life doing it? Is it your calling? How passionate are you about it?

The second test is the test of unique qualification. Will you be the best person to execute it - do you have the capabilities required to bring that idea to life? As an individual you cannot personally possess each and every quality required to build a large business – but then do you have a team of founders that can provide leadership to the company in most of the critical areas? Are you and your team uniquely qualified to pursue that business – the chosen ones so to speak?

The third test is the test of scalability. Is there a reasonable probability that the pursuit of that idea will result in the creation of a large profitable business that grows fast – assuming of course that you do wish to create this kind of business. I must acknowledge here that you can be perfectly happy building a small profitable business or doing a not for profit. Having said that – the fact is that most people do want to build large profitable businesses.

To the extent that the test of passion and, to some extent, the test of unique qualification depend upon qualities internal to you the answers will be different for different people.

However let us look at the test of scalability and explore some of the generic traits of businesses that become large and profitable.

In general, businesses that scale up quickly address potentially large markets. They solve an important problem that is felt by a large number of people. They are first movers in their space or at least early movers – entering markets before competition does. They are usually market leaders.

They have a clear, credible, compelling and differentiated value proposition that is simple and easy to communicate to their prospective customers. They are able to hit a hot button with their intended customers.

They execute well and use a service or product creation and delivery method where capacity is capable of being scaled up quickly.

They create defensible intellectual property. They innovate continuously and focus on those areas where they have a core competence.

They frequently benefit from a positive network effect, have high operating leverage and are in businesses where revenues scale up disproportionate to head count.

They build other barriers to entry in their spaces as well.

They survive recessionary cycles - more than once.

They are magnets for talent and the best people in their industry are usually to be found there.

And they share the wealth with the employees who helped create it.

The most successful companies built in the last three decades around the world by first generation entrepreneurs possess many of the attributes listed above - Microsoft, Yahoo, Google, Infosys, Oracle and many others.

So what’s your big idea – does it measure up?

Review of - The Game Changer

This is a review of The Game Changer – How every leader can drive everyday innovation. By AG Lafley and Ram Charan, that I wrote for the Business Standard recently

The Game Changer is a significant book for two reasons.

First because of the credentials of the authors.

Lafley is the Chairman and CEO of Procter and Gamble. In his tenure over the last seven years P&G has tripled profits and has massively improved revenue growth and margins.

Charan is one of the most influential management thinkers in the world today. Born in a small town in UP, he worked in the family shoe shop, studied engineering and later went to Harvard for an MBA and then a Doctorate. He taught at Harvard and Kellog and is now a full time management consultant with several books and articles to his credit.

The second reason why it is significant is because of the importance of the subject the book addresses – innovation, or rather the management of innovation.

Innovation, to my mind, is or should be, central to the agenda of every high growth high performance company anywhere in the world.

The premise of this book is that an innovation led strategy is the best way for companies to attain sustainable and profitable growth. Lafley opens the book by saying that his job as CEO of P&G is to integrate innovation into everything that P&G does. It is the central principle around which people at P&G make decisions and seek opportunities for growth.

Innovation the authors say must be customer centric, customer driven and organisations must first structure themselves around the customer for this. The organisation and the people working there must possess a motivating purpose and values. The next stage in the process is to identify opportunities, and decide on goals and strategies and then leverage on core competencies to make it happen. At the execution stage organising for innovation involves putting in places appropriate structures and systems, building the right culture and ensuring the innovation process gets leadership.

Sounds like management jargon – well it is and the book has more than enough of it. It sounds great as a textbookish process when articulated like this – but it is the execution that counts. And Lafley did successfully follow this route at P&G.

Orchestrating an innovation centred transformation implies not being afraid of failure. Lafley says he gets worried when sixty percent of his innovations are successful. It means he is playing too safe and not pushing the envelope enough. In the book he candidly lists out the big failures of P&G over the last seven years.

The book is an interesting jugalbandi between Lafley and Charan – with both speaking in different voices. Lafley talks the reader through the transformation, which was centred around innovation, that P&G went through under his leadership. Charan puts the P&G experience in perspective and looks at other companies and industries where innovation has made an impact.

The Game Changer is useful for understanding how one large company pursued innovation to transform its fortunes and there is also prespective of how other large companies did similar things. It should be read by managers and leaders in large companies, by business school students and professors, and by trainers.

However if you are looking for a story with the romance of entrepreneurial brilliance at innovation, eureka moments, one mans passion and dream – the small start up in a garage that set out to change the world and successfully did – forget it. This is not that book.

In fact it is not a gripping unputdownable read. It needs to be read slowly and carefully and after reading a chapter you need to think through the import of what you have just read, perhaps skim through it again – make bullet points and discuss them with a colleague or friend while going through in your head the implications of what you have just read for your organisation.

The book is less about innovating and more about the organisation and management of innovation and the strategic importance of innovation.

It tells you that innovation is not the preserve of Silicon Valley start ups alone. It can successfully pursued by large stodgy companies, with low product or service differentiation, operating in mature markets and displaying moderate growth with steady or declining profit margins.

Bootstrap before looking for funding

My September column in Mint.

Over the last several years many aspiring entrepreneurs have met me for advice – be it at business schools, through TIE, at conferences, at business plan contests or by simply sending me a mail and asking for time. Almost all of them have had an idea, a half written business plan – for which they were exploring the possibility of raising capital. Most believe that without committed funding by a venture capitalist they cannot start or will not succeed. Most struggling entrepreneurs would believe that it’s great to raise venture capital at the start – but is it really?

While many successful companies did raise venture capital early in their life cycle, yet there are many more that did not – Microsoft, HP, Dell are three such examples. Closer home Infosys, HCL and Reliance and many other first generation successes were bootstrapped and built the hard way. The fact is that most successful companies and most successful entrepreneurs reached where they have without raising venture capital.

In the company where I work – we managed to get external funding only after we had bootstrapped for ten years.We were delighted to raise capital when we did. However in hindsight, it was the bootstrapping experience that taught us valuable lessons that saw us through the later years.

There are many learnings you get by bootstrapping.

First bootstrapping is a test of commitment – if you are really committed to your idea you will muster up the courage to quit your salaried job, put in whatever little capital you have or can raise from friends and relatives, tighten your belt and somehow begin to execute your idea. If you aren’t willing to bootstrap then question your entrepreneurial motivation. VC’s understand this and they prefer to invest behind good teams that are bootstrapping rather than behind professional managers who are still in secure jobs but have a nifty powerpoint presentation.

Bootstrapping helps you to validate your concept for yourself, your team and prospective investors. Validation of the concept would mean that the startup team is in place, the product is ready and there are a few paying customers who are happy with the product and are willing to buy again and recommend it to their friends.

Once your concept is validated investors come in with much greater confidence and give you a much higher valuation then they would have at an earlier stage. You get to keep a larger share of your company for the same money. Most entrepreneurs don’t realise the importance of this until much later – should the company go on to become valuable.

Bootstrapping makes you stretch 24x7. It makes you think about survival, about how to break even, about where the next rupee is going to come from and about where it should be going or not going. You innovate more, you prioritise and focus on the essentials. You manage your cash flows better, you go out into the field and sell to customers yourself and you put in twenty hour workdays if required. It instils a culture of frugality in the company. This is a priceless asset.

At Naukri when we were bootstrapping, we had to break even to survive. We found ways of doing that - somehow. So by the time we raised money what we had to do was to scale up and enhance a validated business model. The fiscal discipline that bootstrapping enforced on us is now a part of our DNA. It ensured that we went through the meltdown and became profitable with 40% of the capital that ICICI gave us still in fixed deposits in the bank.

Bootstrapping ensures that you recruit missionaries and not mercenaries – after all you won’t have the money to pay high salaries. You will pay then in stock rather than cash – non believers will simply not join you. This core group of believers will be the people who will see you through the tough times that every early stage must go through.

It takes a lot of time and effort to raise money – preparing the pitch and the plan, doing the rounds of the investors and meeting the interested ones several times, negotiating and signing the term sheet, dealing with lawyers, going through the due diligence and negotiating and signing the final agreement. It is a six month process if you are lucky. This is precious time you can spend instead on building the product, putting together the team and finding paying customers.

And then after you raise the money you have to manage the investor – and that too takes time. The fact is that when you raise money you don’t just get the capital – you also get the capitalist. He will be on your Board and he will have ideas and suggestions to give – it’s called value addition. And he will have disproportionate powers. But you might want to do things your way. In such a situation it might be a good idea to take the business forward till you have something concrete to show and then raise capital.

So, commit yourself, validate an idea, build a team, be an entrepreneur, bootstrap now, raise money a little later.

Entrepreneurship - It's not about the money

I recently began writing a monthly column on entrepreneurship in The Mint. My first piece is reporduced below. What this means is that I will post on my blog at least once a month.

Entrepreneurship is a much more celebrated term today than it was till the eighties. The world has turned around to look up at people who have executed innovative ideas to create value. Entrepreneurship as a career choice has gained social acceptability among the educated middle classes in recent years. I have been on this path for nearly twenty years now. Friends have always ribbed me about the fact that I preach entrepreneurship, but we started a job site - Naukri.com.

Today entrepreneurship is going beyond mere social acceptability and even getting to be fashionable as a career choice. A large number of people are doing start ups – many of them out of a sense of herd mentality, after getting inspiration from hearing the stories of entrepreneurs who founded successful companies. This is a worrying trend.

There is a misplaced sense of romance about entrepreneurship. I would like to caution those considering doing a start up that the early days of struggle of successful entrepreneurs seem romantic to observers only in hindsight. When you are actually going through it – there is a lot of pain. And for every poster boy success in entrepreneurship there are a hundred who are still struggling. The failure rate is high.

The first thing to understand is that entrepreneurship is not about getting rich. Sure if the company you start does become successful chances are you will make money. However that is a happy incidental outcome. It should not be the main object of the endeavour.

If you want to be an entrepreneur in order to become wealthy – my suggestion is don’t. There are very few entrepreneurs I know who succeeded without a longish period of financial struggle, belt tightening and personal sacrifice.

More often than not success will take longer in coming than you think. There will be times when at the end of the month there will not be enough money to pay the office rent and employee salaries – but you will somehow scrape though. There will be times when you yourself will not be able to take home a salary for months. There will be years on end when you will be financially the worst off person in your batch from business school. During these years you will need to make compromises on your life style – the house you are able to afford, the car you drive, the holidays you take, the restaurants where you eat and the schools your children can go to.

And all this without any guarantee of success, in search of the big idea, hoping for venture capital funding – years without any light at the end of the tunnel.

During times like this only your passion, your commitment to the idea and your stubbornness will see you through.

So before making the jump ask yourself a question – will I love doing this for the rest of my life even if I am not financially successful? If the answer is a clear yes – then you have passed the first test of commitment.

Then, when is entrepreneurship a worthwhile career to pursue. If one in hundred will succeed surely it is an irrational thing to do.

You should become an entrepreneur only if you believe that that is how you will find fulfillment.

Entrepreneurship is about freedom, creating, a chance to build a brand, an institution, showing the world a new way of doing something, being your own boss, creating a legacy that will outlive you, identity, making a difference, obsession, ego, having a shot at something big, doing what you love, innovating, doing things your way……..

Whichever way you want to put it – it is about finding meaning in your life.

Yes it is an irrational thing to do – if you are well educated and you have a good career ahead of you as a professional manager.

It is an article of faith. A bit like religion. Or as my friend Nikesh Sinha eloquently put it – it is like falling in love.

It’s an irrational choice.

Lessons of history learnt seven years ago

If experts are to be believed, the Indian economy is entering a phase where money will be slightly tighter than a year ago, growth slightly slower, margins lower and valuations somewhat more modest. While I do not anticipate a meltdown anything like the one in 2000, it is important to learn the lessons of history. On Dec 24, 2000 I wrote the following article in The Pioneer newspaper.


The Story of the Year - The Dotcom Bust

Dec 24, 2000

A little over a year ago, I met a well-known NRI who was visiting India from Silicon Valley.

He asked me how the dotcom I worked for was doing. I proudly told him that we were making a profit, that we weren't running a dotcom but a business, that we actually charged people for our services, that when we had started out three years earlier, dotcoms hadn't been fashionable and that we also intended to be around when dotcoms were no longer fashionable. He told me with a straight face that I had a vision- problem and that I wasn't thinking big enough. If we were making a profit then we couldn't be investing enough in the business. I was crestfallen, for many regarded this luminary as some sort of guru.

A little over a year ago, I thought the world had suddenly gone mad. You could get really serious money on just an idea and a presentation if you told your story well enough, that is. You couldn't throw a brick in this city without hitting someone who had either started a dotcom or wanted to start one or worked for one or wanted to work for one or was funding one or wanted to fund one.

All you needed to talk "millions of dollars" was an expense plan that was outrageous (the higher the expenses, the bigger your vision) and revenue projections that were mostly fiction. The latter were supposed to be worked backwards after seeing which numbers would justify your target-valuation. Valuation was the instrument you measured your manhood with the "mine is bigger than yours" syndrome never mind that the valuation was notional and you could never hope to get that kind of hard cash in your `personal' pocket. All the time of course, you looked people in the eye and said that you weren't in it for the money it was the opportunity to change the world that excited you.

Many wannabe entrepreneurs and their backers failed to understand that there is one set of competencies needed to build a website and another quite different set to run a web-based business. It was assumed that if you could build a good site you would have a successful web business. Frankly, there were too many people chasing valuations and too few actually trying to service customers. Most dotcoms did not have a long- term outlook to their business. Almost all promoters wanted to cash out within a year or two. Fuelling this charge were media reports of Indiaworld selling out to Satyam for Rs 500 crore in cash. That no other entrepreneur in India was able to cash out of his dotcom for a large sum of money, is another matter altogether.

As lakhs of people jumped onto the Great-Indian-Dotcom-Bandwagon in the hope of making millions overnight (not entirely unlike the KBC craze today), I slowly began to come around to the view that perhaps it was I who was old fashioned and the world reasonably sane. Sadly, before I could be completely converted, the Great Dotcom Boom of 1999 had metamorphosed into the Great Dotcom Bust of 2000. The transformation was so sudden that most people went into a state of denial for the first few months "It's a temporary correction, we expect valuations to recover in a few months," went the refrain. As reality begins to sink in and the corpses of once trendy dotcoms begin to wash up on the beach, it is useful for us to collectively contemplate on our respective navels and ruminate on why the dream went so horribly wrong.

The most fundamental lesson from the dotcom fiasco is that, for most of us, there is still no quick and easy way to get rich. Most instantly successful companies take over 10 years in the making. Sadly, even in cyberspace, there is no free lunch. In order to realise value, you have to first create it. You need customers and you need to offer them a value-proposition. You need to sell them something that they want and you need to charge them an economic price for it. You need to provide quality service to customers and you need to focus on terribly unsexy things like the backroom, logistics, fulfilment and customer complaints. You don't need to run an idea, you need to create a business. Most of this stuff is pretty boring and old-economyish – far removed from the dreams of the starry-eyed 20-something MBAs, who were
funded by other 20-something MBAs who worked at the VC firms.

One of the major reasons why the dream went sour is that most dotcoms grossly overestimated the impact the Net would have on India. It was believed that what the Net did in the US, it would do in India. However, the reality check is revealing. The Net has a penetration of 40 per cent in the US and less than 0.2 per cent in India. In other words, 99.8 per cent of India does not have Net access. That is to say, even with a 500 per cent growth in Net penetration, 99 per cent of the population in this country would not have Net access. This would seem to seriously limit the market for products and services offered by dotcoms in India. Of course the Net has not lived up to expectations in the US, even with a 40 per cent penetration.

But then overestimation of market size is not new to India. Remember the myth of the 200 million-strong Indian middle class with the alleged purchasing power of a European country. This myth drew many an MNC to launch luxury products in India, only to learn the hard way that the market size was a fraction of what was believed earlier. Executives in many companies manufacturing breakfast foods, luxury cars, scotch whisky and expensive sneakers will privately testify to this.

Coupled with the overestimation of market size was a rapid overcrowding of the dotcom space without any anticipation of competitor moves. This sort of herd mentality led to a bizarre situation where within three months, the number of women's portals went from zero to fourteen, none of which had a viable revenue model. At least one CEO of a woman's portal has told me that had he known, prior to launch, that competition would intensify so rapidly, he would have shelved his project.

This herd mentality among entrepreneurs was fuelled by competition among VCs to fund dotcoms. There was far too much money and too few good investment opportunities. Purely to get market share, many VCs made sub optimal investments. For a while it looked as if VC grew on trees. Valuations were unreal but the VCs didn't mind, as long as there was someone ready to give an even higher valuation in the next round of funding. It was like a high-stakes game of passing the parcel where as long as the music was playing, nobody got hurt. But then valuations could not stay divorced from intrinsic value for very long and the music stopped, very suddenly.

A problem that industry pundits did not recognise as one, till it was too late was the use of proxies as evidence of success. Hits, page views and visitors were parameters used to value businesses. Whereas conventional logic would suggest that the real health of a business should be measured by revenues, costs and profits. Beyond a point, dotcoms and their cheerleaders were unable to sustain the myth of the validity of such proxies.

Another myth which was perpetuated was that if you spent a lot of money on advertising, you built up brand equity and barriers to entry, which in turn built up your valuation. The net result was that many dotcoms that got funding, spent recklessly on advertising without sufficient scrutiny of how this spending was going to build the business. But that's easy to do with a clear conscience if you are spending someone else's money.

Even companies which had funding, which had built a good site and had in theory at least a viable revenue model, discovered that it takes time to get people to change habits. E-commerce sites quickly discovered that getting visibility and traffic is only part of the story. The reluctance of customers to order on the net without touching and feeling the product limits the potential of e-commerce in this country, at least in the near term.

Yet, there is a silver lining even in this cloud. The dotcoms that survive the shakeout and do not lose sight of their fundamental business objectives, will emerge stronger and thrive. To do that, they will have to understand a few ground realities: They are not running a dotcom but a web-enabled business. The Net is not a business but a channel of communication. That they need to build a business first and build the dotcom around it, and not the other way around. That they need to chase the right metrics - customer satisfaction, revenue and profits are in and page views are out.

That overheads should chase turnover and not the other way around. That a brand is not built by advertising but by customer experience. And that they cannot spend money that they cannot hope to earn.

The dotcom is dead. Long live the dotcom.

On the state of Indian entrepreneurship

A couple of weeks back I wrote this piece for The Mint newspaper on the state of Indian entrepreneurship.

It has been 17 years since I quit my marketing job in a well known MNC to embrace the topsy turvy world of entrepreneurship. At that time it was rare for a somewhat educated young Indian to pursue a career that did not offer the security of an assured monthly pay check. Those of us who decided to take the road less travelled were considered oddballs by people of my parents’ generation: “Arre Sanju itni acchi naukri mein tha, IIM ke baad ye sab karne ki kya zaroorat thi”, was the question my parents would often be asked.

The contrast with the early 1990s is visibly stark now. Just a month back, Hitesh and I spoke at the Tie Entrepreneurial Summit in Delhi attended by more than 1,600 people—many of them start up entrepreneurs and an equal number aspiring to be entrepreneurs. Every month at our company we get dozens of requests for mentoring, funding, partnerships and alliances from young entrepreneurial companies. The start up scene in India is buzzing.

Today, when I meet parents of young entrepreneurs they don’t hesitate to tell me--and it’s with a tinge of pride--that their child is doing a start up with a couple of his friends from business school: “aajkal start up ka bahut trend chal raha hai, you know.” It is now socially acceptable, perhaps even respectable, to be a struggling entrepreneur.

In 2008 we can expect this trend to continue unless there is a global meltdown like the one in the year 2000.

There are a number of other, related changes that have also taken place. Organisations such as Tie have created a platform where start up and wannabe entrepreneurs can network, learn and receive mentoring from successful entrepreneurs, investors, consultants and domain experts.

An entire entrepreneurial eco system has sprung up.

Venture capital is now available. Of course not everyone has the good fortune to get funding—but at least it is available for most good teams and good ideas. Two decades ago there was only one real VC firm in India—TDICI which went on to become ICICI Venture. It was very early days—we had never actually met anyone who had received venture capital (we just read the odd article about it in business magazines), we did not understand it and did not know how to go about getting it—and therefore never even considered it as a source of funding. We struggled for months to get an OD limit of Rs30,000 from Bank of India—and we got it mainly because the manager was a nice guy who felt sorry for us—by all banking norms we did not deserve it. Finally we raised VC 10 years after I had become an entrepreneur.

A very recent trend is the emergence of Indian investors into VC funds. Up until now VC firms would raise money overseas and invest in Indian companies. Now wealthy Indians are investing both as angels and also into VC funds. I expect this trend too to gather momentum in 2008.

As a consequence of all these changes a new class of entrepreneurs has emerged in India—well educated, first generation and with experience in the best in class companies. It is these entrepreneurs and the companies they build that will be one of the major engines of growth for the Indian economy in the decades to come.

Today, almost every business school in India has an entrepreneurship cell and actively promotes it as a viable career option for its students. Twenty years ago entrepreneurship was a fringe movement at business schools. It is now mainstream. However, even as more fresh business school graduates are likely to become entrepreneurs in 2008, it will be tough for most to get funding since investors value experience, domain expertise and a proven track record.

To them and to others who want to become entrepreneurs, I would like to say that today there are role models for young entrepreneurs to emulate and to get inspiration from—right here in India and not in Silicon Valley. When you are starting out you are hopeful about the future but you are also afraid of the uncertainties. And rest assured as an entrepreneur you will face adversity and your commitment will be tested.

We struggled for 13 years before we could call ourselves somewhat successful. At times like this it is good to talk to people who have been through the entrepreneurial journey a few years before you. This kind of emotional support can keep you going when times are tough—for the greatest success factor for most entrepreneurs is persistence, not brilliance. Keep at it long enough and sooner or later you will get lucky, is what I say.

2008 is just a beginning.

The HoneyBee Network

I recently wrote a piece for The Financial Express in the "I Admire" section.

It is about a remarkable person and a remarkable organisation.

The HoneyBee Network was incubated by Prof. Anil Gupta at IIM Ahmedabad in 1988. The Network uncovers and documents grass root innovations from rural and small town India and tries to spread the knowledge and helps the inventors get a fair economic reward for their creativity.



In the last twenty years HoneyBee has documented in its online database more than 70,000 inventions by innovators in rural India. These include – a cotton stripping / plucking machine, a manual milking machine, a coconut tree climbing device, a garlic peeling machine, a device to draw water from wells, herbal remedies, a cowdung powered cell phone charger, a plow and weeding device that can be attached to a motorcycle, a low cost cell phone based switch for household appliances and farm pump sets, a beach cleaner made from an adaptation of a groundnut separator, and a walnut peeling machine among others.



The Network has filed for more than 142 patents and more than twenty have been awarded.



HoneyBee gathers ideas by staying in touch with people in rural India. Apart from a continuous stream of ideas that now walk in through the door the Network conducts Shodhyatras every six months. Basically a group of Networkers led by Prof. Gupta travel through selected parts of rural India over several weeks meeting people, uncovering innovations and recognising and rewarding inventors.



Several companies have come forward to license some these innovations and commercialise them. The Network thus is able to disseminate the innovations while protecting the intellectual property rights of the inventors and ensuring that they get a financial reward.



So how did the Network come about. Prof. Gupta was working in the area of agricultural economics and rural development at IIM in the mid eighties. He spent a lot of time in villages talking to farmers to gather data for his research studies. He would publish his research papers and would travel all over the world to speak at conferences. However he was always plagued by a sense of guilt – he was doing all this but the farmers who gave him the knowledge were getting nothing out of it. He wanted to rectify this injustice.



When I was his student at IIM around that time Prof. Gupta once told me that there is a lot of indigenous knowledge in rural India that is undocumented and may be lost to future generations with the advent of modern technology from the West and he was planning to document it. At that time I did not realise the importance of what I dismissed as a noble idea casually suggested over a cup of tea in his home.



Over the years however from a small beginning in a cubicle at IIM Ahmedabad, the HoneyBee network has created an entire ecosystem where indigenous knowledge and rural innovations are documented, inventors are recognised and rewarded and innovations are marketed to companies.

On sledging, racism, animal references and double standards

It took a New Year Resolution and injustice on the cricket field to get me to post to my blog.

Enough has been said about the umpiring and the Aussie attitude in the test series.

The important thing is that the rules should be the same for both the sides and they should be made explicit before the game starts.

So if Virender Sehwag is suspended in South Africa for appealing for a taking a catch which wasn’t then should Ricky Ponting, Adam Gilchrist, Andrew Symonds and Michael Clarke be. Or are the rules different for different sides.

If most sledging is OK but some terms are deemed racist therefore some forms of sledging are not acceptable while others are - then let the ICC publish the rule book of sledging - what sledging is OK and what is not, with illustrated examples, a dictionary etc. "Sledging for Dummies" or "Sledging - a Users Manual" are two possible titles for the tome.

For instance - it is apparently OK for Glenn McGrath to ask a West Indies batsman what a certain part of Brian Lara’s anatomy feels like because it is a non racial macho Aussie thing to say – basically gutter level personal abuse is OK in the gentleman’s game but not anything to do with race. We in India need to be educated in the tradecraft - we are but beginners in the subject.

Or should action be taken against all forms of abuse.

For the record let me state that calling someone a monkey does not have racist connotations in India – in fact a monkey is a revered animal here and one of the major Indian Gods is the monkey God Hanuman. However that is no defense since calling a person of African descent a monkey does have racist overtones and carries with it offensive historical baggage relating to the way people of African origin were regarded by their white colonial masters whose descendants today are railing against racism, and who resisted breaking off cricketing ties with a South Africa under Apartheid till they had no choice, (the very foundation of the colonial age was built on a notion of race superiority - ask the Tasmaninian Aborignes), and therefore this should not be done – but maybe many in India do not understand the sensitivity of the matter. Is there a cultural gap here.

The joke doing the rounds in India is that when an Australian child learns to say the word “Mother” for the first time the parents say “Two cheers. Junior has learnt half a word”. For the Australian team to complain about sledging and occupy the moral high ground on this issue is a bit thick.

I guess they were getting a taste of their own medicine in the World Cup 20-20 and in India and were perhaps suffering from some not inconsiderable indigestion as a consequence.

Harbhajan made a mistake if (and only if) he referred to Andrew Symonds as a monkey. Wrong choice of animal mate - you should have used a reference to some other noteworthy mammal to respond to Symonds’ abuse - swine or dog come to mind as possible candidates - they are pure insults and carry with them no racist overhead. For good measure add on “non-monkey”. After all you cannot possibly be called racist if you say someone is not a monkey. “You mother*%$#ing, snivelling, lilly-livered, non-monkey, son of a swine” logically ought be acceptable sledging in the ICC and Australian lexicon.

This error by Harbhajan (if he indeed called Symonds a monkey) gave the Aussies a handle to turn the tables on the Indians by raising the racism issue. The Indians need to learn from this and refine their sledging strategy. It needs to be more nuanced and must take into consideration the subtler shades of meaning of various insulting and abusive terms and what they mean in different cultural contexts - someone in the Indian camp needs to think this through. India needs a specialist sledging coach (anyone for Gregg Chappell for this position - after all he is Australian and should be good at it).

But be happy India - in colonial times it took the word of ten Indians to overturn the testimony of one white man. Today you need to have two white witnesses to overturn the testimony of one Indian.

The world is indeed getting more and more flat. Indians have been accepted as honorary whites - capable of racism against people of African origin, which was earlier the preseve of whites only.

Feels a bit odd though - white people accusing Indians of racism.

But have we heard the last of this.

We have a situation where a white match referee (from a country that till very recently practised the worst form of racism as state policy) takes the word of two white witnesses (who are not neutral) over that of one Indian witness (who is not neutral) and without any independent witness or corroborating evidence (no video, no audio, nothing heard by the umpires – can’t blame the umpires though they seem to be deaf as adders and blind as bats and just in case this is a racist slur I voluntarily ban myself from selection for the Indian team for the foreseeable future) bans an Indian player (who the white Australian captain finds himself incapable of playing and so will benefit from this ban, and it was this Australian captain who insisted that the racism charge be laid at Harbhajan’s doorstep).

Hmm. Food for thought perhaps