Sramana: What financing strategy have you followed to build Systems In Motion?
Neeraj Gupta: When we started, we knew this was not a business that bootstrapping could facilitate. We needed a leadership team that could engage with senior-level management. We needed a legitimate delivery center in order to solicit work. We started the business with $10 million in capital which was done in two $5 million rounds, primarily with extended network money. As far as a formal fund, 85% has come from Cervin Ventures.
We have used half of the money to get us to the point we are at today, and we are now cash flow positive. The remainder of the funds will be used for growth. At this point we feel we could easily get more capital, but in our business we think that capital is not the major issue at our stage. Our ultimate constraint will be the speed at which the business can be grown. It can’t happen faster than the operating baseline can handle. Today we can take on a client that wants to get 50 to 100 seats in a year’s time. Once we have a $50 million run rate with 300 people in our center, we will have something that can be mass marketed.
Sramana: Under your model, what is the revenue level of a 250-person delivery center?
Neeraj Gupta: Today we are higher on our revenue per employee, and we hover around $140,000. The reason for that is the higher level skill sets in the mix because our engagements start with higher levels of skill sets. It will probably trend down toward $120,000 per resource per year. That should put us at a revenue run rate of $30 million or more.
Sramana: What are you now?
Neeraj Gupta: We should hit $18 million this month.
Sramana: As your operating model matures and your business scales, what do you see as the operating margin of the business?
Neeraj Gupta: We are currently doing 32% gross margin. Our business plan states we should be doing 35% when we hit scale. In terms of operating margins, our business is modeled at 12% to 15%. It is not the offshore margins of 20% or higher. Today we are in the single digits because of the size of our overhead.
Sramana: If you play your business out three years, what do you think your competitors’ operating margins will be?
Neeraj Gupta: Today they are sitting at 13% on the low end. I don’t see us doing 20% margins with our model. With 85% utilization, this is a business that can deliver 15% net margins as it scales.
Sramana: You may be able to increase your margin by using rural centers to do more commoditized work.
Neeraj Gupta: We are working to use technology to highlight our value to the customer. In the area of business intelligence we are working with a local shop that provides a quick way to do data analysis on Google’s BigTable, BigQuery mechanism. We are integrating that as part of our engagements. In another project we are doing an e-commerce project, and we have 60% of that framework prebuilt using open source components. That is the type of leverage that we are able to get.
Sramana: Very good. I enjoyed your story, and I am delighted to see different thinking applied to this industry. This model seems logical. Best of luck going forward.