Vinit Nijhawan: Serial Entrepreneur, Venture Capitalist

Passage to India Part 2

Chandigarh December 7, 2008

I drove straight north from Delhi to Chandigarh about 300 km, on a much improve four-lane highway. Chandigarh is a planned city that was designed by the French architect Le Corbusier in the late 1950s. It remains a delightfully livable city which the rest of India has failed to emulate. I am attending the wedding of my cousin’s daughter, a recent dentist graduate, to a young engineer who works with the Tata’s. The local TiE chapter has also invited me to speak to their members tomorrow.

 

I have met several entrepreneurs who have returned from the U.S.to take care of aging parents and then set up businesses here. Chandigarhis considered to be a tier 2 city (tier 1 being Delhi, Mumbai, Bangalore, Kolkata and Chennai), in the same league as Pune and Ahmedabad. In reality those cities are far more industrial, including technology-related industry, than Chandigarh. There is a nascent life sciences industry forming, especially around agricultural products: Chandigarh is the capital of Punjab, India's bread basket. However most of the entrepreneurs I met had small outsourced information technology businesses with customers primarily from the U.S. 

There is an excellent engineering college in Chandigarhand I had the chance to meet with the Director of the college Manoj Datta. He is busy setting up new degreed programs to respond to industry needs. For example he was evaluating a graduate program in biomedical instrumentation in conjunction with a local biological institute. We had a vigorous debate about the viability of that degree, along with the head of Phillips Labs from Delhi. Phillips Labs are creating new products for emerging markets by launching them first in India, they support all of Phillips divisions including the medical division in Andover, MA. For example they recently launch a UV water purifier that is more effective than charcoal filters. Tainted water is a big problem in India as many tourists have found. The public water supply is invariably contaminated and almost everybody has a water purifier at home. Boston Universityhas a world renowned public health department that has projects in India, I need to connect them to Phillips Labs and Punjab Engineering College.

I had an interesting conversation with the CEO of the Usha Group, who have been making ceiling fans and air conditioners for many years. He showed me a cellphone that they have launched in tier 3 and 4 cities in India. The cellphone is manufactured by an ODM (Original Design Manufacturer) in China to their specifications and distributed via thousands of cellphone retail distributors. They have been struggling to differentiate themselves other than price. He told the story of an upstart competitor that had inferior products but stumbled on to a need in the rural marketplace for phones that had long battery life. Electricity is not readily available in most Indian villages and is unreliable when it is. I asked him if he considered differentiating on the cellphone user interface, perhaps by using the Google Android operating system and then customizing the UI for rural India consumers.

Passage to India Part 1

New Delhi December 4, 2008

I arrived in Delhi near midnight off a packed flight and to a crowded international airport, no sign of any slowdown in activity as a result of the recent terrorist incidents in Mumbai. The cool winter air is thick with construction dust, there is a new airport being completed and an extensive subway system, including a line running to the airport.

My first task was to get a local SIM for the Sony Ericsson phone I borrowed from my son. I went to a Bharti Airtel customer service center in a south Delhi market in Lajpat Nagar. It was packed with about a dozen customer service reps (see photo), a payment kiosk and about twenty customers. The rep looked at my phone and said that it was locked to the Rogers network (my son goes to college in Canada) and I should go down the street to a shop to get it unlocked. I went to the shop titled “Orange Teleservices” (see photo) and they promptly said they could unlock it for Rs.650 (about $13) and it would take two hours. I then went to get a passport photo taken at a nearby shop called “Kodak Express” (see photo) and paid $1 for 8 color photos. I went back to the Airtel shop and filled out an application for a prepaid account: my photo, passport information and local address was attached to the application. I was told that my SIM would take a day to activate after my application information was verified. This was a new procedure as a result of foreign terrorists acquiring India cellphone accounts to escape being tracked. Seems like the recent terrorists were a step ahead, they bought satellite phones in Dubai to communicate with their handlers in Pakistan.

 

Airtel Customer Service:

 

The entire experience with getting a local phone service was much more cumbersome than activating a phone in the US or Canada. Then again I imagine if I was an Indian citizen visiting the US, walking into an AT&T store I might also have to wait a day to get activation? I was astonished by how many stores there were all over south Delhi offering mobile phones and services. With 300M subscribers, up from about 100M when I was last here two years back it is becoming a huge industry here.

 

Getting my phone unlocked:

 

Getting my photo for the Airtel cellphone SIM application:

 

Obama and the end of the colonial era

Like most Americans I have been awestruck by Barack Obama's capture of the White House. I have also been pondering the significance of this historic event. Of course the first African-American as President is historic, especially in light of America's history of slavery. The outpouring of congratulations and celebration from around the world has been equally astonishing. Why are so many people inspired by Americans' choice of President-elect Obama? This is the question that perplexes me.

My grandfather came to the US in 1947, accompanied by my father who was 17. Invited by the US government, my grandfather, a soil physicist, came to the midwest to Kansas State University. My father began to study engineering at UC Berkley but soon ran out of money and continued his studies at Kansas State while sharing accomodations with my grandfather. He recounted an incident where my grandfather and he were told to sit at the back of the bus in the colored section. India had just got its independence from British rule and 300 million Indians were now free of colonial rule. To now suffer discrimination on the basis of skin color (my grandfather was a professor and the bus driver was likely at best high school educated) was unacceptable to him and he eventually got off the bus rather than comply.

During the 450 year colonial period western European countries, namely Britain, Spain, Netherlands and France in order of scope, colonized and greatly enriched themselves, mostly at the expense of native people. They ruled with a sense of Darwinian superiority of the white races and its dominant religion: Christianity. The ascendancy of European countries was driven by technological innovation, including the understanding and codifying of free market economics. Whether it was Adam Smith or Karl Marx, these ideas came from the West.

Though the second world war accelerated the demise of colonialism, my contention is the colonial era has truly come to its conclusion with the election of Obama. It has taken America, a post colonial power, to bring about its end, with the free election of the first non-white leader of the West. This is what is resonating around the world, especially in many emerging countries who were colonised: India, Brazil, and African countries.

Thoughts on Mobile and Wireless

This was also published in Mass High Technology magazine.

I made one completely off-the-mark prediction for 2007 in my blog: “the iPhone would have disappointing sales”. I made up for it in a 2008 prediction: “Apple's greatest innovation in the iPhone is its browsing capability as a result the mobile internet will finally take off.” The mobile internet was predicted to take off in the late 90’s with over $1 Billion invested in startup companies back then. Ten years later, the iPhone, with its bigger screen and fabulous browser has finally made this prediction come true. M-metrics reported in March that smart phone users browsed the Internet for an average of four and a half hours per month in the U.S. and 80% of iPhone users were browsing the internet compared to 30% of other smart phone users.

 

So the mobile internet is finally here, right? In my opinion, browsing the internet will be a minor usage of smart phones. Just like the PC, I think we will see a mixture of client-only and client-server applications on the smart phone. Apple’s brilliant iPhone Application Store is a testament to this view. Over 1,500 applications are available from third-party developers since the iPhone Store was unveiled in February. These are either standalone applications such as games or true client-server applications. In fact I believe that client and client-server applications will be the dominant use of the smart phones for many years. Here is why:

• Smart phones, unlike the desktop PC, operate in an asynchronous environment, i.e.  wireless coverage is not ubiquitous and bandwidth will always lag wireline by a decade.
• All PCs have the same keyboard and screens at least 14 inches in size. Cell phones, even smart phones, have a multitude of screen sizes, orientation and keyboards.
• You generally use cell phones while engaged in another activity such as driving or walking.
• Cell phones have integrated sensors that only client applications can access: location, camera, voice, accelerometer, ambient light detection, etc.

 RIM, Microsoft and Nokia, the other incumbent smart phone vendors are scrambling to create their own Application Stores. Google is a new entrant with its much discussed Android smart phone operating system. I will go out on a limb and predict that Android will take a while to catch on just like Microsft’s Windows Mobile (finally taking off on version 7), since they are dependent on how well third-party device manufacturers deploy their software.

 

There are 3.5 billion cell phone users around the world compared to 1 billion PC users. Close to 1 billion are in China and India combined. While the majority of those users are not smart phone users, the iPhone has been a huge hit in both countries in spite of no 3G networks. Emerging markets have seen dramatic cell phone adoption but not PC adoption, resulting in many innovative uses such as mobile banking, using limited capabilities of entry level feature phones, such as SMS text messaging. Most emerging markets are hyper competitive with multiple wireless carriers in each country (China is an exception but the regulator there has pushed China Mobile to be innovative). As a result these carriers are quick to adopt new applications that give them an edge. Contrast this with the U.S. where we have an oligopoly of essentially three dominant carriers, Verizon, AT&T and Sprint who between them have about 75% of the market, with Verizon and AT&T increasing their market share by the month. Innovation is being forced upon them by the computer industry, Apple and Google in particular.

If you are thinking of starting a mobile application company I encourage you to: (1) think client-server and (2) think globally.

Regional Venture Capital Business Models

Download nijhawan_presentation_to_necina_sep_2008.pdf

I was invited by the New England Chinese Information and Networking Association (www.necina.org) to speak at their annual business plan competition kick-off. About 150 people showed up on a gorgeous early fall day. My talk was about regional differences in entrepreneurship and venture capital within the US and around the world (see the attached presentation). I was approached by many young entrepreneurs and MBA students after my presentation. Although the audience was quite similar to www.tie-boston.org audiences, I was struck by how many women attended. Other observations:

• Many of the young entrepreneurs and MBA students were from mainland China not Hong Kong or Taiwan.
• There was considerable enthusiasm from young entrepreneurs for iPhone applications.
• Many in the audience were surprised by data on the impact of immigrant entrepreneurs in the US.
• Many wanted to raise money from US venture capital firms rather than purely Chinese VC firms.
• There were two young entrepreneurs from Africa: Cameroon and South Africa and we had a lively discussion about entrepreneurship in Africa. One was searching for a business idea to take back to Cameroon, but was concerned that there were no VCs in Cameroon. I mentioned an article I had read about an entrepreneur in Ghana who had cultivated a stand of trees to provide renewable products. The business model was brilliant and he was seeking $10M in London to expand by purchasing more forested land. The other entrepreneur wanted to raise money for South African startups in Boston. Seems like a ripe opportunity for a VC firm to establish an office in Africa.

The growth of global VC firms with regional offices continues. Boston area VCs have been quite aggressive in setting up offices first in silicon valley, then India and China. Highland Capital is even setting up an office in Europe. These regional offices have sufficient ability to modify their focus for the region they are in but follow the same investment selection and management process as headquarters. An example is Matrix India which is focused on investing in consumer-driven companies, unlike Matrix Boston which made most of its returns on telecom technology companies. Matrix India has invested in a fast food chain and a company that brings luxury brands to India. Boston area VCs have had offices in silicon valley for years but it is odd that most silicon valley firms don't have offices in Boston, I wonder why? It seems to me that aggressive early stage silicon valley firms would be welcomed by entrepreneurs in conservative Boston.

Venture Capital Industry in a Funk

I have been remiss in posting to my blog as I got caught up in the perfect storm of commitments the first half of 2008. Everything was going well until a company that I was advising, Skyway Systems, ran into trouble and I stepped in as interim CEO. This was on top of commitments at Airwide (helping CEO with acquisitions), DegreeC (helping define strategy for a data center thermal management business) and Boston University (teaching an MBA entrepreneurship course and organizing a VC workshop).

While raising money for Skyway I met with early stage venture capitalists in Boston, California and Colorado. It was an interesting reality check of the early stage venture capital industry in the US. I had been hearing from entrepreneurs that it was getting harder to raise seed and series A funding from Bsoton area VCs. My experience was that it was as difficult in California and Colorado. Colorado's VC firms are mostly in fundraising mode. Boston and California firms seemed to more focused on later stage firms. Early stage companies need to be in an ever shrinking "sweet spot": defensible IP (woe if you are a software company), proven management (ie you have made money for a VC), and demonstrable market need (preferably with a customer LOI in hand). The only concession I saw was that VCs were now willing to travel so companies did not have to be local. On the other hand raising money for an acquisition that creates a scale company appears to be readily available.

I completely understand why early stage VCs would want to shrink their sweet spot, it reduces risk for them and frankly makes it easier to screen opportunities. However it does leave a gap in the market for seed and series A funding needs for first time entrepreneurs and products for unproven/nascent markets. This shrinking sweet spot is probably a good thing for VC returns, right? Nada, VC returns have been anemic the past few years, partly being blamed on the lack of an IPO exit market for technology firms. It seems to me that we have to reset expectations of what early stage VC returns have to be. Companies that result in IRRs of 15-20% are still great companies and deserve funding. A new early stage VC business model has to emerge as some LPs will certainly fund managers who are willing to take reduced compensation commensurate with lower returns. This will be a good thing for the industry.

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.