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.

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.

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.

Predictions for 2006

At the risk of looking like a fool at the end of 2006 I will venture some 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 .
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.
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.
4. International--Indian IT companies will acquire US and European IT companies.
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.