Milestone Group Quarterly: July 2007
Articles
- Face to Face: Dinesh Wadhawan, CEO IndiaTimes
- Investment Viewpoint: Naren Gupta, NexusIndia
- By Invitation: Satish Nambisan and Mohan Sawhney: An Advance Look at Harnessing the Global Brain for Innovation and Growth: The Execution Challenge
- Milestone POV: Venture Math by Anurag Chandra of Milestone Group’s Advisory Board
Investment Viewpoint:
Naren Gupta, NexusIndia
Milestone: Tell us about Nexus India Capital.
Gupta: We are a venture fund investing in high-growth companies in the mid to early to stages. Our focus is India and those companies based in India and/or sell to the Indian sub-continent. What makes us unique is that prior to joining Nexus, everyone on our team has been a successful entrepreneur and investor. We understand the challenges in creating successful companies and try to be a valuable partner to the founders and management teams we work with.
As background, I founded Integrated Systems and took it public back in 1990. I was the CEO for about 15 years, during both the private and public phases. For the last ten years, I have been investing in early and growth-stage companies. A number of these companies have gone public and some have been sold. One of the recent sales was a company called Speedera Networks which went to Akamai for over half a billion dollars (based on the current Akamai price).
I have been involved in investing in India at some level for over ten years, first as an LP and advisor to the first India-focused venture fund (Draper International) and later through other funds and direct investments.
My colleague, Sandeep Singhal, lived in the US for more than fifteen years and then moved to India to set up a venture fund, eVentures India in 1999. The fund helped create market leaders in India travel, network hosting, and BPO operations. Sandeep also founded and ran a medical BPO company in India.
Another colleague, Suvir Sujan, also moved back to India after ten years in the US. He co-founded and co-led a company called Baazee, which was acquired by eBay and is now 'eBay India'. Suvir is the leading expert on consumer Internet in India.
Milestone: You've just launched a $100 million fund by saying, "India is finally ready for venture capital in companies driven by innovation." What's in place that makes conditions favorable for entrepreneurs?
Gupta: There are three conditions. First, entrepreneurs in India today understand market needs better than they have in the past, due to the confluence of the returning professional (of Indian origin) and the advanced development and marketing groups set up in India by US and European multinationals. These provide an insight into global market needs.
Second, the growing and changing nature of local markets provide foundations for creating large companies. For example, eating meals out of the home is much more common today, thus allowing the creation of several restaurant chains.
Third, Indian entrepreneurs today are more competent and more likely to take risks, which is inherent in companies based on innovation. Several recent successes have also raised the confidence levels of entrepreneurs.
Milestone: What are the risks inherent to investing in this region? How do they differ from the Silicon Valley or other technology centers?
Gupta: In addition to all the risks inherent in early stage investing anywhere, Asia presents additional risks - political stability, government policy changes, corruption, and exchange rate fluctuations, among other things. In India, poor infrastructure and restrictive labor laws make it difficult to invest in certain industries and can make scaling difficult. Of course, the poor infrastructure is also an opportunity for private equity.
In spite of these risks, venture and private equity investments in India are motivated by the availability of a skilled workforce, knowledge of English among a broad swath of the population, a growing respect for intellectual property rights, consumer spending growth, and capital investment by corporations.
In addition, different needs in the region often make Western products unsuitable for these markets. Companies formed to address local needs will, over the long term, best serve these needs. That has happened, for example, in the mobile communication space and will happen in other areas as well. For example, open source applications (like ERP and CRM), which have not been successful in US and Europe, are gaining earlier - and firmer - traction in India.
Milestone: Outsourcing to India has been thought of as a way to lower development costs and build efficiency into the supply chain. Does that present a problem for innovators out of the region?
Gupta: Yes and no. The outsourcing business can present to entrepreneurs with a ready source of quick revenue and also reduce external financing needs. Sometimes, it reduces the incentives to launch companies driven by innovation, because innovation-driven companies have longer gestation periods, which means more capital, and may be perceived as higher risk.
On the other hand, the outsourcing business is maturing. Increasingly, it is driven by scale making it difficult to launch new enterprises. As an outsourcing business matures, it begins to provide a fertile source from which talent can launch and build innovative businesses. We regularly see teams, who might have spent a few years at leading multinationals, wanting to break off and start their own innovative companies. These teams are exposed to best practices at successful US and European companies and have a better grasp of market needs and the process needed to launch new classes of product.
Most importantly, innovative companies are being launched because there is a growing market need for their product and services.
Milestone: What's your view on Indian outsourcers? At first it seemed to be simple maintenance and Q&A outsourcing; then it shifted into doing more higher value development work. And then things evolved to component based development and re-use coming to the market with pre-packaged solutions. What's next? A bona fide pure product company originating from India?
Gupta: The business of outsourcing to India has gone through a revolution over the last twenty or so years. It is fair to say that only development work that no on wanted to do in the US was sent over to India at the start. My view is that Y2K issues for the first time made it clear that Indian developers could do design work. Over time, companies sent increasingly advanced work to the Indian outsourcers. More recently, large leading-edge multinationals are moving advanced development to India, partly because projects can sometimes be completed in a shorter clock time in India than they can elsewhere. This is likely to continue even as the cost efficiencies are not as pronounced as they used to be.
More recently, the range of outsourcing has expanded to include broad categories including financial research, legal work, market analysis, product planning, and media.
It is not clear what the ultimate boundaries of the outsourcing activities will be. No matter how outsourcing evolves, these new outsourced activities are expected to be breeding grounds for a new class of innovative companies.
Milestone: Obviously, part of the innovation story in India is its growth as a market for consumer and enterprise technologies. How do you see the innovation curve intersecting with market growth? What's the time horizon?
Gupta: India is a long-term growth story. And by that I mean, perhaps, ten to twenty years. And we see different sections of the local economy affected by innovation at different times during this period.
It is important to say that in the Indian context, we look at innovation broadly. Beyond technology platforms, there is a need for innovative approaches in business models and business processes. Over the next few years, that innovation curve may have a larger impact on the Indian consumer and enterprise markets than new technology. We believe that large successful businesses will be created in India driven by business model and process innovation.
There are lessons to be learned from the US. Wal-Mart's and Starbucks' success may be attributable to innovative business processes. Red Hat innovated on the open source business model allowing rapid technology evolution and lower total cost of ownership. In the Indian context, the wireless carriers have deployed innovative customer acquisition and equipment deployment models to cut the cost of mobile calls to a fraction of the cost in the US.
We continue to see a broad range of innovative companies that are focused on addressing local needs. These companies make sense only in the Asian context and would be unsuitable for addressing the Western markets.
Milestone: Until then, the largest market for innovation-based products is the US. What does an entrepreneur from India need to know in order to be successful in penetrating the US market?
Gupta: Obviously, the US market is very sophisticated and highly competitive. Understanding the nuances of the market is critical to success there. While that has been a problem in the past, appreciation for US market needs is growing quite rapidly among Indian professionals. This market knowledge may be available through returning professionals or from Indian operations of global companies. We have noticed that most start-ups in India have at least one founder or senior manager, who has spent several years outside of India.
In addition, it is important for entrepreneurs to understand the high costs of marketing and distribution in the Western markets, and to plan resources accordingly. We often suggest to entrepreneurs that they test products in the Indian market first, where the costs are low, and before they embark on a global deployment.
There have only been a handful of Indian companies that have been able to successfully address the US market with innovative products. However, we see the technology business as becoming global, and we will likely see many more global companies coming out of India in years to come.
Milestone: What are the drivers for early stage success these days? For example, does the technology have to be the product of a collaborative effort (open source) in order to advance collaboration among those in an enterprise? Or is it that the development matters less than the application these days?
Gupta: The drivers for early stage success have not changed much over the years. I still rate passion and commitment of founders and early employees as the most important elements for success. The speed at which an organization can adapt to market inputs is also critical, particularly because markets are evolving faster than ever before. The need for faster response also means that effective team collaboration is critical, especially when the teams are geographically dispersed.
A thorough understanding of the market is also a critical element for early stage success. There has never been a greater need to keep products simple and intuitive. Development matters as much as ever before, but time-to-market considerations and product simplicity require careful trade offs among possible product features.
Milestone: What innovations - or product platforms - do you see in your travels that could redefine a technology, industry or category?
Gupta: We see business model innovation and process innovation affecting just about all the industries from corporate infrastructure, to health care and to consumer products and services, particular in developing economies.
Milestone: What companies have you invested in that fit this mold?
Gupta: We have announced three investments and all three of them fit the innovation mold. Mobile2Win is redefining business models for the distribution of content in the mobile ecosystem. DimDim, a company we funded in syndication with a European and a US venture firm, is providing a platform for web collaboration using open source. A third company, Kirusa, is providing a low cost technology for voice messaging using the SMS platform. This company leverages the broad use of SMS by Asian mobile phone users.
Milestone: We always ask this question: Is there a company that you passed on investing in that you would like to have a do-over on?
Gupta: Yes, there are many companies that I passed on that in hindsight I should have invested in or in some cases made a bigger commitment to. I often ask myself why I passed on a particular company that was ultimately very successful. But I also wonder why I did invest in certain companies as well. We continue to refine our thinking, but the early and mid-stage investing is more art than science and we are far from perfect. That is what makes the business so exciting. And also quite humbling.
Prior to Nexus, Naren Gupta Co-founded Integrated Systems Inc (ISI), a leading embedded software company in 1980 and took it public in 1990. He served as ISI’s President/CEO till 1994 and as its Chairman till ISI merged with WindRiver Systems in 2000. He subsequently served as CEO and Vice-Chairman of Wind River Systems.
Naren has been an active investor for the last ten years. Among his investments, several companies had successful public exits, including Digital Link, E-Tek Dynamics, Numerical Technology and RightNow. Exits through acquisitions include Speedera Networks.
Naren holds a B. Tech. and is a recipient of President’s Gold Medal from the Indian Institute of Technology (IIT), Delhi; an MS from the California Institute of Technology and a Ph.D. from Stanford University, all in engineering. Naren has received distinguished alumni awards from Caltech and IIT and was elected a Fellow of the IEEE.
In addition to Wind River, Naren serves on the boards Tibco Software, Red Hat Inc. and the Community Foundation of Silicon Valley. He is also a founding member of TiE and is an active advisor to Indian entrepreneurs worldwide.
|
