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December 24, 2004

Gung ho about going global

Software and BPO services aren't the only areas where Indian companies are competitive on a global scale. Private equity investors have realized this early and voted with their cheque books in favor of pharmaceuticals, textiles and even steel companies in 2004.

How come?

"Indian manufacturers in these industries are getting coupled into global supply chains. It can only mean more global trade in the coming years," writes Businessworld's economics editor, Niranjan Rajadhyaksha.

More factoids from the article:

India's total foreign trade this year will be about 32 per cent of its total GDP. It means that about a third of our national economy is now linked to the rest of the world...

..Exports today account for about 15 per cent of India's GDP. So a 25 per cent rise in exports adds about 4 per cent to India's GDP growth rate. Or to put it another way, over half of economic growth this year will be accounted for by foreign demand.

The rise of the "product development services" company

Software services are an old story. Product companies - except for a few exceptions - have not taken off (for the usual set of reasons: marketing costs are prohibitive, etc. etc.).

So what's new to write about the Indian software industry? "Product development services", according to a Businessworld article.

What is a product development services company?

Typically, when any company starts to develop a software product, it would have a unique differentiator or core of the product. That core generally accounts for 15 per cent of the development work of the product. This would invariably be developed in-house. But the product would also have a lot of other modules. These are essential, but they are not big differentiators. This is where product development services companies step in - they develop these non-core modules.

Who are the players in this space?
Bangalore-based Symphony Services was among the early players. Then there are Aditi Technologies and Aztec Software (Bangalore), BrickRed (Noida), and Aspire Systems (Chennai).

The article also talks about the 3-year old iSoftTech, a Chennai based company co-founded by Ray Stata (who earlier founded US-based Analog Devices) and IIT-Madras professor Dr. Ashok Jhunjhunwala.

Why would a product company outsource development?

There are several reasons why companies developing products are willing, even keen, to outsource. It helps developers cut the time to market. It also frees up the product development company's management resources to concentrate on the most critical core of the product...

...Software products fail more often than they succeed. Good, and even exceptional products, have failed for lack of financial or marketing muscle. In many cases, new, disruptive technology can make a product obsolete in no time. Even large product companies face huge risks. Start-ups have limited chances of success in full-fledged product development.


What are the various types of engagement models in this space?



So why is this business better than pure vanilla services?

First, margins in the business are much better than in IT services. "Billing rates per engineer per month can be as high as $7,500, compared to the $2,000-$4,500 that services firms make," says (Vijay) Babu (COO of iSoftTech). Sources say billing rates are at least 30 per cent higher than the IT services industry. "The client is ready to pay higher bill rates for predictable high-end product delivery."

More importantly, these companies have the opportunity to do bleeding-edge product development. "It is as if a small company is actually working on a group of products, but without the associated risks," says Babu. There can be no greater turn-on for many hi-tech start-ups. Finally, even one successful product can bring global recognition and a consistent stream of revenues. Product upgrades, new versions, etc., keep product development services companies busy even after the initial launch.

Any success stories to talk about?

US-based Stata Labs, founded by Raymie Stata (Ray Stata's son) had outsourced the entire development of its email software product "Bloomba" to iSoftTech.

Yahoo! recently acquired Stata Labs along with the 20 iSoftTech engineers working for Stata Labs. Yahoo! now plans to use Bloomba to take on Microsoft's Outlook and Google's Gmail.

So why aren't TCS/Wipro/Infosys tapping this opportunity?

This model may not appeal much to the biggies because it is not as scalable as IT services. But for smaller companies, outsourced product development is a terrific learning opportunity.

December 15, 2004

TSJ Media featured in Business Standard article on Silicon Valley VCs investing in India

In 2004, up to November, venture capital and private equity funds invested over $820 million in India-based companies, according to data from TSJ Media, the Chennai-based firm that tracks venture capital investments and mergers. But less than 10 per cent of this money found its way to start-ups.

The pendulum is starting to swing the other way again because new investors are coming forward to invest in the several start-ups that have sprung up in the last two years or so. Explains Arun Natrajan, editor at TSJ Media : “The founders and early employees of IT services companies who have made it big are beginning to make serious investments in local companies.”

He cites the example of Infosys co-founder N.S. Raghavan’s Nadathur Holdings which invested $7 million in the apparel design subsidiary of the Bangalore-based Reach Technologies in March 2004, adding that successful non-resident Indians like Vinod Dham and Tushar Dave of NewPath Ventures, their venture capital company, have incubated companies like Nevis Networks and InSilica and in 2004 helped them raise significant second round investments from global investors like Nokia Ventures and Flextronics.

Click Here to read the full article.

The rush to manufacture mobile phones in India

Businessworld magazine has published an article on why there has been a flurry of activity, interest and announcements in the recent times for manufacturing mobile telephone handsets in India.

So, whose's making (going to make) handsets in India?



Why India?

The sheer size of the Indian market, its frenetic growth rates, and above all, the fact that it conforms to global standards...The Indian mobile market is expected to add around 20 million new subscribers in 2004. At an average price of Rs 5,000 a handset, the Indian mobile market is worth Rs 10,000 crore ($2.22 billion) already...And it is still growing very fast.

In fact, the handset market is expected to grow at 35 per cent year-on-year on an average till 2010. In 2005, nearly 37 million handsets worth $4.2 billion are likely to be sold in the country. That will make India the third largest mobile handset market, after China and the US. By 2008, handset sales are estimated to touch 50 million, catapulting India as the second largest market.

It is this growth that global majors are hoping to cash in on. But they could still have continued to get their handsets manufactured outside India as they currently do. Except that a hitherto ignored variable, a policy decision by the Chinese government, has now altered the equation wholly in India's favour. China has been working on its own 3G standard, the TD-SCDMA. The Chinese government, by pushing this standard, hopes to save the country up to $10 billion in import costs and expensive 3G loyalties. But this would also mean that the handsets sold in China will not work on the standards followed by the rest of the world.

If handsets that cater to global standards cannot be sold in China, it also does not make sense to manufacture them there. Which explains why the global handset majors are setting up shop in the next big mobile handset market. A huge domestic demand also means economies of scale, which can be leveraged for exports.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

December 12, 2004

"Determination to succeed is what counts”: 24/7 Customer CEO

What could be new or interesting about "yet another VC-backed BPO Firm" launching yet another call center facility? Luckily for me, I did not let this question dissuade me from attending the launch of the 24/7 Customer's latest facility in Chennai last week.

A freewheeling conversation with P.V. Kannan, Co-Founder & CEO of 24/7 Customer, after the launch event, left me with a feeling that it would be wrong to slot his company with the rest of the pack.

Here are a few factors that contributed to this feeling:

One is Kannan's impatient attitude - including, refreshingly for me (but not necessarily for good for the company's PR firm), in the presence of journalists. Bangalore has enough PR savvy CEOs - including some who had journalists eating out their hands - but who are not so good when it comes to fetching returns for investors in their companies.

Two, his strong bias for action (versus intellectual debates). Kannan believes the formula for success - for start-ups and other companies - is sheer determination on the part of the founders (or the top management). "Dell Computer and Wal Mart were written off several times. But they ignored the naysayers and kept going and look where they are today," he says. Kannan says the same factor has led to the success of TCS, Wipro and Infosys.

Three, his track record: Kannan earlier founded Business Evolutions Inc, a provider of customer interaction technology, which was acquired by CRM software firm Kana Communications in December 1999. Post BEI's acquisition, Kannan worked as VP with Kana before founding 24/7 Customer. So, he knows something more than the average BPO company founder about the customer interaction space.

Four, the caliber of his investors: 24/7 Customer started out with funding from its co-founders and Ram Shriram of Sherpalo Ventures. 24/7 raised its next round of funding ($22 million) from Sequoia Capital. Ram Shriram and Mike Moritz of Sequoia Capital sit on 24/7 Customer's board. Now, where have I heard of Ram Shriram and Mike Moritz together before? Ah, yes. At a certain company called Google, Inc.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

December 06, 2004

Rajiv Gupta 's new "web telephony company" Cirxit bags CitySearch order

Rajiv Gupta, an former HP executive who co-founded and sold Confluent Software (a Sunnyvale, CA-based provider of software for managing Web services) to Oblix in February 2004, has created a new "web telephony company" called Cirxit, reports SiliconBeat. Cirxit is powering local portal CitySearch's pay-per-call service under which advertisers pay CitySearch whenever a visitor to the latter's site make an telephone-based enquiry.

Gupta wouldn't tell us much about CIRXIT, which is just now coming out of stealth mode — how many employees, how it's funded or much about its technology. The company doesn't even have a public web site yet.

Gupta described CIRXIT as a "web telephony company." Its technology allows Citysearch to offer its customers a unique customer phone number that CitySearch can monitor. When a call comes in to an advertiser, Citysearch can charge the merchant for the call.

"In some sense, what we're doing here is web services,'' Gupta said. "If you take a step back, we've had two separate islands: telephony and the web. What we're doing is integrating the web and telephony in a new platform. This is our first (partnership). You'll be hearing more from us.'

Gupta said the technology has a wide variety of possible applications, such as on online dating sites. There, it could allow potential daters to make that first phone call through the dating site without having to reveal their phone numbers to each other.
Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

December 02, 2004

New India VC Guide

Mumbai-based Dickenson Intellinetics has launched "VC Guide for India 2004-05" providing profiles of national and international Venture Capital/Private Equity that have a keen interest in India. Using a standard template for each VC/PE firm, the Guide sets out crucial information - industry preferences, preferred investment stages, financing role, type of funding, main source of capital, as well as contact information. The Guide also includes an overview of the venture capital industry in India based on Dickenson's survey of 80 VC/PE firms.

One of the highlights of the Guide is an index of VC/PE firms by industry preferences and minimum investment size. Located at the very beginning of the Guide, the index provides an easy and quick way to specific VC/PE firms listed within.

The VC Guide is priced at Rs 6,900 for India and US$295 for other markets. Visit http://www.vcindia.com for more information about the Guide.