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May 30, 2008

Deal Analysis: HSBC’s acquisition of retail broking firm IL&FS Investsmart

By Girirajan. M & Pawan Kumar. R; Venture Intelligence

Deal Summary. HSBC has entered into agreements to acquire stakes held by Promoters - E*Trade (43.85%) and IL&FS (29.36%) - in IL&FS Investsmart Limited (IIL), a publicly listed retail brokerage. The offer, at Rs. 200/share, values IIL at $330 million. In addition, IL&FS is to be paid an additional $19 million as part of a three year non-compete agreement. HSBC is also in the process of making an open offer for additional 20% stake as per Indian securities laws.

About IIL.
IIL was founded in October 1997 as a subsidiary of Infrastructure Leasing & Financial Services (IL&FS) to focus on capital market related activities. It currently has almost 1.4 lakh customers across 133 cities and towns across India. The company went public in July 2005.

In November 2004, Private Equity firm SAIF Partners and US-based online broking firm E*Trade had picked up a combined 34% stake in IIL by investing $14.2 million. (Incidentally, SAIF’s parent firm – the Japan-based SoftBank - was one of the earliest investors in E*Trade.) By early 2007, E*Trade had increased its original 14% stake to 43.85%.

Shareholding Pattern*


*As of Mar 31 ‘08

However, IIL has been an underperformer compared to its peers in the broking sector. (See Table Below)


* All figures in Rs. Crores and rounded; ^Market Cap as of end April; Source: Moneypore / Moneycontrol

Deal Trigger:
With E*Trade getting badly affected by the US credit crisis late last year (the company has lost about 85% of its market value since the beginning of 2007), the company decided to put its stake in IIL on the block.

Deal Impact: While pointing out that the deal is still awaiting clearances, Tarun Kataria, Chairman-HSBC Securities and Capital Markets, is confident that HSBC is entering the retail broking space at the right time and at an attractive valuation.

The deal will fetch E*Trade about $145 million - a gain of $20-30 million over its investments. Ravi Adusumalli, Partner and Head of SAIF’s India office, said he was quite happy with the way the IIL investment has panned out. His firm would most likely tender its shares as part of HSBC’s open offer fetching it an about 4X return.

Other aspects of the deal that are expected to get answered as it goes through the mandatory clearances include the non-compete premium being paid to IL&FS (Will minority shareholders need to be paid this premium as well?) and the status of the commodities brokerage business of IIL (since Indian regulations forbid banks from owning commodities brokerages).

While the brokerage sector might be witnessing a boom phase in India right now, consolidation is inevitable in the longer term. The top Indian 10 brokers have just 24% market share compared to over 60% in the US. Also, Venture Intelligence data indicates almost 20 investments by Private Equity firms in brokerages since 2005. As these investors look for exit routes in the coming years, more M&A action can be expected in this sector.

Venture Intelligence is the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 29, 2008

"Cold chains becoming a hot opportunity"

Business Today has an article on how a slew of companies are setting up cold chain infrastructure across India service the needs of modern retailers.
The business rationale for entering a country like India is visible in the numbers. Consider: India is the leading producer of fruits in the world—at 32 million tonnes (MT) annually, that translates into 8 per cent of global production; in vegetables, it is second in the world (after China), producing 71 MT per year, which gives the country a 15 per cent share of the world market. Now for the bad news: As high as 40 per cent of the fruits and vegetables grown in India (that’s some 40 MT—worth a staggering $13 billion) gets wasted. In fact, India’s waste is huge enough to feed countries like Brazil and Vietnam. The reason for this colossal wastage is the yawning gaps in the cold chain, or even the absence of a cold chain to preserve fruits and vegetables. Such infrastructure is virtually non-existent, cold storage capacities are insufficient, cold storages in close proximity of farms don’t exist, transportation is inefficient, and temperature-controlled transportation extremely rare.



...So what has changed in the last couple of years that’s pushing companies to plunge into this hitherto-neglected segment? Without doubt, it’s the scorching pace of growth in organised retail, which is expected to be a massive $30-billion pie by 2010.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

The Business & Economics of the IPL

Business Today cover story on the business of the highly popular Indian Premier League (IPL) cricket tournament which now has Private Equity investors interested.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 28, 2008

Interview with Squadron Capital CEO

AltAssets has an interesting interview with David G Pierce, CEO of Asia-focused Private Equity Fund of Funds Squadron Capital.

On the firm's due diligence process:

The private equity industry in the Asia Pacific region has seen enormous growth in a relatively short space of time, as have most of the economies in which we invest. We, of course, look deeply at return information, but it is important, especially in countries like China and India that have seen such rapid growth, to determine whether an investment involved true value creation by the general partner or is just a case of "the rising tide lifting all boats".

...Track record is very important for us, but the reality in Asia is that track records are often very brief. We also look at the quality of the team, the quality of the structure, their skill set and whether they conform to global best practice. Essentially, we look at whether their fund aligns the interests of the general partner, its team and the fund's investors.

Challenges facing the private equity industry:
We are seeing a lot of new entrants, with lots of new investors attracted to private equity and the returns it can bring. There is significantly more money coming into private equity, and the asset class has to learn how to cope with large investors increasing allocations. With some of the largest, even an increase of a few per cent is still in the hundreds of millions. The industry needs to seek new markets in which to grow; Asia would be a good example. The issue is how to handle this growth and continue to make good investments.'

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Avnish Bajaj of Matrix Partners on Internet cos.

Outlook Business has an interview with Avnish Bajaj of Matrix Partners India, who earlier founded auctions web site Baazee.com, on investments in Internet-based services.
If you just go through the players and see who has done extremely well versus those who have not, you’ll see the difference. The ones who stuck to what they did best and didn’t try to do too many at that time, have worked. Then, management teams that had a great visionary on the top or had a core team of 5-6 people who hung together have gone the distance. Flexibility has been another big factor. The last few years of the Internet have been a hell of a journey. It has gone from being hyped to non-existent. Companies like Naukri and Baazee decided to advertise on television during the slowdown, a time when it was unheard of Internet companies to advertise on TV. That gave these companies credibility. Add to that flexibility in business models. Companies moved offline, some did acquisitions and all that helped. And finally, there was financial discipline. A lot of people had raised a lot of money and could survive the downturn. But people fundamentally managed their balance sheets well. So, for instance, we (at Baazee.com) were able to acquire Bidorbuy at the absolute bottom of the cycle.

...I think the Internet is finally beginning to take off in India. It starts with access and we’ve seen massive broadband rollouts in the last few years. Once access is in place, applications follow. Today it is smaller than what one would have liked it to be, therefore, even now the business model has to be pure viral C2C (AskLaila, Kijiji) or it has to be subscription-based (Seventymm). We are actively looking for good gaming type of companies. I actually believe there is some opportunity still in financial products. Overall, if we believe that a product or service has even a 50% chance of succeeding, we’ll look at it.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 27, 2008

"Water is a bigger priority than global warming"

At the recent Top Ten Tech Trends event organized by the US-based Churchill Club, Joe Schoendorf, Partner at Accel Partners and Vinod Khosla, Founder, Khosla Ventures made the following interesting comments on this topic: (Source: Tech Trader Daily)

Water tech will replace global warming as a global priority. The world is running out of usable water and (this) will kill millions more in our lifetime than global warming. Darfur could go down as the first water war of the 21st century. And with 2 million deaths, might not make the top 10 list. One billion of 6 billion people do not have healthy water. We’re losing close to 1 million people a year under 5 years old due to dirty water. Imagine a 60 year drought in this state. Within 15 years, will be up to 3 billion people with a water problem. 70% of water (is) used for agriculture; 90% (by) developed countries. If nano technology can work, and can figure out desalinization, (it) can prevent many wars over the next 30 years. (We are) missing the Al Gore for water.

Khosla agrees it is important, but not that it is more important than global warming. Global warming is causal, Khosla says. In 25-30 years, (water) will be rarer commodity than oil, and more valuable. Khosla says he is invested in two water companies, and looking for more. Schoendorf notes that T. Boone Pickens is selling oil companies and buying water companies.

Other member of the panel included Steve Jurvetson, Managing Director, Draper Fisher Jurvetson; Josh Kopelman, Managing Partner, First Round Capital and Roger McNamee, Co-Founder, Elevation Partners. Check out other predictions of the panel captured by Tech Trader Daily here

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 24, 2008

The Credit Crisis & Ways of the Market Explained

Comics John Bird and John Fortune have a hilarious video that explains how "markets work" and why it is only correct for regulators to bail out investment banks whose actions have caused havoc in the financial markets.

Here's how the skit starts (hat tip: Paul Kedrosky):

John Bird: You have to remember a couple of things about the market. They are made of very sharp and sophisticated people, some of the greatest brains in the world. And the second thing you have to remember is that the financial markets, to use the common phrase, are driven by sentiment.

John Fortune: What does that mean?

John Bird: What does that mean. Well. Things are just going on as normally in the markets, and then, suddenly, out of the blue, one of these very sharp and sophisticated people says, "MY GOD! SOMETHING AWFUL IS GOING TO HAPPEN! We've lost everything! My God, what are we going to do?"

John Fortune: Shall I jump out of the window?

John Bird: Shall I jump out of the window. Exactly! Let's all jump out of the window! We've lost it ...

John Fortune: Sell!

John Bird: Sell! Sell!

John Fortune: Sell!

John Bird: Yes, precisely ... and then, a few days later, these same sophisticated persons say, "You know, I think things are going rather well." And everyone else, "Yes, I agree. We're rich. We're rich."

John Fortune: Rich! Yes. Buy! Buy! Buy!

John Bird: Yes. Buy! Buy! Yes. And that's what we call market sentiment.




Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 21, 2008

“We are keen to invest in IT Products and Media cos.” – Interview with Niren Shah of Norwest

N. Sriram of Venture Intelligence recently spoke to Niren Shah, Managing Director of Norwest Venture Partners, who heads the Silicon Valley firm’s India investments out of Mumbai.



Niren was earlier CFO and Director of Operations at Baazee.com and joined eBay as part of its acquisition of the Baazee in 2004. Before joining Baazee in 2000, Niren was part of KPMG India’s Corporate Finance arm.


What is Norwest’s overall strategy for direct investments in India?
We have got about six investments in India and if you count cross border investments (i.e., cos. with back-end operations in India) there are about 22 . And we are looking at more direct investments.

We are basically a very broad fund. We can invest anything from US$ 1-2 million to US$30-35 million. We started off in India with late stage investments. We are now going to be doing few early stage deals apart from looking at late stage investments.

Norwest was a very active investor in 2006, but then went quiet. Why?
That’s incorrect; we actually made investments in 2005, 2006 & 2007. I don’t think there is any completely quiet year. It is just that in 2007, we put out a lot of term sheets but, sometimes, the valuations were completely out of tune. The market was very different and we are happy that we were quite disciplined.

Would you be doing more deals like Mobile2win where investors bought out one of the stakeholders?
In the case of Mobile2win, the management was intact. In general, among late stage companies, we are open for secondary sale by promoters.

Would you consider investments in sectors other than IT?
Yes, we are in the process of looking into various kinds of things like retail, health care, financial services, media and infrastructure. In non-IT , our focus would be on late stage deals.

Within IT, do you have any preference among sectors?
We are fairly bullish on Internet and mobile companies. It’s probably going to take 5 years or more for companies to come of age in these sectors. We are also interested in product companies with a lot of entrepreneurs of Indian origin coming back from the US. Also, the domestic market is gaining critical size in areas like telecom or stock broking.

What sectors will you surely stay away from?
Real Estate. It’s a very large sector and you need a different team. We don’t want to hold land banks, buying and selling properties.

Do you have any policy on co-investing with other VCs? Would you always prefer to be the lead investor?
Yes, we genuinely like to syndicate with other investors. We often become the lead but we have no real preference to become the lead.

How much do you look to put into a company over the life of the investment?
It differs from company to company. But I think it does not make sense to go above US$ 30 million. US$ 10-25 million would be our sweet spot.

What are your current revenue requirements for early stage investments?
It totally depends. Things like sector, concept, plan, competitive scenario, etc. all play a role.

Would you invest in "two guys and a PowerPoint presentation"?
If we see a management team with strong domain (knowledge) which has successfully executed before and it’s a good business plan in a market which is growing, the answer is a resounding yes. Yatra is a good example of such an investment. When we invested, even their website wasn't up.

Will the recession in the US hurt the flow of funds into Indian start-ups?
I don’t think issues in US will have an impact on India - particularly in early stage investing. In the late stage, it has impacted valuations. Norwest continues to believe that the long term story in India is very much intact.

Doing Due Diligence on VCs

These days, there is a lot of good advice online – see examples here and here – on raising Venture Capital in the Indian context.

A lot of knowledgeable persons advice entrepreneurs to do due diligence on a VC firm before accepting their money. For instance, here’s US-based investor Bill Burnham on his blog:
One of the more unfair aspects of VC fundraising process is that VCs are allowed to take months probing every orifice of your company, but entrepreneurs are expected to make one of the most important decisions of their life in a week or two and often with little or no information. There’s no good reason for this and all entrepreneurs would be well served by taking some time to do some basic due diligence on any investor who has offered them a term sheet.

I suggest, at a minimum, talking to at least two entrepreneurs that the VC has funded and then talking through with the VC (about) A) all the deals they have done and what happened to them (and) B) the current status of their fund and partnership.

Doing your own due diligence has 4 main benefits
1) it may help you avoid making a bad decision
2) it will create the perception of a competitive process
3) it will make you appear more savvy and diligent to the VC
4) it can come in handy when you are trying to stall while you get your second term sheet.

But how does an entrepreneur go about locating a list of VCs who might be interested in investing in his/her sector and also learn the list of companies they might have already invested in? Thus far in India, there has been no single place entrepreneurs could turn to for researching VCs and their existing investments. Which is why Venture Intelligence has come out with The India Venture Capital Directory providing an exhaustive view of VC firms actively investing in India.

The Directory helps entrepreneurs get a clear understanding of the VC landscape by providing a brief profile of the VC Firms, their focus areas, names of key executives along with the contact details in an easy-to-use spreadsheet format. Also, it includes a list of investments by each VC firm – so that entrepreneurs can try and avoid conflicts-of-interest and select other entrepreneurs to reach out to for checking out the VCs.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 19, 2008

Lesson from the PurpleYogi

I just read VC Bill Burnham's post on the lessons he learnt from his investment in Stratify. An Internet-era company that was originally founded as PurpleYogi, the company has several Indian connections: it was incubated at IIT-Bombay, raised investments from Infosys Technologies and its founders are of Indian origin. Stratify changed its business model, post the Internet crash, and was acquired in late 2007 by Iron Mountain.

I learned a lot of investment lessons from Stratify, the most important of which are:

1. Don’t underestimate the value of a great technology team. Great tech teams can quickly adapt a product to suit changing markets and priorities. They also create products and technology with lasting value that can be leveraged in multiple ways.

2. If at first you don’t succeed, find a new market and/or a new business model. It’s often said that very few start-ups achieve success with their original business plan and after my Stratify experience I believe it. Start-ups should always keep an open mind about potential changes in business model or market focus that might increase the chances for success and should be honest with themselves when it is clear that they are “stuck”.

3. When everyone else is selling, it’s not a bad time to think about buying. In the public markets they call it capitulation; in the private markets they call it fatigue. It’s hard to fight the urge to run with the herd, but if you can, you can often make a lot of money.

Venture investments can be real roller coasters. Stratify went through two business model changes before they found the market, model and product that clicked . Through it all a core team of people stuck it out and ultimately built a great business that everyone can be proud of. Congrats again to all involved!

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 18, 2008

VC Market

The following companies are seeking capital for starting-up / expanding their operations:

08-03-19-1: Delhi-based Management Consulting Services firm seeks $1-5 M for expansion

08-03-19-2: Mumbai-based hospitality services company providing conferencing, hotel bookings and other services to companies with a current turnover Rs. 1 crore, seeks $5-M for expansion

08-04-09-1: Bangalore based Social Commerce marketplace, with 16 national Brand Stores and having served thousands of customers across India, seeks $1 M for expansion.

08-04-16-1: Pune-based company operating fantasy gaming web site where users can predict outcomes of sports, entertainment, politics through a fun trading game seeks <$1-M for expansion.

08-04-16-2: Bhopal-based company operating hiring web site for IT Freshers seeks <$100-K for expansion.

08-04-16-3: Thane-based start-up planning financial products distribution and wealth management planning for the HNI segment seeks >$5 M.

08-04-30-1: Mumbai-based operator of gifting and matrimonial web sites seeks $100 K.

08-04-30-2: Kerala-based NRI-founded startup manufacturing firm seeks $0.5 M for working capital.

08-04-30-3: Chennai-based Real Estate Developer seeks $1-M for a Residential JV project in the suburbs.

08-05-14-1: Bangalore based provider of Enterprise Integration Software, based on a “software as a service model” to SMEs, seeks $1-5 M for product development and marketing.

08-05-14-2: Mumbai based provider of Telecom Software, specializing in Revenue Assurance, Wi-Fi Billing & Data Management and Roaming Managemen, seeks $1-5 M for expansion into overseas markets.

08-05-14-3: Hyderabad based Mobile Application Development & Services company seeks $5 M for expansion.

08-05-23-1: Kolkata-based IT Services co. focused on Enterprise Software Design, Development, Integration and Implementation, seeks $1 M for working capital and expansion.

08-05-21-2: Bangalore-based Software Products Firm – with a special focus on retail and education - seeks $1-5 M for working capital and expansion.

08-05-21-3: Hyderabad-based IT Services Firm seeks $1 M for working capital and expansion.

For more information about any of these companies, investors - who are subscribers to the Venture Intelligence service - can email the company code to vcmarket@ventureintelligence.in. To learn about our subscription services for investors, please visit our web site.

Are you an entrepreneur seeking capital? List your company in the Venture Intelligence VC Market using the form here

Company Showcase

Clean fuels firm seeks $12.5 M (in two tranches of $7 & $5.5 M)

Company manufacturing conversion kits to convert diesel engines to CNG is looking to raise about US$12.5 million. Conversion is becoming mandatory by law & this company has the track record of converting over 1,000 buses in 2002. This is one of two companies approved by ARAI (other being Cummins) to make CNG engines. The 2008-09 top line is expected to be US$17 million with an EBIDTA of 32%. The new funds are to be used for Setting up the manufacturing facilities and additional approvals of engines and kits.

Interested investors may contact Atul P Anand at apanand@omkam.in or Tel: +91-9810020279.

Poison Pill for India Inc.

Corporate lawyer Rajiv Lutha has an article in The Economic Times on the amendments required to various M&A-related laws to facilitate tools to help ward off hostile takeovers. In the absence of these amendments, Luthra points some ways in which poison pills can be created under existing rules.
History is ripe with examples of how a little legal ingenuity and a few pre-emptive strategies can fend off the advances of the most ardent hostile acquirers. One of the advantages of the poison pill strategy is that there is no rigid structure to it and it can be tailored to suit the particular needs of a company. As a result, Indian companies are not restricted to adopt the classic version of the pill i.e., the shareholders’ rights plan.

For example, DIP guidelines do not prescribe any pricing restrictions on the issue of non-convertible preference shares, non-convertible debentures, notes, bonds and certificates of deposit. Thus, we may consider structuring a poison pill in place whereby backend rights which permit the shareholders to exchange the rights/shares held for senior securities with a backend value as fixed by the board, are issued to existing shareholders when the hostile acquirer’s shareholding crosses a predetermined threshold.

As most takeovers are carried out through borrowed funds, the use of backend rights reduces the profitability of the takeover because of the mounting interest rates on borrowings; thus deterring the hostile acquirer and more importantly sets the minimum takeover price, which is the price at which the shares have been exchanged for senior securities.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

LPs preparing for less spectacular exits?

"We have tempered our growth expectations. But we still expect to see private equity returns commensurate with the risk we are taking, and far in excess of other markets," says CDC Group’s portfolio director of South and South-East Asia, Anubha Shrivastava, in an interview to The Mint.

"The Sensex has demonstrated that India is far from decoupled. And with the appreciation of the rupee and concern around inflation, we have tempered our growth expectations. But we still expect to see private equity returns commensurate with the risk we are taking, and far in excess of other markets." Since valuations will come down on  the  entry  side,  exits are likely to continue to yield good returns. "The recent bout of fantastic exits, though, will slow down."

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Business Today's Hottest Start-ups List

Business Today has published the second edition of its list of Hottest Start-ups.

The list includes two portfolio companies of IDG Ventures India (IT security start-up iViz and 3D visualization software firm 3DSOC), APIDC Biotech Fund-backed organic foods firm Sresta Natural Bioproducts, India Equity Partners-backed HR Services firm Ikya Human Capital and JM Financial-backed publishing BPO firm Premedia Global.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 12, 2008

Analysis of a non-deal

New York Times' Andrew Ross Sorkin has an analysis of Steve Ballmer's missteps in bidding for Yahoo.
..most of all, Mr. Ballmer didn’t realize — though he had been warned by his advisers — that when you make a blockbuster unsolicited offer, you must be prepared to win. Not necessarily win at any cost, but win at a cost within reason. (Just ask Rupert Murdoch.) And the truth is, the few extra bucks that Yahoo wanted in order to save face was within Microsoft’s ability to pay without wrecking the economics of the deal.

...Mr. Ballmer made things worse by lashing out at the company he was wooing. He contended that “public indicators suggest that Yahoo’s search and page view shares have declined.” He threatened to go on the attack, but never did.

...Perhaps the biggest problem in this deal was that neither Microsoft nor Yahoo heeded Wall Street’s advice or listened to what the market was saying. Each company hired armies of bankers — Bear Stearns, Blackstone Group and Morgan Stanley for Microsoft; Goldman Sachs, Lehman Brothers and Moelis & Company for Yahoo — but neither really paid attention to what their advisers told them. Say what you want about bankers, but they at least are good at parroting the markets. At one meeting in Portland between both companies, a Yahoo executive dismissed his company’s bankers as “potted plants” — in front of them.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Is acquiring captives a mug's game?

Basab Pradhan, CEO of Gridstone Research and former Head of Sales & Marketing at Infosys, has a critical post on Indian IT Services companies "acquiring" the captive outsourcing units of MNCs.
(The MNCs) expect the Indian outsourcer to ‘acquire’ (their) Indian subsidiary and pay them for transferring a “stream of cashflows”. To me this seems like an unnatural act. I can’t see how the IT services company can justify this beyond paying for the acquisition of assets. But there is obviously a way this is being justified because it is happening.

...None of these justifications work for me. They are ways to rationalize what these companies feel compelled to do to meet short-term expectations from the market. By this logic, every client outsourcing work in the US should first form a subsidiary, transfer all employees into it and then ’sell’ the subsidiary.

This new game is a dangerous one. It tells a story of an industry that doesn’t know how to respond to the triple whammy of costs, exchange rates and a US recession.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

May 04, 2008

Profile of the Adani Group

Business Today has a detailed profile of the infrastructure focused Adani Group.
Having established itself as India’s leading private sector port operator, the Adani Group is betting big on power. It has lined up investments of Rs 45,000 crore over the next 5-7 years to set up 10,000 MW of generating capacity (see The Biggest Bet).

Here, too, he has followed the Mundra Port model—pioneered in India by the late Dhirubhai Ambani—of integrating his value chain backwards to the source of raw materials. The group has acquired coal mines in Rajasthan and Indonesia, which will feed his projects in Gujarat, Maharashtra and Rajasthan. “But our biggest strength in the power sector is the time to completion,” says Ameet Desai, Chief Financial Officer, Adani Group, who is overseeing the power initiatives. “We plan to complete the entire projected generating capacity by 2012-13,” he says. In fact, he expects the 1,320 MW project at Mundra to go on stream in stages next year itself.

Adani’s plans will bring him into direct competition with the Tata Group and Anil Ambani’s Reliance Power, but he is unfazed. “Work on many of our projects is already underway. We will leverage our backward linkages, the port, the group’s execution capabilities and our experience in power trading to forge ahead in this sector,” says Desai. The group is today a leading private sector power trader in India and commands a 13 per cent market share. The group is also evaluating the potential of entering the power trading business in neighbouring countries like Bhutan, Nepal and Bangladesh.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

The Birth of Aujas Networks - By Manjula Sridhar

On February 10th 2008, 10 PM, all of Aujas’s founders assembled at IDG Ventures India’s Founding Chairman and MD, Sudhir Sethi’s residence to sign the agreements for the seed funding of Aujas Networks Private Ltd and celebrate Aujas’s formation.

We had spent most of the earlier part of the day on finalizing the documents. Although exhausted completely, an immense sense of satisfaction and excitement overwhelmed every other emotion. This was the occasion of successful completion of Entrepreneur in Residence program at IDG Ventures India for me. Here is how it came to being.

Lucent Days and the Start up Bug
Although Entrepreneurship always fascinated me, it was during the middle of 2006 that the idea of entrepreneurship really possessed me. I had been watching the entrepreneurial scene in India for quite some time and was encouraged by the fact that the entrepreneurial eco system in India was booming with lot of VCs coming into India and setting up early stage funds. This was at a time when I was very comfortable in my career having been successful as a technologist and a manager in Lucent Technologies. Having spent considerable time in Lucent US, I had taken a transfer to India to be close to my family. I reported to a very competent, hardworking highly successful boss and mentor Chitra Kasthuri who was a name to reckon with worldwide in Lucent. Chitra kept me busy with many “entrepreneurial” activities of setting up quite a few firsts in Lucent India. Moreover Lucent has been very good to me; While in US, Lucent had sponsored my Masters program and I was appointed as the first DMTS (This was the path to becoming a Bell Lab’s Fellow which is the pinnacle of recognition in the technology world) in India. So by the end of December 2006 with lot of hesitation and trepidation I broached the subject to Chitra and my other director Antarpreet Singh. Although surprised, they were extremely supportive and encouraged me to take the plunge.

When I shared my ideas with my family and friends, they were supportive but cautioned me about my inexperience coming from a non-business background coupled with not too secure financial status. I concurred with them, but was strangely confident that things will somehow work out eventually. Some nagging rational and irrational concerns remained though; “How will I pay my EMIs”, “Is it wise to eat into my savings”, “If things fail will I be able to get back to a good job”, “what if another bust happens”, “Am I business savvy enough”, “How and where will I find co-founders” and many other what if scenarios. However, I was in touch with many entrepreneurial clubs like TIE, both in Chicago and Bangalore and was encouraged seeing many less experienced and less settled than me chucking the comforts of corporate jobs and working hard to create start-ups. I met many successful entrepreneurs, read biographies of successful entrepreneurs, attended the entrepreneurial conferences and charged with hope and dynamism made up my mind that this is for me.

I also did some number crunching and figured that I needed to find some angel money in next six months in order for me to continue in this path. I had masters with a major in network security and had done lot of work in wireless networks and security area. I visualized a product concept based on wireless security. I spoke to a colleague who had quit Lucent and was with another company to be the co-founder. However as he had recently become a father, I asked him to wait until I check out the ground realities and raised money. My plan was simple. Build a proof of concept with some freshers and project trainees (as salaries would be cheaper), organize the business team and raise money. I spoke to some friends and acquaintances who gave me positive indication of some freelancing offers.

Interestingly at this point, I met Sudhir Sethi founding Chairman and Managing Director of IDG Ventures India through a friend Savitha Kini. She came to know that IDG was investing in Telecom industry, knowing my plans suggested Sudhir and I meet up and sent an introduction. This was in January 2007 and this meeting would be providential although at that time I did not know it. When I went there, he assumed that I had come for an interview of Investment Advisor position and grilled me for half an hour. I clarified that I had only come to meet him and explained my plans and ideas quite earnestly and told him that I might be looking for funding sometime later.

Nevertheless, he asked me to meet the whole team in IDG Ventures India. I then met TC Meenakshisundaram who handles the telecom space and I had detailed discussions with him. He is the most tech-savvy finance person I have met so far. He surprised me with very intuitive questions about my telecom work. Then I met Manik Arora who foresees internet and mobile space and Hemir Doshi the investor advisor in Software products and Services. I spent a couple of hours discussing with them some of the aspects of entrepreneurship and VC funding. I learnt that Sudhir and TCM in their earlier Avatar of Walden had seed funded Mindtree Consulting and Techspan. Moreover, I found out about their significant operational background of leading many companies.

Couple of days later we met again and Sudhir asked me if I would be interested in Entrepreneur in Residence position with IDG. I was not sure what it meant, as I had never heard of that designation before, but it sounded quite an attractive option. Partly due to my lack of understanding of the markets and partly out of my own enthusiasm, I did not pursue this at that time. I also wanted to understand the bare bone way of doing entrepreneurship and see if I could do it. Armed with all this knowledge I quit my job in February 2007 and plunged headfirst into entrepreneurship.

Virefree Days
I named the company Virefree and did all the right things by doing market analyses, meeting as many prospective customers as possible, talking to many advisors. Anjana Vivek a friend who is a venture advisor helped me immensely in terms of business plan structuring and providing some good references and acting as a sounding board for some of my ideas. Revathy Kasthuri who had been an entrepreneur in the past and who was an M.D in Novell helped me in my go to market strategy. I hired two MCA students Mamatha and Deepak who had to do six months of project and assigned them to build the proof of concept. It was quite a challenge to go back to basic coding and making sure that the trainees could do the necessary work. Meanwhile I filed for the patent and started looking for customers and angels. I had immense support from friends and fellow entrepreneurs who were slogging themselves in unfamiliar terrain. However, it soon became apparent to me that there are not many angel investors around and almost no VC firm funds such an early stage venture. This stage is probably the most crucial in any entrepreneur's journey.

Since I dabble in mountaineering, I know that in each trek up the mountains, hiking up to 10000 ft is a pleasant experience. When one hits higher altitude around 12000 to 13000 ft, stringent mental and physical strength are required to go further up. The “death zone” after 22000 ft one needs supplemental oxygen as well. I was at the crux of high altitude and death zone. Although my product was ready to go, I realized that market cycles are too long for the area I was focused on. Some of the freelancing offers that I had also fell through due to various reasons.

Apart from these business realities I also experienced what I now call “corporate withdrawal symptom” similar to Altitude Mountain Sickness (AMS) which happens due to thin oxygen. The only cure for AMS is to go to low altitudes. I missed my AC cabin, cozy office environs and the certainty that came with a “regular job”. It was a painful realization but I decided to bite the bullet and seriously started considering alternative options available to me. One easy option was to get back to a corporate job; however, I wanted to get into a job, which would give me necessary business skills for my future entrepreneurship activities. After the trainees completed their respective projects, I started looking seriously at other options available.

That is when I called IDG and asked Sudhir if the Investment Advisor position was still open. We had a discussion and to my dismay, he only offered me a consulting assignment for studying the security business. In hindsight, I realized the importance of this, but I grudgingly took it at that time as I thought it would give me some insights of VC ways and time to figure out my next course of action. What I did not know at that point of time was Sudhir was very passionate about Digital Security and was planning to fund a startup in this area.

Later Sudhir did share with me that this was a deliberate action so that I can ease into the role. In a sense, it was like a start-up pitching to a VC. Technology analyses and market research was a breeze, as IDG owns IDC as well and I had access to all the secondary market research for this business. However, primary research proved more difficult. This is where I had to understand the market reality in India and understand the ground realities. Initially I surveyed couple of big names in the industry for a discussion, but could not get any response.

Though disheartened I persisted in reaching out to many product and services company heads. Eventually I was able to interview many people and get their views on Security Business and Industry. I attended many conferences, met many business leaders in this area and understood peer’s perspective of this. I also studied all the companies existing in this space and made a comparative analysis. I met many of the security startups to see if there was any investment opportunity for IDG.

Finally, I presented the findings of both security industry and security business opportunities around May 2007. That is when I officially became Entrepreneur in Residence with IDG. What this means is a guaranteed funding if the team and business plan fits together. This was a great opportunity for me to realize my dream and get back on track albeit in a different format and much safer path. Having gone through the travails of "no frills entrepreneurship", I can value the immense benefits of EIR model.

All the challenges of entrepreneurship remain in this model, but the platform and the expert guidance from the VCs themselves reduces the challenges considerably.

EIR Days at IDG Ventures India
In the first week of my stint as EIR, Pat McGovern the worldwide Chairman of the fund visited India. Also visiting were the Advisor board members of IDG who include Dr N. Balasubramanian, Dr. K. B. Chandrashekar, Arjun Malhotra, Dr. Sridhar Mitta, Dr Jagdish Seth and Dr.V. Sumatran who are all stalwarts. I presented the plan to them and got very good feedback. The idea behind the next step was simple, to build a team and get out of IDG Ventures. However, this was the hardest and most important step of the venture.

Terabytes of memory have been used while writing about the importance of the team in any organization. Many VCs swear by the fact that the business plan is secondary compared to the team. We were looking for a person who is entrepreneurial and who has handled a large business with some domain exposure. A leader who could build the team and scale up the plan to the next level. That is when I hit the first serious roadblock.

Through our own networks and placement agencies, I made a list of some thirty possible candidates. We started meeting people through various contacts. We also drew upon Sudhir’s vast networks. Now I was pitching the plan to potential co-founders instead of VCs. It was quite an exhaustive exercise. Once Sudhir and I spent one whole day in Bombay meeting with ten candidates. However it turned out there are very few who fit the bill and the ones who did either were hesitant about entrepreneurship or too comfortable in their current job and were on retirement mode. After our initial flurry of activity, we hit a lull. Uncertainty and inactivity is a dangerous combination. I approached Sudhir and asked him if I could help in other deals they were doing. A firm no followed, as that would mean losing focus. After a month of this and several near misses of finding the right person, I seriously started wondering about the viability of this model and some skepticism did surface.

However, it is very hard to stay skeptical with Sudhir around. IDG Ventures India has “Maintain Action Oriented Let’s try attitude” as one of the vision statements and Sudhir is a perfect practitioner of this. His enthusiasm and innovative ways to solve problems rubs on everyone around.

At that time, Lalit Chowdhary who was my mentor in Lucent introduced me to the ex-Director of sales in Lucent who had been an entrepreneur himself. Sudhir and I met him and we thought this might work, only to find out that he already had other plans. At this time, I met Shalini Sethi who was founder CEO of Emploi Globale an Executive Search firm angel funded by Dr. Jagadish Seth amongst others. I decided to meet her to get some advice on finding the right team. She shared with me some trade secrets as to how to go about finding the right person. She informed me about a business-networking site where one could get Rolodex of contacts in various companies. I went to the site and got the contact info of candidates that I thought would fit the role. Another flurry of activities followed and again we hit a dead end.

Deciding to reach larger audience Sudhir and I posted the ad on Linkedin’s recruitment section. Next day the mailbox was full with close to thirty applications, some even from countries like Estonia, Portugal and Brazil. In the following week, we had more than 70 resumes. A flurry of activities in terms of short listing and interviewing followed. Again, we hit a wall here, as still there was not one with the right set of attributes for this venture. After two more months of dead ends, Sudhir and I brainstormed as to what are the options available for us. We decided to revisit this after sometime.

Meanwhile interesting things had happened. We happened to meet Iviz, which was one of the security startup companies in my original research. They were looking for funding and had approached IDG Ventures. They had built a product for AI based automated penetration company based on AI concepts. Bikash and Nilanjan from IIT Kharagpur had set up Iviz. Sudhir was interested in investing in this company as it fit the plan of a comprehensive security portfolio. He explained his vision for a video analytics company that could do automated physical security that could be fascinating if we implement. In any case, for my future company, Iviz could be a great partner, they could detect the vulnerabilities and we could go in and provide solutions including automated monitoring. I did a thorough analyses of Iviz product and did the Technology Due diligence. We agreed to collaborate in future. IDG Ventures did eventually invest in them.

Then sometime in November 2007, Anjana introduced me to a person from a large Indian Service provider. We met for Lunch and I pitched the plan. He was very enthusiastic about this and we agreed to meet Sudhir for further discussion. He introduced us to some more members from his circle. One of the team members even had the security start up experience.

During the same time, I also chanced upon the profile of Srinivas Rao. He was a senior VP in Cisco India with perfect combination of sales and operation background and had been involved in an entrepreneurial venture at Netsol in the past. We met in the IDG office. When we met, he had already quit his job and was on entrepreneurial path. I instantly knew if this has to take off, he would be the perfect fit.

Generally, we used to schedule discussion with Sudhir after couple of days, but that day I walked up to Sudhir and told him he had to meet Srinivas. Sudhir had another meeting in few minutes but he agreed to meet him. Instantly we could see that this might work out. We agreed to meet Srinivas the following week for further discussions. I was amazed and delighted. In a span of a week, we had gone from being in a dead end to having two potential teams.

Following week, Srinivas came up with a business plan. I was happy to see it match the outline we had in mind. Eventually Srinivas then bought in Sameer Shelke an expert in information security industry having had stints in various roles and another founder (our CMO) a business development and marketing person. Therefore, we had a perfect team. Later I learnt that getting Sameer Shelke was providential as he was leaving for Japan and would have missed Srinivas’s call if he had called an hour later. We had couple of meetings and decided to go ahead. Srinivas turned out to be a sharp person and strategic thinker with an excellent multi tasking capability.

I was amazed at the energetic way he handled multiple things. During our customer visits, I also noticed that he had great credibility in the industry with many people speaking highly of him. Sameer is a straight talker with sharp eye for details. His insights of the enterprise market coupled with his expertise of setting up security operations would be a great asset for our venture. Our CMO turned out to be quite an unassuming person with calm composure and expertise with biz development and number crunching. He would be our Excel and Power Point guru crunching the business plan numbers and dazzling the audience with power packed presentations.

At this stage, Sudhir told me to disengage with IDG and get involved with the team completely. While prima facie, IDG was ready to invest in the team, Sudhir felt we needed to work as a team to arrive at our business plan. This was very crucial for me to integrate with the team completely. Again, the model was very similar to a team pitching to the VC.

Aujas Formation
From being an EIR, entering this phase can be very tricky. One tends to sit on the fence between the VC world and Entrepreneur world in terms of day-to-day activities. Nevertheless, this was a crucial and significant phase. Some semblance of certainty, but many things could go wrong. The plans we make and the team building that happens are going to have huge impact for the next few years. For initial meetings, we met at Wood Rose club where Sameer is a member, spent couple of days going over all the aspects of business. We started from scratch and spent considerable time on definition of vision, mission and goals. We analyzed the business segments, domains and focus areas. After a couple of iterations, we were ready with our presentation; however, our financial model was still incomplete. This proved to be quite a challenge due to complex financial and pricing models. Cash flow analyses were very crucial for us as that would determine how much money we would need. We approached Dawn Consulting, a business advisory firm and after couple of weeks, we had very detailed financial model built.

The biggest task for the team was to understand the working style and communication style of each one. Adjusting the schedules of each one was a big task. Our CMO was in Bombay and he suffered the most by having to travel on weekends. Coming from different business backgrounds, we had many debates to arrive at decisions. Given Sameer’s background in managing large teams, we agreed he would be the COO, while I would be the CTO. Some very hard discussions in terms of organization structure, salary and stake followed. There were many tense moments where we felt we would not be able to go further.

We also had some fun while finding the right name. After much search and analysis we settled for the name Aujas. Aujas is a Sanskrit word that means Energy as in a Warrior. Our CMO came up with “Enabling Digital Defense” as the tag line. Srinivas and I did lot of potential customer visits and came up with a list of offerings that we could tackle first. Finally, in December we presented our business plan to IDG and got a formal term sheet. After much discussion on details, we signed the term sheet in IDG’s office in January 2008. At last!

At this stage, Sameer quit his job. Next few weeks were again were of extreme activities involving finding the office, name approval, company registration, logo, visiting cards, and web sites. Meanwhile many agreements like Share Subscription Agreement, Investor Rights, Escrow agreements and employment contracts need to be reviewed and agreed upon. The agreements were literally Greek and Latin with terms like Mutatis Mundatis, Paripassu and other equally choice words. Again some excruciating work followed in terms of meeting the lawyers, understanding the implications and negotiations. We also started writing the detailed solution specs for our product ideas. Sameer’s experience in this was great as he came up with some great templates to present. After much discussion and debate we finally signed the agreement in February 2008.

Well, this is just the first step, I think we have reached the base camp, but the real ascent starts now. How we work as a team and execute will determine success and failures over the next few years. Personally, the biggest learning for me is the value of persistence and patience. The value of mentoring and insights provided could hardly be over emphasized in this type of journey. That is what an EIR model is - an elevated platform for entrepreneurship.

Manjula Sridhar is the co-founder & CTO of Aujas Networks. Manjula is a Telecom and Datacom professional with a decade of experience. She has filed many patents in wireless & network management areas. Her work exposure includes both technology & leadership roles in Lucent and Bosch. Manjula founded a wireless security startup, Virefree and eventually became Entrepreneur-in-Residence with IDG Ventures. She is an Engineer, a M.S (Network Security) and has done Executive Management Program from IIMB.

May 02, 2008

"The tipping point has arrived for India product companies"

Starting with a comparison of Huwaei and Infosys, successful Entrepreneur-turned-Angel investor Venkat Rajendran, has a post (which I noticed only now) on why he thinks why this holy-grail-moment-of-the-Indian-techie has (finally) arrived.

* It is a wide open space: There is no dearth of opportunities. The ground is empty. Telecom, Consumer Electronics, White Goods, Industrial systems, Capital Equipment, Non-conventional Energy, Software systems and tools, Food processing, Financial systems, Instrumentation, Automobiles… the list is endless for building strong branded goods from India and selling to the world.

* Large home market: One of the problems till recently for an Indian product company was a small home market. With a swelling middle class with increasing disposable income, a huge captive home market gives a big advantage for a new product venture. For example, Indian telecom market is the fastest growing major market in the world today. Indian cellular subscriber base grew by 98% between 2005 and 2006. For the same period, the broadband connections grew by 133%. And there is hardly any Indian Telecom product company larger than $ 100 Million in revenue. There is easily space for four or five with Billion $ plus revenue.

...Take Indian Defense – a lot of technology deployments are happening. Indian consumer markets is very promising and just taking off. I believe there are a lot of opportunities. 300 Million Middle class is finally emerging. The needs are just too many. I used to hear 25 years back that is very difficult to conceive and build products sitting in India, because the real market is in the west. But now the story is different. The biggest growth is happening in the emerging markets and we live in these markets. We have a big home advantage now. Start with the home market and take on the world is the way to go.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

"Wave 3 of Indian IT Services"

Sudhakar Ram of Mastek has triggered off an interesting discussion with his guest article titled "Wave 3 of Indian Outsourcing" on Sramana Mitra's blog.
With rising salaries, the appreciating rupee and recessionary pressures in the US, it is difficult to see the Indian industry continuing to sustain a 40-50% growth rate in the labor arbitrage mode. Hence there is a genuine question whether Indian outsourcing is on the decline.

My view, however, is that this is the classic S-Curve in operation. And for Indian industry to grow, we need to shift to Wave 3 work – which is strategic, value-added and non-linear. Capitalizing on the large pool of technical talent available in India and the free availability of domain experts in the western world, Indian companies need to start making substantial investments in building intellectual property – not necessarily as packaged software, but also as frameworks, components, web services and the like. We need to move up to create solutions that have strategic impact and C-level visibility within client organizations. We need to own significant parts of the transformation initiative budgets and be equipped to convert our CMM advantages to predictable deliveries.

At Mastek, we have been involved with large transformation programs, not just within global corporations but also at the city and country levels. We feel that the next wave will take Indian software services exports beyond the $100 billion mark! Far from being a death knell for Indian industry, we see the decline in Wave 2 work as a necessary precondition for the emergence of the Third Wave.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.