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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.


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