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Concept Arbitrage: Opportunities

Posted on Saturday, Jul 8th 2006

Looks like the Concept Arbitrage series has been hugely popular … I am thinking of doing a follow-on to the trends series, and will point to some opportunities I see that can be successfully replicated in India / by Indian entrepreneurs.

The first one that I saw this morning was an article in Business Week about VistaPrint. Now, you may not be able to access it because it is premium content. So here are some excerpts:

> By using Web technologies to standardize the piecemeal world of printing, VistaPrint is putting slickly finished products within the reach of small businesses. VistaPrint does that by combining online design tools for customers with sophisticated printing systems. This eliminates high-cost design and makes the most of every scrap of paper and dram of ink. The result: Prices that can be 80% to 90% cheaper than at custom print shops. Now, VistaPrint churns out 15,000 orders a day for 7 million customers and claims 80% of the online small-business printing market. “They’re transforming the business with a truly disruptive model,” says Mark May, an analyst at Needham & Co.

> It’s a classic case of using tech to create a market. Individuals and small businesses are often priced out of professional-looking printing. Graphic designers can run amok with customized borders and pricey paper, pushing up costs by several hundred dollars. The alternative for most is desktop printing. Founder and CEO Robert Keane’s business model is based on the idea that 90% of professional printing can be standardized.

> It’s tough to argue the point when a full sheet of print work rolls off one of VistaPrint’s $5 million-plus presses. The company’s software pulls together batches of similar jobs the presses can handle most efficiently in one run. That’s how postcards from different customers end up on one sheet of paper. And by cutting orders jigsaw fashion, there’s little waste. Local print shops, and even FedEx Kinko’s (FDX ), can’t match that efficiency since they address each job separately. Of course, with VistaPrint, shipping costs must be factored in. (Delivery usually takes about a week.)

> These innovations have made VistaPrint one of the best-performing initial public offerings. Shares of the Bermuda-based company, whose operations are run from Lexington, Mass., have zoomed 125% since the IPO last September. Analysts expect revenues this calendar year to rise 66% above 2005’s $117 million.

> If there’s a threat to VistaPrint, it’s potential competition from giants like Staples Inc. (SPLS ) or FedEx Kinko’s. The company’s 11 patents will slow down foes, but the real barrier to entry is the complexity of VistaPrint’s technology.

I would submit this technology problem is tractable. You have to check the patents and develop workarounds, but the opportunity is right in the sweet spot of India – both for Domestic and Export Markets. The market size is enormous. If you are a technologist, team up with people from the printing world, of which there are many in India.

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Entrepreneurship 101 For India

Posted on Friday, Jul 7th 2006

These few weeks, I have been hearing from a lot of Indian entrepreneurs in response to the series I have written on early-stage activity in India. There’s frustration, there’s despair. I want to give you guys a few pointers, as you are thinking through your options on how to get your companies to the next level, or just to get yourselves off the ground:

Prepare your business plan assuming that a VC will evaluate it, even if that’s not the route you go.

This means, that you need to be very focused on what you want to do. Indian companies, typically, claim to do a LOT of different things, thereby diluting the positioning. The one thing that VCs NEVER fund is a defocused business plan. You shouldn’t either. Think of yourself as a VC, investing your own time, energy, credibility, career in a deal. Should you?

VCs invest in 3 things: (a) Market (b) Team (c) Defensible Technology.

Positioning is one of the most important things to learn for an early-stage entrepreneur. Read Geoffrey Moore’s “Crossing the Chasm”. It’s the best book on high tech strategic marketing. It has concepts that new entrepreneurs absolutely need to learn and use. Most importantly, this helps you define the market.

Once you have a positioning hypothesis, calculate the corresponding Bottom-Up-TAM (Total Available Market). The big mistake people make in pitching VCs is that they use “a multi-billion dollar market opportunity” that is high level and top down. Be clear, that a top down, 30,000 ft approach means nothing. The question that needs to be addressed is: How much can YOUR particular solution be sold for? How many people / businesses are likely to buy it? The multiplication of the two is your bottom-up TAM. THIS is the crucial number.

If your positioning hypothesis yields a miniscule TAM, you better change the positioning and try to expand the TAM.

Your Team must have some relevant background in what you want to do, unless you have such trackrecord that you can move outside of your areas of proven expertise, in which case, you don’t need to read this post. Pick an area to work in where your background can be leveraged.

On Technology, the key issue is that VCs prefer to invest in companies that either have or can build some technology advantage, as opposed to pure labor arbitrage. This is not to say that labor arbitrage deals are not being funded, but your chances would go up significantly if you can find a nifty technology angle as leverage.

Litmus test: Hold your business plan against this checklist. It, however, is more of an Enterprise / SME oriented checklist. You need a variation of this for Consumer facing businesses.

Understand how the Venture Capital business works. In 1997, when I started raising my first venture round, I read this book to learn the basics: “High Tech StartUp” by John Nesheim. Anytime you are out to sell something, you need to understand the buyer’s point-of-view. In this case, you are selling equity in your venture to an investor. You absolutely need to understand the investor’s point-of-view.

You can bitch and moan about the fact that VCs don’t fund you, or you can learn their game, and present a fundable deal to them, in which case they WILL fund you. Those of us who have traveled down the path of entrepreneurship multiple times, have all had to start somewhere. We had to learn the same things that you have to learn now.

So learn it. And succeed.

eBAY Jitters

Posted on Thursday, Jul 6th 2006

From WSJ : EBay’s PayPal Chief to Step Down, Jolting Investors

From GigaOm : The eBAY Shuffle

Not good. eBAY looks shaky at best. Leadership team appears tired, burnt out, and frankly, out of depth.

Once again, it is time for YahooBay.

Here are all my pieces in perspective:

YahooBAY: Epilogue

P.S. YahooBay

JP Morgan Says YahooBAY

More on YahooBAY

Video FAQs

Pondering World Issues on a Sunday Morning

Posted on Sunday, Jul 2nd 2006

Warren Buffet has just announced that he will donate most of his fortune of about $40 Billion to the Bill & Melinda Gates Foundation. This is the single most savvy philanthropic gesture of our times. Listen to the trio discuss it.

Kleiner Perkins has ear-marked $100M of its $800M to CleanTech. John Doerr is using his clout not only at the business level, but at a geo-political level to raise awareness. In this video, you will see Doerr as a substitute host for Charlie Rose, interviewing Friedman.

I believe, Dr. Yunus should win the Nobel Prize. Many others believe the same, including Bill Clinton. If you are not familiar with his work in Bangladesh on MicroFinance, listen to his speech in this video. Gates talks about MicroFinance in the Charlie Rose interview, so you can see what he is talking about.

Here’s a link to the MIT Open Courseware project, which aims to put all MIT courses online for broad usage all over the world. This is the single most generous effort in enhancing the level of higher education worldwide, and is causing other top institutes in the US to think of doing the same.

Too Much Money, Too Few Deals

Posted on Saturday, Jul 1st 2006

This is the story of today’s India.

Every US VC is running after India. The entrepreneurs are not mature, deals are mostly not fundable. Seed stage “mentor-capital”, essential at this stage of the game to build a pipeline of startup companies, is largely absent from the scene.

As Subrata Mitra and Prashanth Prakash of Erasmic explained to me this week in a phone call from Bangalore, most experienced technology managers in India today make too much money and lead too cushy lives to want to be entrepreneurs. A mid-thirties middle manager with 10 years experience is easily making $100K. Why would they bother with a startup where the total startup capital, at best, is $50,000?

Yes, $50,000 (Rupees 25 Lakhs) is the US $250,000 equivalent of seed capital to start companies. Often even less. We’re talking real micro-cap here … >>>

Concept Arbitrage: Summary Trends

Posted on Wednesday, Jun 28th 2006

I have written about specific entrepreneurial ventures, deals, markets, and trends in the Concept Arbitrage series over the last week. In this piece, I summarize the trends that I see. You can also read the relevant prior pieces in context.

(a) Produced & Consumed in India:

* Concept Arbitrage : Electronic Arts
* Concept Arbitrage : Netflix
* Concept Arbitrage : Travelocity
* Concept Arbitrage :
* Concept Arbitrage : Juniper

  • Consumer is the early adopter in India’s technology market. This includes software, gadgets, internet services, and content. “Soft-good” e-commerce is, by far, the most compelling segment.
  • Classic “hard-good” e-commerce is the notable exception to this trend, although efforts like (purchased by eBAY) has worked. The main hindrance is the postal system’s inadequacy, and those who venture into e-commerce that requires a physical delivery infrastructure, will need to use some overlay service of their own. This makes the barrier-to-entry significant.
  • Digital photosharing is not on this list because digital cameras have not taken off in India yet.
  • There is hardly any enterprise or SME technology market yet.
  • I have also seen a digital payment deal and a shopping deal, which I am not as convinced about from a timing point-of-view.
  • There is also an effort to do a telecom equipment play (Tejas) which is more an exception bet than a broader trend.

(b) Produced in India, Consumed Abroad:

* Concept Arbitrage : Infosys
* Concept Arbitrage : Manufacturing in China
* Concept Arbitrage : Sylvan

  • The industry has gained momentum via the IT & IT Enabled BPO Services markets.
  • Now, new opportunities for labor arbitrage are emerging in Tutoring, Animation, and other areas. Those that have not yet seen traction could be Psychological & Spiritual Counselling, Memoir Writing (attached to the numerous digital photo and family geneology offerings in the US), Virtual Companionship (for older people), etc.
  • The US Small-Medium Enterprise market is a trillion dollar eco-system that has hardly been able to leverage Indian IT / ITeS so far. This could be the next big market for India to crack, especially by leveraging its Telemarketing core competency, which is essential to build a channel to sell low ASP products and services.

In later writings, I will discuss the availability of startup funds in India in more detail from entrepreneurs’ points of view, as well as availability of fundable deals from investors’ points of view. There is a clear shortage of seed stage investors, and an excess of later-stage funds. My question is, is there also a shortage of fundable early-stage deals / entrepreneurs?

Concept Arbitrage: Infosys

Posted on Tuesday, Jun 27th 2006

I wrote an article last Fall called Indian Anime. If you are looking for another multi-billion dollar outsourcing phenomenon, animation could be one.

The global digital animation industry is poised to grow to $70 billion by this year. The Indian animation industry is expected to reach $15 billion by 2008. Big numbers, pointing to India’s next big outsourcing boom. Labor arbitrage numbers are absolutely fantastic: $125/hour in the US versus $25/hour in India for animators. $75 Million to $175 Million for a full-length features film in the US versus $1-$15 Million in India.

From a venture investment point of view, the market opportunity is squarely in the outsourcing space, not in title production.

Down the road, this may change, but in the immediate term, Animation is a straightforward labor arbitrage opportunity.

There is, however, a skill-base developing in India of animators and animation film-makers. The first ever Indian animation film, Hanuman has done okay in the box office. There will be an opportunity to move up the value chain, and create India’s own genre like the Japanese Anime in the future.

Concept Arbitrage: Electronic Arts

Posted on Monday, Jun 26th 2006

Can you imagine, how much fun a Taxi driver in Mumbai would have playing a cell-phone game that lets him undress Aisharya Rai, bit by bit?

Well, as the cell phone content publishers in the US have already discovered, one of the most popular and profitable categories in Mobile Entertainment is what Mauj calls Naughty.

Mauj and Nazara are new entrants into the Online / Mobile content arena in India. India does content well, Bollywood being a wildly successful industry that has, forever, been in domestic production – domestic AND international consumption mode. This is right in India’s sweet-spot, and I am very bullish about the segment.

There is, of course, the Bollywood derivatives, India’s absolute obsession: Hum Aapke Hain Koun: Devar Deewana – In keeping with the Indian Customs & traditions, it’s the 7th month Godh Bharai (Baby Shower Ceremony) for Nishas (Madhuri Dixit) sister. There has been a lot of playful banter happening. Nisha has teased Prem (Salman Khan)a lot of times and now its Prems turn to get even.

India’s obsession also includes soccer and cricket. If you are following the world cup soccer, both games today were decided based on penalty kicks. Well, here is Mauj’s little PK game: Penalty Challenge : The pressure is on. Victory or Defeat, Glory or Tears, it is all down to you. Hold Your nerve and take on 5 levels of increasingly difficult opponents or challenge a friend to a one off competition. It is that moment that can make you a Hero, So go on and become an instant hero by playing Penalty Challenge.

Not much in cricket?? Big surprize! Big mistake. Nazara leads with Sachin on Mobile, which is spot on!

I see interesting Regional content in Mauj’s portfolio. A game called Against All Odds: Sab Kichur Birudho (Bengali) : Play as Malaika Rusedski and fight against an ancient curse in the pyramid. Out of curiosity to explore, Malaika Rusedski touches the Anubis thereby unleashing the curse of the pyramid- leading to a whole new saga of wrath and fury of the mummies. The only way out is to fight till the last breath and survive. AGAINST ALL ODDS!

Well anyway, I have huge confidence in India’s ability to figure out what the market wants in Mobile content, and DISH it out. Mauj and Nazara are very good investments, and I am sure, the infinitely creative cultural pool of India will come up with many others like them. If you are a VC, pick up an Indian content provider for your portfolio. It’s a must. So far, both of these are in Sequoia’s folder.