Viedea’s pick of must read posts for October

The Viedea team tracks a number of blogs about the startup and investing world. We thought it would be useful to share some of the best blog posts we’ve come across in the past month with our community. We will make this a regular feature henceforth.

1.Building a Company vs Building a Business:  Fred Wilson of Union Square Ventures on the distinction between building a business and building a company; something all entrepreneurs need to understand.

2. The Art of getting back pending dues from customers: Venky from efarm has posted this piece on Every entrepreneur who’s done business in India has experienced the difficulties of recovering dues. Very relevant and topical post.

3. How to sell your company : Entrepreneurs need to know how to sell. Some are born salesmen, some have to learn along the way. Entrepreneurs are rarely successful if they do not learn how to sell. This Techcrunch post talks about how being a good salesman does not mean you’re a good negotiator. Important distinction and some good tips on sales.

4. Understanding how dilution affects founders: This is a must read for any entrepreneur aspiring to raise capital. Mark Suster’s blog has a great infographic representation of how founders get diluted over fundraising rounds and the impact of ESOP pools and participating liquidation preferences on their returns. Fred Wilson and Brad Feld have also written some great posts on dilution, but this one has an easy to understand graphic.


Mentoring the Mentor – Deepak Srinath

A couple of years ago, when Viedea was a relatively new start up, I was approached by somebody who offered to become our mentor. I remember being surprised, because the person neither had experience of entrepreneurship nor of leadership in a corporate set up.  Needless to say, we politely declined the offer.

As the number of entrepreneurs and startup’s grow in India, it is but natural that various elements of the support ecosystem also develop.  Organizations like TiE and NEN, angel Networks like IAN and Mumbai angels are all doing a phenomenal job of supporting entrepreneurs. So too are numerous individuals and private organizations like Mentorsquare, Morpheus, etc. who have created innovative models which hopefully will create the sort of support ecosystem Indian entrepreneurs need.

However, the trend that has left me partly amused and partly concerned is the rapidly growing breed of entrepreneurs who are in the “business of mentoring and incubation”.  I have interacted with many such “mentors” over the last few months and barring a few exceptions most have left me with the feeling that they do not have adequate experience or skills to mentor a startup. Some of them are barely out of college themselves and many of them claim to be serial entrepreneur s (on closer inspection, it’s more like ‘serial company starters’, none of which have managed to last beyond a year).  It’s extremely worrisome that young entrepreneurs with smart ideas could be signing up such mentors, giving them equity and wasting a lot of time in the bargain.

A good mentor is a critical part of an entrepreneur’s journey. A few tips for entrepreneurs from my own experience –

  1. Choose your mentors wisely. Sometimes, finding and pitching to the right mentor is as difficult  and as important as finding the right investor,
  2. You may need multiple mentors on your entrepreneurial journey, for different stages of your venture or for different domain skills. It is likely that you will outgrow a mentor as your business evolves and takes different shapes. Make sure your relationship with the mentor is flexible and not joined at the hip.
  3. Decision making should never be delegated to the mentor. The mentor’s role should be to give you perspective and advice, not to make decisions on your behalf.

A few months ago I was approached by a leading incubator to empanel myself as a mentor. However, I did not feel I was qualified to be a mentor just yet.  As an entrepreneur I continue to learn immensely  from my mentors. Only when we have achieved the goals we have set out for Viedea will I believe that I have the right to mentor other entrepreneur’s and share my experiences.

Where’s the action going to be: The Viedea guide to deals in 2011 – Compiled by Deepak Srinath with contributions from Uday Disley, Aravind G.R and Alap Bharadwaj

As we take stock of the year that went by and take our collective deep breaths for the year ahead, we’re pondering on the big question- what do we focus on in 2011? As part of our business planning process we asked each team member to send in their predictions for the year…and predictably got some interesting comments.  Uday felt this was akin to predicting whether the Indian team will win the world cup at home and Aravind opined that we should just ask that big brother VC fund (Wily Wonka’s chocolate factory is Aravind’s precise metaphor) with an army of ex-consulting associates to tell us what sectors they’re investing in and pick up mandates from all companies in those sector….The logic being that all other funds will follow big brother and we’ll be sitting pretty. Finally after much persuasion, the team sent in their vision for the year ahead, and we present to you an edited summary of our guideline for 2011:

(Please note- This is limited to VC/PE and M&A activity in the sectors we focus on in the early, growth and mid market space)

1. Internet /E-Commerce – Unanimously elected as a high action sector for the year. Frantic VC  and angel activity will continue for the first two quarters of CY2011, fuelled by the makemytrip inspired billion dollar IPO vision. The Indian consumer finally seems to be buying online and we expect all sub sectors in the ecommerce space to see funding activity. The internet investment frenzy will ease off by the second half. However, we expect strong M&A action, both inbound and domestic consolidation through the year.  The second half will also see Series B and C investments in internet firms that have managed to reach some scale.

2. Education – Last year’s darling, still has some fizz left for this year. Aravind, our in-house education expert believes that funding action will mostly be for mid to large size firms. Lot’s of small M&A deals are expected as PE funded players mop up strong regional brands to consolidate, especially in the tutorial and test prep space.  M&A deals of the size of Tutorvista-Pearson will be more of an exception than the norm. Valuations will remain unrealistic though, and we may actually see a lot of long drawn out deals that take a long time to close. (Note to Aravind – Patience and Stamina, your mantra for the year!J)

3. Mobile/3G/Connectivity – This year’s big focus in the mobile space will be around 3G plays- Video, Optimization, Software products, Cloud, Data Security and Recovery, Gaming (enabling not developing). We expect VC investments in all these areas and the likes of Apalya have already demonstrated this emerging trend.

4. IT/Tech services – Unanimously voted as the ‘not cool’ sector of the year.  As Alap says,”Mid cap IT will see another year of stagnation on the deal front.” There may be some outbound M&A  traction with Indian mid cap companies acquiring in geographies like Australia and South America.  Alap is betting on Infy making a big acquisition this year but the office betting syndicate is not giving it favorable odds yet.       

5. Hardware devices/Tablets – The gadget geeks in the office (everyone except me) want to believe this will be the year of the Indian tablet. Notion Ink has swayed them all, and we’re hoping this is one rock star to emerge from India. However, hardware plays from India remain hugely challenging and we don’t expect much funding activity here. Even the low cost mobile handset plays seem to have peaked and we expected that raising PE funding will be a challenge for new players.

6. Healthcare – Will continue to attract investor attention, both hospitals and services/technologies that enhance healthcare delivery. Rural healthcare providers will attract VC investment. Consolidation will be seen with bigger hospital chains acquiring smaller or regional hospitals.

7. Financial Services – Financial inclusion, the big investment theme in India over the last few years will continue to drive investments this year also. The MFI party will be muted this year, but areas like housing loans to lower income segments will attract PE investment. Mobile banking platforms, combining technology and brick and mortar may attract some investment.

8. Agri and Food – Farm to fork seems to be the theme for this year with supply chains and agri warehouses continuing to attract some serious investments.  Aravind is of the opinion that food processing companies that emerge from the food processing parks set up by the government will attract some investment.

We hope our analysis is useful as you plan your year. Thank you.

Is India ready for the Tablet PC revolution? – Uday Disley

It will not be long from now that all of us will have a tablet pc in our hands, much like what we would have experienced with a smartphone few years ago, only this time the adoption will be much faster. While Steve Jobs may feel happy about this, but as usual he waited for an year, before he officially launched his Ipad in India. He may have been ill advised not to launch in India, but will Mr Jobs regret, maybe yes, here are some points that he may have missed

A)     3G/ Broadband access: For a country where last mile connectivity has been one of the biggest issues when it comes to internet penetration, 3G/ wireless broad band access should solve the problem. The penetration will be aided by access which will become cheaper as competition increases. There is already talk within the industry that RIL, which has a pan India license for broadband, will do what RCom did for mobile telephony with its prices when they launched, and the rest as they say is history.

B)      Entertainment: When your mother-in-law is active on facebook, you know that social networking is really working in the country. I wouldn’t be surprised if she opted for a 500 gms device which pretty much covers more than her computing needs. Besides this, there is enough and more data on the increase in consumption of entertainment over the internet to substantiate the need for a hand held device. With a tablet, you can literally carry entertainment around with you, as opposed to lugging a 3 kilo laptop (for doing the same things).

C)      Price: Well all of us want the coolest thing that we own, to be the cheapest (price). The tablet’s are at an ‘early adopter’ stage, but there already seems to be a price war (thanks to Steve Jobs for an aggressive pricing on the Ipad). Our prediction is that the price of tablets will drop drastically over the next year or so. The reason is simple, thanks to Google’s android, the hardware is more or less commoditized. Recently I met an entrepreneur who plans to sell Android based tablets at about Rs.10K, while his landed price being Rs.6K (no points for guessing where it is landing from). Now you can expect the second round of handset wars between the likes of Spice, Micromax, Karbon and other homegrown brands. While you may never get the snob value of carrying an Ipad, but I believe that a majority of Indian consumers out there couldn’t care less.

D)     ‘I still have my doubts’: While many may argue that a combination of access, low price, and a ‘better than PC’ user experience is not a sure shot recipe for success, analyse this; you like and use your mobile more than your PC/laptop (and always had a freakish desire to throw it away when it hung); you are a compulsive social network user (you have facebook on your mobile and access it at least 3 times in a day) and last but not the least you wished the laptop was mobile enough to accompany you to the ‘pot’. If you still are in doubt you might just be missing out on the next big wave.

So is the tablet going to change how we do our computing, guess it will not, but it has the potential to be as disruptive as digital music players (thanks largely to ipod), has had an impact on how we access music and the music industry at large. You may still have PC’s, laptops and tablets co-existing, but the way we use all of this will change drastically. So the question really is ‘which side of the opportunity are you on?’

Costly to miss the ‘tech’ business in organised retail – The Editor

Deep slumber will kill anybody in times of competition. Indian retailers and technology companies better wake up soon because I observe that Wal-Mart, in India, is picking up the pace in netting all their potential Small and Medium businesses or ‘suppliers’- as we call them in retail parlance- in to adapting their retail supply chain technology called ‘Retail Link’.

This not only builds Wal-Mart’s supply chain, but Indian SMEs get a foothold in to becoming global suppliers to the largest retailer in the world.

Wake up Indian retailers

Personally, I feel this was the way to build any retail business, which our home grown retailers ignored. There was too much money spent in building the front end brand, without really offering quality to customers. What consumers got was the experience of modern retail discounting, but they were denied of the experience of low price plus quality.

So the argument about middleman being the scourge of organised retail- often cited by big Indian retailers- is doused by Wal-Mart, which is creating a silent revolution among its Indian suppliers. It is the technology stupid! Nobody wants to miss out on the organised retail business which is going to be at least $ 60 billion by 2015 and the total retail market’s size is estimated to be $ 600 billion in the same period.

Believe in sharing

We at Viedea know of several technology companies, even with their small size, who understand that the retail business is of technology integration which facilitates the ability of the warehouse and the supplier to deliver in to the store on time.

It is time that Indian retailers worked with retail technology providers constructively, may be even forge a partnership or engage them to build proprietary software that can be integrated with vendors for best practices.

What is unfathomable in my mind is the pace at which Wal-Mart is building the supplier base; it will certainly gobble Indian retailers if FDI opens up in this country in organised retail. This is impressive on Wal-Mart’s part because it realises that if India needs to be big on the balance sheet at Bentonville- USA then Indian suppliers have to comply with their processes completely or be dumped.

They are eager to teach some other aspiring Indian about compliance issues. Indian SMEs are averse to change, but when forced upon- they will innovate. By following such action Wal-Mart has been able to maintain strict control over purchase orders, inventory keeping and logistics management.

They have passed this value to consumers. These processes flow like a river between the suppliers, warehouses and the cash and carries – all thanks to technology.

Taking the fight to Wal-Mart

TCS, Oracle and SAP have been coaxing Indian retailers to implement their software or partner with them, but Indian retailers do not want to let data flow through such technology because it allows an insight in to cash management, which is a dark secret that is only in the diaries of promoters.

Now you do not want vendors to create a furore for untimely payment if everything is on record, do you? This is where Wal-Mart wins, while the others loose. Will Indian retailers wake up to the need of technology integration? Do call us if you want to be awakened.

Ethics in our business – Uday Disley

If one ever thought about ‘ethics in I banking’ being an oxymoron, think again. It’s no different from all the other businesses out there, which are vulnerable to ‘ethical dilemmas’, on a daily basis. One might ask, if we are immune to questions of ethics.

No sir, sorry, most of often than not, we keep asking ourselves ‘whether we are in the right profession at all’, thanks to some unreasonable situations. So how do we go about life, well, without asking unnecessary ‘existential’ questions, our sagely stance has always been that, ‘this too shall pass’ and a chapter addition to the ambitious autobiography that one hopes to write.

If you ask any seasoned I Banker, he/ she would tell you that, one becomes wiser with experience, better if it is a bad one.

Our dilemma

Sample this, a client (prospective) has sub $1 Million in revenues, says that revenue is booked in one entity and expenses are booked in another, wants a minimum $12 Million to sell and says he is sitting on an offer already.

It gets even better, the promoters and their investors would like their purchase consideration to be paid overseas or if possible in cash. The best of us would say this person has smoked something very potent, but the tragedy is that, the deal is possible, at least theoretically.

The ethical dilemma is whether this deal is straight enough for us to be involved in or is this a opportunity for us to showcase our skills in structuring a complex deal. The big aside also is if this client’s thought process is like this, there is a good chance that we may never see our fees.

As has been our experience with some far thinking clients who have enough intelligence to think far in their business, but end up spending considerable amount of it on finding loopholes in the system and doing the disappearing act when it comes to paying their advisors.

So would ethics override anything that we do in business, well some very successful businesses seems to think so. The Narayan Murthys, Tata’s, Premji’s etc. at least have demonstrated remarkable success in not paying bribes, but only as we know it, but let’s face it we are not them until we are them.

Our cynicism

Recently there has been so much talk about corruption in the public domain, that one can only get more cynical about ethics, worst being that, one tends towards believing that nothing is straight forward in business at all levels (be it a huge scam or your day to day kickbacks).

Even we do get cynical about these things especially when you see some fellow I bankers fall in this trap, but our stance has always been to stay away from ‘Bad deals’ or ‘Unreasonable situations’. On the view that there will always be people who will take up these kinds of deals, well good luck to them and their ecosystem, we are happy to work with client’s who value what we value, even though the number is small.

Striking Gold – Uday Disley

How often do you see our country stand up and take notice of champions who were hitherto unknown strugglers tucked away in some remote unheard of place. It happened recently when we all were glued to our TV’s watching a Krishna Poonia and her team create history, many would have felt the sadness to see a Babita Kumari in tears not having won the gold or a felt a lump in the throat when Achinth Sharath Kamal couldn’t control his tears while singing the national anthem after winning the gold. In a symbolic way what it really meant was that these men and women are not champions because they won, but more importantly because of the odds they have had to beat to reach this pinnacle. In a larger sense the point I am trying to drive home, is the potential of the unheard India that all of us in the ‘mainstream’ (whatever it means to whosoever) tend to ignore or overlook. But that should change and rightfully so.

One might ask why the reference to these athletes; firstly, the sheer number of champions that the CWG 2010 has produced who are from the hinterland of the country; secondly, we at Viedea tend to take sports seriously and draw parallels to it in real life (usually with cricket). If one did a quick recollection of the last few conversations with the investor community, you are more likely to have heard the word ‘bottom of the pyramid’ multiple times. While it wouldn’t take a genius of an analyst to quickly unravel the potential in the rural market, it would definitely take something else to identify ‘champions’ who will succeed in these markets. So what’s our take on this? Well simply put we believe that there are many champions out there (in the unheard India) who have not been discovered, the ones who we believe will strike gold at the ‘bottom of the pyramid’.

So how does one go about finding these champions? Frankly speaking we still haven’t figured it out, and don’t think anybody else has either, but fortunately we have met and worked with some entrepreneurs who will humble you with their understanding of the ‘unheard India’, and their sheer ambition to make things work in towns and villages whose names the ‘mainstream’, may have their tongues twisting over. The potential as seen from their eyes is vastly different from how the vast majority of us look at the untapped potential of rural India. Remember these people like the CWG champions have had to break multiple barriers before even getting into competition, and that’s the difference they bring to the table. As much as cricket from being the domain of urban India, has clearly moved to produce legends from Ranchi and Najafgarh, so have successful entrepreneurs started coming from a Kota or a Belgaum. Maybe this is the dawn of the champions of the bottom of the pyramid, and in the true sense ‘Incredible Inclusive India’.

Spirits in the Material World – The Editor

I was out for a night cap the other day with a bunch of friends and guess what; these guys who have worked under the tutelage of Narayana Murthy suggested that I read the Mahabharata. Then I asked them, “Why should I do that?” The reply was, “it will tell you how different characters behave and how each individual around you is a type set of the character in the great epic.”  I found it very amusing at first and then the lack of a smile on their faces made me realize, there was more to it than what meets the eye when it comes to books and dealing with ups and downs in business. Rumour has it that Mr Murthy too has recently devoured the great epic and is passing on his knowledge of right action, purpose and liberation to his employees by recommending the book. Of the fourth principle, which is “pleasure”- I have no idea how it will be disseminated, but I presume it is in telling ourselves that victory lies in trying to figure out how one builds a great business.

In the early nineties I read a lot of books about the Japanese Art of War and the Warrior. My friends and I said to ourselves, “this is what will discipline us.” Yes we did cut a lot of strategies to precision and in the end it was about cutting in to others to survive when the dot com bubble burst. I was just recovering from being a “ronin” samurai and had returned after a few years in the western world, only this time I was armed with social theories, propaganda and knowledge of political campaigns. So I reentered the world of business to convince myself and everyone around me about a new and changing India. One must remember that when the going was high in 2005, the Bhagvad Geeta was being introduced in most B-Schools and many businessmen were latching on to its teachings. The call of the day was “do your duty, and move away from all the dullness of the mind.” Come 2008 I saw all philosophies disappear and I was rejoicing with the fact that there are no more books to be read to justify business cycles and their aftermath. Instead, I saw a lot of my friends find faith in a church or a temple. I settled for finding myself and accepting losses with a glee and greeting profits with my own hard work and providence. But all my experience did not stop me from being furious when someone stole a deal; then came the suggestion to read the Mahabharata, confirming to me that even books move with business cycles. Very soon I feel movies like StarWars and its legendary dialogue “May the force (money) be with you” will be the object of discussion with future business executives and entrepreneurs. But I still don’t know if all this helps us from not being spirits in the material world. Do let me know about your episode with books and business cycles. Let me go Viedea now.

LPO Prospects in India

If you are wondering whether the current economic slowdown has spared any industry, you will be pleasantly surprised to hear the answer – Yes. Legal Process Outsourcing (LPO) industry seems to be the one which is actually benefiting from the economic crisis! As the corporates and law firms themselves are struggling to trim their cost structure, LPO business is set to benefit from it. One obvious, rather a more meaningful choice for the corporates and law firms abroad is to consider outsourcing some parts of their legal and administrative work to a low cost destination like India where people have no dearth of talent too. However, it is good to understand whether we are fully equipped to reap the benefits from the present opportunity.

LPO as an industry in India is in a nascent stage. The industry is highly fragmented with over 100 firms operating in different verticals. According to a report by ValueNotes, the revenues from legal services offshoring are forecast to grow from $146 million in 2006 to $640 million by the end of 2010. Forrester Research projects that $4 billion in legal work is likely to come to India by 2015. Currently, the size of the industry is small (especially, considering the number of players operating) but the growth prospects are good. It is obvious that many entrepreneurs jumped in to catch a pie of this lucrative industry. But the fact is that only a handful of companies in India are doing well and most of others are still small and suffering. The lack of preparedness while staring the business has led to quality issues as well.

No doubt the industry holds tremendous prospects, but it is critical to understand the industry dynamics which are specific to LPO. Cost benefits are definitely a top consideration for the firms who would like to outsource legal work to India. The cost of getting work done from India could be as low as 20% of what it is in the US. Availability of manpower is not a big constraint in India as thousands of students graduate from Indian law schools and engineering colleges (engineers are needed to execute work related to IP/Patent research). However, training them to carry out the foreign legal work is important and this needs investment. Association with a foreign law firm would be extremely helpful in building the LPO business. This helps in knowledge transfer as well as assurance as far as client base is considered. Signing in a legal client is not a simple task unless there is some backing by a foreign legal firm or you have sales persons who are well connected in the industry.

There is interest from the investor community in the industry. Firms such as Clutch Group, Pangea3, United Lex, Mindcrest and TechLit have been funded by angel investors and VCs.

We believe that LPO is certainly a good space to jump in, but one needs to focus on certain key aspects to be successful:

  • Cost benefit is an obvious consideration while outsourcing – every player in the industry offers it. But being quality conscious is extremely important to be successful and to grow the business. The challenge for the Indian LPOs is to convince the firms outsourcing the legal work, about quality of output.
  • Investment in training and devising right training techniques is important.
  • Industry connection/network is critical – either through foreign law firms’ association or through a well connected sales force
  • Confidentiality – this is an important aspect any legal client would expect from LPO firms while executing the assignments. Therefore, implementing measures to take care of this and winning client’s confidence is of great importance.

We also believe that as the industry becomes more competitive, small and inefficient players may be forced out of business and we could also witness some consolidation happening in the industry.

Surviving the Downturn

A lot has been said and written about the downturn across all media on how bad it already is or how bad it could get. The end analysis is that nobody has answers to these questions let alone coming up with solutions. The question then is how does one survive a downturn – the answers could be as complicated as the question itself or is it? An article in the Businessweek, has tried to map out businesses which had survived the ‘Great Depression’ and still continue to exist (and succeed). Sure Charles Darwin is smiling from somewhere!!!

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