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Thursday, November 30, 2006

IT's loss is Elevators' gain...!

After marriage & travel portals, retail chains, restaurants, construction and real estate now it’s the turn of a rookie sub-group to hog the PE / VC limelight in India. Elevators. The boom in the construction industry has contributed significantly to the business of elevator manufacturers. Especially in the western state of Gujarat. According to the industry sources, the demand for elevators is likely to go up by 25% this year. Naturally PE / VC firms who originally came to India to invest in its growing IT / ITES segment, wants a slice of this too.

It all began with OTIS Elevator Company forging a JV with TRIO Elevators of Ahmedabad, Gujarat. Later Kinetic Elevators was tracked down by Morgan Stanley for a piece of its action. Grapevine has it that another local player ORBIS is in talks with a European Elevator major. Thyssenkrup is also lurking around scouting for local JVs.

What is driving these deals…? Reason is not so hard to find.

Good distribution network, strong local brands, competitive pricing and effective maintenance have made these companies attractive for large no. of foreign players. PE investors are more or less assured of a surer, lucrative and faster exit on the back of a sizeable Indian market, where more and more middle class people ( estimated to be 300 – 400 million ) are attracted to living in skyscrapers, shedding their stodgy pads in 3 – 4 floored buildings – minus the elevator comforts. This growth is fuelled by rising salaries, general buoyancy in the economy which is growing at 8% + and quick and easy Mortgage financing options available now.

That’s part of the story.

Yet another reason is – desperation. VC firms realised soon after opening their offices in India that its famed IT sector offered little opportunities for early stage investments. They expected too much from their US educated Indian Managers ( who had their stint at the global HQ before their posting in India ) to evaluate good early stage IT investment opportunities. Big mistake. The 30 somethings whom they have relied upon proved to be just “ego balloons” who would not step out to scan the ecosystem, but would depend on a handful of investment bankers to bring them the deals. I-Bankers as a breed are known to stick only with big ticket deals – which are not available in the startup space. Result - the startups never get noticed, much less funded. The millions of $$ raised by India focused early stage VC firms idle and the seed stage VC firms began transforming themselves soon into late stage champions. What IT lost, Elevators gained.

Where did the balloons go wrong…?

In understanding the Indian entrepreneurial environment. They were looking for a completely bootstrapped company, post beta, with a star studded Board of Directors / Advisers, early revenues and repeat customers. To achieve this milestone, on an average the startup entrepreneur should have an initial capital of at least $ 50 k - $ 75 k. This in a country where 40% of the 1.1 billion population live with just under $1 a day.

While it’s true that the situation is slowly improving, there’s quite a few miles left to be covered. Most of the startup entrepreneurs are fresh graduates whose educational loans are yet to be repaid. Unlike in the US, in India Colleges do not offer liberal scholarships, graduate / teaching assistance fund support. It's the middle class parents who undertake to fund their children’s education till the graduate level at least. They put up with a lot of struggle and financial misery to let their children complete their graduation. Naturally, not many graduates, no matter however bright they may be, can think of seeking the parent’s help to fund their startups. This is what the son-of-a-rich-dad Ivy league educated, balloon will not understand or conveniently, pretend not to. In 90% of the cases, he'll blame it on the bad business plan presentation by the founder instead. Ask the balloon what's a good biz plan ? Na, Na...that's not my job. Oh, my God...the startup is not "VC ready"...!

How to dance with the Indian startups then…?

First prick the balloon and his ego. No short cuts. Indian balloons will have to step out of their office suites and rub shoulders with the the entrepreneurs at various incubators and Technology parks. Give them real strategic support besides your money. (The balloon has no clue about this.) Guide an entrepreneur to gauge a market need and put together a team to build a technology that can be sold. (This is what the balloon is `supposed' to do. But with his background of having done a summer at Morgan Stanley running some errands followed by a couple of years at Mckinsey drawing charts / compiling survey reports - if he is posted as a VC in India, don't blame the suits him to be arrogant so that he could cover his ass. He's neither a proven Engineer, nor has ever sold a Hershey's to a kid, but is wide-eyed and aspiring to spell D . E . A . L before anything else.... Had he done any, he would be busy doing more....wouldn't he be...? )

Get local and real. In India, you can do with much less early stage funding. For starters, don’t talk in millions of $$ - talk in `lakhs’ of Rupees ( 1 lakh = 100 k ). The balloons will not do that for the fear that their US education would not be highlighted otherwise...!!!

My visits to the numerous incubators have revealed that there are of course many interesting businesses that are being founded. It’s way too below the balloon’s dignity to ferret them out and breath some life in. If only were these balloons replaced by locally bred, genuine, mature, down-to-earth Indian business minds ( the Ivy league educated, JP Morgan trained is a strict No No ) – Indian IT startup scene would be dramatically different.

Saturday, November 11, 2006

Web 2.0 entrepreneurs - doing more with less…

1k = 1mm…?

In the recast VC dispensation of boom 2.0, it seems it is….!

Several venture firms are seeking to adapt. Just last week, Charles River Ventures announced it would offer loans of $250,000 to entrepreneurs as a way to gain access to promising start-ups.
Other firms are also giving out small loans, albeit not as a part of any formal program. CRV has also put up a calculator in their site to decide the convertible ratio ( at a 25% discount, of course ) by the borrower.
For its part, Mohr Davidow Ventures has increased the number of “seed” investments — small sums given to embryonic companies — to about 10 a year from 5. And Union Square Ventures, which was formed in 2003, has made nearly half of its investments at $1 million or less, a departure from its initial plan to make first-round bets of $1 million to $3 million, according to its Web site.

Then there is Paul Graham’s Y Combinator, whose rule of thumb for investing in start-ups is $6,000 per employee. One of its investments, Reddit, was acquired last week by Wired Digital, which is owned by Condé Nast Publications, for an undisclosed sum.

In the last couple of years, hundreds of other Internet start-up companies in Silicon Valley and elsewhere have followed a similar trajectory. Unlike most companies formed during the boom 1.0, which were built on costly technology and marketing budgets, many of the current crop of Internet start-ups have gone from zero to 60 on a shoestring.

Some have gone without VC $$ altogether or have raised far smaller sums than venture investors would have liked. Many were sold for millions before VCs could even get in. That has been a challenge for VCs, who have raised record amounts in recent years and need places to put that money to work.

I think there is in the V.C. community a sense that the rules have changed or are changing. How does the V.C. who is set up for a model that requires millions, if not tens of millions, revamp for a different scale…? How do they cope….?

For smaller funds, the economics are far different.

For starters, those who manage them do not earn huge management fees. Instead, they are almost always among the largest investors in the fund, so they will earn a return if the investments pay off.

In the boom 2.0, several forces are allowing companies to operate cheaply compared with the boom 1.0. They include the declining costs of hardware and bandwidth, the wide availability of open-source software, and the ability to generate revenue through online ads.

As large firms try to go small, they are encountering a new crop of competitors who are happy to bankroll start-ups on the cheap and are fueling the current Internet boom. They include a large pool of angel investors and a number of small venture funds whose specialty is to invest tens of thousands of dollars, or hundreds of thousands at most - only.

I am beginning to like it….! Know why...? Indian VCs have a habit of following valley trends...
Ah, you get it now…!