Vinit Nijhawan: Serial Entrepreneur, Venture Capitalist

Global warming and US entrepreneurs

I was at a "Go Green" dance in my hometown here is the Boston-area, sponsored by a local Global Warming Action group. It struck me as ironic and a bit absurd that we were revelling in order to raise money to save mankind's future on Earth. Yes a bit dramatic but, as the experts say, global climate change will have the most impact on emerging countries and not on the developed ones. So why should developed countries bear an unfair burden on reversing global warming? One could argue that the 150-year industrilization of developed countries made them wealthy and was a major contributor to our current climate woes. To now tell Brazil (rainforests), China (coal power plants) and India (coal power plants) to leapfrog to the latest costly enviromental standards is hypocritical at the least. On the other "invisible" hand, entrepreneurial first movers are favored, they amass huge wealth and use their incumbency to thwart insurgents. Technology or innovative business models are usually the weapons of choice. Ethnic Europeans have been the clear winners in this economic arms race in the recent past and deservedly so. What is the solution?

Some background on the the global warming debate (excerpted from various sources):

• From 1100 to 1500 AD significant deforestation took place in Western Europe as a result of the expanding human population. The large-scale building of wooden sailing ships by European (coastal) naval owners since the 15th century for exploration, colonization, slave – and other trade on the high seas and (often related) naval warfare (the failed invasion of England by the Spanish Armada in 1559 and the battle of Lepanto 1577 are early cases of huge waste of prime timber; each of Nelson's Royal navy war ships at Trafalgar had required 6000 mature oaks). Source--Wikipedia.

• In Michael Williams excellent book, Deforesting the Earth: From Prehistory to Global Crisis, temperate forests in Europe and North America were virtually eliminated by 1920. Tropical forests such as the Amazon began to be depleted relatively recently in the 20th century.

• The United Nations Intergovernmental Panel on Climate Change (IPCC) November 2007 report says: "There is also the moral/equity issue concerning the extent of the polluters obligation to compensate for past emissions (i.e., a form of environmental debt)..... "In particular, developing countries emit much less per capita and have contributed less to past emissions".

• From the Economist "How Green is their Growth": At the moment, perhaps 2 billion people have no formal access to modern energy—they make do with cow dung, agricultural residue and other solid fuels which are far from healthy. Unless foresight and intelligence are applied to the satisfaction of these people's needs, they may embrace the filthiest and most carbon-emitting forms of fossil-fuel energy as soon as they get the chance.

The grassroots climate change movement in the US is slowly creating change in the face of the failure of our government to regulate change. Innovation in business models (eg carbon offsets) and new technology (eg cellulose ethanol, clean diesel) is rapidly catching hold in the US. Many of us technology entrepreneurs are reinventing ourselves to participate in these new Cleantech opportunities. I am involved in the spin-off from www.degreeC.com of their AdaptivCool data center thermal management solution that can reduce energy consumption by 20-30% in a data center. Data centers consume 1.6% of the nation's electricity, and that consumption is doubling every five years.

Inspired US entrepreneurs have the opportunity to create the technologies that will make people's lives better in emerging countries, while reducing green house gases. This is a great way of paying our environmental debt to the world.

A Walk on the Dark Side

I have been part of the entrepreneurial ecosystem for over 25 years, mostly as an entrepreneur but also as a VC and angel investor. I firmly believe that the symbiotic relationship of entrepreneurs and smart capital is the key to economic development around the world.

I have spent the past six years either running VC backed startup companies or as an investor at Key Venture Partners. Here are some of my observations from my time on the Dark Side:

• If one rates what it takes to be a successful VC partner, sourcing deals is usually the number one task. Therefore it is surprising how many VCs are slow to respond to phone calls and emails from entrepreneurs, even when referrals come from trusted sources.
• The VC business requires long term thinking but very few VC partners are willing to invest in relationships with entrepreneurs that may not bear fruit for years. I believe that those VCs that develop long term relatioships, tend to outperform those that don't.
• Being a VC is learning how to drink from a fire hose. In the two years I was a VC I sourced 220 deals and invested in one company. That doesn't count all the other deals that we discussed in partners' meetings. One has to develop judgement on a deal very quickly even if it means that you may decline what turns out to be a good deal.
• My philosophy in dealing with entrepreneurs was that I always gave something back to them for the time they spent with me. Even if I declined to invest I would give them a VC or customer lead, or some advice about their business. In my view, this created the foundation for a longer term relationship. Many VCs have lost sight that they are service providers to entrepreneurs not the other way round.
• As experienced entrepreneurs know, not all VC partners add value to their portfolio companies. Some can even add friction to the governance process and can be distracting for management. Usually this results from differences in opinion about exit timing but also sometimes from ego issues.
• I thought hard about how we as a firm might add value to our portfolio companies. One area that a CEO is responsible for but always seems to get relegated to lower priority, because day-to-day operations take precedence, is exit planning. At Key Ventures we developed an exit template for all our portfolio companies that included: investment banks with relevant focus, analysts, potential acquirers (and we built a relationship with their VP Business Development), public company valuations, etc.
• It is known that serial entrepreneurs matched with serial VC partners generally leads to successful companies. The problem, in my opinion, is a shortage of serially successful VC partners in the US and especially in Massachusetts. I have joined Boston University's Institute for Technology Entrepreneurship and Commercialization and will endeavor to address this shortage by researching what makes the good ones so effective and then teach these best practices to aspiring VCs.
• The symbiotic relationship between entrepreneurs and VCs is recognized as the best way to develop an economy. It has been over 60 years since General Doriot and others founded American Research & Development Corp. (in June 1946), the first organised venture capital firm. In 2006 venture-backed companies' revenue made up 17.6% of the GDP and 9.1% of private sector employment in the US according to the NVCA. Similarily China and India have accelerated their economic growth rates as a result of unleashed entrepreneurial energy in the past 20 years. The rest of the world is now adopting this model.
• I believe this model needs some tweaking in the US as it gets applied to new innovative industries such as life sciences, energy and nanomaterials.

Predictions for 2008

Here are my predictions for 2008:

1. Buzz--The buzz topic of 2007 will continue to be energy and cleantech. We will see a huge growth in VC investments in such companies.
2. Exits--We will see a dramatic increase in cross-border M&A with many Indian and Chinese companies acquiring US and European companies.
3. National--We will experience a recession.
4. International--The Flat World concept (Friedman) will be replaced with the lumpy world (Ghemawat). Companies will have to deal with a global skills shortage in very local ways.
5. Mobile--Apple's greatest innovation in the iPhone is its browsing capability as a result the mobile internet will finally take off.

Here is how I fared with my 2007 predictions:

1. Buzz--The buzz topic of 2007 will be energy and cleantech. We will see a huge growth in VC investments in such companies. I was right on. CleanTech investments by US venture capital firms reached $2.6 billion from 168 deals in the first three quarters of 2007, according to data from Thomson Financial and the National Venture Capital Association. The year to date 2007 dollar volume represents a 46% increase over full year 2006 dollar volume.
2. Exits--After a six year hiatus Nasdaq IPOs are back and we will see a significant increase in Nasdaq technology company IPOs. Again I was correct. In the US there were 224 IPOs, raising $50bn. Additionally, Europe had a record year with a total of 651 IPOs, raising $90bn.
3. National--We will see a slowdown in growth and may even experience a recession. I was partially correct, the sub-prime crisis did cause a dramatic drop in the housing market but while the overall economic growth slowed, there was no recession.
4. International--There will be significant growth in US VC firms investing in India, especially in Infrastructure related growth opportunities. I was dead on. India is expected to place $13.5bn in VC/PE investments in 2007, up from $7.5bn in 2006. There are 366 PE firms operating in India with another 66 raising funds.
5. Mobile--The Apple iPhone will have disappointing sales. I was totally wrong, the Apple iPhone lived up to its expectations and is selling briskly.

Telecom’s new Epicenter: India, China

The acquisition of BCGI (Nasdaq) by Megasoft (Bombay Stock Exchange) for $65M continues the trend of Indian telecom software companies acquiring European and North American companies. Driving the trend is the growth of telecom, particularly wireless telecom services in emerging markets, particularly China and India. China now has 400M+ subscribers and India 150M+. Indian telecom technology companies are benefiting as suppliers to Indian wireless service providers. India is a highly competitive wireless market with five equal players generating profits at subscriber monthly revenue of $8/month (as compared to $50/month in the US). Suppliers to wireless carriers have to provide their products and services at a third of the price they would garner in the US or Europe. As a result these suppliers are very competitive globally. Additionally the capital markets in India, both venture and public markets are frothy so Indian telecom companies can readily raise cheap capital for acquisitions. Indian telecom companies can reduce the operating costs of any US or European acquisition and thereby make money losing companies such as BCGI immediately profitable. Also the Indian rupee has been appreciating against the US dollar so acquisitions are becoming cheaper for India companies. BCGI is yet another story of a Boston company that was not able to diversify its product and customer base in boom times and as a result was not able to survive setbacks in tougher times. BCGI provides outsourced prepaid billing services to US wireless companies and their largest customer Verizon decided to bring prepaid billing in house. Additionally, BCGI lost a patent case and the resulting payouts crippled them financially. I predict we will see many more acquisitions of Boston area technology companies by Indian and Chinese companies (especially if China strenghthens their currency). Sadly this continues the trend of local companies selling out, first to Silicon Valley and now to Bangalore and Beijing.

Predictions for 2007

A little into the year but here are my predictions for 2007:

1. Buzz--The buzz topic of 2007 will be energy and cleantech. We will see a huge growth in VC investments in such companies.
2. Exits--After a six year hiatus Nasdaq IPOs are back and we will see a significant increase in Nasdaq technology company IPOs.
3. National--We will see a slowdown in growth and may even experience a recession.
4. International--There will be significant growth in US VC firms investing in India, especially in Infrastructure related growth opportunities.
5. Mobile--The Apple iPhone will have disappointing sales.

BTW, here is my scorecard on my 2006 predictions:

1. Buzz--Like Web 2.0 was the buzz topic of 2005, the buzz topic of 2006 will be video over the internet. We will see an explosion of amateur video content creation with distribution to PCs . I was dead on: Google acquired YouTube for billions, and internet video companies raised hundreds of millions from VCs.
2. Exits--We will see many US technology companies looking to exit on the London Stock Exchange's AIM exchange which has a lower hurdle than Nasdaq but is increasingly providing liquidity. I was partially right, there were a few AIM listings but not as many as I thought there would be.
3. National--After being eclipsed by silicon valley in 2005 Massachusetts will be back: companies to watch are Airvana, Netezza, Starent, Virtusa, Airwide, Confluent Surgical. I was dead on: Airvana, Netezza, Starent and Virtusa all filed for Nasdaq IPOs. Confluent Surgical was acquired for $245M by Tyco. The CEOs of all these companies will be on a panel at www.tieconeast.com on June 16th. Airwide added over 15 new wireless operator customers.
4. International--Indian IT companies will acquire US and European IT companies. I was dead on: 60% of total M&A or $8.4B was outbound M&A, though pharma was in the lead and accounted for $2.2B. IT M&A was second.
5. Mobile--Music downloads to cellphones (songs not ringtones) will become a billion dollar market. Wireless broadband for "last-mile" internet access by companies will expand dramatically. I was partially right, Clearwire had a billion dollar IPO. Music downloads grew more slowly than wireless "last mile".

Craigslist, monks and Nantucket

I just returned from the 8th annual Nantucket Conference (www.nantucketconference.com), an elite gathering of Boston's VC, CEO and entrepreneurs. As always it was a thought provoking two days and a time to solar charge my batteries with the early summer weather.

Besides the panel I moderated on CEO-Board relationships (:-)), I found Jim Buckmaster, CEO of Craigslist the most fascinating panel at the conference. Jim was interviewed by Jessi Hempel, Innovation Editor of Business Week. Craigslist can best be described as a local community bulletin board, operating in hundreds of cities in the US and around the world. 20 million unique visitors visit Craigslist every month. The entire endeavor is run by just 24 people in San Francisco, mostly developers and customer service representatives.

Jim clearly had honed his responses to business journalists over the years and provided to-the-point, almost droll responses to all ofJessi's and the audience's questions. There was this sense of confusion and awe in the audience about the mission of Craigslist, a for-profit organization, not maximizing revenue and profits but serving their users' requests. In fact they generted revenue only when users requested it, for example with paid classifieds in a few cities. Jessi estimated their annual revenue to be $25M, but given their large user base, they could generate hundreds of millions of dollars in revenue annually. Jim kept reiterating that the company was not capital constrained in responding to users' needs and really had no need to generate more revenue.

I went up to Jim afterwards and remarked that the closest organizational parallel to Craigslist I could think of was an order of monks. Like Craigslist monks have a mission to serve their constituents, they raise capital to fullfill that mission (donations, selling homemade jam, etc.) and they can get distracted from that mission by accumulating too much wealth and heirarchy (eg the Catholic Church). Reforming sinners, or spammers in Craiglist's world, is part of that mission. Monks get by with minimal personal comforts and get pleasure in fulfilling their mission, similarly the software developers and customer service people (and Jim and Craig) get the pleasure of peer recognition in satisfying their customers and seem not to be motivated by personal wealth accumulation.

We watched a movie: 24 hours on Craigslist, which provoked another thought. Perhaps online communities like Craigslist could provide analytical fodder for measuring the health of real world communities. Analytical information such as job creation, etc is already being collected from online communities but I am thinking of things such as the mental health of a community. Data on Craigslist's user base in every city could be analyzed by academics for these kind of indicators.

I was having a discussion over lunch with Mark Heesen, President of the National Venture Capital Association (www.nvca.org), Don Dodge of Microsoft (http://dondodge.typepad.com/the_next_big_thing/2006/06/microsoft_looki_1.html) and others about this parallel for Craigslist and got quite a discussion going. Mark's observation was that for-profit organizations by focusing on growth generated jobs and that was beneficial to a community and that Craigslist was an aberration. While I am fully in agreement with Mark on job creation, many people, particularly younger people in the US are coming to the realization that personal fullfilment does not come from wealth creation alone. Maybe we should adopt Bhutan's measure of national wealth: GDH or Gross Domestic Happiness instead of GDP!

The World is Lumpy

I just read a thought-provoking article in Foreign Policy magazine by Pankaj Ghemawat www.ghemawat.org, a Harvard Business School professor on why the world isn't flat. The article was sent to me by Kirk Owen CEO of www.merscom.com, an online casual games developer with a global footprint. Ghemawat talks about the "10 Percent Presumption"--that by most indicators, on average, globalization is closer to 10%. One of the indicators he points to is long-term human migration which stood at 3% of global population in 1900 and was 2.9% in 2005. His point is that not only is the entire world not flat, but even where it is flat, it can easily develop a bump. For example with democracy there appears to be a groundswell movement back to socialism in South America. In fact for most of us in the U.S. we are constantly perplexed by citizen choices for governments that are detrimental to their well being, eg Hamas in Palestine. Yes the world is lumpy.

AT Kearney recently published their Globalization Index that ranks countries by how global they are: http://www.atkearney.com/shared_res/pdf/Globalization-Index_FP_Nov-Dec-06_S.pdf. Singapore (a city rather than a country!) ranks first. The U.S. ranks third, China 51st and India 61st. The only category that India is ranked high on is remittances! China on the other hand gets high marks for economic and FDI categories. All three U.S., India and China get low marks for the "personal" category, which makes sense since these are large countries the majority of whose populations do not travel abroad.

Having run one, I have personally experienced the rise of the "micro-multinational" companies. These are startup companies that an early stage company go global--for customers and/or talent. In some sectors early adopter customers are no longer in the U.S. or Europe, for example telecommunications where most of the innovative service providers are in emerging markets led by India and China.

Yes globalization is happening, then again it was happening in the 1400s when European powers spread and began becoming colonial powers. Even then the world was not flat but lumpy. The British ran India differently than they ran Kenya to accomodate local norms and conditions. Economic opportunities in macro terms tend to be the same around the world, people want food, shelter, clothing, education for their children, etc.. However there are local variations because of tastes, climate, culture and so on. Most importantly humans clearly like to be in geographically local communities. Growth on the Internet has been faster within countries than between them. Less than 10% of phone calls are non-domestic.

To get a global perspective in technology and life sciences attend www.tieconeast.com titled "The New World Keiretsu". There will be speakers like Ram Sriram who was an angel investor in Google and sits on the Google board, Governor Deval Patrick, and Dean Kamen the prolific inventor. This is the best conference in Boston to network with entrepreneurs, businessmen, financiers from around the world to get a perspective on our lumpy world.

The Battle of the Smartphone-- Google Phone vs Apple iPhone vs Microsoft

There is a huge amount of interest in the lowly cellphone, why, because a 960M of them were sold last year. The majority of them were so-called feature and entry-level phones. Only 50M or so were smartphones, the category that Google and Apple are planning to dominate by leveraging their ubiquitous branding and user interface (UI) skills. So what exactly are Google and Apple planning?

There has been a great deal of speculation in the blogosphere about the nature of the upcoming Google Phone: http://blogs.business2.com/apple/2007/03/photo_is_this_t.html and http://www.engadget.com/2007/03/15/google-exec-confirms-phone-in-the-labs/. Much of what is being discussed is nonsense. Here are my predictions:

Apple: Enough has been written on the iPhone's features but not on Apple's strategic moves. The most important is Apple sees the necessity of partnering with wireless carriers. This partnership is unlike the relationship other handset vendors have with carriers. Nokia, Motorola, Samsung and other handset vendors do develop new handset concepts but in the end they customise "standard" handsets to carrier specifications. Apple's iPhone is more akin to RIM where the carrier is a distribution channel for a standard iPhone handset. As far as the iPhone's two differentiated features: a touchscreen and voicemail integration, these remind of the Apple Newton, Steve Jobs' invention of the PDA category. It was not a huge success and I am betting that the iPhone will not be a huge success. It is very hard to change user behavior and the telephone keypad and Qwerty keyboard have been around for over 30 years. Nonetheless I hope the iPhone makes me a convert to touchscreens.

Google: Google's business model is slightly different for their Google phone. Google has spent more than $50M to acquire companies (i.e. Android) and software licenses to create a handset operating system (OS) that I believe Google intends to offer handset manufacturers for free (essentially open source like Linux). Just like most PC users enter the internet via Google's home page, Google's intention is to have cellphone users do the same by making their handset OS ubiquitous. So far HTC is running the Google OS on a handset but I believe many other handset ODMs will follow. In this business model the handset ODMs will offer the Google Phone to carriers for distribution.

Microsoft: Microsoft is about the release Windows Mobile 6.0. When I was CEO of Kinetic we developed the first Windows Mobile (then called Windows CE) vehicle computer using version 2.0. We were on the bleeding edge and soon discovered that Microsoft had no idea how to develop an embedded OS nor understood user behavior for mobile phones. Microsoft's strategy of connecting Windows Mobile to Windows Office appeals to large enterprises but I'm certain they will lose out in the consumer market. I was urging Microsoft's Windows CE product managers to focus on the enterprise market back in 1999 but they felt that market was too small. Just deserts--Microsoft sold just 10M Windows Mobile OSs in 2006.

Nokia: Nokia's wholly owned OS subsidiary Symbian is more ubiquitous than any of the other smartphone OSs as it dominates the high end of the feature phone market. My prediction is that Symbian will soon be used only in Nokia handsets. I also believe that it will be the big loser in the smartphone OS battles.

Motorola: Motorola is betting on all the above OSs including embedded Linux but not Symbian. They will eventually become like Dell, dependent on TI (equivalent to Intel in the PC world) and OS vendors.

The Coming Global Skills Shortage

There are a number of recent studies that connect entrepreneurship to the role of immigrants in the U.S.:

National Venture Capital Association: http://www.nvca.org/pdf/AmericanMade_study.pdf

Duke University: http://memp.pratt.duke.edu/downloads/americas_new_immigrant_entrepreneurs.pdf

Kaufmann Foundation for Entrepreneurship: http://www.kauffman.org/pdf/Entrepreneurial_Roadmap_web.pdf

They all essentially say the same thing: skilled immigrants coming to America have been a significant driver of new business creation. America has attracted many of the best brains in the world because of our wealthy post-secondary educational institutions, our enlightened immigration policy and, in my opinion, the quality of our "soft infrastructure" (the attitude and actions of Americans and institutions in favor of entrepreneurs and wealth creation). We were fortunate that many countries were unable to retain these brains for political and economic reasons and they migrated here.

The opportunity for skilled labor has changed dramatically. Two decades of sustained global expansion, ubiquitous digital communications allowing services to be perfomed remotely and the end of the cold war now means that many brains can stay home and be economically active. As a result I predict a global skills shortage where companies will troll the world looking for people. The two most populous countries in the world: China and India are already facing skills shortages in tier 1 cities and the quality of the hordes of "engineers" they are graduating is suspect. America, the third most populous country, is facing the retirement of tens of millions of baby boomers over the next 20 years.

The fear is that global growth will slow down as a result of this skills shortage. Alternatively, productivity could increase thus decreasing the demand for skilled workers. The issue is that it is hard to automate skilled work. Even relatively simple tasks such as computer programming are still labor-intensive and the productivity of programmers has not improved significantly in 30 years. Plus the universe of skills is increasing exponentially--subjects such as bioinformatics, nanotechnology did not exist two decades ago but now attract tens of thousands skilled workers.

So what is the solution? The studies above have a number of recommendations for U.S. policy makers. However they don't address the global skill shortage problem. I think the only viable, large-scale solution is for companies to take the lead to educate new employees for skills that the companies need, either through in-house educational institutions or by paying for employees to go to school. This will be harder for smaller companies, but they might be able to work through their industry organizations to educate employees. Each skilled educator can generate hundreds of skilled workers annually.

Public schooling was promised to provide equal educational opportunity to every citizen. In most countries public education is unable to keep up with the pace of change of educational needs for youth, primarily because of teachers' unions and shortage of funds. I believe that private companies are where the skilled labor is needed and private companies will have to get into the education business.

Sunita Williams and Bangalore

As Sunita Williams circles overhead our mutual hometown of greater Boston on the International Space Station, I am struck by the ascension of us Indians around the globe. We can be proud that a quarter of all technology startups in the United States in the past ten years with an immigrant CEO or CTO founder was an Indian-American. Proud that Bangalore and Gurgaon are as well known as Boston and Silicon Valley in technology circles. In contrast, having just returned from a whirlwind tour of four Indian cities, poverty, urban decay and a general lack of world class infrastructure, belie this new view of India and Indians.

Bangalore’s rise as one of the technology capitals of the world was not accidental. Government decisions made fifty years ago to locate defense research establishments, the Indian Space Research Organisation (ISRO) and the Indian Institute of Science in Bangalore were key to what Bangalore is today. In particular ISRO headquarters established by Vikram Sarabhai in 1969 was an astonishing organization. I had the good fortune of meeting two of ISRO’s leaders: Prof. Satish Dhawan and Prof. U.R. Rao in the mid-80s. They exemplified today’s leaders in Bangalore: self-assured, humble and with a quite determination to have India join the league of leading scientific and engineering nations.

As a young overseas Indian visiting ISRO in the mid-80s, the place was an eye-opener for me. I discovered an India that was fresh, egalitarian and self-confident. This self-confidence in particular was refreshing—ISRO was building satellites, rockets and related technology completely indigenously with no outside help. This was in part because of the U.S. embargo on technology transfer but it was also a result of Homi Bhabha’s legacy. He set India on an independent path of nuclear and space ascendancy that has created the technical self-confidence evident in Bangalore, greater Delhi, Chennai, and Hyderabad. I recall hours of discussion with Kiran Karnik at ISRO SAC in Ahmedabad, when he was a young turk representing Doordarshan at ISRO. The country was planning on putting a satellite receiver in every village in India, beaming information from indigenous INSAT satellites. We speculated that there would be great social upheaval once villagers had access to the world and woke up to their potential. We were both right and wrong. There has been much change in India these past 20 years, but it has mainly affected urban India, villages essentially have remained the same.

Clearly there were visionaries in the government that set India on the right path fifty years ago with these great research institutions, and great post-secondary institutions such as IITs and IIMs. It allowed generations of leaders and managers to emerge that form the foundation of the industrial growth the country is experiencing and will do so over the next decade. What was lost was the will and vision to educate and make healthy every Indian child. In some ways these were the competing visions of economic development of India at Independence. Nehru felt that a top-down Soviet planning model was the fastest way to industrialize and bring people out of poverty. Gandhi’s instinct was to distribute economic development to the villages, using the spinning wheel as a metaphor. Clearly both economic growth models are needed.

We know that vision from government is necessary but best in the form of incentives to the private sector. India has a unique opportunity to learn from best governance practices in other large, diverse countries. These practices have to be applied to the unique situations in India. Let’s take transportation as an example. China has built thousands of kilometers of roads and dozens of airports but in the process hundreds of thousands of people have been displaced. India’s democracy will not allow the same displacement of people. Clearly a different vision has to emerge for giving people and goods in rural India access to transportation. Will it be low cost jet aircraft flying from new regional airports or perhaps coastal ferries, or maybe light-rail? Most likely an innovative combination of all these will be needed.

There appears to be a political consensus forming in India that the country cannot skip the development of its agricultural and manufacturing economies. The service economy, though booming and world class, cannot provide employment to 80 million youth over the next two decades. In order for agriculture and manufacturing to thrive, India needs to invest billions in physical infrastructure: transportation, logistics, power, and telecommunications. India also needs to spend billions in soft infrastructure: education, and health.

Sunita Williams, a product of pluralistic India, is an inspiration for all, not just Indians. Even more so is the story of a non-profit organization Akshay Patra. Akshay Patra delivers half a million lunches daily to Indian elementary school children for Rs. 5 per lunch. Patra was founded by Indian entrepreneurs who have applied modern day logistics and distribution thinking to achieve enormous scale. With the right incentives Indian entrepreneurs can reach the moon!

Wireless Spectrum: a scarce commodity?

Wireless spectrum is a public commodity that has increasingly become very valuable for national governments: as a source of public finance and for public policy. In the US the FCC is in the midst of auctioning 3G spectrum and the bids have reached over $13B. While this may seem like a lot of money, wireless operators in Europe paid almost $100B a few years back for 3G spectrum. In the current auction the highest price paid per megahertz per head of population (MHz-POP) was in Washington DC at $1.59. In contrast UK and German operators paid $4.22 and $3.86 MHz-POP respectively. T-Mobile USA was the biggest bidder paying over $4B. US spectrum is also less restrictive than European spectrum--operators can deploy any technology they want whereas European operators had to deploy W-CDMA technology which at the time was too immature.

In India the regulators do not sell spectrum but provide it on a revenue-share basis to operators. As a result operators do not need as much capital to provide services but do get hurt in their Opex. Since India is a hyper-competitive market with 12 operators resulting in the lowest voice tarrifs in the world, increased Opex is meaningful. Nonetheless the top operator in India Bharati Airtel is profitable at ARPU of $6. This compares to ARPUs of $45 in the US. Bharati's operations are very innovative and I predict that operators around the world will move in their direction. Bharati has outsourced most of its major activities: radio infrastructure to Nokia and Ericsson, business support services (BSS) to IBM. The radio infrastructure deal is particularly clever: it is revenue share based on $/erlang. In other words, Bharati has incented Nokia and Ericsson to efficiently utilize their spectrum, thus passing on the revenue share arrangement from the regulator.

I am less familiar with how China regulates its spectrum. Since its main operator China Mobile is majority government owned it is likely that they get "subsidized" spectrum. China has held out offering 3G spectrum to encourage a home grown standard SD-CDMA to evolve. The government hopes to use it's huge domestic market as leverage for its equipment and handset vendors to get a head start for global exports. This strategy backfired for broadband wireless with WiMax defeating a home grown standard.

Private equity in India

I am back after taking a couple months to run a very successful conference Innovating in a Flat World: www.tieconeast.com with over 1,400 people attending.

Stanford University and TiE have recently published a study on private equity in India http://aparc.stanford.edu/publications/accessing_earlystage_risk_capital_in_india/. Some of the highlights of the study:

• There is a dearth of seed and early stage investment capital in India with just 6.9% of capital going to that stage, as compared to 12.5% in China and 29% in the US.
• The authors recommend the Indian government allocate capital in conjunction with venture firms to early stage companies, modeled on Israel's Yozma program
• SEBI, the Indian regulatory authority, allow foreign accredited investors

An interesting observation from the study was that India gets more private equity than China, almost double in 2005. It appears China's industrial growth has been funded more by debt than equity financing. This is borne out anecdotally by the number of new private equity funds that are targetting India. The latest news is that Matrix Partners is setting up a fund in India. Likewise the average deal size in India is about $15M versus $4.5M in China. The number of deals in China are now greater than India. It seems that China uses equity financing at early stages and debt at later stages. India uses sweat equity and customer financing at early stages and equity financing at later stages. This also evident from trends in commercial loans--Chinese banks lend 130% of their deposits while Indian banks lend only 61%.

Indian VCs are reluctant to invest in early stages given the inexperience of entrepreneurs. Indian banks, dominated by state-owned banks are too conservative. Clearly there is a need for the government to reform banks and to encourage early stage investing like the US government did with the SBIC program.

Immigration and Innovation

I spent the last few days at the 7th annual Nantucket Conference (http://www.nantucketconference.com/agenda.html) to chair a VC panel with Todd Dagres of Spark Ventures, Jeff Andrews of Atlas Ventures, Charley Lax of Grandbank Ventures and Mike Greeley of IDG Ventures. I have been an advisor to the conference for several years and it continues to be a "must-attend" venue for VCs and entrepreneurs in New England. One of the keynote speakers this year was Susan Hockfield, President of MIT. I had hosted Susan a year back at www.tieconeast.org when she had just become President of MIT. She has accomplished a lot in a year and I was again impressed by her vision and grasp of details.

Of particular interest to me was her interest in globalization of innovation and MIT's role. She mentioned MIT's lead in Open Courseware (all of MIT's course material is available for free online) which had inspired other universities around the globe to do the same. She also brought up a few facts about innovation and immigrants:

• 60% of US GDP growth since WWII is attributed to technology innovation
• MIT has consistently been rated as the #1 science and engineering college around the world since US News and World Report began scoring and has been instrumental in leading US innovation
• 50% of the faculty of MIT was not born in the US and have driven this innovation
• 8% of undergraduates and 30% of graduate students at MIT are immigrants
• Since 9/11 applications from international students has plummetted as the US has raised the hurdle for student immigrants to get visas

The recent issue of Economist has an article http://www.economist.com/opinion/displaystory.cfm?story_id=E1_GRRNGQS on US immigration policy for knowledge workers. Some excerpts from that article:

• 3,000 technology firms created in Silicon Valley since the 1980s were founded by Indian-American and Chinese-American entrepreneurs (30% of the total firms created in that period)
• Foreign-born college graduates in Australia are 10% of the population, 7.5% in Canada and just 3% in the US. While the US was closing its borders after 9/11 both Australia and Canada actively sought skilled immigrants

I am convinced that the US will maintain economic leadership through the 21st century on the strength of its post-secondary institutions (Harvard's endowment of $25B is certainly more than the sum of endowments of all the universities in Canada and Australia) which attracts the best minds in the world. Attracting and retaining these minds has been hugely beneficial for the US and for the rest of the world. Successful Indian-American entrepreneurs are providing knowledge and capital to entrpreneurial ventures in India and some are even returning to India. US immigration policy needs to be biased towards legal, skilled workers. All the recent focus on illegal immigration is important but as history has shown, disproportionate wealth is created by skilled immigrants.

Kaavya Viswanathan

I was just reading a review in the Boston Globe of Kaavya Viswanathan's novel "How Opal Mehta got kissed, got wild and got a life" and was struck by the irony of it. The novel is about the "engineering for success" of Opal Mehta by her parents: admission to Harvard as the catalyst. Clearly Kaavya's real life parents have engineered a similar path for Kaavya. As a parent of three teenage boys living in a highly competitive town, with hundreds of parents similarly engineering their kids' resumes, I am sympathetic to Kaavya's parents, it is a competitive world and we want the best for our children. Parents in India and China are similarily pushing to their children to attain skills and entry to the right educational institutions to allow them to succeed.

While the world appears to have become more competitive the reality is that practically everything in nature is governed by normal distribution, also known as the gaussian or bell curve. There is no way for everyone's children to be "pushed" towards the right of the curve. Certainly as quality education becomes available to more and more children, we can squeeze the curve to make it narrower and therefore include a great portion of people within a standard deviation. Success, however, is determined by many other factors than formal education, it is especially determined by experience. One can compress life's experience into fewer years and of course some people learn from experience better than others. Nonetheless, there is no substitute for first hand experience.

Entrepreneurship is similar in nature. While there are first-time entrepreneurs who were very successful in 2-3 years of starting their ventures, the majority of us took 10+ years of experience to learn how to engineer success. I was recently on a panel at MIT put together by Asian MBA students http://www.talentforum.org/panel-entrepreneurship.htm. A student asked if it was better to work somewhere first or launch a venture straight out of school. Another VC on the panel Andy Goldfarb of Globespan said it was better to work at an established company, build a rolodex of customers and accomplished fellow employees and then start a company. I differed in my response by pointing to another panelist who was a very successful entrepreneur in China who started his company at a young age.  This leads to a good question, is it better to learn on the job like a staright-out-of-school first time entrepreneur or learn on someone else's nickel first. I believe both methods work. If you want to learn on the job, surround yourself with good mentors, and make sure that you have set everyone's expectations for a slow road to success. Good mentors can be drawn from VCs, fellow CEOs (there are CEO groups such as the www.ceo-roundtables.com) and advisors. If you want to learn on someone else's nickel choose a succesful company where you are more likely to find good role models.

So a lesson from Kaavya's troubles, don't be compelled by your parents or peers to attain success on their timetable. Be in a hurry but take care to build the foundation for future success. A strong foundation comes from experiencing things first hand and internalizing that experience into your own understanding and desire for success.

Consumer power in India

Based on purchasing-power parities, in 2005 the US, China and India were respectively 1, 2 and 4 in world GDP ranking. In 2020 this is forecasted to change to 2, 1 and 3. The rise of China as a global economic giant is well understood but what of India. With its crumbling infrastructure and corrupt politics, how will India rise to the third largest economy in the world?

The answer lies in consumer savings and spending. Some facts:

• Consumer spending accounts for 64% of the Indian GDP. This compares to 58% in Europe, and 42% in China.
• Of the $450M in annual consumer spending, only 2% is done with credit, direct pay or debit
• India has the highest density of retail outlets of any country in the world, 15 million. The US has 900,000 where the market is 13 times India's.
• Only 4% of Indian store are bigger than 500 square feet.
• Organised retail in India therefore has a great opportunity and is already growing at 20% annually.
• Local conglomerates such as Bharti and Reliance are planning huge investments in organised retailing in India.
• Global retailers such as Walmart and Carrefours are eager to enter India. Walmart would transform both the retail supply chain and would likely drive Indian exports. Walmart accounts for 10% of the exports from China to the US.

The Indian population is the youngest in the world and as income levels rise, they are busy buying all the things young people are want to: housing, transportation, financial services, processed food, entertainment, telecom services and so on.

Mark Warner for President

I hosted Governor Mark Warner in Cambridge last week for a "meet and greet" with about 30 people. Invitees were VCs, CXOs and management consultants. About two thirds of the group were Indian Americans. I was asked to host Gov. Warner by two general partners at Columbia Capital (www.colcap.com) a firm that Gov. Warner co-founded. Background on Gov. Warner can be found at www.ForwardTogetherPAC.com.

After a successful business and venture capital career, Gov. Warner embarked on a political career that led him to become one of the few Democratic governors of a Republican state, Virginia. Allowed only one term by law, Warner made a significant impact in Virginia, balancing the budget, dramatically improving education and health outcomes and making government functions more efficient by using IT. He left office with a 80% approval rating and was able to get his Lt. Governor, Tim Kane elected as Governor on a similar platform of bi-partisan, roll up our sleeves and get government working efficiently and effectively. Warner has been criscrossing the country meeting VCs and other "friendly" constituents preaching the same platform for the nation. The New York Times wrote a balanced article on his candidacy recently http://www.forwardtogetherpac.com/contents/show/62.

I have been a big fan of Gov. Warner as I see him as a centrist with libertarian instincts: on the right for economic issues and pragmatic on social issues. He has demonstrated a desire to make government more efficiently offer services for common good, and doesn't have a knee-jerk reaction that government is bad. He governs using facts and figures, not ideology which is the bane of our federal government today. After meeting him in person, he is all I thought he would be. Energetic, full of ideas and more importantly someone who clearly will implement these ideas and measure their success--exactly the qualities that U.S. businesses employ to make them the best in the world. He will surround himself with experts in all subjects, not loyal party faithfuls like the current administration does.

Some of the highlights of his remarks:

• Competition from India and China is intense and our best option is to educate our population and compete, not put up trade barriers. He brought several hundred software jobs to rural Virginia because of his policies on (1) broadband penetration and (2) skill-based education.
• He has visited both China and India and feels that U.S. relations with both these countries is crucial for a new world order to emerge that is pro-democracy and governed by free markets.
• He had admiration for the emerging healthcare coverage policy of Massachusetts and felt that it had applicability to the nation. He pointed out the U.S. government could use it's clout in funding Medicare to encourage the use of IT in making healthcare delivery more efficient.
• Democrats need a candidate that can win in blue and red states.
• He will balance the budget, period.
• Education is a key domestic priority for him and he will replicate the successes in Virginia throughout the country.
• Will prepare a real plan for managing the mess in Iraq and extricating U.S. troops.

I am excited about his candidacy, should he run. It is about time we elected a tech-savvy President, who is truthful about U.S. strengths and weaknesses and is developing a plan to accentuate our strengths and reform our weaknesses.

Competition from China and India

McKinsey has published a couple of article recently about the growth of value based companies and the "shrinking middle" with premium and low value product offerings growing and medium value offerings shrinking. Value based company example are: Southwest and Jet Blue Airways, Walmart, Kohls. Premium company example are: Starbucks, Neiman Marcus. Many of the value based companies are able to do so because of low cost manufacturing in China and increasingly low cost back-office service centers in India.

Jay Dwivedi writes about Investments in India http://tieboston.blogspot.com/. He makes some great arguments about why India is emerging as a great place to invest. The consumer class in India is growing rapidly just like it did in China over the past 10 years. I would add that China and India are emerging as growth areas for U.S. value companies like Walmart. Value companies must look at these two markets to sustain global growth and to continue to offer value to their customers in the U.S. Both these countries have several new product categories now with over 50 million consumers: cars/motorcycles, cell phones, household applicances, financial services such as credit cards and mortgages, etc.

Venture Capital in India

There are a number of new funds being raised to address growth opportunities in India. Until recently most of these were later stage and buyout funds (two started by TiE-Boston www.tie-boston.org charter members: Monsoon Capital and Sandstone Capital both based in Mumbai). There has been a perception that Indian entrepreneurs were good at developing service companies but not product companies. I believe this trend is changing. At the GSM conference in Barcelona in February I met several good product companies in the mobile software space. They all were seeking venture funding from US sources as their was a dearth of early to mid-stage funds in India. In my opinion, we are bound to see a dramatic growth of early to mid-stage venture funds being established in India. An example of this is the $200M Helion fund that is expected to close in April 2006.

The dearth of experienced startup management teams will be a near term growth inhibitor for product companies in India. I predict that a number of middle managers in successful service companies such as TCS and Infosys will be a good source of senior management for product entrepreneurs. The question is can they adapt to the venture-backed product company model. Only time will tell....

Shakespeare and Innovation in China and India

I spent a couple of days last week with 50 CEOs at a retreat led by Tina Packer, head of the Shakespeare company in Lennox, MA. The Boston Globe wrote an article on the retreat: http://www.boston.com/business/globe/articles/2006/03/10/executives_confront_their_inner_hamlets/.

Shakespeare wrote and performed his plays at a time of intense change in England. The country was finally united under Queen Elizabeth and had become a Protestant nation. The theater was an alternate venue from the church for public discourse. Rhetoric (the gift of gab as I call it) and the rule of law emerged as a way to settle disputes, with the sword relegated to the professional soldier. At that time I learned, England was the most litigous country in the world. I believe as a result of rhetoric scientific thinking became prevalent and England went on to colonize the world with its superior technology and economic innovation.

The US inherited this love of rhetoric and law with the settling of the Puritans in Massachusetts. In time the US became the leader in innovation and controversially, the most litigous country in the world! Freedom of thought and economic pursuits are ingrained in the constitution (a marvel of rhetoric), forming an oasis that economic immigrants from around the world have flocked to.

So if rhetoric and the rule of law predicate the growth of countries what does that portend for China and India? First of all I would argue that rhetoric and the rule of law are more necessary in diverse countries than homogeneous ones. Japan has done reasonably well as a one-party state for over 50 years (a multi-party state being a proxy for vigorous national debate and rhetoric). I would also argue that smaller, diverse countries can also get away with less rhetoric (eg Singapore). This would suggest that large, diverse countries such as China, India and Russia will enjoy economic growth only in an environment of rhetoric and rule of law. So why do these countries have such different rates of growth given that India has the most rhetoric and China the least? I think the answer is that it is a marathon not a sprint. Over 30-50 years India should emerge as the economic leader, Russia second and China last. That is assuming the status quo. In reality, under Putin Russia is limiting rhetoric and should therefore slow down economically. China has an historic opportunity to increase rhetoric and emerge as a true world power. India must grow fast enough so its abundance of rhetoric does not turn into a populist revolution of the underclass led by socialist thinkers (witness the growth of Maoist rebels all over South Asia).

Venture Panel at TiE Boston

I moderated a venture panel last week with Bruce Sachs of CRV, Ajay Agarwal of Bain, Zenas Hutchinson or Vesbridge and Bill Wiberg of ATV (http://boston.tie.org/Home/iFrame_template?day:int=28&month:int=2&year:int=2006&title=EventsCalendarBox). Over 230 entrepreneurs were in the audience and there was a robust discussion of the current state of the venture industry, particularly in Boston. Some points:

• There was general agreement that the exit environment had improved significantly in 2005 with each of the panelists' firms having a handful of exits and at least one good one.
• There was a feeling that Boston had missed the early Web 2.0 wave but we would see a number of high-profile exits in 2006, mostly in traditional telco infrastructure and software companies.
• Bruce has been spending a week a month in SV and confirmed that Boston firms and management teams liked doubles and triples while SV firms and teams swung for the fences.
• In spite of his Lucent background, Bill was devoting considerable time to clean tech opportunities. These opportunities were spread throughout the country, not concentrated only in Boston and SV.
• There was a general nostalgia about the pre-bubble environment when venture was a collegial environment and not too many companies were funded in any given space.
• The shakeout in the VC industry continues with two scheduled panel members dropping out as they were leaving their firms: Duncan McCallum of Bessemer and Bob Flemming of Prism Ventures. What was unusual is that these guys are still in their prime. Both are taking time off and contemplating their next ventures.

There has been a lot of hand-wringing in the Boston start-up industry about the loss of eminence to California. In my opinion, the pundits have written us off too early. As the tech industry matures I am convinced that VCs playing the double and triples game will return greater IRR. Risk adjusted returns are the name of the game and Boston VCs play this game very well.