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November 28, 2004

Differences between investing in China and India

China has a very strong government and a weak corporate sector. India has a weak government and a strong corporate sector.


Some extracts from an interesting interview in Businessworld with James J.C. Birch, managing director, Institutional Client Services (equities division), Goldman Sachs International, who recently escorted a group of twenty large institutional investors to India:
On the surface, as you step out of the airport, China appears to be light years ahead. It looks like Chicago. It's simplified by the fact that they have a one-party government. If they want to do something, it happens. But trying to find good companies to invest in is very difficult. China has an economy that has been fairly closed until recently. They don't have much history in competing on a worldwide basis. You (India) have companies who are leaders in their own field and have competed against the world's best companies in a reasonably open way. And in fact, they are doing better than ever at the moment on a global scale. China has companies that are protected by state subsidies.

If you are very blunt, China has a very strong government and a weak corporate sector. India has a weak government and a strong corporate sector. What's important then is a clear impression of the government. When we came in, people were nervous about elections, coalitions, how many politicians are being investigated for corruption and things like that. But the politicians we met understood the issues. The government itself said that whether it's the Congress party or BJP, don't worry too much.

We were reassured, but the concern really is more on the implementation and execution. So, even if you want to review the Mumbai and Delhi airports, is it going to take 3 years or 10 years? And it's not just a matter of time. Because all the time that this doesn't happen, other people are overtaking you. Your IT sector's English-speaking advantage will not last for very long, because all the Chinese are learning English very, very fast. That's why you need to get as far ahead as you can. There are no Chinese equivalents of Wipro or Infosys. TCS has an office in China with over 200 people. That's what should be happening. But since you delay infrastructure changes, it [still] takes an hour and a half to get from the Leela to Infosys's office. The traffic and the airport aren't the only important things; power and water are equally important...
...There is a concern that Indian infrastructure just doesn't support them and puts them at a great disadvantage to other countries. [However,] I don't think you want to go crazy and do what the Japanese have done - build roads for the sake of building roads. Even the Chinese have probably built too many highways and too many airports. And they've built them because constructing things creates employment opportunities. I'm not suggesting you do that.


Getting VC funding without a MBA

# Unless your best friend in the world -- whom you happen to have embarrassing pictures of -- is a VC partner, please do not contact any VC. It makes no sense.

# Passion, experience, real-world results are not qualifiers for introduction to VCs. An MBA from some elite school with 20 board members who know Jack Welch personally, with an extremely complicated idea that has never been built, are preferred.

-- E-mail from a Dallas-based CEO to Jerry Colonna, a former VC with JPMorgan Chase, Flatiron Partners and CMG@Ventures.

Here's an extract from Colona's response to the e-mail in his column for Inc.com:

Yes, I'll admit, having compromising pictures of a VC may help get a meeting or even a term sheet, but the larger point speaks to the network effect. Implicit in his frustration is a question I often got when I was on the speaking circuit while an active investor: What's the best way to get the attention of a VC?

Unfortunately he's right about the business school mafia that exists out there. Perhaps the single most important reason for getting an MBA is the network of alumni that comes along with it. I detest that fact. As a graduate of a public college in New York City, as someone without an MBA, I sympathize greatly with his frustration.

But he's missing the larger point; the point is that you MUST get connected. You know that business relies on people connecting with other people and that few great ideas are truly great enough to break through and emerge as successful companies without the founder/entrepreneur/CEO going out and pressing the flesh. So you don't have an MBA. So what? Go out and find a network you can join. If there's none in your area, start a chapter of the Young Presidents' Organization (YPO) or Young Entrepreneurs' Organization (YEO). Go to you nearest university and meet with the professors there.

Larger domestic IT market makes China more attractive to VCs

What is the size of the domestic market for IT products? This is one of the first questions that a General Partner at Boston and Silicon Valley based Battery Ventures posed to me, when I introduced myself to him as someone who tracks VC activity in India (at a Silicon Valley Bank event in Bangalore). The question was interesting since the popular assumption is that US VCs are primarily interested in India as a place for their portfolio companies to outsource R&D or other backend work.

Now, there's a new report saying Battery is set to invest $8-12 million in Bangalore-based optical networking technology company, Tejas Networks, most of whose customers are Indian telecom companies. Not surprising. Since telecom is indeed one sector where the Indian domestic market is large, fast growing and cutting-edge in terms of technology adoption to be very attractive to international product companies. And VCs.

Larry Cheng, an investment professonal with Battery, explains why "Huge Domestic IT Markets" is the "Reason #1" why US VCs are making a beeline for China, in a recent article for Pacific Epoch:
To appreciate China, you can’t compare it to other international investment hot spots like Israel or even India, just yet. The reason is simply that the vast size and breadth of China’s domestic market stands well above these other markets. China is one of the few countries that can support multiple billion dollar companies across several different segments of technology on the basis of its domestic market alone. The big win for many Chinese IT companies never has to entail it expanding beyond its borders. Let’s take a simple example like the semiconductor component market. Chinese companies in 2003 spent anywhere from $15B-$18B in semiconductor components. This is built ground up with local companies like Huawei and others spending $500M+ on components each. This overall number is expected to grow to $50B in the next several years. But, that isn’t even the most compelling fact which is that in 2003, ~90% of the spending was on imported components. It is anticipated that a bulk of the market spend will migrate to domestic manufacturers as capacity comes online through companies like SMIC and others. That means the import replacement market alone could grow to be tens of billions in a few short years in China. That’s a huge market. Same goes for the 350M fixed line subscribers, 350M wireless subscribers, 200M online gamers and the list goes on. Already, half of the top 25 most visited websites in the world are Chinese websites. These are all rational market numbers and form a valid reason to be enthusiastic.

Later in the article, Cheng explains how Chinese companies proceed from (doing import replacements) to becoming global IT names:
They first defeat import vendors to win the import replacement market. Then they fight and win among brutal domestic competition to maintain their leadership in China. And, once they beat domestic competition in a price sensitive market like China, they have a very strong position and cost structure to win globally. As one proud Chinese woman said at a conference, “If you can sell to smart, but poor Chinese, you can sell to the rich, dumb Americans.” This dynamic will play out in other IT markets.


Fenwick & West Venture Capital Survey 3Q 2004

Mountain View, CA-based law firm Fenwick & West has released the 3Q04 edition of its Silicon Valley and Israel Venture Capital surveys.

Click Here for the Silicon Valley survey.

Click Here for the Israel survey.

November 22, 2004

Should Warren Buffet worry about Ram Shriram?

Ram Shriram of Sherpalo Ventures, an early investor in Google, is free to become a billionaire anytime - ie, anytime GOOG trades above $190. As of last Tuesday (November 16, 2004) the lock-in period on his shares - and that of other early investors in Google - expired.

Here is an extract from SiliconBeat (a blog created by two writers at San Jose Mercury News and seemingly, huge fans of Shriram), which "calculates" that Shriram's Google investment was "the best, if not the best, investment in a company ever":

Shriram is keeping the exact amount he invested into Google a secret. However, the angel round in 1998 of slightly less than $1 million consisted of four main investors, of which Shriram was one. When you factor in that a few other individuals, family and friends may have invested some money, we'll assume Shriram invested between $100,000 and $200,000 give or take.

Given that his return is near $1 billion (see math below), he's made between 5,000 and 10,000 times his money back. That's got to be a record, right? True, much of Shriram's investment profits from Google are still on paper. But Google insiders, including Shriram will be allowed to sell some more of their shares tomorrow, after a three-month lock-up period expires.

Here's the math. Shriram owned 2.2 percent of Google's shares, and first sold a portion at the IPO, raking in $22.6 million. He still holds an additional 5,058,427 shares, which at today's price of $185 (at least at the time of this writing) translates into an additional $935.8 million. That's a total of $958.4 million.

Ok. Enough talk about numbers. Who exactly is this guy, Shriram?

Here is an extract about his background from the profile (finally!) revamped Sherpalo web site:

Immediately prior to founding Sherpalo, Ram served as an officer of Amazon.com working for Jeff Bezos, founder & CEO. Ram came to Amazon.com in August, 1998, when Amazon acquired Junglee, an online comparison shopping firm of which Ram was president. While at Amazon, Ram helped grow the customer base during its early high growth phase in 1998/1999. Before Junglee and Amazon, Ram was a member of the Netscape executive team, joining them in 1994, before they shipped products or posted revenue. He drove the many partnerships and channels that Netscape employed to get massive distribution for its browser and server products during those now legendary early days of the Internet.


To me, the most notable - and fascinating - feature about Shriram's investments is the way he has kept his faith in consumer Internet companies right through the "Internet bust".

Check out his list of investments here. Will his other investments fare any where as well as Google? I don't think so. But, who cares. Even if Sabeer Bhatia (of Hotmail fame) never ever creates another successful start-up in his life, he will continue to remain a great entrepreneur. Similarly, Sherapalo - the only company that Shriram has actually *founded* - is already a great model angel fund.

PS: Talking about Sherpalo's founding, I had to Google (!) to locate the fund's co-founder, Randy Korba. He's now working with Buyer Leverage, an e-commerce technology company. Kind of sad that the Sherpalo web site does not mention Korba at all these days. Wonder why. Maybe it's good meat for yet another Shriram-related story for SiliconBeat?

November 14, 2004

Heralding "global-from-day-one" start-ups

As I was going through the program agenda of Ernst & Young's Israel-India-China Global Hotbed Cross-Border Company Showcase event (at the San Mateo Marriott on November 4, 2004), I was intrigued to see a "Sandeep Kumar" listed as the presenter for an Israeli multimedia semiconductor company called Adimos. Must be a misprint, I thought. And marked Adimos as an "Indian company" whose presentation I needed to attend.

As I learnt later from Kumar's confident presentation to the gathering of VCs, investment bankers and fellow entrepreneurs (most of whom had traveled from the three "hotbed" countries to pitch for their companies' next round of funding) and a visit to the Adimos web site, the company is located in Los Altos, CA (USA) "with research and development facilities in Israel and a growing presence in Japan". Adimos' chips help electronic devices transmit multimedia content wirelessly within the home (like video from a DVD Player to a TV located in another room).

Here, according to an article in Forbes magazine titled "The Global Startup" (issue dated Nov. 29, 2004), is how Adimos was born, landed Kumar as its CEO, and is leveraging Keiretsu (in Japan!) for its business development:

During a partner meeting early last year Hiroshi Ikegaya, JVP's partner in Japan, alerted his colleagues to a hankering by Asian consumer electronics firms for a chip that could transmit video wirelessly within the home. One of Ikegaya's partners knew some engineers in the Israeli military who were using such a technology. (JVP founder Erel Margalit) recruited an Indian executive from Texas Instruments to run the operation out of Los Altos, Calif. Along with Benchmark Capital, Gemini Israeli Venture Funds and Genesis Campus, JVP invested $12 million in the new company, dubbed Adimos, in July 2003.

Since then Ikegaya introduced Adimos' chief executive, Sandeep Kumar, to Mitsui & Co., a giant Japanese distributor that also invests in JVP's funds. Kumar also called a contact at Toshiba Corp. Now Adimos is working with Toshiba and Mitsui to develop a wireless videochip that will suit their needs. The chip will be embedded in TVs to receive music, pictures and movies from PCs, set-top boxes and the Internet.

Kumar, an IIT-Delhi (1984) and University of Cincinnati alumnus, worked for 16 years with Texas Instruments during which he established TI's operations in Israel.

Going by the indications at the E&Y event - organized in conjunction with Silicon Valley Bank (which itself opened an office in Bangalore recently) - and the Forbes article, we are set to witness the springing up of more and more "global-from-day-one" start-ups like Adimos. And venture capital investors that continue to sing the "we do not invest in companies that are more than half-an-hour drive away" tune, will begin losing out to their competitors who do not think twice about flying to meet companies located half-a-world away.

Indian gaming industry to grow 5-fold by 2006-07: KPMG survey

Fuelled by booming demand for mobile games and local content, the Indian gaming content industry is set to grow five fold to touch $100 million by 2006-07, according to a KPMG study. The current size of the industry is about $20 million, Economic Times reports quoting the KPMG study. Most of the 15-odd game developement companies - which together employ about 600 people - are focused on providing development services to overseas gaming firms.

Businessworld magazine recently profiled three of the largest players - Paradox Studios (a subsidiary of telecom services firm Reliance Infocomm), Dhruva Interactive and Indiagames - which are busy creating their own branded games.

"VCs are a hindrance for experienced entrepreneurs": Kintera CEO

While venture capital serves a valuable role in providing capital and partnership to young entrepreneurs, "if you have a seasoned management team and a track record, VCs are more of a hindrance than a help". This according to Harry Gruber, co-founder and CEO of Nasdaq-listed Kintera Inc., which provides software and services to help for non-profit organizations raise funding through the Internet.

Gruber, a trained medical doctor, has raised funds from leading VC firms like Kleiner Perkins Caufield & Byers and 3i Group for his earlier companies including two publicly traded biotech firms and InterVu (a provider of Internet video and audio delivery that was acquired by Akamai Technologies in 2000). For Kintera, Guber avoided VCs and had raised about $30 million from high net-worth individuals, before taking the company public in December 2003.

"VCs have a need to gain control of their investments because founders are typically inexperienced. So, certain decisions are made by the VCs that are not always in the best interest of the founders," Gruber says in an interview to Venture Capital Journal. "VCs use entrepreneurs to educate them on the industry. It's free labor for them. But it's not a healthy relationship long-term for entrepreneurs."

Entrepreneurs preferring to be stealth: KPCB partners

It is tough to do venture capital research in the US these days. Start-ups that receive VC funding are no longer keen to publicize their fund raising. So much so that the "dip" in VC investments during the latest quarter - indicated by data from VentureOne and VentureEconomics, may in fact be "artificial", according to a report in San Jose Mercury News.

The newspaper's assertion that "start-ups are trying to stay under the radar longer and not announcing their VC funding", is validated by no less than John Doerr, Brook Byers and Ray Lane (all partners at leading Silicon Valley VC firm Kleiner Perkins Caufield & Byers).

"Entrepreneurs want it that way. Ten years ago, as soon as a venture was funded by a reputable venture capitalist, within six months, two or three clone ventures would be launched like heat-seeking missiles right up their tailpipe. People got wise to that. Why should we say anything about what we're doing until we have happy customers, and we're ready to try to expand and grow our market? You see many more entrepreneurs wanting to remain in stealth mode for a long, long time. The smart ones, anyway," Doerr says in the interview.

"By talking too early, they produce weak competitors. The worst thing you can have is weak competitors. A strong competitor is actually good for you in an early market, because it helps build the market. A weak competitor, it turns off a client. The client says, ""I don't get it," because they're not able to put it across. It's not good for that original idea," adds Lane.

According to the KPCB partners, start-ups today are willing to forego the ability to attract positive buzz and good employees by announcing that leading VC firms have funded them in favor of the advantages of remaining stealth!