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Concept Arbitrage: Juniper

Posted on Monday, Jun 26th 2006

Tejas Networks is the emerging leader in India building next generation optical networking products for the global market. Tapping into the exploding need to deploy broadband data services based on Ethernet while still supporting traditional voice services, Tejas pioneered the development of cost effective, software-differentiated, next generation SDH/SONET products that enable telecom carriers to converge traditional voice-based networks with the new data-dominated networks.

This company is a somewhat unusual bet coming out of India, although the fact that its founder and Chairman is Desh Deshpande, who had also founded Sycamore and Cascade explains the anomaly.

In 2005, Tejas did $10.5 M in revenues, mostly catering to Indian Telcos and Utilities. It is being wildly publicized as the poster child of Indian innovation: Built In India, Built For India, and Built For The World.

It’s a good effort, and so far it is going well. However, as a model, especially in Telecom equipment, I am not sure that this is one to replicate. It is not a sector that I track very much, but selling to global Telcos is not easy business, and before anyone declares this as a trend to emulate, I would think not twice but twenty times.

For hardware products, I would look more in the consumer electronics areas, especially, communication+computing devices, learning devices, medical electronics, and other non-mainstream application-specific consumer devices. Digital cameras, DVD players, and cell phones will be tackled by the major global brands. But the opportunity will be in the niches, where the price sensitivity is so intense, that the global players may not be able or willing to play. (Hint: Think LeapPad from LeapFrog.)

An extremely key technology for India to build core competency in, if it wants to play in electronics will be System-In-Package. Most of East Asia has mastered this, and are rolling out mid-volume gadgets at a fierce speed.

India needs to learn this game, now.

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Concept Arbitrage: Manufacturing in China

Posted on Monday, Jun 26th 2006

Software Product Development Outsourcing & Offshoring in India is an equivalent trend, whereby ISVs use India-based companies like Persistent, Symphony, Aztech, Aspire and Impetus to build their products, soup to nuts. Everything except design is off-shored, and a select group of smaller Indian IT firms have capitalized on this niche. Open Silicon, funded by Sequoia and Norwest, also capitalizes on the same concept, but in chip design outsourcing.

I have been speaking with Anand Deshpande, Persistent’s CEO, for about 3 years now, and last December, Anand finally took venture funding from Promod Haque at Norwest. Symphony is close to $100M in revenues, and all these firms have very significant presence in the venture-funded startup business, as well as in the mid-market of software ISVs. The larger ISVs tend to have their own India operations, and do not outsource, although they too offshore abundantly.

The mainstream IT services outsourcing is an area dominated by the large players like Infosys, Wipro, Satyam, and other large players. The smaller companies have to find niches, and while Anand and others have found Outsourced Product Development (OPD) as their niche, it is not a very large niche. It will perhaps support 10 sizable players, before it exhausts. This is especially true because the mid-sized software company market is consolidating and being subsumed by the larger players. The VC-funded startup market, on the other hand, is a highly price-sensitive and volatile client base, as we found out in the dotcom boom.

My thesis, while I like the way Persistent, Symphony and a few others have positioned themselves, on the next generation of opportunities for smaller Indian IT services companies, is that they need to go after SMEs in US and Europe. The IT expertise availability in SMEs is very low, but they have significant buying power, and by all means, there remains still an opportunity to build a few more companies catering to that segment. It is, however, difficult to penetrate, and Telesales is essential because deal sizes are smaller. For Indian companies, though, this may be just fine, if they can tap into the call-center expertise for their own business development.

Finally, I am not very bullish on the chip design outsourcing business at the moment for India. There is a shortage of skilled resources, and the discipline is not one in which people can be trained en masse that easily. Whatever capacity exists in India today, I believe, is being absorbed by the MNCs, who are building capacity aggressively. I don’t think a startup would stand much of a chance.

Buffet Bends It Like Beckham

Posted on Sunday, Jun 25th 2006

In a radical shift in his philanthropic plans, Berkshire Hathaway Chairman Warren Buffett announced he will give away most of his company stock to five charitable organizations, beginning in July. The vast majority will go to the Bill & Melinda Gates Foundation. Buffett disclosed the plans in an interview with Fortune magazine.

For more information, please see this.

Well, right after Bill Gates’ announcement to step away from Microsoft to focus on philanthropy and his foundation, I had criticized Buffet, Jobs and Ellison for being lesser men.

Now, I am delighted to drop Buffet off from that list, and hope that Jobs and Ellison will follow suit, and put Bill Gates in charge of their fortunes, in a similarly trusting, savvy move.

On the other hand, Ellison’s ego may not permit that.

Jobs, who has so far shown zero interest in philanthropy, will probably be okay with Gates managing the larger destiny of his fortune.

Needless to say, also, that if Jobs decides to dedicate his enormous talent and creativity into greater good, the world is likely to end a better place.

It is a wonderful trend that these men are setting, a stellar way to set examples for the growing wealth of the world resting in individual hands.

Recommended Reading:

Jobs vs Gates: Who’s The Star? in Wired Magazine’s January Issue.

And a response from Theo Cacao explaining the Jobs phenomenon.

My personal interest would be in seeing Jobs do something with EduTainment, where his talent, creativity, design & usability instincts, understanding of the consumer, entertainment, marketing – ALL will be leveraged. And he can do that in a for-profit mode, from Apple & Disney, let his shareholders and himself benefit.

The iPod is wonderful, but at the end of the day, there are more fundamental issues in Maslow’s hierarchy that need his attention.

Video FAQs

Concept Arbitrage: Monster

Posted on Saturday, Jun 24th 2006

Earlier this year, the Indian equivalent of Monster and HotJobs got a lot of press. Naukri got a chunk of money from Kleiner Perkins and Ram Shriram.

India’s online job seeking population in 2005-06 stood at 6.5 million, an astounding 71 per cent growth over the 3.8 million in 2004-05. With 100 million Indians expected to use the Internet by 2007-08 from the present 38.5 million, the number of online job seekers is expected to cross 9.2 million this year (2006-07), says a study conducted by Internet & Mobile Association of India (IAMAI).

The report puts the market size of the Indian online recruitment industry at $32 Million in 2005-06. It is estimated to reach $54 Million in 2006-07.

Based on where the B-C Internet market is in India right now, these are pretty good growth numbers, and are expected to balloon, as the web becomes ubiquitous in that society.

Jobs are an incredibly important issue, literally, for hundreds of millions of people in India. This includes blue-collar jobs, of course, and somewhere in the future, the web’s power will need to be unleashed on the blue-collar segments as well.

In the US, plumbers, for example, are using Craigslist, as are Nannies, Housecleaners, etc.

The online recruitment market, however, is also extremely fragmented at the moment, due to its inherent low-barrier-to-entry nature.

As we enter the next phase of this market, with Naukri going public later this year, a lot more capital will be infused into the segment by a few larger players that will break out from the pack. This money will be spent primarily on concept selling, brand awareness, TV advertising, outdoor bill boards, etc. to educate a mainstream population.

While India lacks the product marketing skills to bring “technology” products to market, it absolutely does not lack the skills to bring consumer products to market. The B-C segment in India, thus, is very attractive in the Concept Arbitrage mode, and Online Recruitment is a prime instance of a leverage opportunity.

As in matrimonials, newspaper job classifieds has been part of the culture for eons, and most people devour those postings.

In fact, I would submit, Job Search could become the killer app that drives Internet adoption up to the 100 million goal that the country has set.

Concept Arbitrage: Match.com

Posted on Friday, Jun 23rd 2006

In ancient India, there was a wonderful tradition called swayamvar, which facilitated the choice of husbands for women of rank. The swayamvar of a princess, for example, would attract the kings and princes from every corner of the country, assembled at the court of the father of the bride. The bride would go around the room with a garland, check the guys out, and put the garland around the neck of her chosen mate.

Read this article about Times Of India’s matrimonial site TimesMatri, which offers a creative spin on the Online Matrimonial concept in India, by applying the ancient swayamvar dynamic to it.

It is refreshing to see this “intrapreneurship” in the TOI Group. We see a lot less aggressive new media adoption by the New York Times!

Competitor Shaadi.com has received $8 M from Westbridge, and are leading the pack of independent ventures. Jeevansathi.com, Bharatmatrimony.com, and numerous other me-too sites and a minimum barrier-to-entry concept makes it an infinitely attractive category for entrepreneurs. Kleiner invested in the parent company of Jeevansathi earlier this year.

Traditional Indian society has used matchmakers and matrimonial ads in newspapers for as long as anyone can remember. I would say, this concept is far more successful given the Indian cultural context than it is in the US. Families get involved. People’s intentions are serious, thus you have less fiascos and harrassment cases.

Concept Arbitrage: Netflix

Posted on Friday, Jun 23rd 2006

I wrote an article last October about Netflix being a ripe Concept Arbitrage opportunity for India. Netflix itself has been going gangbusters, with 2006 revenues charted to hit $1 Billion. A PwC study forecasts: “Online subscription rentals, including DVD-by-mail and broadband delivery services, will grow from virtually nothing in 2002 to $3.62 billion in 2010, compared with the then-estimated $6.18 billion in-store rental market. ”

Meanwhile, Netflix has sued Blockbuster. Does that mean, everyone else who copies the concept will get sued? Do their patents protect them internationally?

Which brings us to the company SeventyMM, an online DVD-rental service a-la Netflix in Bangalore, that hopes to hit a $100M+ revenue run rate in 5 years, by expanding into all the major metros in India. Ambitious goals, obviously, but let’s say they can get a subscriber base at an average of $40 / year. They need 2.5 Million subscribers to make that number.

India’s target is to have 20 Million broadband subscribers by 2010, and 40 Million high-speed Internet subscribers. DVD Players came in at 4 Million in 2005, likely to grow rampantly at about 25%, will be about 10 M units in 2010. The market LOVES movies, and video rental, so far, has been a less than satisfactory experience in the brick-and-mortar format. Aggressive target, but may happen.

It is not that they don’t have competition. Catchflix and Clixflix are two. They don’t have major funding yet, but as the trends catch on, I am sure they will. SeventyMM, of course, has already raised $2M from DFJ, and is looking to raise a larger round soon.

Glad to see this concept starting to gain traction in India. I have so many film buff friends in Kolkata who would love to be able to access all the foreign films that I constantly talk about …

Hope not too many companies will get funded though, as it always happens in Silicon Valley, when a good concept starts to gain traction.

All the VCs follow the trend, and inevitably crash the segment!

From that perspective, it is a good thing that the number of VCs playing in India is still reasonably limited.

Concept Arbitrage: Travelocity

Posted on Friday, Jun 23rd 2006

Expedia, Travelocity, Orbitz, TripAdvisor, Priceline – each carved out a unique niche for itself in Online Travel, and established a hot new category at the very beginning of the Internet in the US. The overall travel market today is $518 billion between US and Europe, not even taking into account China or other parts of world. $121 Billion of that is going to be online.

China’s online travel services market reached $31.6 million in the fourth quarter of 2005 (Source: Analysys International). Miniscule number? Not if you look at the forecast. China’s online travel market will grow to $9.6 billion by 2009.

In India, the total online travel market size is projected to be $368 million in 2006, and $523 million in 2007. I don’t have the 2009 forecast number, but it is safe to assume that it is in the billions. The overall Indian Travel sector is growing tremendously, forecasted to be $32 Billion in 2008.

Not surprising that the category is receiving venture capital: Yatra from Norwest’s Promod Haque, and TravelGuru from Westbridge Capital’s K.P. Balraj are two examples tackling the mass market. MakeMyTrip.com was an early entrant that is already at a $40 M+ revenue.

Seed Incubator Erasmic has a more nichy one called India Resorts Survey (IReS), focused on leisure travel in India.

The US market, in its turn, is becoming mature, and more segmented, as vendors start differentiating by focusing on specific niches. One of my favorite examples is Groople, which focuses on Group Travel. According to their CEO, Michael Stacy, Because there hasn’t been any formal studies on the group market, they don’t have the market size, but from talking to several hundred suppliers, they claim that over 30% of their business is group business (defined as 5 or more reservations). “We think there’s a $40 billion market not online yet. When you look at the size of the market the opportunity is tremendous.”

Reminds me of my childhood in India. We often traveled in large groups of friends and family. Traveling in groups, I strongly believe, is very much in the DNA of Indians.

So here’s an idea for a further concept arbitrage : Add the Groople concept to IReS.

Concept Arbitrage: Preface

Posted on Friday, Jun 23rd 2006

This is an introduction to a series on entrpreneurship in India, investments, investment prospects, and emerging trends and opportunities. The structure I will follow in the series is that I will analyze specific sectors, deals in those sectors, how they came about, and summarize conclusion nuggets and trend implications.

In researching the series, I have looked into the India portfolios of those funds that are involved in the early-stage investment game in India. The deals that I will discuss are:

May be others. Don’t know yet. If you have ideas and segments or companies that you want to see covered, please ping me.