#05 - FEBRUARY 2008 by CyberMedia (I) Ltd

publication a

Vol 2 / Issue 05 / Feb 08

/Rs 30/-

big business of fashion The

Complete guide to debt ﬁﬁnancing nancing Credit ratings explained The 1,700 Cr. business of wine making 4,100 Cr. in rural tourism Pet grooming is a 300 Cr. opportunity Don’t rush to open shop in Second Life

entrepreneur of the month/

RC Agarwal, Vishal Retail unique idea of the month/

Ek Mutthi Anaaj

investor of the month/

Srini Vudayagiri, Lightspeed CASE STUDY Indus World School Early-stage funding in India A brush with failure

Vol 2 / Issue 05 / FEB 08

BOARD OF ADVISORS C K Prahalad

University of Michigan

N R Narayanamurthy

Chief Mentor, Infosys

Kanwal Rekhi

Chairman, TiE

Romesh Wadhwani Chairman & President, Wadhwani Foundation Gururaj ‘Desh’ Deshpande

Chairman, Sycamore Networks

Saurabh Srivastava Chairman, Indian Venture Capital Association Kiran Mazumdar Shaw

Chairman & MD, Biocon

R Gopalakrishnan

Executive Director, Tata Sons

Philip Anderson

Professor of Entrepreneurship, INSEAD

Shyam Malhotra Editor-in-Chief Krishna Kumar Group Editor ANALYSTS Arunjana Das Binesh Kutty Chhavi Tyagi Shilpi Kumar Sreejiraj Eluvangal Vimarsh Bajpai OPERATIONS Ajay Dhoundiyal Product Manager VIjay Rana Design Anil John Photography SALES & MA Jaideep Mario Gabriel Chandan Sengupta Himanshu Bakshi Raghavendra Naveen Barsainya

/cover story

The big business of fashion

MARKETING Associate VP West North North South South-East Asia

PRINT & CIRCULATION SERVICES NC George Associate VP T Srirengan GM, Print Services Sudhir Arora Circulation Services Manager Pooja Bharadwaj Assistant Manager, Reader Service Sarita Sridhar Assistant Manager, Reader Service Printed and published by Pradeep Gupta. Owner, CyberMedia (India) Ltd. Printed at International Print-O-Pack Limited, B-204-206, Okhla Industrial Area, Phase 1, New Delhi-20. Published from D-74, Panchsheel Enclave, New Delhi-17. Editor: Krishna Kumar. Distributors in India: Mirchandani & Co, Mumbai. All rights reserved. No part of this publication may be reproduced by any means without prior written permission. BANGALORE 205, 2nd Floor, # 73, Shree Complex, St.Johns Road, Tel: 41238238 CHENNAI 5B, 6th Floor, Gemini Parsn Apts, 599 Mount Road, Tel: 28221712 KOLKATA 307, 3rd Floor, Ballygunj A.C. Market, 46/31/1 Gariahat Road Tel: 65250117 MUMBAI Road No 16, D 7/1 MIDC, Andheri (East) Tel: 28387271 DELHI D-74 Panchsheel Enclave Tel: 41751234 PUNE D/4 Sukhwani Park North Main Road, Koregaon Tel: 64004065 SECUNDERABAD #5,6 1st Floor, Srinath Commercial Complex, SD Road. Tel: 27841970 SINGAPORE 1, North Bridge Road, # 24-09 High Street Center Tel: +65-63369142 CORPORATE OFFICE Cyber House, B-35, Sec 32, Gurgaon, NCR Delhi-122001. Tel: 0124-4031234, Fax: 2380694.

DARE.CO.IN 4

FEBRUARY 2008

Complete guide to debt ﬁnancing

DARE.CO.IN

/contents

others/ Entrepreneurs share their success secrets ........................... 22 How to set up an NGO........................... 68 IT Equipment: Lease or buy?................. 74 Get guided, without a VC or Angel........................................ 96

entrepreneur of the month

Ram Chandra Agarwal Vishal Retail I have always believed in karma. If you do the right karma, you will always succeed. No other person will come in between success and you

opportunity/

Storm in a wine glass With the rise of wine as a lifestyle drink, the industry is set to grow in leaps and bounds

/INSEAD Case Study Indus World School

18 44

Early-stage funding

unique idea of the month/ Ek Mutthi Anaaj.................................... 54

blogs/columns Philip Anderson .......... 16 Rupin Jayal................... 52

This is the story of the campaign thatâ&#x20AC;&#x2122;s running with the belief that a handful of grain is all it takes to begin a movement

Paranjoy Guha Thakurta .. 79

Investor of the month/ Srini Vudayagiri

coming soon

If we were to draw a list of top ten things that we look for in a pitch, the top eight will be the team itself

DARE.CO.IN interactive business models,

wiki proďŹ les, business

graph of the day, idea

pic of

the day, sector spotlight, blogs, news, discussion fora, keyword based alerts, rss feeds, contacts,

mentoring, market trends, webinars,

newsletters, live chat,

opinion polls,

leads, slideshows,

professional guidance,

strategy/IT

Don't rush to open shop in Second Life

Sure there is a buzz. However, taking your business to the virtual world can wait

opportunity / Digging gold in rural India ....................48 Pet Grooming A business of Rs 300 Crore ................80

funding / Credit ratings explained ......................65

search, on demand,

archives, event calendar, research, directories, faqs

TiE / Driving entrepreneurial growth ......... 102 FEBRUARY 2008 5

KNOWLEDGE 25 years ago, Indiaâ&#x20AC;&#x2122;s first IT magazine, Dataquest, was born. And that started CyberMediaâ&#x20AC;&#x2122;s journey as a specialty media house dedicated to the knowledge industries. Our 15 publications, 12 websites, 100+ events, weekly TV programs, market research and media services are a testament to that. As India moves on its journey to become the knowledge capital of the world, CyberMedia will be at the forefront. Catalyzing the knowledge industries.

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blogs/edit

Birthday Celebrations DARE is the youngest division of CyberMedia, which just turned 25. We have planned a number of activities during the coming year to include you, our reader, in the celebrations

ow does one celebrate a 25th birthday? I remember the day I turned twenty ﬁve – it was a day of mixed emotions.

Part of me wanted wild celebrations, but another part, for the ﬁrst time, did not want to grow any older! What does a company do, when it turns 25? My previous one gave silver coins to everyone (and I missed it because I joined 3 days later!) Many others have had year-long celebrations. And what do you do, if you are the youngest division in a company that just turned 25? Why am I asking all these questions? DARE is the youngest division of CyberMedia, which just turned 25. We have planned a number of activities during the coming year to include you, our reader, in the celebrations. Meanwhile, you could also tell us via SMS and email as to how you would like to be involved, and we will try our best to make those ideas come true.

/Krishna Kumar

FEBRUARY 2008 7

Feedback DARE.CO.IN

I came across a copy of DARE quite

Referring to the article “It’s Lunch

ized in our country, the article on wed-

by chance a bookstore here in Trivan-

time folks” carried in January 2008

ding planners (“Planning someone’s

drum. I was pleasantly surprised by the

issue. It is true that, if you want to be an entrepreneur, innovation is the

big day”) was also very timely. Wishing

It was also quite pleasing to see an

key. This is where Pune based Mom’s

more academically oriented articles

article on the exact topic that I needed

Kitchen has done it right. With such

and other news items.

some information on, I am referring to the article in the Jan issue on wedding

a growing economy there are several new sectors are emerging and loads of

planning.

foreign companies are touching Indian

depth of information that it carries.

The article on turtorvista.com was also very informative. May I request that you publish more articles on such Internet based services, their business models, pricing and marketing strategies etc. Also, do provide some tips on sources of accurate market statistics and other quotable information. It would be a boon for aspiring entrepreneurs. It would be refreshing to see at least one article featuring a woman entrepreneur, or a woman who was part of the founding team of a venture. Women face unique challenges and it would be educational to get an inside perspective. I am deﬁnitely subscribing ASAP. I would like the Oct, Nov, Dec 2007 issues also to be sent to me. Nisha, Trivandrum Refer to “Planning someone’s big day” (Dare January 2008). The best use of black money is in Weddings, after Real Estate. Wedding in farmhouses, ﬁve star hotels and such places is a status thing. Now, even dress designers have queued up for show big fat weddings. In fact, wedding is the one of the biggest dream that most people nurture. For the Indian middle class parents it is still a major responsibility to get their children married. Marriage in India, unlike the west, is still considered sacred. We must try and preserve the sanctity of this ideal. M. Kumar 8 FEBRUARY 2008

shore. Considering this, there is indeed a huge opportunity for such an initiative, where someone could provide not only hygienic but tasty and hot food to the employees. Bal Govind

DARE all success and expecting many

G. Anuplal Senior Lecturer in Industrial Relations, St.Joseph’s College, Bangalore This is for Professor Philip Anderson. Your write up on “integrity” is a real jewel. It so lucidly explains the difference between loyalty, honesty and integrity. Generally these terms are

Mentor Wanted I am businesswoman from Mumbai and a regular reader of DARE. My business is in the food retail segment, which I have been running since last three years. The current turnover of my business is 5.5 crore and will be closing this ﬁnancial year in double-digit crore. I am interested in diversifying my business into other facets of retail and venture into food product exports. I have a wish to grow my company into a 600 crore business in the next four years. I have a business plan, and I need a mentor. Please help me ﬁnd one. Arti Atin Kamble A number of articles in the previous issues have been of academic interest to me. In issue 04, one article of special interest has been “Family businesses: growing the next generation of entrepreneurs”. This article has looked in to various aspects including sociological, connected with family businesses. At a time when Weddings are becoming more and more commercial-

used interchangeably. Your comment ‘integrity is in part culturally deﬁned’ is a masterstroke. This type of ‘culturally deﬁned integrity’ is quite common in India. Is it so in the other parts of the world also? This article is a must read for one and all. I marked it ‘must read it many times’ for myself. Keep enlightening the world. Dr V Pawar, Bathinda

Via SMS - DARE 56677 DARE, Prof Prahalad, Indian effeciencies is a chimera. It is a fundamental attitude - chalta hai, short sightedness, ingrained corruption & dishonesty. DARE is a great inspiration and would help India get some great entrepreneurs. After failing once a decade back, I would try again and do it. Mukul R Gupta

SMS “DARE <your comments, questions or suggestions>” to 56677 or Drop us an email: dare@cybermedia.co.in

news

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/news Indo-UK Angel Network launched British Prime Minister Gordon Brown has announced the launch of an Indo-British angel investment network to promote entrepreneurship among young Indians who have big ideas but fall short of ďŹ nance. The partnership between the Indian Angel Network and the British Business Angel Association is likely to trigger off bilateral trade and investment between the two countries for seed and early stage ventures. The two Angel Networks later shared ideas at a workshop, which also deliberated on sharing best practices and preparing companies for due diligence, thus facilitating a better understanding of entrepreneurs and investors.

Beluga Shipping introduces kite propulsion system Beluga Shipping has done a ďŹ rst by introducing an innovative SkySails towing kite propulsion system on a cargo vessel. The ďŹ rm believes that the SkySails system is the only sail system in the maritime shipping sector to date that can be used in commercial operation without any restrictions in vessel use. Of all known concepts for effective and sustainable alternative propulsion of merchant vessels, SkySails represents the only suitable model: no bothersome masts on deck, no restriction of stowage space, no hindrances to loading and discharging, no risk to the crew, cargo or ship as well as reliable overall performance. Utilization of wind energy by means of the towing kite makes it possible to provide relief to the main engine and 10-15% less bunker consumption is expected in the initial phase of operation. Application of the towing kite propulsion system points to a sustainable way out of direct dependence on the oil price.

10 FEBRUARY 2008

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/news Asia’s healthcare sector to overtake US

Infra investment to rise 19%

On the back of increasing opportunities in medical

Rating agency Crisil has said investment in the infra-

tourism, the demand for healthcare in China, India, Japan, Korea and Singapore is likely to cross that of the US

structure sector is likely to grow 19% per annum to Rs 30.34 billion in the next two years. Several large infra-

by 2015, according to a report by Credit Suisse.

structure companies such as Larsen & Toubro and Punj

at 20-30% annually, and about 1.80 lakh medical tourists

Lloyd have grown 50% in the last two years. The growth is expected to come on the back of sev-

were treated in 2004.

eral road and hydro projects and two ultra-mega power

It also says that medical tourism in India is growing

This comes in the backdrop of a CII-McKinsey esti-

projects at Sasan and Krishnapattanam.

mates that India’s medical tourism will boom into a $2 billion industry by 2012. In 2006, the industry was pegged

Global carbon trade up 80%

at $350 million. 2007 was a year of brisk trading in carbon credits. The

Imports from China on the rise Compared to India’s other trading partners, imports from China have increased much faster. Chinese imports have risen over eight-fold since 2001-02, whereas the in-

trade in carbon credits rose to $60 billion in 2007, up from $33 billion in the previous year, according to Point Carbon, a group of greenhouse gas consultants. Traded volumes in the global market touched 2.7 billion tones of GHG reductions in 2007, up 64% in the same period.

crease in our imports from the world was only three-fold during the same period, industry body FICCI has said.

RBI’s red light to 30 foreign VCFs

This has led to a sharp increase in China’s share in India’s imports from around 4% in 2001-02 to 9.4% in 200607, while India’s share in Chinese world imports continues to be 1.3%, FICCI said.

Govt to offer incentives for solar power The Ministry of New and Renewable Energy has launched a new scheme for installation of solar power plants. The ministry will provide ﬁnancial assistance amount-

At least 30 foreign venture capital funds (VCFs) waiting on the fence to invest in India’s real estate sector will have to wait more, as the Reserve Bank has refused to grant them the necessary approvals. This comes in the aftermath of the Union finance ministry reviewing the policy for investment in the real estate sector for both FDI and portfolio investments by FIIs. According to estimates, VCFs put in over $770 million in 57 deals for start-up firms in the country during the first three quarters of 2007.

ing to Rs 12 per KW hour in the case of solar photovoltaic and Rs 10 per KW hour in the case of solar thermal power fed to the electricity grid. 50 MW solar power plants have been considered for the 11th Five Year Plan period. The government has decided to provide generationbased incentives for grid interactive solar power generation for the ﬁrst time.

Economy to grow at over 8% Indian economy will remain strong in 2008 and is expected to grow by about 8.2%, the United Nations has said in its report titled ‘World Economic Situation and Prospects 2008’. The reports said the growth will happen despite the growing recessionary pressures and worsening economic crisis in the world economy.

SME CEO’s Knowledge Series ICICI Bank, in association with CyberMedia, has launched SME CEO’s Knowledge Series. The series aims to empower the SME CEOs by providing a platform for knowledge sharing and joint learning amongst the entrepreneurs.

SEBI’s policy on small IPOs Market regulator SEBI has released a draft policy for imposing a price band of 25% on the issue price of IPOs of issue size up to Rs 25 million. This would not only assist in a more orderly price recovery process over a period of time but more importantly, also have a salutary impact on potential price movement on the day of listing, SEBI said. FEBRUARY 2008 11

DARE.CO.IN

opportunity/wine

Storm in a wine glass The potential capacity of the Indian wine industry is somewhere around Rs 1,700 crore, out of which the current standing is Rs 450 crore only. With the rise of wine as a lifestyle drink, the industry might even overtake the speculations /Arunjana Das

omebody once called wine bottled poetry. Slick fragrant wine swirling elegantly in clinking curvy glasses tells a story that no other drink does – a story of its life, starting right from its origins through to the very moment it is served on your table. It is this story that had enchanted Ranjit Dhuru, owner of a Rs. 400 crore IT enterprise, into starting Chateau d’Ori, a vineyard and a winery, from a wasteland in Dindori in Nasik. Dhuru is just one of the many entrepreneurs who had fallen in love with the Indian wine story. A glass of wine spells culture and class. Considered the drink of the gods, it ﬁnds mention in Bhagwad Gita

FEBRUARY 2008

as Sura and the Last Supper of Jesus, “representing all things spiritual!” Appreciating wine, hence, requires fine sensibilities. Making it requires even finer ones. Wine-making dates back to the very genesis of human race, with Noah as the very first winemaker the world had ever known! Not many would know that Noah was the man who, after the proverbial Great Flood, started life anew on earth by planting the first vineyard and making wine! Whereas, as his father said, Noah did it for “bringing us relief and comfort from our work and the toil of our hands,” the Indian entrepreneurs are doing it for exploiting the Rs 1,700 crore worth market that remains to be exploited.

DARE/what is wine? Wine, derived from vin – the Latin word for vine - is an alcoholic beverage made from the correct fermentation of grapes. Wine can also be produced from other fruits, such as apples, pineapples, berries, plums, starch products such as rice, and a few varieties of nuts. Constituents of Wine Acidity that gives wine its kick, tannins help wine mature, grape sugar ferments into alcohol There are currently around 125,000 hectares of land under grape-cultivation in Maharashtra, out of which around 1000 hectares is for wine-grapes. In Bangalore, there is around 200 hectares.

opportunity opportunity/wine wine

DARE.CO.IN Chateau Indage, formerly Champagne India Limited, was started in 1982 and is one of the oldest and biggest players in the wine-scape of India. Chateau Indage, headed by Shamrao Chougule, Founder Chairman of the group, and his two sons, Ranjit and Vikrant Chougule, also operates an upscale hotel group, the Indage Group. Chateau Indage grows some 68 varieties of grapes, for trials and for commercial purposes, in their vineyards in Narayangaon. How popular is Indian wine in the domestic and international markets? RANJIT CHOUGULE Wine is a rapidly growing category within the CHATEAU INDAGE Indian alcohol industry. With urbanization and hedonism emerging in the Indian consumer, wine is one of the new categories that have grown as a result of this. With increased focus from governments, both state and central, as well as a widening base of producers in states such as Maharashtra, there is wider visibility and availability of wines throughout the country as well as widening price points and product types within the wine category. This has allowed for a rapid growth in the interest levels and consumption of wine in metros as well as semi-urban areas in the country. Internationally, wine continues to be a growth area in a large majority of the wine-consuming countries with ours being the fastest growing market in the world with annual sales exceeding 330 million cases. Traditionally, older regions of wine consumption such as France have shown some decline in overall consumption, but this is merely on account of a shift to consumption of higher quality wine and reduction in the production of lower quality ones. Asia as a whole is registering good growth overall with China now reaching almost 0.5 liters of per capital consumption.

Of this, 70% is already yielding and 30% will start yielding in a span of 2-3 years, totaling the annual wine grape yield to around 15,000 tons and an average annual yield of around 0.9 crore liters of wine. Agreed, compared with its counterparts in Europe and Australia the Indian wine industry is still a colt. However, with an annual growth rate of 25-30% that the Indian wine industry is enjoying, wine experts speculate the colt to grow up soon to a racing stallion, strong enough to give the French Bordeaux a run for its money.

Weaving the Wine Story There are currently around 40-odd wineries in the country, with a total annual production of 0.62 crore liters. The prominent players in the business are Sula, Grover and Chateau Indage, who, having recognized the opportunity early-on, cashed in by setting up vineyards, importing machinery and bringing in world-class wine experts to deliver quality wine with all its kicks. Compared to these big daddies of the industry, who have been around

How did your strategic partnerships and acquisitions come about? Indage has already taken steps to transform itself form a single vineyard and winery company in a single geographical location to multi-vineyard, multi-winery and multi-location company, with production and vineyard facilities in various parts of the country and, now, in various parts of Australia. This transformation will now increase its pace over this calendar year with South Africa, New Zealand, United States, France and Italy being added to this global portfolio. This allows Indage to strategically offer a range of wines from various parts of the world at varying price points and allows it to differentiate both at a product and brand level. What are the current bottlenecks in the industry? Within India, glass manufacturers, corks, skilled wine-makers and skilled viticulturists are potential bottlenecks as the industry grows. Globally, differentiation in products and brands within the wine category is a major challenge that all producers face. What are the downstream opportunities? We have already invested heavily into forward integration through a group company, Indage Hotels, since the year 2000. The company has steadily built up a portfolio of F&B (food and beverage) outlets that all focus heavily on wine and communication to the consumers of Indage brands. We have also heavily invested into wine retail with a variety of formats in standalone stores, supermarkets and shop-in-shops to ensure greater visibility of wine in comparison to a normal alcohol retail environment, as well as maximizing communication and feedback opportunities for category growth within the wine consumer. How do you see this industry evolving in the future? A large degree of consolidation will occur within India with a majority of inefďŹ cient producers at lower scales of operation becoming merged into larger, more efďŹ cient businesses while more boutique wineries will also emerge within India. There will also be a greater focus on regional vineyards and its impacts on quality and styles of wine within India and the globe for Indian wines. At a global level, consolidation and efďŹ ciency of production are key factors to success. FEBRUARY 2008 13

DARE.CO.IN

opportunity/wine

DARE/potential market size Area under grape cultivation In India: 60,000 Hectares (Ha) Assumption: 1% used for wine-grape cultivation Area available for wine-grape cultivation

600 Ha

Average return per hectare per harvest

20,000 kg

Total wine-grape production

6,000,000 kg

Wine to wine grape conversion ratio

0.94635 liters/kg

Total wine capacity

11,356,200 liters

Average market price per 0.1 liter (100 ml)

Rs 150

Potential wine production capacity

Rs 17034300000 (Rs 1700 crore)

for the last 10-20 years, there are also those who have jumped into the business only some 3-4 years back, and are doing well. They got allured into this business by the aura of elegance and the ‘greens’ that the industry promised them. Most of them belong to the ilk of those who jumble successful corporate careers or those who have quit their corporate careers altogether to delve into it as a full-time occupation. Whereas Ranjit Dhuru of Chateau D’Ori and Ramesh Rao of Mandala Valley Vineyards belong to the first, Yatin Patil of Vintage Wines belongs to the latter. Ranjit Dhuru describes himself as a person who is passionate about wine and interested in making wine the right way. Founder of a Rs 400 crore IT enterprise, Aftek, he started Chateau D’Ori out of personal interest and a hunch that the wine market was going to explode. He got his license a year and a half ago and did his first crush last year. Chateau D’Ori launched five brands last year and Dhuru is optimistic that more and more professionals

with a flair for wines will get into this business in the next five years. Another professional who juggles a corporate career with winemaking is Ramesh Rao of Mandala Valley Wines. Rao owns Scion Advertising, an advertising and brand-management company based in Bangalore, and got introduced to good wines over business lunches and dinners in India and overseas. He started Mandala a few years back in Bangalore and tied up with a few grape growers in Maharashtra for supplying wine grapes. Yatin Patil of Vintage Wines is credited with having grown Italian wines in India. Yatin and his wife, Kiran, quit their corporate careers, bought some land in Nasik and started Vintage Wines in 2000. The popularity of their flagship brand Reveilo can be judged by the fact that their Reveilo Chenin Blanc 2005 was awarded a bronze medal in the recently concluded India Wine Challenge. Their Cabernet Sauvignon, Syrah and late harvest Chenin Blanc were also awarded Seals of Approval in the same event, which cor-

robates the high standards of quality that Yatin and Kiran have maintained in their wines. There are also those who source wine grapes from local growers in addition to in-house harvesting. Pralhad Khadangale of Sankalp Winery and Shivaji Aher of Renaissance Winery, to name a couple of them. Whether it is the established makers or fresh entrants, they all have one thing in common—the motive behind getting into the business, which is a passion for wine and money! Passion, coupled with the rising demand for Indian wines, has propelled quite a few entrepreneurs into becoming vinopreneurs. A spurt in fresh vinopreneurs over the last few years is resulting into a wine revolution. “Almost every other week a new brand of wine is getting launched,” says Subhash Arora, President of the Indian Wine Academy and a renowned wine expert. What’s more, the rising demand is attracting even more entrepreneurs and established corporate individuals into turning vinopreneurs.

How do you get in There are three ways of entering the wine industry. One is to set up a vineyard to produce your own wine grapes, the second is to source your grapes from external agencies and carry out the processing and bottling in-house and the third is to buy the wine from a winery, bottle it in your in-house bottling facility and sell it under your own label. Depending on your core competencies and business models, the easiest approach could be any one of the said

Indian wines are coming of age. This industry is massive, there are very less number of players and we do understand that a lot of compromises have been made in the past. Still, India is blessed with a good climate, fertile soil and hard-working farmers. Hence, I don’t see why in the next ﬁve years we won’t be world-class. — RANJIT DHURU, CHATEAU D’ORI 14

FEBRUARY 2008

opportunity/wine DARE/setting up a vineyard BASICS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Site location: Fertile soil, dry climate, controlled rainfall Buying land: Average 20 acres Getting a manufacturing license (subject to state rules) Trademark registration in case of a company setup Grape variety selection (dependent on soil type) Sowing the seeds Two-three years’ gestation period First harvest: Usually not used for wine-making Subsequent harvests: About 30% pruned away for better quality Crushing and fermentation in winery: Subject to the GMP (Good Manufacturing Practice) code of WHO (World Health Organization) 11. Bottling and labeling in bottling plant: Subject to the Fair Packaging and Labeling Act of FDA (Food and Drug Administration) of the United States 12. Stock and sale licenses FINANCES Initial Investment: Cost of land + Input cost (seed, manure, fertilizers, labor, etc.) + Cost of machinery + License fee Cost of land : Rs 500,000 to Rs 20 million per acre Input Cost : Rs 50,000 to Rs 200,000 per acre Cost of machinery : Rs 5 million to Rs 50 million License fee : Rs 15,000 to Rs 50,000 Annual Investment (Working Capital): Maintenance Cost + Production cost + Stock and Sale License fees Maintenance Cost : Rs 15,000 to Rs 50,000 per acre Production Cost : Rs 30,000 to Rs 100,000 per acre Stock and Sale Licenses : Rs 50,000 to Rs 100,000 Initial investment per acre : Rs 500,000 to Rs 20 million Annual investment per acre : Rs 50,000 to Rs 200,000 Cost of machinery : Rs 5 million to Rs 50 million Fees for licenses : Rs 50,000 to Rs 200,000

DARE.CO.IN options. Taking it from the bottom, let us assume you are not too inclined towards understanding the nitty-gritty of handling a vineyard and a winery, and would rather steer away from the same. If that is the case, you can simply buy quality wine from a winery and sell it under your own label as is being done by several big and small players, UB (United Breweries), Diageo and Big Banyan being some of them. The winery is effectively on a lease with you. “Initially you can start off with nothing except buying the wine, bottling it and selling it. At the end of the day, it is your ability to sell that would count,” says Arora. If you have a processing and bottling facility in place in your winery, you can get the grapes from a vineyard as a part of a contractual agreement. Quite a few wineries, however, are the kinds that produce their own harvest of wine grapes and source the rest of their requirement from other wineries or vineyards. Mandala Valley Wines Contd. on Pg 88

FEBRUARY 2008 15

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blogs/INSEAD

A brush with failure may be just what you need What matters is how you conducted yourself under extreme duress, when failing seemed inevitable /Philip Anderson

began to understand the competitive nature of India’s educational system 20 years ago when I ﬁrst started reviewing applications for the PhD program at Cornell’s Johnson Graduate School of Management, where I began my academic career in 1987. I swiftly learned how to read a letter of recommendation from an Indian professor. “Not bad; won’t embarrass himself or our school” meant “one of the ten highest-scoring graduates of our institution in the past decade.” The top 1% of the top 1% applied America’s most prestigious schools, and for us, trying to separate “really brilliant” from “really, really brilliant” was nearly impossible. India’s educational system is set up to separate the absolutely extraordinary from the merely exceptional from the extremely good. To accomplish this, schools rely heavily on examinations, particularly in quantitative subjects, designed to achieve an absolute ranking of individuals by distinguishing those who make one mistake from those who are absolutely perfect. One unintended consequence of this system—despite its undeniable efﬁciency at producing students for whom Failure Is Not An Option—is that in pursuit of perfection, far too many people learn to play defensive cricket. Being “not out” becomes the goal as competitors strive to dodge traps and avoid the one mistake that can close the doors of opportunity. For this reason, I was especially intrigued when talking with an experienced venture investor recently who told me about one of his techniques for spotting the kind of management talent in which he wants to invest. “I ask people to tell me about a near-death experience in their career, a time when things looked as hopeless as they ever have,” he said. “I ask if they have ever painted themselves into a corner where there seemed to be no way out, and then I asked what happened, what they did in that situation.” 16 FEBRUARY 2008

An immediate red flag goes up if the interviewee has to struggle to think of such a situation, which turns into a flashing danger sign if the answer is, “Honestly, that has never really happened to me because my career is one unbroken chain of successes.” Someone who has never faced looming defeat, has never wrestled with despair, is a weak candidate, not a strong one in this expert’s view. Why? “Nothing is more certain in a venture than at some point things will look hopeless and a rational person would quit,” he explains. “I don’t want someone’s first brush with adversity in his life to take place with my capital at stake.” When I tell my MBA students this story, I’m invariably asked “Does that mean we should try to fail at least once, to ensure that we have a failure on our resumés?” Of course, failing is not a badge of honor and is not a career goal. What matters is not whether you failed or not: it is how you conducted yourself under extreme duress, when failing seemed inevitable. Failure itself isn’t necessarily much of a teacher. Plenty of people have bowled a few balls or tried their hand at art; concluded they wouldn’t be much good at it; and moved on without strengthening their character noticeably. What forges toughness is the experience of struggling against almost-certain failure when the stakes are high, when you are desperate to find a way to win. How resourceful and resilient you are when it’s easier to focus on disaster rushing toward you is the aspect of your track record that professionals want to learn more about. What is the difference between a “noble failure” that enhances the amount of respect people have for you, and an “ordinary failure” that is best avoided? Talking with venture investors, I have uncovered five elements of a “noble failure experience” that seem to capture whether one can reasonably expect that you will surmount challenges in the future just when things look their bleakest. The first is whether you were taking an appropriate risk. When someone has an unblemished record of success, the first question in venture investors’ minds is whether that reflects an unwillingness to take appropriate chances. It is frequently said that entrepreneurs are risk-takers, but that doesn’t mean they go hang gliding on weekends or ride a motorcycle without a helmet. It

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blogs/INSEAD means they are not risk-averse, which most people are: they take risks even though they don’t seek them. Suppose you play a coin-flipping game: you invest a rupee, winning three if the coin comes up one side, none if it comes up the other side. On average you win half a rupee each time you play so it’s a good bet. But most people will not play the same game if the downside is more severe or more likely. If you have a 1/3 chance of winning 100,000 rupees and a 2/3 chance of losing 40,000 rupees, the expected value of the game is positive (on average you’ll win 20,000 rupees every three turns), but the prospect of losing so much money is too daunting for the average person. An entrepreneur is someone who is willing to take risks when the expected value is positive because he or she is willing to tolerate the risk of a negative outcome. If you take such a risk and fail, it’s a noble failure. If the odds were so far against you that on average you could expect to lose, then you get no credit for accepting the hazard. If you can explain why the probability of success multiplied by the payoff made taking a chance worthwhile, failing in such circumstances is more admirable than not playing at all. Second, was yours an execution failure? To illustrate, science normally proceeds through dozens of unsuccessful experiments for every successful one, so scientists seldom bemoan such failures. However, if an experiment went wrong because someone forgot to wash the glassware or mis-measured or neglected to keep the heat constant, there is nothing to learn from the failure. Similarly, if you fell short in business because you carried out a project too carelessly, it’s unlikely you learned much or grew significantly from the experience. Third, when faced with failure, did you exhibit unusual resourcefulness and creativity? Some people fail because they keep battering at the same wall, hoping that sheer persistence will bring things right eventually. But, as either Benjamin Franklin or Albert Einstein (depending on your source) once said, “The definition of insanity is doing the same thing over and over and expecting different results.” The author of a noble failure thinks through why things aren’t working and tries every clever solution

he and his team-mates can conceive when doggedness alone is not producing results. Sometimes one runs out of time before running out of alternatives, but those are exactly the kind of defeats that make a person stronger. Fourth, did you keep your cool and stay optimistic? A number of investors I know enjoy taking prospective portfolio company CEO’s on long airplane flights to visit customers or facilities, because they want to know how the person performs under stress. A great deal of success in life depends not just on being able to perform, but on being able to perform when you are tired, distracted, distressed, and bombarded with a mounting wave of negative feedback. Such circumstances can forge the steel in your soul, but only if you stay focused on closing the gap between the present and your goal instead of giving free rein to your frustrations and disappointments. Finally, when and how did you admit defeat? There comes a time in many endeavours when cutting your losses and finding a different way to accomplish your objective is the sensible thing to do. The dividing line between stubbornness and perseverance can be fine, but the best indicator is whether you actually listen to data in an honest way. If your defeat stems from confronting reality instead of losing faith, and if you strive to retrieve as much as possible from a bad situation on behalf of yourself, your teammates, and your backers, then you have shown the same nobility under duress that characterizes those who turn setbacks into triumphs, even if triumph escaped you this time. A brush with failure may be just what you need to demonstrate your worthiness as an entrepreneur—as long as you conducted yourself appropriately. Knowing how someone behaves under dismaying circumstances can give your prospective supporters a greater level of comfort than is possible with a champion who is undefeated and untested. Take intelligent risks in your career and do everything possible to overcome worthy challenges. You might be surprised to find yourself considered a better bet than your “perfect” peers who survived the game of school DAR E without learning how to play the game of life. INSEAD Alumni Fund Professor of Entrepreneurship, Director, Rudolf and Valeria Maag International Center for Entrepreneurship and Director, 3i Venturelab

SMS “DARE <your comments, questions or suggestions>” to

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case/INSEAD

Indus World School

India needs 4,00,000 schools over the next 25 years but the existing growth rate will produce only 1,10,000 /Philip Anderson

atya Narayanan R walked across a set of boards over a puddle in the still-drying cement floor of the new school building as he carried another armload of books to the library. This, the Hyderabad campus, was the first of a chain of K-12 institutions called the Indus World School (IWS) that he and his partners had founded. In mid-2006, the laughter of children mixed with the sound of workmen putting on the finishing touches, as the first batch of students used the classrooms that had been finished even as construction was drawing to a close in other parts of the building. Satya and his team had begun the Indus World School (http://www.indusworldschool.com) with a dream of providing high-quality, affordable education to India’s middle class. Even more parents had applied for the first intake than projected; clearly IWS had struck a chord in the community. As 18 FEBRUARY 2008

Satya’s gaze swept over the campus and its green jewel of a sports ﬁeld, his thoughts turned to how to evolve the school’s business model in order to keep the cost of tuition within the reach of the families the school was started to serve.

Background: from CareerLauncher to Indus World School Satya attended St. Stephen’s College in Delhi, then graduated from the Indian Institute of Management (IIM) in Bangalore. He worked for a brief period at Ranbaxy, one of India’s leading pharmaceutical ﬁrms, before starting CareerLauncher in 1995, where he is chairman today. CareerLauncher started as a one-man business: Satya himself coached a batch of students how to apply successfully to an IIM. Having proved he could produce results, he grew the business by hiring more coaches, expanding to more lo-

cations within India, and broadening the range of examinations for which CareerLauncher offered courses and guidance. By 2006, CareerLauncher was the leader in its ﬁeld in India and was beginning to expand overseas, starting with Dubai. Satya was ready for the next step in his journey toward building a broader education provider. He and a team with a Career Launcher background started what became the Nalanda Foundation to build a network of primary and secondary schools intended eventually to expand throughout India.

A new breed of learning institution Nalanda acquired plots of land in Hyderabad and Indore and began building two private K-12 (kindergarten through twelfth year) schools for children. As Satya explains the concept: India needs 400,000 schools over

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case/INSEAD the next 25 years, but the existing rate of growth will produce only 110,000 schools. This creates a huge market opportunity, and in addition, competence in the education sector has traditionally been rather low. The best talent in India chases other paths, like an MBA; we want to get some of them back into education by paying competitive salaries and selling the life style. It seemed to Satya that much of India’s public educational system had grown into a bureaucratic behemoth that focused on executing a curriculum for form’s sake. He believed a new venture could differentiate itself by creating schools with a different educational philosophy. He explains: We think a huge amount of work needs to be done. Schools don’t realize that their mandate is preparing a child to be ready for life, equipping him with the skills for a career, as opposed to delivering lessons just because they are in a curriculum. A child can’t get what he wants. We are saying let’s look at education from the standpoint of the learner and the parent. We intend to modify the curriculum framework of India’s central board of education, adding a lot of things on top of it that are customized for each individual student. The Indus World School intended to take a child through three different stages of learning. The ﬁrst would be called Ananda, which means “joy” in Hindi or Sanskrit. Targeted at children from the age of three through the second grade, its purpose would be to embed the joy of schooling and love of

Independence day celebration at the school

learning into each student’s psychological makeup. The next stage, Jigyasa, was intended to impart the spirit of inquiry to students by exposing them to a broad variety of disciplines. From the third to the eighth grades, children would take the usual Indian curriculum and in addition explore areas such as environmental sciences, languages, sports, art, music and dance. The pursuit of excellence along a speciﬁc path would be the theme of the ﬁnal stage, Sadhana, stretching from ninth through twelfth grade. Here, the program became more focused.

Satya elaborates: Children are ready to explore more speciﬁc options after grade 8, so we have developed psychological tool that will help a child identify a couple

of areas to focus upon, based on observation sheets over the years plus questionnaires and interviews. If a child is talented in sports, for example, we will help him focus on that as well as academics. Our endeavor will be to help him get to the next important milestone at the school leaving stage. If he is great at guitar, can we help him get to the Royal School in London? If he is talented in sports, can we help him get a scholarship to an American university or to the best academy in India in that discipline? The bedrock of the Indus World School was to be a new breed of educators, forged through intensive training. Says Satya: Teachers go through a six-month phased training program, which is unheard-of in school circles. They come

We are saying let’s look at education from the standpoint of the learner and the parent. We intend to modify the curriculum framework of India’s central board of education, adding a lot of things on top of it that are customized for each individual student. — SATYA NARAYANAN R FEBRUARY 2008 19

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case/INSEAD

5 1. Hyderabad & plantation 2. old age home visit 3. Visit to a blind school 4. Children's day Celebration 5. Visit to a garden

6 3 from industry or other schools, so we have to re-load a lot of the software in their heads. We are very selective; we sifted through 500 applicants to choose 25 teachers for the ﬁrst school we’re opening in Hyderabad. Two of CareerLauncher’s co-founders with degrees from the Indian Institute of Technology and the Indian Institute of Management moved into the Indus World School venture full-time. Says Satya: They know what top education means. The director of the Hyderabad school is an MBA from IIM Bangalore, and that is pretty out-of-the-box for education. The buzz in Hyderabad and Indore is that there has never been a school done by IIT and IIM alumni, and in fact that is the lead line in our communication with the outside world about these schools. 20 FEBRUARY 2008

In the future, Satya also hoped to differentiate the schools by linking up with world-class partners. He explains: Some of the things we want to do are extremely ambitious. For example, sports in schools are a very unorganized market—the quality of coaching and sports management inside schools is amateurish. Could we do a tie-up with Manchester United in football or Florida’s Bollettieri Academy in tennis? Similarly, in music or art, can we give poor and middle-class Indian kids access to the top institutions in India and the world?

Evolving the business model The Nalanda Foundation designed Indus World School as a franchise opportunity. In each city they entered, they planned to ﬁnd entrepreneurs who would invest in the land and infra-

6. Fire station excursion

structure for a hub-and-spoke system of 4-5 Anandas within a six to eight kilometer radius of a Jigyasa/Sadhana school. Nalanda would recruit and train teachers, provide the entire curriculum and backbone infrastructure, and use its brand to attract students in return for 15% of revenues. The ﬁrst two schools were wholly owned, designed to prove to prospective partners that the concept would work. Satya explains: We plan to enroll 250 in Hyderabad and 200 in Indore; if we can ﬁll them up, we’ll show people that we’re on the right path. People want to know what you have done on your own before they’ll consider a franchise. There is some initial skepticism about the things we claim to do, but we are not going to depend on outside funding to get this off the ground.

case/INSEAD Indus World School planned to target initially the middle of India’s socioeconomic pyramid while also reaching out to bright students who could not afford a private education. He explains: We could have charged 1.3 lakhs per annum, but instead we’re charging 40,000 rupees for a year because we want to be within reach of a typical middle-class Indian*. If a household can spend 15% of its monthly income on education, we are within reach. Someone who makes 2.5 lakhs per year can send a child to our school comfortably, and 10% of our seats are offered free of charge to promising poor kids in the community, the kind whose family earns a dollar a day or less. The fee includes a mid-day meal, which some of them need as much as they need a school. Satya’s longer-term vision was to bring the price of tuition at Indus World School down to 10,000 rupees per year, which would put top-quality education within reach of India’s lower middle class. Reaching this price point would truly revolutionize Indian education, he believed, but it would depend on innovative thinking about revenues. He elaborates: We have to find novel revenue sources to fund today’s scholarships and eventually bring down our price for everyone. The challenge is not the top line or the bottom line; it is venturing out of one’s comfort zone. You can make profits with a school if the people driving it look at it as an infrastructure project and maximize value generation. Right now, people queue up, get educated, and go home at 2 pm. You have to change the mindset, get them to stay until 6 pm, and broaden the use of the facilities. If a school could generate ancillary revenues, it could earn a profit for Nalanda and its franchisees without relying too much on tuition. Satya’s team was planning to pursue three sources of non-enrollment revenue to supple* In 2004, the average Indian income per capita, adjusted for purchasing power parity, was estimated at US $620 (27,800 rupees), with wide disparities between rich and poor. See http://www.finfacts.com/biz10/globalworldincomepercapita.htm

DARE.CO.IN ment income derived from charging for education. First, the entrepreneurs planned to make the school’s facilities available to the local community on a pay-and-use basis. Says Satya For example, we have a swimming pool, four tennis courts, and a huge cricket field; how do I make them useful to the community to drive revenues from them? Our sports ground is good enough to lease out Prof. C K Prahalad at IWS Hyderabad We’re lobbying with young memto the cricket association, which pays to maintain 15 school grounds where bers of parliament across party lines, local league matches happen. Similar- explaining to them why the governly, could we lease out our auditorium ment must let go of education. India can implement a voucher system and to the local music society? Second, they intended to explore lease out schools to organizations like revenues from training. CareerLaunch- ours, which would give us a fully-deer was paying several organizations to preciated infrastructure without a train its first batch of teachers; could it capital cost. In early 2006, we did a take over the training and offer it not workshop for 27 people built around only to Indus World School teachers a case study of what is happening in but to others as well? Could serious, Kenya and in Bangladesh, and it was professional coaching and training be quite eye-opening. Then we did anoffered in areas such as sports or mu- other workshop in Delhi that shows sic, since each school would have the how governments are leasing out public schools to organizations like ours. necessary facilities? Third, the entrepreneurs could look for industry sponsorships. Satya was Conclusion less excited about this route, musing: A month ahead of the June, 2006 openYou can’t go to the same person ing of the first Indus World School in year after year for donations. Whether Hyderabad, Satya Satya and his partthey donate depends on their moods, ners were focusing on execution first, so it’s icing on the cake, not a healthy and the hunt for additional revenue way to forecast revenues. Industry streams second. They believed their partnerships are more interesting; for project could revolutionize education, instance, can we work with companies which had to be the foundation of Indeveloping educational technologies, dia’s growth in the 21st century. To realsuch as Intel or Microsoft? ize their dream of making world-class, While brainstorming additional learner-centered schooling available revenue streams, Satya and his part- to most Indians, however, they would ners also were laying the foundation have to find creative revenue streams for what they hoped would be a future that did not depend on charging parwave of public-private educational ents tuition. What might those be, partnership, along the lines of Ameri- Satya wondered? Contd. on Pg 72 can charter schools. Satya comments: FEBRUARY 2008 21

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tips/startups

Entrepreneurs share their success secrets Young entrepreneurs who set up their own companies share some tips for those wanting to start up /Sreejiraj Eluvangal

tarting your first company can be a painful process, especially if you come from a non-business background and are working on a tight budget. First-time entrepreneurs may be daunted by questions like how to deal with government officials, how much to invest in an office, and what kind of a legal structure to put in place. DARE spoke to some young entrepreneurs to come out with a list of tips to help first-time entrepreneurs move through the different stages of setting up their own companies.

Core team comes first Contrary to what many may believe, the biggest and the first challenge for anyone trying to start a company is not money or infrastructure. It is usually finding the right mix of people. Though

many entrepreneurs start out raising money and setting up offices, it is the P factor that experienced entrepreneurs find to be the most crucial. “The first thing to do, before you start investing in an office and infrastructure is to ensure you have the right team, everything else comes after that,” says Snehesh Mitra, who set up the Bangalore operations of the portal easysquarefeet.com One of the most common mistakes committed by start-ups is to under-estimate the importance of the team - and the different skills brought in by different

people. It doesn’t do to have just any people, but people with specific skills. Most start-ups, especially in high-tech areas, are started by domain or technical experts, who typically under-estimate the non-product aspects determining the success of the venture. “At the end of the day, you may have the best product in the market, but if you cannot market it right, it is worth nothing,” says Dasharatham Bitla, a Bangalore-based software engineer who left his job at a Bangalore IT services company last year to start a custom-made software products firm called Software. In a widely shared acknowledgement, Bitla feels that one of the early mistakes he made as an entrepreneur was to underestimate the importance of sales. “When we demonstrated our first product for travel agents, they would say it’s a very good product… But getting them to say ‘good product’ and making them actually cut a check for it

are entirely different skills. One doesn’t necessarily lead to the other, which is something we learnt over the last few months,” he says. M Thiyagarajan, co-founder of ‘Motvik’, the company behind ‘wwigo’, a software that allows you to connect your instant messenger to your mobile phone’s camera wirelessly tends to agree: “If it is a b2b domain like telecom where relationships matter, it sometimes takes a year to convince a telco to try out your product,” he 22

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tips/startups

The rule of thumb is that unless you are keen on raising money initially, you may be able to do with just a partnership rather than a full-ﬂedged company registration.

— M THIYAGARAJAN, CO-FOUNDER OF MOTVIK

says, adding that the usual attempt by the technical team to try to sell their product frequently ends up in slow progress. “It is of course possible for an engineer to become a good sales person, but can you wait for three or four years for that person to become one?” he asks. Snehesh points out that while starting out, the teams are usually biased in favor of technical people, partly as a result of a lack of contact between technical and sales executives at their old work-places. Besides, many startups shy away from trying to hire sales experts due to the high expectations of the latter. “The only thing that a good sales person is attracted to is sales,” says Snehesh. “To get a good sales person to join you, you have to prove to him that your product can be sold. You will ﬁrst have to prove the product by selling it to one or two companies, and then try getting a sales person on-board. Another important thing is to not look at the sales person as just another employee... At the end of the day, sales is the only criterion by which companies are judged in the marketplace. This is something that a lot of young entrepreneurs from product-design backgrounds do not grasp adequately,” he points out. The sales challenges are less daunting in a consumer-facing business, as adoption there depends largely on marketing and product quality. Snehesh therefore suggests that one of the core members should be from a sales background. “Even if you are interviewing a sales person for a job, if you get a really good one, be open to the idea of taking him on as a partner,” he points out.

The right legal step Once the core team is in place, the second step is to lay the basic legal framework for the company. Among the formalities are incorporation, which is the basic underlying ‘formation document’ of the company, creating tax accounts of various types and creating a shareholders’ agreement. While some of the elements can be done by the entrepreneur directly, not all can be done without the help of experts. As a result, the consensus tip on dealing with government and legal requirements is to outsource it completely to a trusted accountant or firm. “The first step is to find out whether you need a full-fledged company registration (as a private limited company) or whether a partnership would do,” says Thiyagarajan. “The rule of thumb is that unless you are keen on raising money initially, you may be able to do with just a partnership rather than a full-fledged company registration. A private limited company will take a month or more for the formalities to be over while a partnership can be registered by filling a few forms out in one day,” he points out. Thiyagarajan points out that partnerships don’t have strict disclosure norms, making it difficult to get external investment, but are ideal for the early or product-development phase of a company, especially in areas like software where government support and interaction may be limited. Besides reducing paperwork, partnerships also make it easy to change the capital structure without having to go through extensive notification and permission-seeking processes. They can also be closed down relatively easily, compared to full-fledged compa-

nies, which require court hearings before they are allowed to be shut down. While partnerships can be started by spending as little as Rs 2,000, to start a company would require about Rs 30,000 or more, including the fees of a chartered accountant. While nobody suggests trying to register the company directly, everybody emphasizes the importance of hiring a trustworthy chartered accountant or outsourced CFO services firm. “The only stumbling block to getting your incorporation down is if your company name sounds too generic, like XX technologies. Otherwise things will be over in about a month, though some CAs may say they will do it in ten days. It nearly always takes a month,” Snehesh points out, adding that it is important to go for a trustworthy CA with some experience through referrals, “and not necessarily the smartest and most expensive one.” While most small start-ups may be able to get all their legal and government work done through CAs or accounting firms, for companies who are involved in licensing and other b2b agreements regularly, a lawyer or a legal firm will also be required. In the case of both the accountants and lawyers, all the entrepreneurs were unanimous in placing utmost importance in trust. “These are people you have to be able to trust blindly, because they are going to do negotiations on your behalf. Spend more time finding them, but find the right ones,” says Rajiv Poddar, one of the founders of Bangalorebased Sedna Wireless, which designs wireless terminals. Another important legal document for the company is the shareholders’ agreement, which lists out how much FEBRUARY 2008 23

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tips/startups

each of the company each shareholder owns and describes their inter-relationships. A well thought-out shareholders’ agreement may be all that separates a smoothly run company from one in which the original founders end up at each others’ throats. Many start-ups, in their eagerness to start off, do not pay enough attention to the shareholders’ agreement, Thiyagarajan points out. “Even if you are starting out with everyone having equal stakes, it is important to spell out how it can change in the future–if and how one can increase one’s stake, how to exit the venture, how long each person must stay vested before he can bail out etc.,” he points out. “I know start-ups that have run into problems because they have overlooked these aspects,” he adds. A related issue is capital preservation, where the founders decide not to draw any salary or draw a nominal amount for the ﬁrst few months or years. While well intentioned, it leads to the lock-in of founders’ efforts in the company and makes exit out of an early-stage company a thorny issue since the accumulated salary is not recognized separately or encashed. “The best way to deal with it is to convert the salary into debt owed by the company to the persons,” says Thiyagarajan. “But a large amount of debt won’t look good if you are trying to raise money,” he adds.

Infrastructure costs Having formed a team and a legal entity, it remains to give it a concrete shape. While the kind of on-the-ground infrastructure required will greatly depend on the nature of the business, there are a few rules of thumb to help start-ups

No matter what business you are in, going completely without an office is not legally permissible, as any legally registered company needs to have an office in a commercial area, with proper signage. save money on their infrastructure requirements. The foremost is, of course, to economize as much as possible. “People are surprised at the idea of an office-less company,” says Snehesh. “Before hunting for an office, ask yourself - do you need an office? I have a friend who has started a company where all the employees work from home,” he says. He also warns against getting carried away by the idea of having a well-decorated office. “Chances are, if you are a start-up, nobody is going to come to your office to see all that. Instead, you will end up waiting in other people’s offices,” he says, “If revenues don’t come as you planned, an expensive office is exactly the kind of thing that is going to kill you. The office rent should be below Rs 6-7,000 per month.” Of course, no matter what business you are in, going completely without an office is not legally permissible, as any legally registered company needs to have an office in a commercial area, with proper signage. However, in such cases, a small nominal office may serve very well, especially in software companies, with the employees working from home.

Another option is to share offices, like Rajiv of Sedna did. “Our first proper office was a bedroom in a friend’s training institute. We stayed there for 6 months. The atmosphere was more conducive to work than at home. At home, we never got into the mood to work,” he remembers. A more organized form of the concept is what online learning portal TutorVista turned to as they were expanding beyond their two-room set-up at Bangalore’s Indian Institute of Information Technology (IIIT). “TutorVista was one of the first companies to shift into Orchid, a shared-office concept at the STPI (Software Technology Parks of India) Bangalore. It was very easy. You didn’t have to worry about electricity, water, wi-fi, backup, etc. In fact, on the day we shifted, we were coding at IIIT in the morning and at STPI in the evening,” remembers Bhaskar V Kode, an engineer from Anna University, who was working with TutorVista and has now set out on his own to start Hover.in a context-based linking tool vendor for websites. The facility also provides free common amenities, such as a library, a board-room, videoconferencing facilities and a canteen, and charges on a per-seat basis. “Even companies who need just two seats are also encouraged,” Bhaskar says. However, the facility remains more as an exception, with few other such institutions available in the country. Another start-up tip for small companies from people who have started out is with regard to sourcing computing hardware and software. Though mainly applicable to software and services firms, many start-ups found that a transition from desktops to laptops resulted in a jump in productiv-

For hiring, use your old contacts–ask your former boss, your old colleagues, your alumni network, use online networking.

— BHASKAR V KODE ENGINEER FROM ANNA UNIVERSITY

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tips/startups

When I started off, I realized that nearly everybody had some friend or friend of friend who could be useful to me as a client, employee or customer. — HARPREET SINGH GROVER CO-FOUNDER OF COCUBES.COM ity, though some of their employee’s spouses may dispute the desirability of the result. Another tip, especially for buying enterprise software, is to look for companies specializing in or having special packages for start-ups. “When we were looking for hardware design software, we zeroed in on two companies with similar offerings. But we picked the one that we did because they had a scheme under which we did not have pay the entire cost of the package at one go, but only as we hit milestones in terms of revenue and usage,” Rajiv of Sedna says.

Hire smart Finally, after getting the right team, office and the legal set up in place, it is time for the start-up to hire the extra hands, right from the receptionist to highly qualified workers. Vibhore Goyal, who is associated with two startups now, believes that there are two kinds of technology employees, and it is important to have the right balance. “There are those who work for money, not very smart and not experienced, and then there are those who are very smart and passionate their work. Sometimes, people think that they will make a great team of people who are very smart and passionate about the work, but the truth is many things don’t require thinking, like populating dummy data into database, or making fake pages for a demo, etc. It’s good to have a team of mostly passionate people but a few from the first kind are a must,” he says. Getting employees, however, whether of the first or the second kind, is not easy for small start-ups and calls for special strategies. “At first, we 26 FEBRUARY 2008

went through the regular web-ads and placement consultants,” says Harpreet Singh Grover, co-founder of CoCubes. com, an online campus recruitment portal. “The job market right now is very hot. The consultants have big companies as clients. So, even if they say they will do it, they don’t really pay much attention to a small company for whom not only is the number small, but so are the chances of someone joining,” he avers. For a small start-up, therefore, the only way to get good employees and partners is through referrals. “Use your old contacts–ask your former boss, your old colleagues, your alumni network, use online networking,” says Bhaskar. “The concept of stealth mode, where you try to minimize attention to your venture for competitive reasons, just doesn’t work,” he adds. “When I ﬁrst started asking my existing contacts–relatives, friends, etc–I didn’t realize how huge it was. Soon, I realized that nearly everybody had some friend or friend of friend who could be useful to me as a client, employee or customer,” says Harpreet. He adds “as an entrepreneur, you cannot be shy.” He has also ﬁgured out a few dos and don’ts for recruiting people. “If you

Though mainly applicable to software and services ﬁrms, many start-ups found that a transition from desktops to laptops resulted in a jump in productivity.

are a start-up and don’t have a proper or impressive office, always schedule the first meeting with a prospective employee at a coffee-shop or a similar place. The first impression is very important. Spend two or three hours communicating your ideas. Once the vision is transferred, it won’t make much difference to tell him that you work from an apartment,” he points out. Another tip for start-ups to find employees is to ask for the login and password for recruitment sites from other start-ups. Snehesh points out the need to exercise caution in recruitment. “On paper, everything looks easy–you start a company, hire employees and run it. But in reality, it is very different. If you hire people you can’t make use of, they become liabilities. It is a good idea to stretch yourself to the limit, instead of hiring just because you feel there needs to be a such-and-such in the company,” he says. To avoid taking in the wrong people, he believes it is important to wait for three or four months after starting the company to know what kind of person you require. “When you are initially drawing up the plans, don’t put yourself in a strategic position and delegate away all the work to other people. You still have to work if you don’t get all the people you were hoping to get. And yes, if you get a good person who can be very valuable to you, don’t shy away from offering him a partnership and not just a job. Twenty-five percent of a Rs 50 crore company is more valuable than 50% of a Rs 5 crore company,” he points out. Finally, the best way to deal with problems is, as Harpreet says, to “just ask, you will be surprised by how much DAR E help you will get.”

REGISTERED OFFICE: SME Development Centre, 7th Floor, C-11/G-Block, Bandra Kurla Complex, Bandra (East), Mumbai 400051. Tel.: 022-26541807, Fax: 022-26541821, Website: www.cgtmse.in

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28 FEBRUARY 2008

/bio

DARE.CO.IN

/bio

RAM CHANDRA AGARWAL VISHAL RETAIL LIMITED

He quit his Rs. 300 per month job back in the 1980s with a dream. In 2008, he sits on a retail empire worth in excess of Rs. 600 Crore. Good Karma, he says, ensured that nothing or no one comes between him and his success. This month, we have the man who started his business for sheer survival sharing his entrepreneurial story.

hat is the story of the entrepreneur behind Vishal Retail Ltd?

I was born and brought up in Calcutta. Before I started my entrepreneurial endeavor, I used to work as an Assistant Manager in a rolling shutter company in Calcutta with a salary of Rs 300 per month. I come from a very average middle-class family. For my family and me, money was required for basic survival. When I started my own business, it was mostly a battle for survival. In early 1980’s, I noticed people slowly moving away from suiting-shirting to readymade garments. So, I basically just identiﬁed the readymade garment business as an opportunity that is not really tapped and holds huge potential. With that in mind, I started off with a 50 square feet store at Laal Bazaar Street in Calcutta, dealing in readymade garments. The store was not owned; I had taken it up on a long-term lease. Now, it spans in an approximately 18-19 lakh square feet area. I did not have any previous experience in the garment business, but I learnt everything gradually. Back in those days, India was not growing at a fast pace in terms of capital, proﬁtability, competition, etc. Then again, Calcutta was a very middle class city. When I started my garment business, I did not have much capital. I had to borrow money

entrepreneur of the month from some of my friends and neighbors. At that time, I pumped in about Rs 5,000-10,000 to begin with. When the store was up and running, the sales generated were also not really good. My vision was to make it big. I would say, the gradual and successful scaling up happened because I was clear about my vision, the sincerity in my work, and the efforts I made. I found people to work with me quite easily, because I was willing to share my vision, dream and proﬁt with them. In order to make my business grow, I started putting up big sales in Calcutta, which really clicked with the market. In 1994, I opened up my ﬁrst big store in Calcutta. In 2001, I moved to Delhi where I started by opening a store in Rajouri Garden. The journey from how I started to where I am right now has been tough.

From a turnover of Rs. 146 crore in 2005 to Rs. 288 crore in 2006, and then to Rs. 602 crore in 2007… what vitamin is Vishal Retail on? Yes, we have been growing at the rate of around 100 percent per annum. You can say there are multiple factors to this speedy growth. India is developing at a very fast pace, and the retail industry is booming. We have been aggressive in our efforts to make Vishal Retail really big. All of us have been sincere and hard working to make this happen.

Why did you choose to have your own manufacturing unit? Manufacturing as well as retailing, how does the combo work? I always wanted to go into backward integration. The logic is fairly simple; we had a ready buyer in the form of Vishal ReFEBRUARY 2008 29

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tail for that production unit. It benefits both the units as it compliments each other. Moreover, this takes away the dependability on other vendors. This way, we maximized our profits. India has always been into manufacturing readymade garments. The combination of manufacturing and retailing is working really well for us. Take a look at our slogan. It says “From manufacturing to retail”. I always wanted to see goods flowing directly from the manufacturer to the consumers. With our manufacturing unit, we are doing just that.

Where or from whom did you get your early support? My mom, Shanta Agarwal, supported me a great deal. She was always there for me. Other than that, I am a person with a very strong will. Whenever I want to do something, I tend to do it with extreme conﬁdence.

What was your first big success? What is the one failure from which you learnt a lot? It is difficult to place a finger on one single incident to say, 'this is the singular success,' because of which I am where I am today. I can always reminisce some of my milestones as success points. Like starting my first big store in Calcutta’s Dharamtala Street, opening my first store in Delhi’s Rajouri Garden, starting off of the big hyper market in Mathura Road, and so on.

What is the biggest act of faith you received when starting up? I have always believed in Karma. I think one should always have faith in Karma. If you do the right Karma, you will always succeed. No other person will come in between.

Today, being in the retail business calls for cut-throat competition. In this scenario, how do you acquire the market share, maintain it and grow? It is all about getting your processes right. It should be smooth, and to implement these processes you need to get the right people. Not just that, you need to delegate authority and power to these people so that the implementing becomes easier. For procuring more market share, maintain it and make it grow, we keep our costs in control and provide good value to our customers. We are always more than 10 percent cheaper than the prevailing market price. We are always implementing new processes by which we try to bring the cost down, maintaining our supply chain, etc. Scale, cost control, right processes, dedicated employees, and many such factors help us achieve this.

How will the arrival of foreign retail brands affect you? How do you plan to handle it? I think in most of the countries, the biggest retailer almost always tends to be the local retailer. We can always compete with them and give them tough competition at that. We all

MANTRA/I HAVE ALWAYS BELIEVED IN KARMA. IF YOU

DO RIGHT THE KARMA, YOU WILL ALWAYS SUCCEED. NO OTHER PERSON WILL COME IN BETWEEN SUCCESS AND YOU.

As for the one big failure, you can say that one should not be overconfident about anything. At one point of time, some time in the year 1999-2000, I was overconfident about something, and that did not do very well. I did mention that I am a very confident person, so how do I differentiate between confidence and overconfidence? If you identify a spot at a height that you can reach by jumping and succeed in doing that; that is confidence. If you cannot see clearly what you want to achieve, and you overestimate the height that you can jump; that is overconfidence. I learnt to scale up step-by-step and started seeing my next steps as well.

In your early days, who or what were your biggest critics? How did you handle them? If you do something that is against the normal and accepted way of doing things, every one seems to be skeptical and always suggest that you better be careful. This happened in my life too. I got to hear statements such as ‘you are too young to do this’, ‘you will fail miserably’, ‘you are moving at an extremely dangerous speed’, ‘do not open so many stores’, and more. However, I was always focused on what I wanted and had faith in what I was doing. 30 FEBRUARY 2008

source from the same countries, such as China, Vietnam, etc. They source a lot of products from India too, where we have a very good base already. Technology is available for everyone today. It will take them three to four years to understand the Indian culture, taste, etc, By then we would be a big corporation in Indian retail industry.

What according to you is the next big change in the retail business? Right now, I think organized retail occupies only 4-5 percentage of the actual potential. In my opinion, in the next ﬁve years this will increase up to 25 percent. That 20 percent jump can be looked at as one big change in the Indian retail industry.

What is your next big dream as an entrepreneur? Vishal Retail is one of the top three among the Indian retail companies. With some giants like Bharti, Walmart, etc. starting operations in India, I need to still maintain my position in the top three. Overall, I want to be in the top 25 companies in the country. I am chasing that dream; let us see how DAR E much I will succeed in achieving that dream.

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funding/debt

Complete guide to debt ﬁnancing

What is debt ﬁnancing?

Debt is a good option to raise money to grow your business without giving up the freedom to operate /Vimarsh Bajpai

ohd Haroon is a happy man. Last year, this founder and managing director of Noidabased auto parts company Aglow Engineers wanted to grow his business, for which he needed to buy more sophisticated machinery. Haroon looked around for options to raise money and finally zeroed in on J&K Bank. He took a loan of Rs 35 lakh at 11.5% interest, to be repaid in five years. Haroon has had a good working relationship with the bank, from which he has been taking working capital loans to meet his company’s day-to-day needs. Since the amount needed by Haroon was low, he did not even consider the option of going in for equity financing. Now he is targeting a turnover of Rs 8-9 crore in the next five years, as against Rs 2 crore at present. Every business, no matter how big or small, needs money to meet its short-term, medium-term and long32

FEBRUARY 2008

term capital requirements. While short-term requirements are aimed at meeting daily expenses, those relating to medium- and long-term are aimed at scaling up the business to increase the value of the company. While for working capital loans companies look up to banks, when it comes to making big investments, they have to take a tough decision—either go for pure debt, pure equity or mixed financing. It is widely believed that companies prefer to bootstrap first, which means relying on their internal resources such as savings, family and friends. If that falls short of requirement, they go in for debt, and lastly, they opt for equity. The equity option for small and medium businesses is in the form of angel funding or venture capital, while the same for large businesses is raising money from financial markets, which involves launching an IPO. Debt options are in the form of bank loans and bonds.

Debt financing refers to borrowing money from a source outside the company under certain terms and conditions relating to interest rate and the period of return of the principal amount. Most entrepreneurs prefer to start their operations with the money borrowed from banks and financial institutions. But this does not mean that large corporates are averse to taking loans. In fact, most big businesses have a debt component in their balance sheets, the reasons for which could vary from tax breaks, low interest funding or big acquisitions. But the option of debt financing may not be open to some sectors at all. For instance, startup technology companies. This is because they have no assets to offer as collaterals. According to Jayant Tewari of Outsourced CFO and Business Advisory Services, “in the technology space, debt is fundamentally not available. This is because there is no asset base that can be securitized as most firms operate out of rented premises. The only asset they can lay claim to is hardware. Thus debt as an avenue of funding is not available.” However, “to some extent, they can do a little bit of leasing on their hardware, which is negligible, This too does not apply to startup firms,” he adds.

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funding/debt But for large corporates, sometimes, equity is more attractive that debt and it is also easy to come by based on their reputation. “If you are an Infosys or a Wipro, then you are giving equity at par. Take the case of Reliance Power IPO priced at Rs 450. You are giving 10 rupees share to get Rs 450. Thus Rs 440 comes without any cost. In this case, equity becomes ideal. This is because you manage to sell equity based on your image in the market,” says S Padmanabhan, Director, Padmaja Financial Services.

burden have to be on their toes to ensure that enough income is generated to service the debt. CONS • Repayment: One needs sufﬁcient cash-ﬂow to keep servicing debt. Failure to do so may result in lenders taking legal recourse to recover their money. This could even result in bankruptcy. The

Pros and cons of debt financing PROS • Autonomy: This is a big reason why going in for debt is considered to be a better option vis-à-vis sharing a part of your company with the lender during equity financing. Raising a loan leaves you with the freedom to run the company the way you want to, without any interference from the lender, as long as you meet your re-payment requirements. • Tax benefits: Interest payments on loans are deducted from the company’s income before calculating taxable income. This reduces the tax burden, thus making debt a favorable option for both small and big firms. • Discipline: Some experts believe that managers of firms that have no debt and generate high income tend to become complacent. This may lead to inefficiency. On the other hand, managers who work with companies that have a debt

pared to those with a good credit rating. Higher the debt on your balance sheet, greater the difficulty in getting a good credit rating. • Collaterals and guarantees: Most loans come with riders. You have to provide collaterals, which could be the ownership papers of your company. At times, you may need someone to guarantee the return of loan amount on your behalf. These may act as dampeners, as you see a part of your company lying with the lender. However, Pankaj Jain, Director and CEO, Finman Venture Consulting believes that the advantages and disadvantages of debt financing may vary for different companies. It all depends on the requirements of the company, which may be short-, medium- or long-term. “A company should look at its own cash-flow situation, based on which it should take a decision on debt financing,” he says.

Types of debt ﬁnancing lender is not concerned whether your business succeeds or fails, as long as you are making repayments on time. Even if your business collapses, loans have to be repaid to avoid getting into legal hassles. • Interest rates: The rate of interest may vary depending on the source of ﬁnancing and your company’s credit rating. So it is important to look for a good deal. Companies with poor credit rating are offered to pay higher interest rate, com-

Working Capital Loan: This is the most popular short-term financing option. It is meant to fund the purchase of raw material, payment of wages and other administrative expenses, financing inventories, managing internal cash-flows, supporting supply chains, funding production and marketing operations. Most banks provide these as secured loans, ie, against collaterals. For instance, State Bank of India, the country’s largest bank, offers working capital loans that are “tailored to suit the precise requirements of the client” or structured as a combination

A company should look at its own cash-ﬂow situation, based on which it should take a decision on debt ﬁnancing.

— PANKAJ JAIN DIRECTOR AND CEO FINMAN VENTURE CONSULTING FEBRUARY 2008 33

DARE.CO.IN Q&A WITH AN OFFICIAL OF SME RATING AGENCY OF INDIA What issues do SMEs face when it comes to raising debt? How easy / difficult it is for SMEs to avail of loans? Several SMEs borrow from their family members, relatives, friends or local moneylenders. Trade credit is another popular form of debt among SMEs. While dependence on such informal sources of funds is convenient to the SMEs, it limits their borrowing and leveraging capacity. The SMEs are not subjected to rigorous assessment and the potential for growth is not fully exploited. Relationships, goodwill and past profitability would help the SMEs in raising such debt. On the other hand, SMEs who borrow from banks are subjected to the discipline of maintenance of proper accounts and regular repayments of loans. They are subjected to periodical monitoring through a reporting structure of financial and other statements and also through analysis of cash flows routed through the banks. These inputs provide better knowledge about the prospects of the SMEs. Bankers are in a position to provide advice on adequate level of leveraging and provide information on different technology and promotional schemes. However, with limited skill sets at the field level in the banking sector, the credit decisions are largely dependent on factors like Relationships, goodwill, past profitability and value of security available at the banks’ disposal. Also, lack of enough transparency in the financial documents and uniform accounting is a major reason for either SMEs not approaching banks for a loan or banks not sanctioning one. The ease/difficulty faced by SMEs in availing loans depends upon the strength and transparency of SMEs. Non-performing SMEs or those who do not maintain transparent, reliable accounts may find it difficult to raise loans, particularly from banks. Per contra, strong SMEs with proper accounting and viable business proposition are generally welcomed by banks. Bank credit is not a constraint for the right kind of SMEs What role does SMERA play in helping SMEs access finance? Information asymmetry is the bane of bank finance to SMEs. While there are numerous bankable SMEs in the country, lack of information on these SMEs is restricting the flow of credit from banks to SMEs. The primary objective of SMERA is to enhance the flow of institutional credit to SMEs through amelioration of the information asymmetry. Through rating SMERA serves as a conduit for the flow of information required for assessment of the credit worthiness of borrowers. This supplements the assessment done by the bankers and enhances their confidence in lending to the SMEs. Through rating, credit worthy borrowers benefit in the form of faster processing of their loan application, lower collateral requirement, larger amount of loan and above all at cheaper rate of interest. In its role as a conduit for the flow of information, SMERA has gone beyond rating. To expand the outreach of the banks among SMEs in shorter time and with less resources, SMERA has taken up a pioneering work of risk profiling of SME clusters in different parts of India as a thrust activity. SMERA is also setting up SME Facilitation Centres in different clusters to facilitate financial linkage between lenders and rated entities of SMERA and also additional services that may help SMEs in improving their profitability and credit-worthiness. Through the brick and mortar presence in each cluster, SMERA intends to enhance the knowledge base of SMEs with respect to various schemes and facilities available from the stables of different stake holders - for their promotion and also to assist in their enablement for availing finance from banks. Does SMERA also help SMEs decide on the best financing option -- debt or equity or mixed financing? if yes, what should SMEs keep in mind while deciding on their best financing option? SMERA does not provide information on the best financing options for an SME, though in its rating report SMERA provides references to the deviation of the level of debt or equity from the industry levels. 34

FEBRUARY 2008

funding/debt of cash credit, demand loan, bill financing and non-funded facilities. These loans are extended for tenures of up to one year. The loans normally carry a floating interest rate linked to the SBI prime lending rate for working capital finance. Certain self-liquidating short-term loans are also linked to the bank’s Short Term Advance Rate (SBSTAR). “Everybody takes working capital loans. It is meant for running the business. Even large corporations take such loans,” says Padmanabhan. Overdraft: The other short-term debt option is the overdraft facility, by way of which a company opens a current account with a bank and can overdraw money up to an agreed limit. In this case, you pay interest only for the time you use the money. For example, HSBC India offers overdraft against RBI Bonds and Debt Mutual Fund units. Factoring: In this case, the bank buys the customer’s account receivables in domestic and international trade, assuming the responsibility of collecting them from the party that owes money. Commercial Papers (CPs): It is a short-term money market debt instrument issued by companies at a discount on the face value. Banks, individuals and mutual funds usually buy commercial papers. Of late, there has been a rise in the amount of commercial papers issued by companies. As of October 2007, the total amount of outstanding CPs issued by companies rose by about 80% to Rs 42,183 crore, compared to Rs 23,521 crore during the same time last year. Term loans: Most popular loans. These are mostly taken to buy assets and grow business. These loans are tenure based, which may vary from

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funding/debt

In the technology space, it is hard to obtain debt. This is because there is no asset base that can be securitized as most ﬁrms operate out of rented premises.

— JAYANT TEWARI OUTSOURCED CFO AND BUSINESS ADVISORY SERVICES

three to ten years. The amount, the tenure and interest rates may vary depending upon the risk profile of the company. In the case of State Bank of India, the SSI unit that takes the loan should not have any history of defaults in payment of interest or installments of the principal. The unit should have a strong performance record and a respectable credit rating as per the bank’s own credit assessment scales (in case of loan above Rs 25 lakh). Term loans are either asset-backed or cash-flow backed. In the case of asset-backed term loans, lender institutions seek assets of the company as collaterals while issuing loans. In the case of cash-flow backed loans, banks carefully scrutinize the balance sheets of a company to study its cash-flow capability. The lenders want to be assured that the borrower’s financial situation is good enough to make debt repayments. Due to high popularity, most banks have now devised tailor-made term loans targeted at women entrepreneurs, and specific sectors, such as textiles, jewelry, pharmaceuticals, construction and tourism. Syndicated loans: Syndicated loans are large capital loans raised by big corporations from a group of banks. These are aimed at acquiring domestic or international companies. In this case, one bank acts as a lead bank. According to consulting firm Dealogic, Indian companies raised over $35 billion in syndicated loans in 2007. The loans were spread over 112 deals. Project Finance: Large and longterm infrastructure projects require

huge amounts amount of funding both in the form of debt and equity. In project ﬁnancing, lenders (banks) rely on the assets created for the project as security and the cash-ﬂow generated by the project as source of funds for repaying their dues. These projects include building of roads, dams, ports etc are sensitive to regulatory and political policies and tariffs. Debentures: This is a long-term debt instrument issued by a company with the acknowledgement that it would repay the money at a certain rate of interest to the buyer. These are not shares, thus the buyer can stake no claim in the share of the company. Inter-corporate deposits: This is a short-term help provided by one corporate with surplus funds to another in need of funds. These deposits could be both securitized and unsecuritized. The major disadvantage to lenders is that the money is locked in for the certain period of time.

Whether to go for pure debt, pure equity or mixed ﬁnancing depends on three major factors— capital requirement, which may be short-term to long-term; repaying capacity in case of debt; and money-raising capabilities

Personal loans: Of late, several entrepreneurs have been taking personal loans from banks and ﬁnancial institutions to fund their projects. Most banks these days offer such loans of up to Rs 3 lakh for small business ventures. The interest rate may vary from 17% to 24%. These are mostly unsecured loans and are easily sanctioned. This is making personal loans popular among self-employed entrepreneurs.

Deciding on debt or equity Whether to go for pure debt, pure equity or mixed financing depends on three major factors—capital requirement, which may be short-term to long-term; repaying capacity in case of debt; and money-raising capabilities. A promoter’s thought process on ownership also matters. If a promoter does not want to part with the ownership of the company at all, raising debt is the best option. A good decision can be taken after carefully studying the company’s cash-flow analysis and determining the debt equity ratio. Cash-flow represents the flow of money to and from the business. A close look at receivables, inventory, payables, etc, helps determine the financial health of a company. It represents a record of the company’s income and expenses. To carry out a meticulous cash-flow analysis, a business needs to identify clearly its major expenses in the future, and also major investments. “In the case of our clients, we take at least a five-year time frame. We then estimate their entire fund requirement at different stages of growth. Then we assess their cash-flow situation. Based FEBRUARY 2008 35

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funding/debt minimum asset base, and not sell any assets without the approval of the lender. Liability-related covenants may restrain the firm from incurring any additional debt. In some cases, a lender may impose cash-flow related covenants which would restrain the firm’s cash outflow by restricting capital expenditures, salaries and perks of managerial staff.

on which, we advise on the amount of debt and equity to be taken,” says Jain of Finman Venture Consulting. Experts believe that a company’s management should spend considerable time, effort and money to obtain a correct cash-flow data. It is important to recheck the information received from various departments such as accounts, production, and marketing to arrive at an accurate figure. Debt-equity ratio of the company also plays a major role in deciding on the debt option and also affect’s the lender’s decision to give money. Debt-equity ratio is calculated by dividing the total liability of the company by shareholder’s equity. “Debt-equity ratio may vary from 2:1 to 4: 1. Normally it is 2:1,” says Padmanabhan. A high debt-equity ratio represents a high-risk business and a diminishing capability of a firm to repay debt.

Who is offering what?

What do lenders look for? Any lender, be it a bank or a ﬁnancial institution, would want to reassure itself that the borrower would repay the loan on time, without hassles. That is why banks and FIs offer securitized loans, ie, seek collaterals. Besides, they would want to get maximum information about the borrower company. This information may include that related to its audited balance sheets, income tax returns, number of employees, list of customers, etc. In the case of listed companies seeking to raise debt, banks would also want to know about the shareholders and full-time directors. But in the end, the onus is on you to prove that you have the capability to repay debt on time. Security can be of two types. In the case of term loans, primary security refers to the assets acquired using term loans. This is a form of hypothecation, ie, the assets you buy with the money taken as loan remain with the lender till the time you pay back the debt. The secondary or collateral security refers to the company’s current and future assets, which are secured by the bank 36 FEBRUARY 2008

while issuing loans. To protect themselves further, some banks impose restrictive covenants, generally referred to as terms of loans. This may make it mandatory for the borrower to keep the lender informed about the ﬁnancial health of its business by furbishing the ﬁnancial statements of the company. In the case of asset-related covenants, banks would like to see the company maintain its

Any lender, be it a bank or a ﬁnancial institution, would want to reassure itself that the borrower would repay the loan on time, without hassles. That is why banks and FIs offer securitized loans, ie, seek collaterals

ICICI Bank: Provides both corporate and SME banking. Also offers structured financing, which involves a customized package from a lender to a borrower. Its brand financing involves a loan to the company with security of the brands, loan to a company to fund purchase of a brand, or a sale and lease back of brands by the lender. Transporter financing is aimed at truck operators. HSBC: Offers factoring solutions to SMEs. It is a structured working capital finance solution that includes finance against domestic or export receivables, collection of receivables on due date, credit protection and credit advisory services. Bank of Baroda: Provides fundbased finance for capital expenditure, acquisition of fixed assets towards starting and expanding a business or to swap with high cost the existing debt from another bank. Its non-fund based finance involves deferred payment guarantee for acquisition of fixed assets for starting or expanding business. State Bank of India: Besides working capital loans and term loans, the bank offers deferred payment guarantees, export credit, and project finance. It has a special offering for mid-corporate groups with a turnover between Rs 250-350 million. It is also mulling providing supply chain financing. Oriental Bank of Commerce: Offers special agriculture loans for farmers. It also has tailor-made loans for women entrepreneurs and self-employed professionals. Note: The list is only indicative. D A R E

DARE.CO.IN

strategy/IT

Don't rush to open shop in Sure there is a buzz. However, taking your business to the virtual world can wait /Binesh Kutty

38 FEBRUARY 2008

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strategy/IT

uch talked about, but still not sure what is the draw. That is pretty much the state of Second Life (SL), and not just here in India. So what is Second Life? It is one of the most popular three-dimensional virtual worlds, something collectively referred to as the ‘metaverse’. Neal Stephenson coined the term ‘metaverse’ in his novel Snow Crash (1992). In this metaverse, humans in their ‘avatars’ (digital projection of oneself ) interact with each other both socially and economically. Linden Labs, a virtual world technology company founded by Philip Rosedale, built Second Life to be similar. The environment is very comparable to what in the gaming world is called MMORPG (Massively Multi-player Online Role Playing Game). Just that it takes interactions beyond gaming to social networking and makes it a platform for v-commerce (virtual commerce). Ever so often we see Second Life and the companies in it making news. Reebok has a presence there. So do Adidas, MTV, Toyota and Pontiac to name a few. Closer home, Wipro also has a presence in the metaverse. The big names seem to be doing it. So are some virtually unknowns. There must be something to it, right? Are you missing something? Should your business have a presence in this world yet?

Second Life: A Business Primer Second Life was released to the public in 2003. The population of SL residents (users) started gaining momentum only by the second half of 2006 and now stands at almost 12 million residents. A majority of this population is from the United States, with a 30% share of the total user base. India stands at the 27th position with a scanty 0.32% population share. What do users do once online? They take on a different identity altogether, complete with a Second Life name, in the form of an avatar. Second Life is a vast digital continent in which residents meet new people and experience the environment. It is along the lines of an Orkut, or a Facebook… just that this world is in 3D. Second Life has a strong v-commerce element running through it. Residents can buy and sell virtual goods

and services. You can open a nightclub, sell jewelry, become a land speculator, be a witch or magician or even take on identities that are taboo in real life like a stripper (both male and female) or a sex slave. Yes, there are people out there who are making a decent income off an occupation in SL. Party and wedding planner, pet manufacturer, tattooist, automotive manufacturer, fashion designer, custom avatar designer, XML coder, freelance scripter, game developer, dancer, musician, theme park developer, publicist... the list of virtual occupations and businesses is huge. And these include real life businesses providing solutions inside Second Life, like Indus Geeks, who are a metaverse development ﬁrm developing goodies for SL inhabitants. For commerce, SL has its own unitof-trade called Linden Dollar (L$), which can be exchanged with US dol-

We designed our island not only as another opportunity for our faculty, students and alumni to interact in real-time with each other, but as a cyber institution to expand their wealth of knowledge. DANESH DARYANANI VP – MARKETING, U21GLOBAL FEBRUARY 2008 39

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strategy/IT

ow would you explain the buzz around SL? Is it part of the buzz around social networking? Or is it something else? The buzz was around the newness and the recognition of the metaverse’s potential. The subsequent chill is about the fact that technology is still clumsy and people don’t know how to overcome it. A big contrast with Facebook, which has much less potential but is extremely easy to use.

Is SL a passing phenomenon, a temporary buzz till the next big one comes PROF. SURVARY MIKLOS along, or is it here to stay? PROF OF MARKETING, INSEAD I think it is the killer app of the Internet. But it will take more time before the Net migrates to this new platform. I think what it lacks is a big investor (capital). What sort of continuing effort is required to keep up the presence in the virtual community? Capital. Will the Linden dollar “threaten” real life currencies anytime soon? I don’t think so. Worst case scenario is that the Linden economy collapses but this should have limited effect on other economies. What sort of business activities are conducive within SL? Anything that requires interaction between remotely located people. This could be categorized by internal versus external activities. Internally businesses can use it for training and collaboration activities—to build corporate culture, etc. Externally, one could use the platform for marketing, product demonstrations and expositions. How to use it concretely depends on the actual business. What benefits can a business look forward to by opening a presence in SL? Is it just branding and visibility? No, it is mostly to promote interaction with customers. You can have a sales force, for example. You can have sales assistance in an Internet store. What kind of brands can benefit from a presence in SL? Any brand. What was the reasoning behind INSEAD deciding to launch a virtual campus in SL? This is a platform that helps us do better what we have been doing so far. Our SL campus does not target a new segment. It helps us stay in closer touch with our existing constituencies (students, staff and professors). Briefly, it helps us build a stronger INSEAD community. What has been the response to your initiative so far? People love it, but few have tried it or used it regularly. The tech barriers are still high. But this is normal, we are patient. What are the pitfalls a business should be aware of, in venturing into SL? No pitfalls – this is an experimental platform. Don’t bet the company’s future on it, but I think the bigger pitfall I think is to ignore the medium. lars at several online Linden dollar exchanges. As of this writing, a US dollar can fetch about 270 Linden dollars. One of the major commercial activities in SL is buying, renting, and selling of virtual land, ie, the real estate business. Commercial activities in SL account for tens of millions of real-world dollars annually. 40 FEBRUARY 2008

What are the businesses doing? Many big corporations have set up their presence in SL. This includes the likes of Microsoft, Sun, Intel, AMD, Warner Bros, Adidas, Reebok, Nissan, Toyota, and many more. Is it because they want to be in the space, which might just be the next thing to happen to business? We would like to think

so. Media coverage is something that is assured once a presence on SL is made. IBM is putting its SL presence to lots of good use. There are various conferences, brieﬁngs, orientations, trainings, etc being conducted on this virtual space, saving on cost, time, and carbon emission. Wipro too has its island in SL with an offshore development center (ODC) model campus, with facilities like a client engagement center, learning center, a three-ﬂoor ODC setup with cubicles, a security desk at the campus entrance gate, an amphitheater, a press announcements hall, basketball and volleyball courts, admin, Data center and Library. But then, there are not many Indian companies with presence in SL at the moment. In about a year’s time, about 20-25 Indian companies are slated to open shop in SL. Even educational institutions are not behind in being there. INSEAD’s Second Life campus was established in March 2007, and is designed to offer an innovative learning environment in which its participants from around the world can collaborate in real-time and learn from the diverse experiences of faculty and peers. The school plans to integrate Second Life into a range of programs, including MBA, EMBA and Executive Education. In addition to the course offerings, INSEAD also plans to build a research center and a social science research lab on its virtual real estate. On how people have reacted to their initiative so far, Prof. Sarvary Miklos, professor of marketing, said, “People love it, but few have tried it or used it regularly. The tech barriers are still high. But this is normal, we are patient.” Similarly, U21Global launched their island on SL in September 2007. “The idea is to complement the dynamic executive education experience that we provide,” said U21Global Vice President of Marketing, Danesh Daryanani. “We designed our island not only as another opportunity for our faculty, students and alumni to interact in real-time with each other but as a cyber institution to expand their wealth of knowledge.” The U21Global virtual

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strategy/IT

help you do all this. After this, and this is very important – you would need to keep this place alive by organizing activities on a regular basis.

How to make money in SL?

campus occupies 65,536 square meters of electronic real estate, on which they spend about 1000 dollars for the land and another 500 dollars for activities and maintenance every month. Daryanani too mentioned that there are tech barriers, bandwidth issues, and still a lot of development for SL to undergo before the world embraces it. Indus Geeks, an Indian metaverse development company, calls their presence in Second Life, Geekdom. On Geekdom, they run a number of companies, which according to Founder and CEO of Indus Geeks, Siddharth Banerjee, are for experimenting with business process models. Geekdom was set up to explore and is yet to turn proﬁtable. SL Job Finder is one of their efforts, with a database of 14,000 residents. Then there’s CGL Island, where they host SL Brands, which have people selling skins, shapes (body shapes)

eyes and the likes. He intends to expand his business to selling India-centric virtual goods such as ethnic clothing, handicrafts, etc.

The business of real estate in Second Life is one of the top grossers out there. Even currency and land speculators do well. Besides opening shops that sell goodies to the in-world inhabitants, there are various occupations, some of which we mentioned in the beginning of this article, off which users could make some money. According to Banerjee, “Right now, about 134 people out there are making more than 5000 dollars a month. Someone going for a job in SL can easily make 500-1000 dollars a month. Everything put together, there would be around 5-10 thousand people who make around 500 dollars every month”.

How do you get started?

What are the limitations?

As a business, you will most probably start by buying land. Land can be acquired by buying it from other residents. A list of available lands and plots can be found via the Land Sales tab in the in-world map view. Other ways of acquiring land include getting it through auctions of newly created land, or simply purchase private, expandable islands. Once you have land, you would want to start building your virtual property – by creating ofﬁces, conference rooms, auditoriums, shops, playground, beach, etc. Most likely, you would want to hire the service of metaverse development companies to

The issues in Second Life at the moment are manifold. These include bandwidth related problems like lag time, connection severance, security and privacy issues, in-world infrastructure challenges causing teleports to fail, inventories to disappear and transaction loops to stall, etc. Besides these, there are issues such as having a presence in SL and not able to get a constant visitor inﬂow. Gartner analysts, who examined the hype and reality around virtual worlds during Gartner Symposium/ITxpo 2007, advised enterprise clients that this is a trend that they should investigate and experiment with, but limit substantial

Right now, about 134 people out there are making more than 5000 dollars a month. Someone going for a job in SL can easily make 500-1000 dollars a month. SIDDHARTH BANERJEE FOUNDER AND CEO, INDUS GEEKS FEBRUARY 2008 41

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ﬁnancial investments in until the environments stabilize and mature.

Be on SL now or lose all advantage? “I think it is the killer app of the Internet. But it will take more time before the Net migrates to this new platform,” says Prof. Miklos of INSEAD. Like mentioned before, Miklos believes techbarriers are still quite high in SL, and if it were here to stay it would need big investments. Today, SL is growing but it is not happening at the crazy pace that it was happening at around March last year. The growth has stagnated, but the growth has not stopped. Miklos explains, “The buzz was around the newness and the recognition of the metaverse’s potential. The subsequent chill is about the fact that technology is still clumsy and people don’t know how to overcome it. A big contrast with Facebook, which has much less potential but is extremely easy to use.” Banerjee of Indus Geeks believes that even though there was a dot-com bubble that burst, every company has a Web presence today. Only the people who were in the bubble (i.e., the dotcom businesses) crashed, while the others remain unaffected. He believes SL to be progressing along the same lines. According to him, “The ﬁrst wave of companies that ventured into SL came with the intention of getting media mileage. If the company has a client-facing pres42

FEBRUARY 2008

strategy/IT

ence, one should make it interactive and have someone present there at all times to guide them through.” According to a July 2007 Brand Science Institute survey, released at openPR.com, insufficient customer care and opportunities for interactions between SL users and companies were identified as the main problems in a customer satisfaction survey in SL. In a sample of 200 avatars, 42% believed the activities to be a short-term trend and to lack commitment from the companies. Only 7% considered it as a positive influence on brand imaging and their future buying behavior. Besides this, New Media Consortium did another survey in spring 2007 amongst educators. Describing their worst experience in SL, 36% respondents said they had faced technical issues. Coming from the same sample, the positive experiences included rich interactions and meeting new people, which topped at 45%. In the list of gen-

DARE/other lives ACTIVE WORLDS

CLUBPENGUIN

GAIAONLINE

HABBO HOTEL

HABBOHOTEL

KANEVA

MOOVE

OPENLIFEGRID

THERE

VIOS

VIRTUAL MTV

ZWINKY

eral activities, random wandering at 91% seems to be what the respondents do most of the time. This is followed by activities such as meeting new people, listening to presentations and talks, and participating in meetings. What was interesting to notice was the fact that shopping was in the bottom half of the activities list at 52%, and selling things at 10%. The overall response indicates that serious business on SL is still not happening. Apparently the Chinese government is pouring in millions of dollars to create a virtual world of its own for showcasing the products and businesses of China. According to a Reuters news report (Dec 2007), AOL shuttered its island in SL to focus on virtual worlds that use AIM instant messaging software for communication between avatars, like vSide. That said, the metaverse is going to see many virtual worlds coming in the future. However, interconnectivity or interoperability between these different worlds in the same universe is still a big question. On the Internet, you have a single browser to open any Website you want. For SL, you need to download its proprietary software program, as is the case for other virtual worlds. Which one will be the best suited for you? There are many unanswered questions. There is a belief that SL ‘could be’ the place. However, serious business is still to take off in SL. According to both Daryanani of U21Global and Banerjee of Indus Geeks, in another year or two, business activities on SL should see a positive shift. There are a lot of can-bes and should-bes on SL as of now. Even those with a presence in SL believe that there are issues and limitations that need to be taken care of for v-commerce to gain momentum. Even if many believe it to be the next version of Internet, the technical know-how that needs to be acquired, for both businesses and users, is overwhelming at the moment; and that is just one of the many hurdles for SL. Second Life still has a long way to go before becoming a phenomenon from its DAR E current hopeful state.

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funding/INSEAD

Early-stage funding in India: how to ﬁnd water in the desert Building a good team and getting quality mentoring are the initial steps to raising money for your startup /RK Misra

“W

RK Misra, an IIT Kanpur and Tokyo University graduate has been a serial entrepreneur. He is an angel investor and mentor to some start-up ventures. His area of interest include public policy, angel investing and entrepreneurship. He represents INSEAD’s Rudolf and Valeria Maag International Center for Entrepreneurship in India. 44

FEBRUARY 2008

ater, water everywhere nor any drop to drink,” is the problem of Coleridge’s ancient mariner on a becalmed ship surrounded by a salty ocean. The same adage aptly describes the situation of early stage start-ups in India, who are struggling to raise their ﬁrst round of funding, while the country is ﬂooded with private equity capital targeted mostly at later-stage investments, recapitalization, or private investments in public equity (PIPEs). Venture capitalists and market watchers regularly warn that too much private money is chasing too few deals in India as domestic partnerships have sprouted just when foreign venture funds decided they must have a presence here. A common complaint

PERCENT OF INVESTMENTS IN EARLY-STAGE DEALS India

6.9

China

12.5

Israel

is that valuations are too high relative to comparables as a result. One reason why is that since the dotcom boom ended in 2000, in most year 85-90% of venture investments have gone into later-stage deals or PIPEs. According to Raﬁq Dossani and Asawari Desai, a much smaller fraction of India’s venture investments go to early-stage deals than is the case in other countries.

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funding/INSEAD What is an entrepreneur in need of early-stage capital to do? To attract early-stage funding, you must ﬁrst understand how the situation appears to investors: why are they reluctant to invest in younger ventures, where the risks and rewards are supposed to be proportionately high? Then, by following a disciplined step-by-step process, you can anticipate and eliminate one at a time the main risks and barriers that keep such investors from reaching for their cheque books.

Why is early-stage funding in India scarce? India’s dearth of seed funding has clear historical roots. Between 1960 and 1990, when robust entrepreneurial networks were emerging in countries such as the US and Israel, entrepreneurship in India was limited to relatives or close friends of industrialists who had both the capital and the access to government machinery required to start a new venture. An entrepreneur without such connections could only dream of starting a new enterprise. The result was a mass exodus of educated and talented youth to western countries, and a dampened entrepreneurial spirit among those who stayed in the country. Things started changing in early 1990s when economic liberalization coupled with IT outsourcing made Indian entrepreneurs believe there were opportunities to start their own business ventures. Government deserves credit for allowing the IT industry in particular to operate in an environment free red tape and bureaucratic hassles. Because such entrepreneur-

ship is less than two decades old in India, there is still a mismatch between our entrepreneurs and risk capital providers, and the ecosystem conducive for early and growth stage investment is still emerging. India nearly compressed into one decade the entrepreneurial network growth that took twenty or thirty years to emerge in the West, thanks to the dotcom boom. The heady days of the late 1990s proved that masses of Indians harbor in their hearts the dream of running their own businesses; there is no shortage of entrepreneurial ambition in the country as long as the risks seem reasonable. However, the global collapse of dotcom valuations in 2000 left investors with a hangover and bitter memories. Says Subba Rao, a partner at Actis (www.act.is), a leading private equity investor in global emerging markets, “Early stage investing suffered once the technology industry went into trouble in 2000/2001. This left a number of investors and entrepreneurs bruised and the situation is only now slowly turning positive.” Because India joined the dotcom boom toward the end, relatively few entrepreneurs experienced successful wealth-creating exits, compared to the US, UK, and Israel. That left a hole in a crucial part of the entrepreneurial ecosystem where wealthy entrepreneurs with glistening track records become the angel investors, board members, and/or founders of the next generation of start-ups. Says Ashish Gupta, co-founder of Junglee (Amazon.com) and Tavant Technologies, now Managing Director of Helion Venture Partners (www.helionvc.com), In-

dia’s ecosystem lacks “angel financing, a mentor network and role models.” Adds Bharati Jacob of Seedfund, one of India’s very few early stage funds, “We don’t have too many entrepreneurs becoming serial entrepreneurs, or becoming mentors/advisors/angels for start ups, or becoming part of the early stage investing environment.” The result, from some entrepreneurs’ point of view, is a power imbalance: because there are so few experienced veterans of previous successes, ventures do not have many choices and options, which can lead to mistrust. Says Prabhakar Tadepalli, Managing Director of Tyfone (www.tyfone. com), a provider of mobile banking solutions, “A true entrepreneurial ecosystem that starts with the right mix of angels and mentors is lacking here. There are a few (angels and mentors), but they are mostly network-based and unsophisticated. The result is that seedstage VCs can and in some cases do exploit entrepreneurs to their benefit.“ Another major problem that results from an immature ecosystem is that India’s vast talent pool that can seem deficient by international standards. Says Helion’s Gupta, “Lack of belief in upside among the employees makes it really hard to get employees from number 10 onwards. There are not enough middle managers wiling to join a start-up.” Adds Seedfund’s Jacob, “The biggest stumbling block for a startup is often its inability to recruit high-quality manpower for a combination of stock and cash. I guess we need many more success stories before start-up employers become part of consideration set.”

Stay focused on customer; don’t fall in love with technology alone. If you are in the internet space, try out your stuff and iterate quickly to see what sticks.

— ASHISH GUPTA CO-FOUNDER OF JUNGLEE (AMAZON.COM) AND TAVANT TECHNOLOGIES FEBRUARY 2008 45

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funding/INSEAD

As DARE readers have been advised many times, venture financiers pay more attention to a venture’s quality of management than to any other factor when they decide to invest. Discussions with several reveal that many Indian venture teams suffer from a handful of deficiencies known to hamper a young company’s success chances: • Most of the entrepreneurs seeking early stage risk capital are first time entrepreneurs with no prior experience or knowledge of working in a start-up. Globally early stage risk capital has been most successful when co-founders have had prior entrepreneurial experience. • First time and early stage entrepreneurs though technically competent, lack market awareness and skills to manage complete product life cycles. • Few role models who have been successful entrepreneurs are available to mentor first time, early stage entrepreneurs. This makes it difficult for a venture to assemble a stellar board of directors or team of advisors. In addition, high-growth domestic markets have been responsible for entrepreneurial innovation in many parts of the world by providing learning and market test opportunities. The Indian domestic market is slowly reaching this maturity level where globally competitive products and services could be developed and tested in domestic markets and subsequently marketed globally. For the next few years, Indian entrepreneurs like those in small countries such as Israel, Singapore, or Ireland must find interna-

tional customers much earlier in their life cycles than do their competitors in the US, Europe, or China. This puts an extra demand on ventures: unless their team includes people with international experience, it is hard to persuade investors that they can grow abroad as rapidly as they need to. These factors mean that from a venture investor’s point of view, early stage investing is risky, requiring a lot of hard work and patience to get returns. Says Actis’ Rao, “Early stage investing is not popular in India because there are not enough investors in the chain to support an early stage company through its growth. This means a VC who takes the early risk may be left in no-man’s land as next stage investors are not easy to find.” Add Helion’s Gupta, “There is not enough money at the early stage because a lot of investors are remote and early stage is very hard to do in that case.” Early stage deals require careful scrutiny and much hand-holding, which is not practical if an investor has a remote or skeletal presence in India. From an investor’s point of view, the returns to running a fund optimized for early-stage investing are much less attractive than those of running a larger fund that targets later-stage opportunities. Explains Balaji Srinivasan, a partner in the venture capital firm Aureos, “If a company needs less than $5 million, I am not sure if there are that many players in the market. Essentially the economics of running a sub-$100 million fund is not favorable and hence you do not find many VC’s who have less than $100 million under management. The result is that most

investee companies raise more capital than that is required or do not get to raise capital at all. Hence in that sense the eco-system is still not favorable for small and early stage companies.” Because fund-raising and managing exits require similar skills for all private equity investors, if one stage seems more promising than the other, it tends to attract the talent and capital available. Comments Actis’s Rao, “Private equity funds are seeing more value with less risk and effort in doing later stage deals. Only if there is overcrowding or pricing becomes unattractive in later stage deals will VCs revert to early stage funding.” Adds Mark Sherman of Battery Ventures, “There are plenty of investment opportunities in mid and late stage companies with lesser risk. Foreign VCs who are new to the market would rather play safe and go for easier opportunities. Success begets success, and when more VCs taste success (from successful early-round investments), late stage VCs will start looking at mid-stage funding while mid-stage VCs will be less risk averse and look at early stage opportunities.” The strength of India’s stock exchanges, which in the past couple of years have provided some of the world’s most attractive returns, has also contributed to the imbalance in venture investing. High profile large exits such as iflex (www.iflexsolutions.com), Bharti Airtel (www.airtel. co.in) and Genpact (www.genpact. com) have encouraged private equity funds to chase late stage deals actively. Aureos’ Srinivasan contends there are not enough exit options available for investors in early stage companies,

Get out there and create real solutions for real people using real technology! Don’t always follow ‘concept arbitrage’ - so no more of social networking, ‘Youtube’ kind of companies but things that work in India for Indians. — BHARTI JACOB, SEEDFUND 46 FEBRUARY 2008

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funding/INSEAD suggesting, “from a VC’s perspective, there is a need for a platform to exit small and mid size companies, maybe a stock exchange that allows listing and trading in such enterprises.”

A road map for securing early-stage funding To overcome these issues, experienced entrepreneurs and venture investors suggest following a four-step road map. The first step is to assemble a team that is passionate about a concept that addresses the needs of a substantial market. Says Gupta of Helion, “Stay focused on customer; don’t fall in love with technology alone. If you are in the internet space, try out your stuff and iterate quickly to see what sticks.” Adds Seedfund’s Jacob, “Get out there and create real solutions for real people using real technology! Don’t always follow ‘concept arbitrage’ - so no more of social networking, ‘Youtube’ kind of companies but things that work in India for Indians.” Adds Vijay Bobba of IMINT, “Focus more on the team than on the idea. Once the team is in place, any thought can be experimented.” Next, get high-quality mentoring. Actively engaging a mentor who understands your idea and technology and is willing to do hand holding in early days of the venture can be a big accelerator. Notes Sanjay Swamy, CEO of mChek (www.mchek.com), an ondemand solution provider for mobile payments and two-factor authentication, “The Indus Entrepreneurs (TIE) has several regional chapters, most of which are chartered with helping entrepreneurs. Some as in Delhi or Bangalore have specific programs such as the Entrepreneur Accelerator Program that are designed to help young startups.” But Gupta cautions, ”Get a few advisors whom you like, not because they have big names, and don’t get too many.” Third, look for your initial funding from close associates, incubators, angel investors, or venture investors who specialize in early-stage deals. The first port of call for most entrepreneurs who have not experienced a successful exit is mentors, advisors,

family and friends. It is also possible to get seed funding from some incubators who usually provide some money along with incubation facilities such as IIT Bombay, IIT Delhi and Nirma Labs etc, though this is much easier if you are a student or faculty member of the institute. Angel investing is slowly emerging via groups such as the Indian Angel Network (www.indianangelnetwork. com), India’s largest such network, which includes successful entrepreneurs and CEOs interested in investing in early stage businesses. (See

Look for your initial funding from close associates, incubators, angel investors, or venture investors who specialize in early-stage deals. The first port of call for most entrepreneurs who have not experienced a successful exit is mentors, advisors, family and friends “Angel Investing in India,” DARE, October 2007 for more information.) The right angel should understand your idea and product and be able to add substantial value by his advice and professional network. An angel investor who provides money just because he is expecting returns higher than a bank deposit or stock market, is the wrong choice, experts warn. Another option is to approach one of India’s few early stage funds such as Seedfund (www.seedfund.in) and Erasmic Venture Fund (www.erasmic.com). Erasmic claims to be the first of its breed of “mentor-capitalists” in India, that is focused on moving ventures to the next level with extreme hands-on involvement. Recently Google invested in Erasmic and Mayfield Ventures has invested in Seedfund.

Pitching to venture capitalists is usually the fourth step on this path, not the first. This community depends a lot on networking and word of mouth, so being introduced to VCs by mentors and angel investors is a major advantage. Because they receive hundreds of unsolicited business plans per month, venture capitalists very seldom respond to cold calls or e-mails. Entrepreneurs who reach this stage must be realistic in their expectations about how their firm will be valued by venture investors. Entrepreneurs are sometimes carried away by some valuation number mentioned by a VC at a cocktail party, and if this is taken as the true worth of a company, they end up getting no funding. Advises Balaji of Aureos, “Focus on the business and value will be created, if you focus a lot on valuation to start with, there will be lot of pressure on you and business if it does not deliver as per the business plan.” India’s entrepreneurship ecosystem in India is still not mature enough to provide sufficient opportunities for would-be entrepreneurs to interact with successful entrepreneurs, financiers and potential co-founders in a professional and organized environment. However, says mChek’s Swamy, “It is now developing; I would say 2-3 years ago it was almost non-existent.” This is not necessarily all bad-overcoming daunting obstacles is the mark of a successful entrepreneur, and those with the grit and fervor to take setbacks and cherish success in a realistic manner will win respect from venture capitalists when they reach the appropriate stage of development. Counsels Helion’s Gupta, “It’s OK to not to be an entrepreneur. Do the startup only if you feel passionate about the idea/problem, not because it is going to make you money.” Anyone who can launch a successful, growing venture despite the handicaps one faces in India can face international competition secure in the knowledge that the resourcefulness and imagination he has honed from necessity are the most important assets needed to thrive on a DAR E bigger stage. FEBRUARY 2008 47

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opportunity/agri-tourism

Digging gold in rural India Agri-tourism is a Rs 4,100 crore opportunity. Are you ready to hit the village trail? /Vimarsh Bajpai

Sunil Bhosle, farmer, (extreme right) with his family. 48 FEBRUARY 2008

or Sunil Bhosle, a farmer in the Jogwadi village in the Baramati taluk of Pune district, a 13 acre piece of land tilled by his entire family round the year meant an annual income of Rs 60,000-75,000. This was before he was exposed to the beneﬁts of agri-tourism six months ago. Bhosle, with the help of the Agri Tourism Development Organization (ATDO), opened his farms to tourists in June last year, charging each Rs 300-350. He has since welcomed 150 tourists with traditional garlands and authentic Maharashtrian delicacies. The effort translated into an additional income of Rs 15,000, after deducting an equal amount in expenses. He is now constructing two more rooms for tourists. "Agri-tourism has given Bhosle a full-time job,” says Pandurang Taware, Director, Marketing and Sales, ATDO. Taware is the brain behind the launch of a pilot project in agri-tourism in Baramati in 2005. Having spent

around 17 years in the tourism industry, he realized that for marginal farmers, farming alone could not bring the necessary financial benefits. He felt that attracting tourists to rural India could open a new earning stream and help promote village handicraft, food and culture. In the first year of operations, between October 2005 and October 2006, 8,700 tourists visited farms pooled in by villages in Baramati. The influx grew to 17,000 in the second year. Since October 2007, more than 21,000 tourists have taken the rural trail.

Old ways, new ideas Agri-tourism is all about unraveling various facets of village life. This includes opening up farms to tourists from cities and abroad, and letting them spend some time in the lap of nature. Apart from telling them about the various crops and how they are sown and harvested, agri-tourism exposes

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opportunity/agri-tourism tourists to authentic food, handicraft, dress, culture, music and language. Tourists get to indulge in rural activities such as bullock-cart rides, milking cows and goats and picking farm-fresh fruits and vegetable. The activities may vary from village to village, as a country as diverse as India has so many different experiences to offer. Agri-tourism activities can help generate more jobs in rural areas, and thus reduce large-scale migration from villages to cities. Two-thirds of India’s population lives in villages, and agriculture is their mainstay. But unfortunately, unlike IT, agriculture is facing under-investment. So here is a chance to marry the beneﬁts of agriculture with those of tourism. “India has a global edge in its potential to offer unique experiences, particularly linked to rural India, which has tremendous wealth in its rich tradition, lifestyle, culture and wisdom. Unfortunately, tourism in these areas is at a nascent stage and it can therefore absorb much of the necessary expansion in the tourism sector as a whole,” says Tushar Pandey, Country Head, Strategic Initiatives – Government (SIG), Yes Bank. The private-sector bank is bullish on the prospects of agri-tourism in several states, particularly Uttar Pradesh. It is partnering with CII to study the potential of agri-tourism in Uttar Pradesh. The study is likely to be presented to the state government soon. The Central Government has a scheme on rural tourism, as part of which various activities, such as improvement of infrastructure, are being conducted in a big way. The focus of the scheme is to tap the resources available under different schemes of the Department of Rural Development and state governments. Setting up an agri-tourism farm doesn’t cost the earth. It can be developed in a village where farmers are willing to showcase their culture and traditions. All one needs to set up is a decent boarding and lodging facility for tourists. It is important to have a clean place and hygienic food. The spend on travel, food and accommodation is low and so it is easy to scale up the number

of tourists they can receive. “To make arrangements for 12 tourists, for whom you need to build four rooms, costs approximately Rs 5 lakh,” says Taware. (See Table 2: Money Matters)

A Rs 4,100 crore opportunity The tourism sector is one of the major foreign exchange earners for the country. In 2007, 50 lakh tourists visited India, up from 44.5 lakh in 2006. Correspondingly, the foreign exchange earnings grew 33% to over $12 billion, compared to $9 billion in 2006. According to estimates, 40.6 crore domestic tourists criss-crossed the length and breadth of the country. So, presuming that 10% of the total number of tourists may consider visiting various farms across the country during the year, the number would be close to 4.1 crore. Each person stays for about two days, and the tariff is Rs 500 per day. Thus the size of the opportunity is a whopping Rs 4100 crore! Agri-tourism is now growing in a big way. However, it may take some time before it starts to grab a major share of the revenue generated from tourism-related activities. “In the initial stage, we expect only a marginal contribution, but in the long-term perspective of 10-12 years, we expect rural tourism to contribute about 7-10% of the total revenue generated from tourism and close to 10-15% of the total jobs in the tourism sector,” says Pandey. There is a huge scope of developing various pockets of agri-tourism in the country, as India is a counFEBRUARY 2008 49

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opportunity/agri-tourism How and when did the idea of starting an agri-tourism project come about? During our market survey in 2005, we found that 73% of the people in urban India had no relatives in villages. So we thought that this segment could be our prospective tourists or guests. I mooted the idea to the villagers in Baramati, my hometown. Around 40 farmers came together to start this project on their farms. We then started calling tourists to the farm. The number of tourists increased to 25 by October 2005. This was when we registered the Agri Tourism Development Corporation. The current area under the project is 110 acres, which belongs to Agricultural Development Trust.

How did you spread awareness about the project? We did road-shows in Pune and Mumbai on bullock carts to spread awareness about the project. First we got tourists from Mumbai and Pune to spend the day at the farm. When the tourists arrive, we extend a traditional welcome, with marigold garlands and saffron. Then we take them to the farm for breakfast. After which, we take them around for sightseeing. Also, we tell them PANDURANG TAWARE, about sowing methods and harvesting methods, ie, give them some basic knowledge about DIRECTOR, MARKETING AND SALES, AGRI TOURISM DEVELOPMENT ORGANIZATION agriculture. We told villages to prepare and sell souvenirs to tourists. For this, we set up a souvenir shop. It was important to make the stay of tourists safe and hygienic. Also, to provide them clean rooms and toilets. We started holding one-day seminars for farmers to help then understand the nuances of the business . What is the minimum area and capital required to start a small agri-tourism project? What is the return on investment? Most farmers in our country are marginal farmers with less than 2-5 acres of land of holdings. We are asking those farmers to come forward and start agri-tourism activities. To make arrangements for 12 tourists, for which we are asking them to build four rooms. To construct, say, a 180 sq ft room for 3 tourists. This will cost approximately Rs 5 lakh if we consider a rate of Rs 400 per sq ft and keep Rs 300 per sq ft for furnishing. Today there are a lot of banks in the cooperative sector that are willing to give loans to farmers. The Pune District Cooperative Bank is the first bank in the country to offer loans for agri-tourism. There is no electricity in villages for about 12 hours, so we also give loans for generators. So the total cost may come to around Rs 575,000. So Rs 5 lakh can come as loan while the farmer can put in about Rs 75,000. According to our experience, we receive tourists for 104 days out of 365 days. Say ten tourists visit a farm each day for 104 days, and each pays Rs 500. This works out to Rs 5,20,000. The expenses are about Rs 15,000 per month ie, Rs 1,80,000 per year. Now deduct annual loan payment of Rs 1,50,000 per year. So the net income of a farmer is Rs 1,74,000 a year. This is additional income for the farmer only from the land. Tourists also buy food grain, fruits and vegetables, handicraft, etc. This results in some additional earnings. Is there any government clearance needed to set up a project like this? We have told the farmer that for every acre, he can take 2-3 tourists. So for five acres, he can take 10-12 tourists. When this is the scale for a project, it does not require any clearance from the government. But when tourism activity will overrule agricultural activity, then it will be considered as a tourism project. In this case, the project would require clearances related to tourism projects. If one were to do it in a commercial manner, it would be treated as a tourism project and the necessary clearances have to come from the tourism department. How has the state government supported the project? This project was actually a pilot project. It was a new idea even for the Maharashtra government. The government has taken steps and has included this in the tourism policy 2006. The government has supported us unequivocally. It felt that since this is a pilot project, let the farmers first see the pros and cons for 2-3 years. Under the tourism policy of the Maharashtra, the government is planning to launch a brand called Mahabhrman. This will give a marketing platform to all those involved in agri-tourism.

Total number of tourists in 2007

41.1 crore

try of extreme diversity. “There is a saying in India that with every 12 miles you cross, the water changes, the culture changes and the food habits change. So at every 12 miles there can be an agri-tourism project!” says Taware.

Say, 10% of tourists are game for agritourism

4.11 crore

Look before you leap

Tariff from one tourist for a day

500 Rs

DARE/estimates Number of foreign tourists who visited India in 2007 Number of domestic tourists in 2007

Say, each tourist stays for

50 lakh 40.6 crore

2 days

Earning from each tourist

1,000 Rs

Estimated size of opportunity

4,100 Rs crore

50 FEBRUARY 2008

Here are a few things you have to keep in mind before taking the plunge. Community exercise: An agri-tourism project is less about money and more about the rural experience. Therefore, a farm house in the outskirts of any city can never meet the basic need of

agri-tourism. It is important to develop agri-tourism as a community exercise, which should involve every section of a village society. A big challenge is to convince most people in the ecosystem to play the role of a good host. Location: The location of a village would play an important role in attracting tourists. Proximity to a big city can be a big positive because most tourists would prefer to spend less time on the road and more time in the village. Marketing: Getting a village ready to welcome guests is not all, if tourists don’t get attracted to the site. Suitable marketing strategies need to be devel-

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opportunity/agri-tourism Yes Bank is partnering CII for a study on the prospects of agri-tourism in parts of Uttar Pradesh. What does the study aims to achieve? Agriculture and allied activities remain the single largest contributors to India’s GDP and represent the means of livelihood for about two-thirds of the workforce in the country. With Uttar Pradesh being a predominantly agrarian economy, it also represents a substantial segment of India’s agrarian population. The accelerated growth of this sector will support inclusive economic growth, and sustainable development reﬂects positively on the progress in the state and the nation as a whole. While opening up a whole array of unexplored tourist destinations in Uttar Pradesh, the basic foundation of agri-tourism lies in community welfare, rural economTUSHAR PANDEY ic growth and social equity. It supports development COUNTRY HEAD, STRATEGIC INITIATIVES - GOVERNMENT in both agriculture and tourism and our SIG group (SI-G), YES BANK has proposed this as a rural employment generation mechanism for the state. The publication also brings to focus potential regions in Uttar Pradesh where considerable opportunities for the development of agri-tourism exist and highlights the investment potential. What is the bank’s view on the growth of rural and agri tourism in the country? Yes Bank’s strategic initiatives and advisory – government (SIG) division has consistently been advocating rural and agri-tourism as an innovative and effective mechanism for driving growth in the rural economy, and has identiﬁed it as a crucial contributor for inclusive growth, wealth distribution, sustainable development, employment and income generation. We foresee a positive outcome of a collaborative approach that involves all stakeholders and advocate a cooperative/cluster structure where entrepreneurial sprit is the driving force for success. In the initial stage we expect a marginal contribution whereas in the long-term perspective of 10-12 years, we expect rural tourism to contribute about 7-10% of the total revenue generated from tourism and close to 10-15% of the total jobs in the tourism sector.

DARE/money matters ACCOMODATION Number of rooms needed to accommodate 12 tourists

Size of one room

180 sq ft

Cost of constructing one room

400 Rs/sq ft

Cost of furnishing one room

300 Rs/sq ft

Total cost of one room

1,26,000 Rs

Total cost of four rooms

5,04,000 Rs

EARNINGS Say, 10 tourists visit the village for 104 days/year Each tourist pays Gross earnings

500 Rs 5,20,000 Rs

EXPENSES Monthly spend on food, electricity etc

15,000 Rs

Annual spend on food, electricity etc

1,80,000 Rs

Loan repayment of Rs 5 lakh

1,50,000 Rs

Total spend Net Earnings per year

3,30,000 Rs 1,74,000 Rs

Do you believe that public-private partnership can help promote agri-tourism? Development in the rural sector is signiﬁcantly embedded within the purview and domain of the government. It is from this perspective that Yes Bank has been steadily advocating the public private partnership (PPP) approach to facilitate the bridging of the urban-rural divide. For rural tourism, we believe that a collaborative strategy built on the foundation of PPP principles will enable the penetration of beneﬁts to all stakeholders and facilitate a win-win situation. Based on this, the SI-G division within the bank executes this by working in close collaboration with the government and key stakeholders. SI-G has been compelling governments through thought leadership initiatives, knowledge publications, advisory and knowledge partnerships to recognize their role as facilitators of growth in the rural economy. oped such as road-shows on a bullock cart! Internet could be the best bet to advertise an agri-tourism unit. Accommodation: Providing clean and well-furnished dwelling units for tourists is very important. Some of them could be allergic to dust and pollens and would prefer to stay in a hygienic environment. This could be an uphill task.

Doctor on call: Although most tourists are advised to take precautions while moving around in a village but as a host, you have to be prepared for any untoward incident that might happen. Having a village doctor on call could help. If nothing, keep a ﬁrst-aid DAR E box ready. FEBRUARY 2008 51

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strategy/brands

Creating customer addiction Where efforts at building loyalty might stumble, aiming for brand addiction might succeed

/Rupin Jayal

t is important to retain customers. This is an adage that all marketers are well aware of and most of them conduct some kind of activity to retain their customers. But how many really know their loyal customers?

Loyalty: A fickle bedfellow Are your customers with you out of sheer inertia (as is the case of many bank customers)? Or are they there out of habit or convenience (toothpaste, soap brands, mobile phones)? Or are they with you because it is just too much of a hassle to change (mobile phones)? Or are they “locked in” to some kind of so-called “loyalty” program (airline frequent flyer program)? Understanding the nature of customer loyalty is absolutely critical to judging who is attitudinally loyal, i.e. those who continue to choose a brand because they really have an affinity for it, versus those who do so for practical reasons, some of which are mentioned above (behavioural loyalty). The type of purchase and category too has an impact on the type of loyalty that a frequent purchaser may have for a particular brand. For many routine, frequently-purchased, daily-usage product categories, the most widely distributed and most visible brand is the one purchased most frequently by the largest number of people. In some cases even a very positive experience does not necessarily build loyalty to a brand since the customer chooses to upgrade to another brand rather than stay with his existing one. This is often the case with cars where the decision to upgrade includes the brand as well – so when he moves from a hatchback to a sedan he often moves away from the “small car” brand as well. 52

FEBRUARY 2008

American corporations lose half of their customers in ﬁve years. Disloyalty stunts corporate performance by 25 to 50 percent or more. REICHHELD, 1996 Added to this is the continual introduction of new brands offering changes in technology, or a host of added features and more aggressive pricing, further eroding customer loyalty. With so many brands wooing them and wallets that are not big enough to service booming aspirations, Indian consumers are considered to be some of the most challenging in the world - they are true “bargain badshahs.” So a good deal can upset years of carefully nurturing loyalty by a brand.

Addiction: A step beyond loyalty

sumed by “hi-tech” mania and with burgeoning aspirations? In fact, where efforts at building loyalty might stumble, it is aiming for brand addiction that might succeed. Aiming for loyalty is a bit like aiming for the middle of a chasm you wish to leap over. Building loyalty usually means giving out the occasional “delight” and keeping in touch with mailers and the occasional freebie or discounts on repeat purchases. That is not to say that brands are practising even this level of loyalty building. Mobile phone service brands for a long time spent far more resources on wooing new customers and very little, if anything, on retaining their existing base. The inertia of a medium or heavy user due to the lack of number portability allowed them to get away with it. Even now their effort seems to be mainly directed towards building loyalty and that might just prove to be aiming for the chasm of customer indifference. So what is meant by customer addiction? Simply put, it means a brand that a person simply cannot do without. It means that using any other brand in the category engenders a feeling of insecurity. Acquiring the brand becomes a necessity. And continuing to use the brand is driven by an emotional need for it. Overreaching? Consider the quote at the start of this article and consider

In a country driven by the youthfulness mantra, with the average age less than 25 years, loyalty can become an unnecessary burden, with the latest and the newest being far more attractive than the tried and tested. In most categories the average age of the consumer is coming down, so brands have to address younger consumers who tend to be more demanding, open to change and keen to try something new. With all this, what relevance can loyalty have and is it just a marSTOCK MOVEMENT OF HARLEY DAVIDSON keting chimera? And we are not talking about just loyalty here, but addiction. Is that really possible in a “young” country, relatively new to the magical world of brands, con-

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strategy/brands the spiralling cost of acquiring new customers in almost every category. Consider the continual upgradation of products. Consider the cacophony of brand advertising blanketing almost every waking moment of most people. Consider how hard brands have to run to just stand still. And then consider the sheer ﬁnancial performance of brands that have created consumer addiction. In the case of one of the most addictive brands Harley Davidson the addiction is not to the product itself but even the stock seems to generate addiction for it.(See Graph) Nike, with its legions of addicts waiting patiently at Nike Town outlets for the latest range, has ensured the brand’s dominance over the sports footwear market. This has generated more than market dominance, it has given the brand the ability to withstand various controversies that could have pulverised lesser brands with merely “loyal” followers behind them. Apple, with its annual gathering of the “faithful,” has become a messianic brand, far beyond the mundane world of computers and portable music systems. Pepsi was, at one time in India, representative of an entire generation in India and was able to create such tectonic shifts as the popularization and “cool” quotient of “hinglish” and even the use of its base line by war heroes. How many soft drink brands do people actually argue over as do “Coke” guys versus the “Pepsi” generation? Swatch created legions of addicts who would interact, attend gatherings all over the world and built social networking into a powerful source of expression long before the Facebook phenomenon. And Virgin Airlines just might become the only addictive brand in a sea of monochromatic airlines, all with great loyalty programs but with little soul. All the brands mentioned above have weathered storms that, without their legions of addicts, could have seriously damaged them. They all have been very proﬁtable and resilient. They all have gone way beyond loyalty and have succeeded in creating deeprooted conviction for them as well as an addiction. Ask any Apple Mac user

The research projects undertaken by Bain & Co. show that keeping five per cent more customers each year can boost profits by 35 to 95 percent. The reason why profits can be improved in such a dramatic way boils down to the fact that customers show a lifecycle profit pattern: the longer the customer stays, the more profitable he becomes thanks to growing revenues, cost savings, referrals and decreased price sensitivity. Other studies show that 65 percent of the average company’s business comes from its present, satisfied customers, that it costs five times as much to acquire a new customer as it costs to service an existing customer. ROSENBERG AND CZEPIEL, 1984 to switch to another brand and you would probably get a look of pure horror at the heresy of it. Ask any user of another brand of laptop to switch and he would get into a long discussion of specs, performance and features. The processor inside the computer of these other brands is probably a more addictive brand than the computer itself!

The anatomy of addiction So how can you build customer addiction? It really requires conviction at all levels of the company to go way beyond small acts of customer “delight.” It means, ﬁrst of all, to really understand what your customer is buying (ref: Dare December 2007). It means: 1. No longer thinking of your brand’s audience as “consumers” but as “people” with strong convictions and equal ownership of your brand (ref: Dare January 2008) 2. Giving your brand a meaning and identity that transcends its category and occupies a more meaningful space in the life of people. 3. Creating a free space where people can express themselves, talk about your brand and build a meaningful dialogue with your brand as the subject (Harley owners groups, Snapple and Innocent) 4. Understanding a key relevant megatrend, social inhibition, ingrained habit, sociological context or aspiration and either becoming the spokesperson for it or building a cause against it. For example Airtel

today has the potential of building a hugely addictive brand through its espousal of “conversation to break barriers.” For a region where the lack of a real conversation between opposing viewpoints creates painful and insurmountable barriers this could be a powerful platform, which could create legions of true believers. 5. Live your brand conviction every minute of every day of every year. In the example above, the idea can create a messianic brand, the voice of generations, or just remain a “good ad.” But to become the former, the entire organisation has to be inspired by the same zeal—not because there is a corporate diktat for it, but because they have an inner conviction. Nike only hires people who play at least two sports. Oakley insists on hiring people actively involved with adventure sports. Brands like Microsoft, Apple, Saturn, Pepsi, Harley Davidson, Innocent, etc are addictive because ﬁrst and foremost those who work for them are addicted to them. Creating consumer addiction isn’t easy. It isn’t just a tweaked loyalty program. It isn’t about buying buyers through some engaging “delights.” It is about setting a powerful, category transcending the raison d’être for your brand and then living it rather than DAR E just living up to it. The author is Director-Strategic Planning at M&C Saatchi FEBRUARY 2008 53

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/unique idea of the month

Ek Mutthi Anaaj This is the story of the campaign that’s running with the belief that a handful of grain is all it takes to begin a movement – and that the poor have the power to eradicate their own hunger and poverty /Shilpi Kumar

ccording to nutritionists, a healthy diet should provide for at least 2500 calories of energy. There are 320 million people in India that barely get 1500 calories in a day, and mostly sleep hungry every night. That too, when India possesses around 65 million tons of food-grain surpluses. Many of us get to know this fact, dwell on it for a while, and move on with our lives. Then there are people like Shakun and Hina Goyal of the MCKS Food for Hungry Foundation (FFHF), who have given this more than just a passing thought and actually stepped up to make a difference.

FEBRUARY 2008

“My mother, Shakun Goyal (Managing Trustee, MCKS FFHF) and I realized that we needed to think of a unique, approachable way to get people reach out and help the hungry. Even though these people want to help, convincing them to volunteer becomes difficult. Donation in the form of cash brings in skepticism about their money actually going to the proper channel. We needed something that was more credible in its approach. After about a month of brainstorming, we finally came up with it – the Ek Mutthi Anaaj initiative,” says Hina, the project coordinator. A month later on July 29, 2007, the Ek Mutthi Anaaj campaign was implemented. The campaign aims to seek contributions from donors in the form of grain instead of cash. Everyday, each donor puts in a handful of grain in a bucket provided by the FFHF. This grain is collected from their home between the 25th and 30th of every month by the area coordinators of the campaign. Even the coordinators contribute grain for this cause. The grain collected from each area is sent to the MCKS FFHF office at Vasant Vihar, where it is repackaged and sent to the various beneficiaries based in New Delhi (See box). What has made the Ek Mutthi Anaaj initiative different from various other hunger eradicating programs is the transparency with which it works. “People feel connected and directly involved with the

campaign, when they give grain from the comfort of their homes and from their own hands. It is a workable solution for them and the tangibility leaves the donors as well as the coordinators feeling much more convinced and satisfied. We constantly encourage the volunteers to come to the head office in Vasant Vihar to come and monitor the entire process by helping us weigh, repack, and distribute the grain to the various beneficiaries,” claims Hina. A record of all the grain that is being received and then distributed is also maintained. Surangna Jain, an active donor, comments, “My experience in being associated with the campaign has been great. Donating in the form of grain, rather than money, assures us that our donation is being used for a genuine cause.” Anu Bajjaria, a housewife and donor, says, “Although there are various other organizations that work towards the same cause, I chose to be a donor for this one because it was convenient and I could make a difference from the comfort of my own home.” What do the various organizations that are benefiting out of this have to say? We talked to a few of them. Ranveer

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/unique idea of the month

THE IDEA Ek Mutthi Anaaj is a unique initiative taken up under the MCKS Food for the Hungry Foundation, aiming to minimize hunger by asking people to contribute everyday in the form of grain. The grain is deposited in a bucket that is placed in the homes of the volunteers and collected at the end of the month. What really persuades the donors is that the program is completely transparent. The donors are encouraged to weigh, repack and even distribute the grain themselves. The foundation strives to bring relief to the homeless, beggars, children of daily wage laborers, slum dwellers, orphans and aged people.

VISION A hunger-free India MCKS Charitable Foundation was started in 2004 by Choa Kok Sui, who once pondered, “How do you feed the soul when the body is going hungry?” It is with this purpose that MCKS started working towards self-sustainable solutions to counter hunger and poverty.

MISSION Right to Food – one of the basic human rights MCKS gets the poor back on their feet by providing them with basic necessities like cooking utensils, boats, ﬁshing nets, food grains, etc. They also provide rehabilitation and initiate education and livelihood programs, so that they are able to sustain a living by themselves.

PRESENCE Andhra Pradesh, Delhi, Karnataka, Maharashtra, Tamil Nadu, and West Bengal

BENEFECIARIES (DELHI) Blind Students Hostel (Rohini), Leprosy Home (RK Puram), Diya Foundation (Nangloi), Homeless Boys’ Hostel (Asaf Ali Road), Akshay Pratisthan, Manav Seva Sansthan (Mehrauli), Khera Khud Ashram, and Salam Balak Trust.

CONTACT Hina Goyal Tel: 32964676 Email: hina@mcksffh.org Ranveer Kumar Tel: 65935513 56 FEBRUARY 2008

HINA GOYAL TRUSTEE AND PROJECT COORDINATOR, MCKS FOOD FOR HUNGRY FOUNDATION Even though people want to help, convincing them to volunteer becomes difﬁcult. Donation in the form of cash brings in skepticism about their money actually going to the proper channel. We needed something that was more credible in its approach.

DARE.CO.IN

/unique idea of the month

My experience in being associated with the campaign has been great. Donating in the form of grain, rather than money, assures us that our donation is being used for a genuine cause. — SURANGNA JAIN, OUTSOURCING CONSULTANT & ACTIVE DONOR, EK MUTTHI ANAAJ CAMPAIGN Kumar, the General Secretary of the Ideal Hostel of college-going blind students (Rastriya Pragya Drishti Sansthan), says, “We end up getting about one quintal of wheat and rice and about 20 kg of daal as part of Ek Mutthi Anaaj scheme, monthly. Our requirement, however, is about 10 quintals.” Heenu Singh, the director of Salaam Balak Trust, a trust that provides shelter programs for street children also comments, “We receive about 200-250 kg of rice from Ek Mutthi Anaaj scheme. It is a great endeavor, but our requirement is a lot more.” Hina responds to this by saying, “The Ek Mutthi Anaaj scheme is a fairly recent one, and we are looking to have more donors, so we can provide more food and reach more areas of Delhi. We are also looking to tie up with colonies who can get involved with this, because eventually it should be a citizen’s initiative to help those who are hungry.” She continues by saying, “Meanwhile, we are trying to fulfill the requirements of the beneficiaries, till whatever extent we can, in the form of rice, daal and wheat. If the requirement is a lot more, the MCKS FFHF steps in and provides spices, vegetables, oils, etc accounting for a complete healthy meal.” When asked whether the quantity of grain they get every month from the donors is sufficient for the beneficiar-

ies, Hina comments, “We are not really worried about the quantity that comes. Our main aim is to make people realize that they need to give in whatever form or amount possible. If everyone takes the initiative to start helping out in whatever way, big or small, it will snowball into a much bigger endeavor.” In the near future, they also plan to adhere to an average daily requirement per head, in terms of nutritional/caloriﬁc values. “As of now, we cannot really function on those bases as it is too vast a ﬁeld. We are concentrating on giving the organizations enough food for one meal. If you have nothing to eat, you are not going to be bothered about how many calories you are going to get, you are going to be concerned about putting food into your stomach.

“We end up getting about one quintal of wheat and rice and about 20 kg of rice as part of Ek Mutthi Anaaj scheme, monthly. Our requirement, however, is about 10 quintals.” — RANVEER KUMAR, GENERAL SECRETARY & BENEFICIARY, RASTRIYA PRAGYA DRISHTI SANSTHAN

Hopefully, we will be able to come to a point where we can take care of every person’s full nutritional requirement in the future,” Hina comments. How has the response been like in the past six months? As Hina puts it, “The campaign initially started by word of mouth. I called up my friends and relatives and asked them to be a part of it. But now, six months later, we have roughly about 500 household donors.” In Delhi, the household donors stay at New Friends Colony, Defence Colony, Sainik Farms, Ashok Vihar, Vasant Vihar and Rohini. Besides these, various educational institutes like the New Era Public School and several establishments across Delhi are participating in the campaign, as either donors or coordinators. Will the campaign extend beyond Delhi? It has already been initiated in Jaipur, Kolkata and a school in Guwahati, and on its way to being implemented in Mumbai and Orissa. We could feel the pride and joy in Hina, when she said, “It is good to be a part of something that is becoming so strong a movement. We plan to specially run the campaign in more schools and encourage children to actively contribute. We want them to become more responsible towards those in need as DAR E children are the future!”

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FEBRUARY 2008 57

DARE.CO.IN

opportunity/fashion

The big business of fashion The size of the Indian apparel market will touch Rs 1,30,000 crore this year, according to ASSOCHAM. DARE explores the opportunities /Shilpi Kumar

all it the western inﬂuence, driven further by the media, but one visit to the shopping malls and you notice just how fashion conscious Indian consumers are becoming. Brands, foreign labels and designer wear are no longer just for the niche customers- they are for the masses! With more and more retail chains opening in the country and both Indian and foreign players looking to invest in the industry, one can’t help but wonder, is this a good time to enter the apparel market?

The stage is already set One of the apparel industry veterans, and the Director of VIP Group of Maxwell Industries, Sunil Pathare mentioned about the change in trend that he has witnessed in the last decade. Pathare reminisces about the same, “Retail trends have not only changed at a crazy pace in the last decade, but it has also changed perceptions. The perception of the masses has changed to be in favor of the ‘Made in India’ tag; a tag that was looked down upon as a low quality product,” He adds, “India is delivering good quality and extremely fashionable garments. In fact, Indian labels are valued even abroad. It would not be wrong to say we are giving even the Chinese competition!”

On whether the stage is set for entrepreneurs, in the apparel industry, to enter and ﬂourish, the unanimous feeling is ‘Yes’. “Lots of foreign fashion houses are making presence in India. Besides this, many international designers have begun working in conjunction with Indian designers. The timing is just right for Indian entrepreneurs to venture into this sector,” says Pathare. Even the fashion schools are extremely optimistic about the changing scenario. Kappil Kishor, lecturer of Illustration Designing in National Institute of Fashion Technology (NIFT) emphasized, “The domestic market is becoming huge and exports are booming. A number of young designers with innovative concepts are now working for export houses, designer agencies and retail outlets.”

A market worth Rs. 1,30,000 crore According to Associated Chambers of Commerce and Industry (ASSOCHAM) the apparel market in India was worth Rs. 1,11,000 crore in March 2007. As for 2008, their projected estimate is a whopping Rs. 1,30,000 crore. With ‘brands’ such as Levi’s, Gucci, Lee Cooper, etc becoming a hot favorite with the youth today, the branded apparel industry touched Rs.30,000 crore in 2006-2007. In the same period, ‘de-

signer labels’ such as Ritu Kumar, Satya Paul, etc accounted for Rs. 270 crore. The market of designer labels is expected to hit Rs. 750 crore by the year 2012. India has an added edge over many other countries and hence the potential to grow much more than that. The fact that we are the third largest cotton producing country, rich in textiles and have a ﬂood of young and talented designers coming out of institutes like NIFT, National Institute of Fashion Design (NIFD) and Pearl Academy of Fashion should hint towards the unexploited potential.

Opportunities worth exploring According to ASSOCHAM, the worth of designer labels in the global market is Rs. 1,62,900 crore, growing at a rate of 9.5% every year. The Indian fashion industry only accounts for 0.2% of the international industry’s net worth. At the moment, the Indian designer labels industry consists of many smallscale individual designers who hardly have the resources to grow in size and create a cohesive industry. As the demand for ready-to-wear branded as well as designer apparel increases, India would need more fashion houses and retail enterprises. These fashion houses and retail enterprises need to bring together the apparel export com-

Fashion sense in India is vastly segmented. What might be fashionable in north might not be in south. Similarly, fashion tastes will differ from metros to other cities across the country. Also, although it is important to look at trends, you should not give up your own unique style, while designing for apparel. — VIVEK KARUNAKARAN FASHION DESIGNER, VIIA DYSN CO. 58 FEBRUARY 2008

Photo Courtesy: VIIA DYSN CO.

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opportunity/fashion

Ritu Kumar's early days in fashion design "I began my work with four handblock printers and two tables, in a small village near Calcutta forty years ago". She traveled to Rajasthan, U.P, and Delhi looking for fabrics and prints that had a traditional aesthetic to them. At the time, there were only a few textile museums in the country and there was very little study material available. The word designer was not even in the national vocabulary. Her first exhibition of saris, which used designs from India’s renowned print schools was held in Calcutta. Out of the thirty, Ritu only managed to sell about a dozen. Reflecting back on the day, she says, “ It taught me my first lesson. Never "NEVER TRY AND DESIGN WITHOUT A VISION" try and design without a vision, which is not based on contemporary needs. Use the idiom, motif, the design and all that that made that school of design so important; but work it for the present day.” Coming a long way from then, Ritu now produces some of the country’s most exquisite garments and accessories in cotton, silk and leather. She was the first woman to introduce the boutique culture in India under the brand name ‘Ritu’. Her sub brand, Ritu Kumar Label, redefines traditional handwork to meet the changing needs of the new generation. The inspiration of these garments is basic Indian motifs, prints and embroideries but they are mingled with a wide range of western silhouettes. “I believe in going deep into the roots of every design to find out its relevance in the present context. I also try and visualize whether a woman would look elegant in my designs. It’s a lot of hard work. But then this is a very competitive field and unless you put in that extra effort you will lag far behind.” 60 FEBRUARY 2008

opportunity/fashion

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We have employed designers, working at a subsidized rate, from the Spanish design committee in Barcelona. They take care of everything from designing to getting the raw material. I had to initially train them about the fashion dynamics of this part of the world. Now, the designers send me a couple hundred designs, from which I select the designs that are apt for an Indian consumer. The selections are then translated into actual products and sent to India. â&#x20AC;&#x201D; JASMINE KERAWALA OWNER, COCO (SPANISH BOUTIQUE) FEBRUARY 2008 61

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opportunity/fashion

There is designer wear and hip clothing for young women, men, children, ofﬁce goers, party hoppers, and even bigger sizes but there is absolutely nothing to celebrate those beautiful nine months. — MRIDULA BOSE SAHAY THE MOMEASE munity, the designers and the manufacturers, under one organized unit. Vivek Karunakaran is the man behind the label ‘Viia’ – one of India’s very own designer labels. Karunakaran runs Viia Dysn Co in Chennai, which enables entrepreneurs of varied backgrounds to launch labels of their own under one house. According to him, when the quota regime that restricted free export of materials and garments from developing countries, ended in 2005; it resulted in an export boom. In fact, this change even saw Indian designers being invited to Milan Fashion Week and New York Fashion Week. This clearly shows a global recognition of the work of Indian designers. In terms of domestic market, there is scope for opening up more foreign designer stores. Jasmine Kerawala of Mumbai owns the ﬂagship store of Coco – a popular high street label from Barcelona. Kerawala says, “The selection of western brands is extremely limited in India. The focus is mostly on casual, everyday clothing. There are 62

FEBRUARY 2008

a lot of Asian goods, especially from China and Thailand, coming into the Indian market. When it comes to European designs, however, there is still a hole in the market. This needs to be and can be ﬁlled. This is what got me started with my store.” One other opportunity lies in kids’ apparel. According to a KSA Technopak research (December 2007), the total worth of this market over $3 billion (Rs 12,000 crore), of which $701.7 million (Rs 2800 crore) consists of the branded segment. However, the market is fragmented and dominated by the unorganized sector. The demand for kids’ apparel in the country is mostly functional than fashionable. Added is the fact that children outgrow clothes rapidly and so the consumers prefer shopping at local shops rather than hitting the branded stores. Kids’ apparel retailing is expected to touch an annual growth of 3035%, making it an opportunity worth exploring.

Maternity clothing is a segment with a huge gap in the Indian market. It is difficult to find maternity wear that looks good, suits a variety of occasions, and at the same time gives you comfort. According to estimates, the business potential of this segment is nothing less than Rs 600 crore in the next two years. The market size is huge and the players few. Mridula Bose Sahay and Rashi Gaur of Delhi own and run one such maternity wear brand ‘Momease’. Mridula says, “There is designer wear and hip clothing for young women, men, children, office goers, party hoppers, and even bigger sizes but there is absolutely nothing to celebrate those beautiful nine months.” The trend was that of wearing handme-downs from relatives, buy oversized clothing or get someone from abroad to send maternity clothing. This trend is up for a change with maternity wear such as Momease starting up in the country. The undergarment industry is growing in double digits as well. Ac-

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opportunity/fashion cording to Sunil Pathare, The VIP Group, “The country’s leading 46 intimate wear brands and manufacturers together service a market worth Rs. 2815.73 crore (FY 2005-2006), out of which Rs. 1851.1 crore consists of innerwear, including shorts.” He believes that time spent in purchase of intimate wear is increasing by the day, which is why it has become important to provide complete solution to the innerwear needs of the people. “It is because of this, we have decided to take our brand to a whole new level. We will be among the few domestic brands to have opened exclusive lingerie stores through which we will have both men and women’s innerwear in both national and international brands,” says Sunil. Clearly, there is an opportunity for more such stores to be set up.

What does it take? Ritu Kumar, one of India’s foremost designers, has a very simplistic but well articulated approach. Kumar says, “I believe in going deep into the roots of every design to find out its relevance in the present context. I also try and visualize whether a woman would look elegant in my designs. It’s a lot of hard work. But then this is a very competitive field and unless you put in that extra effort you will lag far behind.” When she started, the word designer was not even in the national vocabulary. However, with a lot of perseverance and hard work she became the first woman to introduce the boutique culture in India under the brand name ‘Ritu’.

Kappil Kishor, professor at NIFT says that you need to keep up with rapidly changing trends and keep yourself updated with new designs, fabrics, cuts and colors that come into the market. “India is famous for its ethnic wear. We can integrate our ethnic expertise with western designs and concepts to better suit the needs of the Indian consumer today,” he says. Also, you need to set up a good unit of professional designers, workers who cut the garments and those who stitch it. Designers should ensure that the ﬁnal output is being delivered exactly the way they conceptualized it. Pathare, who took up the challenge of foraying the VIP brand to the international market, believes that to hit the mainstream pulse a lot of markettrend research, design-product development, trend-setting and efﬁcient retail-distribution network is required. “When we launched in the Middle East, there were only Japanese and Korean brands. Our quality products at affordable prices enabled us to replace them and now research shows that it is not just Indians who are purchasing our innerwear,” he says. Having an innerwear business worth Rs.300 crore, ask Sunil what it takes to reach where he has, and he says, “Everyday is a learning experience. In the retail business, it has to be a never-ending process. There are a lot of things that go into selecting raw material, designing and giving comfort to consumers. Even after being in this business for so many years, I can’t say that I know everything.”

According to Kerawala of Coco, creating of a mass appeal is a crucial element to grow. There is already an incessant craving in the masses for variety, good quality and affordable price. This can be satiated to quite an extent by bringing in foreign designer labels. However, choosing the right brand to offer also requires a lot of thought. Kerawala shares hers, “I wanted to bring in ‘Zara’ out here. However, not only the brand itself would have been very expensive for a mass appeal, I would also have had to pay a really high franchise fee. Being in an already niche segment, I believed that the masses would not be willing to shell out Rs 6,000 just for a top. It was important for me to not get into that level of a niche, which is why Coco clicked with me.” Karunakaran believes being in a country with more than a billion people with an eye for novelty makes it an ideal market to be in. However, this huge population has a lot of cultural and demographical differences in taste. He explains, “Fashion sense in India is vastly segmented. What might be fashionable in north might not be in south. Similarly, fashion tastes will differ from metros to other cities across the country. Also, although it is important to look at trends, you should not give up your own unique style, while designing for apparel.”

How do the logistics work? In the case of big brands, companies have their own manufacturing units, where they procure raw cotton locally

There should be a wing in the Fashion Design Council of India that provides a platform for young designers. Spending lakhs of rupees promoting designers who are already established is useless. Although a few entrepreneurs are given an opportunity, nothing is really being done for the masses. — KAPPIL KISHOR, PROFESSOR, NATIONAL INSTITUTE OF FASHION TECHNOLOGY FEBRUARY 2008 63

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opportunity/fashion

Retail trends have changed at a crazy pace in the last decade. The perception of the masses has changed in favor of the ‘Made in India’ tag. Indian labels are valued even abroad. It would not be wrong to say we are giving even the Chinese competition! — SUNIL PATHARE, DIRECTOR, VIP and then convert it into yarn, using a spinning mill. The processing house then takes care of the knitting, dyeing and garmenting. Some of the raw material, like certain fabrics or laces or frills in the case of lingerie, has to be imported. The designing team that consists of qualiﬁed designers from various fashion institutes in India and abroad then make the designs for the selection team to select. Stitching factories with laborers need to be set up in various parts of the country. Foreign designer stores, like Coco, sometimes choose to have their apparel designed and produced abroad and then exported to them. Kerawala of Coco comments, “We have employed lots of designers, working at a subsidized rate, from the Spanish design committee in Barcelona. They take care of everything from designing to getting the raw material. I had to initially train them about the fashion dynamics of this part of the world and there was a lot of trial and error involved. Now, the designers send me a couple of hundred designs, from which I select the designs that are apt for an Indian consumer. The selections are then translated into actual products and sent to India.” For Ritu Kumar, at her time, things were even tougher. She began her work with four hand-block printers and two tables, in a small village near Calcutta forty years ago. She traveled to Rajas64

FEBRUARY 2008

than, U.P, and Delhi looking for fabrics and prints that had a traditional aesthetic to them. There were only a few textile museums in the country and there was very little study material available. Coming a long way from then, Ritu now produces some of the country’s most exquisite garments and accessories.

Shows and events: a good idea? For any newcomer in the apparel industry making a unique presence counts a lot. In this scenario, does exhibiting the collection in fashion shows and events actually help in setting up their image? Kerawala does not really agree with this. She comments, “Although it can increase awareness, it actually happens with the classes and not the masses. For those who want to tap the masses, indulging in these activities does not really help.” Pathare too shares the same thought. According to him, “Fashion shows abroad are for showing new collections and meant for business. Distributors are called and it is a great avenue for trade to happen. In India, however, it has become more of a trend. The real reason isn’t quite coming out.” Kishor of NIFT strongly believes that there should be a wing in the Fashion Design Council of India (FDCI) that provides a platform for young designers and deals with establishing them in a proper way. “It is useless spending

lakhs of rupees promoting designers that are already established. Although a few entrepreneurs are given an opportunity, nothing is really being done for the masses,” he claims.

Possible Challenges Sahay of Momease sums it all up, when she says, “Some of the key challenges include being cost competitive, labor concerns, supply chain and logistics and of course the vagaries of the monetary market.” Pathare of VIP shares another key challenge that he has faced. “It is no doubt that India is going through a retail revolution with the premium segment growing at the rate of 35%, but you do not get enough retail space to showcase the entire collection, especially in the case of innerwear.” Abroad, entire ﬂoors are dedicated to lingerie sections, but in India, increasing lingerie retail space against the outerwear apparels, becomes a challenge. To promote India further in the international market, the apparel industry needs to get more organized. There is still a lot of room for improvisation, especially when it comes to infrastructure. Labor laws is also a key concern. The high import duty on clothing is another reason why why foreign brands shy away from coming to India. The apparel industry faces acute concerns on account of rising costs, infrastructure and the appreciating rupee. D A R E

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ﬁnance/credit rating

Batting for a good score A good credit rating can ease the process of raising money, and give you the necessary edge to negotiate the terms and conditions /Arunjana Das

ducomp Solutions, a techdriven education company received a rating of SME1 (top rating for SMEs) by the leading credit rating agency CRISIL in September 2005 with the validity of a year. The promoters decided to take the company public soon after through a successful IPO, which was oversubscribed 34.96 times. The credit rating helped the company gain investor conﬁdence during the IPO process. Armed with the top rating the next year, Educomp raised Rs 116 crore through issuance of equity shares and Foreign Currency Convertible Bonds (FCCB). Educomp is one of the many companies lining up at the doors of a handful of credit rating agencies to get themselves rated based on the due diligence carried out through a series of risk assessment techniques. In a country like India, where markets are still emerging and a lot of money is changing hands, it becomes prudent to put systems in place that make such transactions transparent and establish the credibility of the party who’s getting the money. This has prompted investors and ﬁnancial institutions to take note of credit ratings granted by a number of Credit Rating Agencies (CRAs).

What is credit rating? Credit rating reﬂects an organization’s credit-worthiness, which is determined by the company’s probability of meeting its ﬁnancial obligations. These may be in the form of debt servicing or equity allocation. Credit rating provides the ratee company insights into its strengths and weaknesses as the extensive due-diligence that rating agencies carry out reveal loopholes in the performance, strategy and managerial setup. This helps organizations under-

stand and manage their risks better. Credit rating holds special signiﬁcance for a startup since a good rating does away with the need for an in-depth due-diligence on the part of the potential investors or ﬁnancial institutions and provides the startup negotiating power to work out a better equity deal, or in case of debt, lower interest rates. A good credit score establishes your credibility and ability to pay back on time and hence helps in raising debt. Contrary to this, a bad rating could lead to acquiring credit at higher interest rates, known as risk-premium. Credit rating is done by Credit Rating Agencies (CRAs). Moody’s, Standard and Poor’s (S&P’s) and Fitch IBCA are the top three agencies in the world. In India, there are several governmentapproved agencies providing ratings to individual borrowers, SMEs and large and small corporate entities. CRISIL (Credit Rating and Information Services of India Limited), CARE (Credit Analysis and Research Limited), ICRA (an associate of Moody’s) and Fitch Ratings are the leading registered

For a startup, we look at the track record of the promoters and projected cash ﬂows. The criterion is different for different startups. For example, in a technology-based startup, we look at whether the technology is tied up or can be cashed on. — RAMAN UBEROI, CRISIL

Leading Government-approved CRAs in India 1. Credit Rating Information Services of India Limited (CRISIL) http://www.crisil.com 2. Investment Information and Credit Rating Agency of India (ICRA) http://www.icra.in 3. Credit Analysis & Research Limited (CARE) http://www.careratings.com 4. Fitch Ratings, India http://www.fitchindia.com A CRA in India may take anywhere between a week and a month to finish the due diligence process and rate an organization. A CRA charges may vary from Rs 40,000 to Rs 15 lakh. The cost depends upon the size of the organization, depth of the study, time taken, effort required, etc. Rating is granted for a period of one financial year, during which the organization is kept under constant surveillance by the CRA. In case of any inconsistencies, the CRA reserves the right to change the rating of the concerned organization.

CRAs in India. Fitch Ratings India is a 100% subsidiary of the international credit rating agency, Fitch Ratings. It is the only international credit rating agency providing its services in India. CRAs are regulated by the SEBI (Credit Rating Agencies) Regulations, 1999 and the Credit Information Companies (Regulation) Act, 2005, which lay down certain guidelines in accordance with which CRA in India are allowed to register and function.

Rating Virtually anything involving money can be rated. CRAs usually divide the ratees into two categories – issues and issuers. Issues can comprise any debt instruments (bonds, commercial papers, etc), funds, IPOs, or in fact, any money instruments; Issuers are the organizaFEBRUARY 2007 65

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ﬁnance/credit rating

Ratings awarded to issuers by major CRAs

— Highest Safety

— High Safety

— Adequate Safety

— Moderate Safety

— Sub -moderate Safety

— Inadequate Safety

— Substantial Risk

— Default

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tions issuing the concerned instrument. The issuer can be a big corporate or an SME (Small and Medium Enterprise), an established entity or a startup. CRAs usually rate issues based on long-term or short-term requirements. When a company is rated, it could be from a long-term or short-term perspective depending on its requirements and agreement with the rating agency. A company can get a rating even without any immediate plan of coming out with a public issue. As and when required, it can go for debt instruments or an equity issue, depending on its debt policy and capital structure, although the issues will need separate rating. However, the leverage obtained from a good issuer rating is enough to have made several companies in India go for issuer rating. The rating is a result of the financial, non-financial, legal and risk evaluation of your company. For different industries, the rating process is different. For example, the rating process for a manufacturing or infrastructure company will be different from a banking company. Irrespective of the size or nature of the issuer, however, the rating rationale is the same - credit-risk assessment. Credit risk assessment involves an in-depth study of the company’s financial history, level of technological development, risk-management systems, cash flow, liquidity, legal framework, resilience to market fluctuations, etc. A few factors that are given emphasis during the financial history evaluation are credit performance, which includes the company’s credit payment history, current debts, length of credit history, credit type mix and frequency of applications for new credit; financial ratios, such as liquidity ratios; efficiency ratios, such as asset turnover ratio and profitability ratios, such as net profit margin, return on investment (ROI), etc. These factors are given due weight-age depending on the industry, the company’s business and market position. CRAs employ various techniques to evaluate the credit risk associated with their ratees. Leading CRAs of the

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finance/credit rating country have devised many off-theshelf risk-assessment software customized specifically for industries across sectors, giving due weightage to the assessment parameters. For instance, CRISIL has designed a Quick Rating Model (QRM) for enabling a quick and easy evaluation of an organization’s credit-worthiness. The applicability of this model is, however, confined to manufacturing and infrastructure entities only. Similarly, CARE, ICRA and Fitch follow their own off-the-shelf models for credit quality assessment. The dependence on these software is not 100%, since there is a good bit of qualitative analysis involved, which is why a registered agency with competent analysts are required! “There is a good deal of subjectivity involved”, says D R Dogra of CARE Ratings. Although it becomes easier for CRAs to rate big corporate entities with known promoters, experienced management, good track record of revenue-earning, healthy cash flows and transparent accounting systems, it doesn’t mean that startups would be handed a raw deal. The challenge that a CRA faces in rating a startup arises from the lack of a track record, which is why CRAs focus on promoters and general management of the startup in addition to a few profitability parameters and projected cash flows. If as a startup you possess strong fundamentals in the form of a good business model, earning potential and efficient management, you would end up with a good credit score since your ability to earn is a good indicator of your ability to service credit. The ratings are divided into four broad categories, namely, A (AAA to A) - highest to adequate safety, B (BBB to B) - moderate to inadequate safety, C - substantial risk and D - default. The sub-categories in each of these broad categories take care of the deviations present in a specific category. The rating obtained by the said instrument stays throughout the life of the instrument until it expires or until some external or internal events bring about a change in the risks associated with the ratee.

Factors affecting your Credit Rating 1. Credit performance history 2. Past, current and projected ﬁnancial performance 3. Legal framework 4. Management 5. Resilience to market ﬂuctuations

A company with a good proﬁt margin, asset turnover and leverage will be easily rated in the A segment, provided it has a good credit history and clean accounting practices. Such a company would be seen by potential investors as good and reliable. Good proﬁt margins and turnover with a somewhat irregular credit history usually fetches a B rating. It will face slightly higher rates of interest for debt, or in the most extreme cases, refusal from a few credit lenders. A C rating poses a substantial risk to a lender. There are certain legal bodies, which lend money to such borrowers who are refused credit by mainstream credit institutions. Known as B-paper loans or subprime lending, they enable organizations with murky credit histories to borrow money at high rates of interest. The recent crash in the US credit market has proved how risky subprime lending can be to not only the subprime lenders and borrowers, but also to primary credit markets. The worst happens to those rated D. There aren’t many subprime lenders who are willing to touch a company rated D, not after the recent global credit crisis. So where does this company get its money from? Mostly from

Comfort in the cash ﬂows of a company should be so strong that there is no chance that it would be affected by the pressures that generally affect an organization. — D R DOGRA, CARE RATINGS

a big shot corporate loan shark. A loan shark is literally a shark! It’s an illegal lending agency and hence charges you rates of interest equaling 120-150%! In case you are unable to pay back on time, which is rather likely, you’ll be threatened and treated with violence by hired goons! Hence, it’s not only for the health of your company but also for your own health that you should keep a good credit score.

Getting a good rating For an established entity, getting a good rating may not be tough. However, it is tougher for startups to acquire a good rating since, more often than not, it has no steady finances to show. In the absence of a convincing business model or for unfavorable markets, its projected cash flows may not be very optimistic either. Some analysts believe that the ideal time for a startup to go for a rating is when it has at least a couple of healthy balance-sheets to show. However, others believe that the right time is any time before a startup starts looking for external funding. Irrespective of these varying opinions, all analysts agree on the importance of putting creditrating enhancement mechanisms in place. More than anything else, these mechanisms provide startups a way out, and vary from credit guarantees to cash flow prioritizations. Credit guarantees can be acquired in two ways. If your startup is a sister concern or subsidiary of a bigger organization with a good rating, you can acquire credit guarantee from the bigger concern. Third Party guarantees can be obtained from banks or financial institutions with whom you had dealings in the past or with whom you have a functional escrow account maintaining fixed deposits, thereby creating a credit-cushion. Credit guarantee, however, is a conditional mechanism and may not be applicable to a large number of startups. In such cases, cash flow prioritization can be done in a way that ensures that the ratee will be managing its risks and current and projected liabilities well over DAR E the next 5-10 years. FEBRUARY 2007 67

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policy/NGO

How to set up your NGO There are many legal forms that your NGO could take. How do you know which one is the best for you?

/Chhavi Tyagi

here are no real statistics on the number of NGOs in the country. The estimates vary widely, with a recent article putting the number at over a million. And less than half of these are legally registered. Before we go further, what exactly is an NGO? Short for Non Governmental Organization, NGO is not an easy term to define. Generally, they are taken to be not-for-profit organizations that work on one or many developmental issues. Way back in the ‘nineties, the World Bank tried to work out a comprehensive definition of the term (see box). The fact is that you do not have to register an NGO to do not-for-profit, developmental work. But being a legal entity helps, particularly when you want to get funding of some sort, or when you want to make the organization big, bring in professional management or when you want to work in certain sensitive areas.

Where do I register? There is more than one way in which you can register an NGO—four to be exact. You can register as a society, a trust, a cooperative or as a not-forproﬁt company. All these come under separate Acts—Bombay Public Trusts Act of 1950, The Societies Registration Act of 1860, the State Cooperative Societies Act or the Multi-state Cooperative Societies Act or the Companies Act of 1956, speciﬁcally Section 25 of the Companies Act. The process, per se, is quite similar under all the Acts; the difference being in where to get registered and other procedural details, like the minimum number of people 68 FEBRUARY 2008

What is an NGO? “The diversity of NGOs strains any simple deﬁnition. They include many groups and institutions that are entirely or largely independent of government and that have primarily humanitarian or cooperative rather than commercial objectives. They are private agencies in industrial countries that support international development; indigenous groups organized regionally or nationally; and membergroups in villages. NGOs include charitable and religious associations that mobilize private funds for development, distribute food and family planning services and promote community organization. They also include independent cooperatives, community associations, water-user societies, women’s groups and pastoral associations. Citizen groups that raise awareness and inﬂuence policy are also NGOs.” - World Bank

policy/NGO

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FEBRUARY 2008 69

DARE.CO.IN required, the documents required, jurisdiction under which registration is possible, mode of succession of management and such. Now the question is, which of these options should you go for, given your circumstances? Why should you choose, say, a society over a trust or a Setion-25 company? “There are merits and demerits attached to different Acts. It is difficult to pick any one and say that this is the best form to get an NGO registered. It all depends on the requirements of the person or the organization seeking registration”, says Rodney Ryder, a practicing lawyer and partner with FoxMandal Little. Choosing the right Act is not that difficult as there are certain characteristics of all the Acts that are specific to some circumstances.

Public or Charitable Trust A trust is the easiest to get started with as the minimum strength required to form a trust is just two—the author and the trustee. And the author could also be the trustee. So, if you want to start small or if you do not have many people who share your vision or objectives, then a trust is your best bet. For a trust to be formed, there has to be the author or the person at whose instance the trust comes into existence, a clear intention by the author to create a trust, a purpose for the trust, property belonging to the trust (usually bequeathed by the author as part of the trust deed, to start with) and beneﬁciaries of the trust. The ownership of the trust is divested by the author in favor of the beneﬁciary or the trustee. A trust is set up on a basis of a trust deed and cannot be dissolved unless it is provided for in the trust deed. Trusts also get tax exemptions on parts of their income. Charity is a matter of state jurisdiction. So, different states have different legislation in the form of trusts or endowment Acts to govern and regulate public charitable trusts. For example, the Bombay Public Trusts Act, 1950, governs all public charitable trusts in the state of Maharashtra. Other state 70 FEBRUARY 2008

policy/NGO acts are more or less similar to the Bombay Trusts Act. In case a state does not have a speciﬁc Act, then the general principles of the Bombay Public Trusts Act, 1950, apply. There are also private trusts governed by the Indian Trusts Act of 1882. But that is outside the scope of this discussion. Between a trust and a society, a trust offers more democracy and transparency than any other form of registration, but the fallback for a trust is the fact that all the trustees are equally empowered and one dissenting partner can be the cause of the trust to become non-productive.

There are merits and demerits attached to different Acts. It is difﬁcult to pick any one and say that this is the best form to get an NGO registered. It all depends on the requirements of the person or the organization seeking registration “When it comes to a trust, the Act empowers all the members, better known as trustees, equally. Though there is a head of the committee designated as the chairman, all the decisions, under this Act, are taken after discussion with all the trustees. This sometimes can end up in delays and the functioning gets cumbersome,” says Rodney Ryder. “A trust is like a partnership—one for all, all for one. Whereas a society is similar to sole proprietorship—one person makes all the decisions and the work is fast”, concludes Ryder. In terms of documentation, the main instrument for the registration of a trust is the trust deed, which sets out the aims and objectives of the trust, the number of trustees (a minimum of two) and other details about your trust. While registering, you would be

required to be present personally to submit these documents to the charity commissioner of your state.

Society A society requires a minimum of seven individuals to come together and may be wound up if three-fifths of the members of the general body so desire. Societies are registered under the Societies Registration Act. While this is an all-India Act, each state has its own variations. In Maharashtra and Gujarat, for example, all societies must also simultaneously be registered as trusts under the Bombay Public Trusts Act, 1950. As per the law “every society registered under the Societies Act may sue or be sued in the name of the president, chairman, or principal secretary, or trustees, as shall be determined by the rules and regulations of the society, and, in default of such determination, in the name of such person as shall be appointed by the governing body for the occasion.” However, “if a judgment shall be recovered against the person or officer named on behalf of the society, such judgment shall not be put in force against the property or against the body of such person or officer, but against the property of the society.” The documents required to register a society are a memorandum and an article of association, which need not be executed on a stamp paper. The memorandum of association should have the name of your society; the objectives; the names of all the trustees and other details of your committee members to which the management of its affairs is entrusted. All these documents should be submitted to the registrar of joint-stock companies of the state in which you are seeking registration.

Cooperative Society A cooperative society is registered when the intended beneﬁciaries are the members themselves. You have the choice of registering under the concerned State Cooperative Societies Act or the Multi-state Cooperative Societies Act of 2002. Increasingly, the latter

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policy/NGO is being preferred. A cooperative society can be registered under the Multi-state Act if “its main objects are to serve the interests of members in more than one state; and its bye-laws provide for social and economic betterment of its members through self-help and mutual aid in accordance with the cooperative principles”. Members can be individuals, other cooperatives registered under the act or a combination of the two. It has to be registered with the Central Registrar of Cooperatives and have an elected board of directors and a CEO who is a full-time employee. The application for registration has to be signed by at least fifty persons from each of the states concerned. Such a cooperative society can be dissolved if “any number, not less than three-fifths of the members of any society, may determine that it shall be dissolved.” Multi-state cooperatives are required to invest or deposit funds in cooperative banks, securities specified in the Indian Trusts Act, 1882, etc., and are restricted from making contributions “to an institution that has an object of furtherance of the interest of a political party.” Multi-State cooperative society with limited liability can be established “by having the liability of its members limited by its bye-laws to the amount, if any, unpaid on the shares held by them or to such amount as they may, respectively, thereby undertake to contribute to the assets of the society, in the event of its being wound up.”

Not-for-proﬁt Company An NGO can also be registered as a company under the Indian Companies Act. Section 25 of the Indian Companies Act, 1956 provides for the registration of the NGOs. A Section-25 company is identical to an ordinary company in all respects except that it is not established for proﬁt and commercial gain. Section 25 of the Companies Act states that if a company “is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful ob-

“Do ask your lawyer or the chartered accountant to make the objective clause as broad as possible so that you do not face any problem if and when you feel like expanding your area of work. Keeping the objective clause broad gives you more freedom to work.” — RODNEY RYDER PARTNER FOXMANDAL LITTLE ject, and intends to apply its proﬁts, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members” then the government may allow it to drop the word “limited” or “private limited” from its name. A minimum of three promoters are required to register a (Section 25) company. Winding up a company is a fairly time consuming and laborious process. A Section-25 company perhaps offers the best liability protection to the founders and owners. An NGO under the Companies Act for all practical purposes is a company, a distinct legal entity and will be sued as such.

The shareholders will not be liable to action against the company. Traditionally, there have been very few NGOs registered under the Companies Act. It has always been more of a choice between a trust and a society, irrespective of the size of the organization. Dr Ravi Chandra, who recently set up a small organization to carry out developmental activities amongst the under privileged in rural Bihar chose the trust route—the Bihar Development Trust. However, there are some changes happening. Laura Parkin Executive Director of the National Entrepreneur Network (NEN) says that NEN is being registered as a not for proﬁt under the companies act. “The cost of compliance of running a Section 25 is higher than it would be for a trust or society. Despite that, increasingly NGOs, particularly those with international ties, are electing to go the Section 25 route,” says Parkin. According to Parkin, this makes it easier to bring in professional management akin to what companies do, and keep them separate from the share holders. A Section-25 company, like any other company, requires a memorandum and an article of association to register. The memorandum and article should have the same information required to register a society. The fee for registering an NGOs is very nominal under all the Acts; it varies from Rs 3 to Rs 50. But there is more to it, and like with many other things you can make the papers move faster. The easiest way to get the paperwork done is to get an experienced CA or lawyer to do the drafting and even to get the registration done.

Funding and registration NGOs, registered under any of the Acts, should have an experience of two years to be eligible for foreign aid. However, you can apply for government aid from the day of receiving registration. Before applying for foreign funds, you should have FCRA (Foreign Contribution Regulation Act) registration, which falls under the purview of Home Ministry and an FCRA DAR E bank account. FEBRUARY 2008 71

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case/INSEAD

Indus World School - Contd. from Pg 21 By February, 2008 Indus World Schools had successfully opened a third campus in Noida while filling the original two. Three more schools were due to open by June in Amritsar, Raipur and Mandi. “We’re consciously trying to make the concept the most viable by looking at class B and class C cities where land and construction costs are significantly lower than in Mumbai or Delhi,” explains Satya. “The cost of land is 33% of the price in the big ten cities, and we are actively researching 25 more such locations.” In its first two years, Indus World School received over 200 applications from prospective franchisees. The Hyderabad campus was turned over to a franchisee, who took control of the land and building, while the school in Mandi was built from the start by a franchisee, who provided the entire investment and working capital. “We think that making things work for franchisees is one of our core competences, so we are going slow, ensuring that the things are in place critical to making a franchisee system work,” Satya says. By 2010, he projected the system would include eight schools run by Nalanda and ten by carefully selected franchisees. “Their attitude toward education and patience concerning returns are vital,” he says. “It is not possible to open a school and get returns the next quarter.” 72

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The system enrolled 1250 students in 2008; on the most mature campus in Hyderabad, the ratio of applications to admissions was 4:1. “We’re not expanding as fast as the market wants, and that will be a perpetual challenge in India, numbers being what they are,” says Satya. The Nalanda Foundation’s head projected that the system would break even by April, 2010 and start showing signiﬁcant proﬁts in 2011.

School facilities

As the system expanded, the founders were able to meet their pricing targets but realized that some locations would charge different tuition amounts than others. “Most cities will hover around the price point where we started, 3000-4000 rupees per month, but I would not rule out charging 25% less in some locations and up to 6000 rupees per month in others,” Satya comments. In Raipur, for example, the best reference point, the Delhi Public School,

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case/INSEAD

charged 80,000 rupees per year in tuition, suggesting that there was considerable room for IWS to experiment in order to ﬁnd the right price point. Fees paid by parents still accounted for the vast majority of the system’s revenues while IWS was reaching toward a critical mass. “The business model will work even if there are no other revenue streams, but that’s a poor model to emulate—it’s just not good enough,” explains Satya. “We think at

Parent teachers meeting

least 25% of revenues should be generated by ancillary offers and that looks quite possible as we go along. In the new cities where we are launching, we are doing market seeding to generate goodwill. Those efforts don’t generate revenues yet but the positive word of mouth they create lay the foundation for strong ancillary revenues when the school is established.” The most important such initiative was called “Math for Mothers.” Origi-

nally designed to enhance a parent’s confidence in mentoring children at home, the original course of 90 minutes per weekend for 13 weeks was growing into a year-long diploma program for parents. “Some phenomenally talented mothers work at home, and when we get to a couple of hundred graduates, those who do very well in the program will be enrolled to become community ambassadors for some of our products, so they can be entrepreneurs in they way they want to,” Satya says. Nalanda’s chairman and chief mentor says the biggest learning his team has absorbed so far is that the franchising model works. “We thought it would, but there was little precedent in the school market,” he comments. “We want a strong return on investment, so capital use must be very efficient, which it is when you work with business partners.” Additionally, the team has learned that a school can attract outstanding talent from outside the field of education. “Our IIT/IIM connection made a difference because it has a deep, psychologically positive meaning in India,” he comments. “A good, heart-warming lesson is that when you put the word out that this is the kind of school we are doing and this is the kind of people who are leading the team, talented people want to DAR E join in this cause.” FEBRUARY 2008 73

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strategy/IT

IT Equipment: Lease or buy? Arriving at a decision on this will not only help in using capital wisely, but also eliminate wastage of time and effort, and boost overall productivity /Binesh Kutty

ypically in a company 3-4% of the total annual expenditure is done on IT equipment. For any company, startup or well-established, where the IT investments are not clearly defined face this question time and again – Buy all required IT equipment or to take the lease route? Deciding on favor of either, without really understanding the benefits and problems, will definitely affect the company’s monies and overall performance. So which option is the best suited for you, and when? This piece will clear just that.

Why should you consider leasing? The benefits of leasing equipment are manifold. Many companies look at matching their cost benefits, so that they would have smoother inflowoutflow in terms of benefits. Besides this, many companies, especially the 74

FEBRUARY 2007

ones in growth phase are quite skeptical about purchased equipment and technology going obsolete. Since most of them not able assess infrastructure

"Lease or buy decision has a very simple rationale. Any asset that appreciates should be purchased, and those that depreciate call for leasing, such that it does not carry the risk unto the company’s balance sheet." SRINIVAS CHAKRAVARTHY, COUNTRY MANAGER, IBM GLOBAL FINANCE

needs and be sure about its scalability, they would anytime prefer someone else to bear the risk. This is when the lease route comes out as a blessing. Then, when a company has a large population of small assets like PCs, notebooks, and servers – many are worried about the disposal of these assets. Most of the states in India does not allow crushing, or land ﬁlling of e-waste. This is one other reason why companies prefer leasing, because at the end of life of the equipment, it can be given back to the leasers, who can ﬁgure out what can be done with it. When going for an outright buy, there are certain things, which even though might seem negligible, matters a lot in the long run. Owning calls for maintenance, logistics, consumables, and other such activities and expenditure which is not directly related to the core business. Going for a lease takes

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strategy/IT away the time and effort required in actually owning the equipment, thereby not only effectively using the capital, but also boost overall productivity.

Cash flow issues – CAPEX vs. OPEX This issue is rather complicated. There is a possibility that it could be an operating expenditure or a capital expenditure based upon the accounting policy of the company, which varies from company to company. Speaking on the capital and operating expenditure implications of going for lease, Srinivas Chakravarthy, Country Manager, IBM Global Finance explains, “Even if we offer an operating expenditure model of lease to them, and even still it could be a capital expenditure for them.” According to him, the accounting policy of a company is only one of the parameters. There are other factors like who is carrying the technology risk. For instance, a notebook might be taken on lease on market value on an effectual interest, which means that the cost would be substantially lower than what would have been the case if bought from the market. In case of going for such a technology lease, it could be an asset in the company’s book of accounts, but still the risk does not exist in the accounting books. “One can not structure a lease to meet the accounting guideline,” adds Chakravarthy, “You need to do a lease to figure out whether it is a capital lease or operating lease. It is for each company to take a call on this, individually according to their needs.” The common market perception is apparently that going for a lease means using up the operating expenditure, whereas if an outright purchase is made it becomes a capital expenditure. While that is the perception, as a thumb rule lease cannot be classified as capital expenditure or operating expenditure. Besides this, there are times when because of unforeseen circumstances IT infrastructure calls for an immediate overhaul. Shankar Das (name changed on request), IT strategy manager of a 100 crore company, who wished to remain anonymous told us more about

one such instance. When Das took over IT of his company, the mail server did not have a firewall, and it crashed one fine day. “Our mail server was in the pits, and we could not afford a long downtime, we needed another server immediately for getting the firewall up and running. Immediate funding was required,” Das said, “Under the circumstance, we did not have enough funds remaining in the capex budget for the year, and getting the mail server up as soon as possible was also very crucial, so the best option for us was to go for lease.” It has been around a year now since his company’s leased server is handling mails. Das believes

"If you calculate the Total cost of Ownership of the lease model, in the long run the customer does beneﬁt as he saves all the time he has to invest in the asset procurement, maintenance, logistics, and consumables." HENRY ELLIS, DIRECTOR BLACK MAGIC TONERS that converting the requirement into an operating expenditure, instead of a capital expenditure, amortization in the form of lease, helped his company keep the cash ﬂow intact.

Some elements to help you decide IT equipment is used for enhancing the productivity of the company. The simple logic is investing the funds of a company in things where the return on investment is high. IT equipment, by nature, tends to be an element, which depreciates very fast, as compared to other assets. So, the ultimate question is should you buy it? Chakravarthy of IBM Global Finance says, “It is a simple rationale. Any asset that appreciates should be purchased, and those

that depreciate call for leasing. Such that it does not carry the risk unto the company’s balance sheet.” At times on a need-to basis, lease turns out to be the best route to take. Like in case of the problem that Das faced, he opted for leasing the server because it would have taken more than 30 days to process funding and acquire the server. For him, time was very crucial, as the entire company’s mailing depending on that. Because he chose the lease route, he not only amortized the expense as an operating cost, he also got the job done in minimal time and productivity damage. On a need-to basis, one might even have a requirement of specialized equipment for the period of a project; this too is a perfect time to look at lease as an option. One other crucial element is setting up term lengths to not extend past the useful life of the equipment. For instance, it would not make sense to lease 1,000 PCs for three years, when its known that it would depreciate signiﬁcantly and could also face technology obsolesce, in say two years.

Direct Vendor lease vs. Third party lease Once you have decided on taking the lease route, you will ﬁnd that there are direct vendors such as IBM as well as third-party leasers like First Leasing. How to choose between the both is purely a decision based upon what suits you best. Between them, the competing factors could be technology readiness, rates offered, etc. “We are a technology leasing company, and the way that we can take risks involved, third party vendors just cannot,” defends Chakravarthy, “For instance, when the assets come back to us upon end of life or technology absolution, we know what to do with it.” While the other crucial factor i.e. the offered rate is something that is totally dependant on the kind of money a company is willing to pay up for the equipment it needs. What are the leasing prices from third-party vendors like? It depends from vendor to vendor, and negotiations for the best price offering. Typically, desktops should be in the range FEBRUARY 2007 75

DARE.CO.IN of Rs 3,000 per month, notebooks at Rs 6,000 per month, printers around Rs 3000 per month and servers at around Rs 2 Lac p.a. However, it is advisable to gauge the time period and you want to rent the equipment for.

What the vendors have to offer? There is an array of hardware, software and technology that can be leased today. Direct vendors like IBM and third party vendors such as Black Magic, Team Computer, Computer Junction, Muskaan Computer Solutions, etc who specialize in leasing specific set of equipment such as Desktop computers, notebooks, printers, servers, and more. Besides this bandwidth too comes on lease, and there are many players out there in the likes of Airtel, Reliance, Spectranet, etc. IBM is the one of the forerunners in the technology lease business. IBM does leasing for all kinds of IT equipment i.e. hardware, software, services, to their qualified customers, based on the risk assessment. Says Chakravarthy of IBM; “One of the key factors is to offer technology protection to the customer, which means he can upgrade the technology assets when the one he opted for originally becomes outdated.” He added, owning equipment also means managing it, and managing means need of lot of technical resources that are either not available easily or simply not required by nonIT companies. Besides leasing options, there are managed services that are at offer that a small customer can opt for like a managed or shared data centers. IBM has witnessed Indian companies slowly embracing the lease model in the last three years. APC-MGE does offer flexible leasing options in association with third parties. These offers are primarily available for customers to deploy a pre-engineered data center in any start-up or working environment to ensure affordability, manageability and flexibility for the customers. Subodh Tagare, Marketing Manager, APC MGE emphasized on the benefits of leasing too. “Leasing option helps customers to keep technologies cur76 FEBRUARY 2007

strategy/IT rent, reduce costs, minimize risk, and preserve their ability to make ﬂexible equipment decisions throughout the entire technology life cycle,” he said. Black Magic Toners who offers Managed Printing Services (MPS) to about 250 customers and has more than 1000 printer installations of MPS across the country, has seen an increase in the number of companies looking at this model and seeing its long term beneﬁts. Speaking on what type of businesses should go for a leased printer, Henry Ellis, Director at Black Magic said, “The leasing model could be used for any kind of business, it will be appropriate to say that if your printing needs are high and consistent (e.g. anywhere from 5000 pages and

"Leasing option helps customers to keep technologies current, reduce costs, minimize risk, and preserve their ability to make flexible equipment decisions throughout the entire technology life cycle." — SUBODH TAGARE MARKETING MANAGER, APC MGE above every month) then this model is the right choice. Also, this is apt for Any Customer who wants to outsource printing solutions (i.e. PPO Print Process Outsourcing).” Leased Printers come in different packages such as billing on total number of copies printed, a fixed sum on a monthly basis, and so on. When we did the math, we realized that a customer ends up paying much more than sum of the cost of the printer, toner, and AMC (annual maintenance contract). Explaining the rationale for going in on such deals, Ellis mentioned, “If you calculate the Total cost of Ownership of this model in the long run the customer does benefit as he saves all the time he has to invest in

the asset procurement, maintenance, logistics, and consumables. So looking at all this it is any day better for the customer whose laser printing needs are high and consistent, to go in for the lease model.” Now that besides justifying the monies spent, also allows the company focus on his core business activity, instead of coordinating and chasing multiple vendors for a printer. Besides hardware, there are leasing options available for software as well. Starting from operating system to high-end applications. Microsoft offers its Windows operating system on a subscription-based model in which the buyer has the flexibility to pay in a span of three years, instead of making huge upfront payments. How much does one end up paying more? It really depends upon the number of computers in the company, the tenure of the subscription, and so on. Typically, this should be somewhere in the 120-130% range. Besides the benefit of getting to pay in installments, the company also gets a handful of free updating and upgrading options. Other than this, there is a variety of Customer Relation Management (CRM) Software that companies are opting to lease from Application Service Providers (ASPs) like Sage and Salesforce.com. Very recently Microsoft announced the launch of Microsoft Office 2007 Prepaid Edition in India. Explaining how the prepaid edition works, Sanjay Manchanda, Director, Microsoft Business Division said, “The prepaid edition is bundled with a new PC through our system builders. This Office Ready PC comes with a six months trial period. After that period the customer can decide whether they want to renew their subscription.” He added that the system of EMI has been a successful concept in India, and this lease option has been worked out on the same model. The starter pack is available at Rs 1,499 after which the customer has to pay Rs 1,299 for a renewal kit that lasts for three months. In the instance that a customer does not want to renew their subscription, they can still view and print files but not modify existing files DAR E or create and save new ones.

About TiE The Indus Entrepreneurs (TiE) is a global not-for-proﬁt organization focused on promoting entrepreneurship. TiE helps budding entrepreneurs through advice, guidance and assistance from successful & experienced entrepreneurs and professionals. Our greatest strength is our network through 48 chapters in 11 countries that consists of many participants in the entrepreneurial ecosystem successful & experienced as well as budding entrepreneurs, venture capital ﬁrms, angel investors, service providers, etc. We make continuous efforts to interconnect this network in a way that allows us to deliver real value to all our constituents. TiE activities are conducted around three core elements – Mentoring, Networking and Education.

Highlights • 1,600 experienced entrepreneurs and business executives as charter members • 12,000 aspiring entrepreneurs and professionals as members • 48 chapters in 11 countries • Over 500 Sponsors worldwide • Brand name Sponsors-Fortune 500 corporations and top Venture Capital Firms • Non-political and non-religious with a singular focus on wealth creation through entrepreneurship • Encouraging cross border trade and free enterprise policies internationally • Inspiring and educating budding entrepreneurs • Providing role models and one-on-one mentorship • Holding regular workshops and networking meetings • More than 500 events with over 70,000 attendees worldwide

TiE Membership Form Name :___________________________________ Designation : ____________________________________________________ Company : ________________________________________________________________________________________________ Contact Address : __________________________________________________________________________________________ Membership Type : _________________________________________________________________________________________ (Charter/Corporate/Associate) Telephone (O) : ____________________________ (R) : ___________________________ Mob: ___________________________ Fax : ____________________________________ E-mail : _________________________ E-mail (Personal) : ________________ URL : ____________________________________________________________________ For enrolling as a member, please enclose a brief proﬁle along with a cheques of Rs. 3371/- in favour of ”The Indus Entrepreneurs” payable in Delhi. Mail To: Puja Taneja, TiE, New Delhi C-25, 2nd Floor, Sector-8, Phase-1, NOIDA - 201 301, Tel: 0120-4243322, Fax: 0120-4243311, E-mail: info@tienewdelhi.org

TiE New Delhi (www.tienewdelhi.org) One of the largest and most active chapters worldwide â Fosters the spirit of entrepreneurship through over 30 events each year including mentoring clinics, seminars, workshops, round tables and networking evenings. â Mentoring sessions provide mentoring and guidance to budding and aspiring entrepreneurs in order to help them start and scale-up their ventures. â Engages policy makers and bridges the gap in the entrepreneurial Eco system . â Maintains excellent links with organizations focused on the small and medium enterprise segment. These organizations include: NASSCOM, STPI, MAIT, IIT, FICCI, NAUKRI.COM, YI (CII), IIM & IIT ALUMNI ASSOCIATIONS among many others. â Charter members include thought leaders and captains of industry from many sectors including: IT, Telecom, Biotech, Media, Financial, Legal institutions, Education & Training, Tourism & Hospitality among many others. â Active in the area of social entrepreneurship. (www.tienewdelhi.org/ social.htm) â Maintains an important legacy of mentoring and nurturing entrepreneurs through the Entrepreneurial Nurturing Program (www.tienewdelhi.org/enp.htm) â Special Interest Group covering the entrepreneurial opportunity in the Education & Training sector. â Special online 24X7 Networking platform for members to explore business & networking opportunities (www.tieconnect.org) â A vibrant & growing platform with over 100 charter & 800 associate members.

TiE New Delhi Membership Categories Charter Members are accomplished business people & professionals with a willingness to help budding entrepreneurs. This category of membership is by invitation only. These members derive satisfaction by helping budding entrepreneurs & networking with other Charter Members. Annual Dues Rs 42,135 (37,500 + 12.36 % service tax) General/Associate Members include all those with an entrepreneurial spirit. Some of the beneﬁts of this category of membership include the many workshops, seminars and mentoring sessions held throughout the year. Members also have an excellent opportunity to network with peers in the global business eco-system. All members have access to mentoring. Mentoring is a key value proposition of TiE and is a one-on-one interaction between a senior entrepreneur or professional and an entrepreneur who needs guidance from someone who has an educated view on the subject or who has more experience in the situation under discussion. Annual Dues Rs 3,371 (3,000 + 12.36 % service tax) Corporate Members are organizations with a keen interest in furthering the growth of entrepreneurship in India Annual Dues Rs 42,135 (37,500 + 12.36 % service tax)

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/blogs

Why small is not beautiful in India Small enterprises are still craving for credit from banks and ﬁnancial institutions /Paranjoy Guha Thakurta

hat most enterprises in India are small (rather, one should say very small) is a fact that cannot be denied. Despite a host of directives put out by government authorities from time to time, these small enterprises – often described in derogatory terms as momand-pop businesses – are starved of credit from banks and financial institutions. Denied access to finance, such enterprises are unable to expand their operations and create new job opportunities. It has been recently suggested that a separate fund be created by the Union government to address the credit requirements of small enterprises in the unorganized sector. In 2007, there were an estimated 58 million small enterprises in the country, with a total workforce of 104 million. In other words, at least one out of every ten Indians is employed by a small enterprise. Most of these enterprises (94 per cent, to be precise) are in the non-farm sector and each enterprise has an investment of not more than Rs 500,000. What is especially revealing is that these 58 million enterprises received only 2 per cent of the total quantum of credit disbursed by scheduled commercial banks. If one looks at the lowest segment of the unorganized sector, namely the cottage industries run by artisans, the proportion is even lower at a meager 0.6 per cent of the gross bank credit of banks. If the investment limit in plant and machinery is increased from Rs 500,000 lakh to Rs 2.5 million – the official definition of a ‘micro’ enterprise – such enterprises put together received 4 per cent of gross bank credit and a similar percentage of micro enterprises had access to any kind of institutional credit. The statistics cited are contained in two reports prepared by the National Commission for Enterprises in the Unorganized Sector that were submitted to Prime Minister Manmohan Singh on November 5. What is significant is that the Commission found that almost the entire credit that has gone to small and micro enterprises has been on account of government promoted programmes. It is fashionable in certain circles to deride schemes like the Prime Minister’s Rozgar Yojana for Educated Unemployed Youth, the Swarnajayanti Gram Swarozgar Yojana and the National Rural Employment Guarantee Programme and describe these as progammes that throw away taxpay-

ers’ money with little or no tangible beneﬁts accruing to the poor and the underprivileged. Yet, the Commission found that had it not been for such ‘populist’ programmes, even the little credit that went to small enterprises would not have been disbursed. And without credit, these enterprises can hardly be expected to support initiatives for marketing and technology development. The reason why the Commission has suggested that a new and separate National Fund for the Unorganized Sector (NAFUS) be instituted is on account of the poor track record of the two existing development banks in the country at present, that is, the National Bank for Agriculture and Rural Development (NABARD) under the Reserve Bank of India (RBI) and the Small Industries’ Bank of India (SIDBI). It has been contended that both NABARD and SIDBI have “not been able to provide either adequate credit or promotional services to non-farm micro enterprises,” particularly those with investments of less than Rs 500,000 each. Although scheduled commercial banks and regional rural banks are meant to advance credit to unorganized enterprises on a ‘priority’ basis, the reality is just the opposite. Disbursing credit to enterprises in the unorganized sector is accorded the lowest priority by most banks and RRBs, which brazenly ﬂout RBI guidelines that state that loans up to Rs 500,000 can be sanctioned and disbursed without collateral. In actual practice, however, barely 26 per cent of loans to this sector have been advanced without collateral. Currently, micro enterprises pay an interest rate that is 2 per cent below the prime lending rate on small loans (below Rs 200,000) and 16 per cent on loans above this amount. On the other hand, large enterprises in the organized sector pay annual interest rates varying between 6 per cent and 7 per cent on much larger loans. Clearly, the prevailing system discriminates against small enterprises and contributes to rendering them uncompetitive. Why is it in the interest of the country as a whole to ensure that small and micro enterprises not just survive but prosper as well, thereby creating jobs? The answer is obvious. Unorganized sector enterprises, covering both the farm sector (other than in cultivation and plantations) as well as non-farm activities, account for as much as 30 per cent of India’s gross domestic product (GDP), and that is why we can ignore the plight of this sector only at the expense of the DAR E nation’s economic development. The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media – print, radio, television, internet and documentary cinema. FEBRUARY 2008 79

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opportunity/pets

Pet Grooming – A Business of Rs 300 Crore A fairly new concept in India with only a handful of player, snipping and clipping pooches and kitties for that ‘oh so cute’ look is a big business in the making /Shilpi Kumar

“E

very dog has his day,” is a popular saying, but a pooch in the hands of the likes of Paris Hilton, Britney Spears, or even our very own Bipasha Basu, is one lucky pup! Adorned in designer clothes and shoes, sprayed with expensive perfume, and with their hair trimmed and styled, these four-legged creatures are living a much-coveted

dream- a dream that their owners are willing to fulﬁll with pleasure! But celebrities are not the only ones availing the services of a pet groomer. People from all walks of life now own exotic breeds and are just as enthusiastic about taking their pets through that heavenly experience. We l c o m e to th e b u s i n e s s o f pet grooming!

DARE/estimates AS IN THE YEAR 2007 Total number of domestic dogs in India

22 lakh

Average customer base of each groomer

2,500 pets

Average spend per customer, per visit

Rs 1,000

Average number of visits per customer per month

Annual revenue

Rs 6 crore

Total Market Size

Rs 132 crore

Projected growth every year

26 %

2010 PROJECTION Estimated total of domestic dogs Average customer base of each groomer Average spend per customer, per visit Average number of visits per customer per month Annual revenue Total Market Size

80 FEBRUARY 2008

28 lakh 3,000 pets Rs 1,500 2 Rs 11 crore Rs 299 crores

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opportunity/pets DARE/who are doing it?

An overview of the pet-grooming business Taking pets out to a professional pet-grooming salon has been extremely popular in the US where you can find such parlors in almost all cities. The salons offer a wide range of services including shampooing, blow drying, hair cutting and styling, nail trimming, ear cleaning, massaging and perfuming with the average price ranging anywhere between $30 and $50. Depending on the breed size, the coat condition, the length and temperament of the pet, the bill can even inflate up to $150. But in India “pet grooming is still a fairly new concept with only about four full-fledged pet grooming salons in New Delhi, Mumbai and Bangalore that specialize primarily in dog grooming,” says Preeti Kumar, who, along with her husband Sanjiv run Scooby Scrub, a pet grooming salon in New Delhi. In the US, both dogs and cats get to pay regular visits to salons, while in India it is mostly restricted to dogs, as cats lose out because of various superstitions associated with them. “In our parlor, 80% of the customers come to groom their dogs, although we do get customer’s bringing in cats, guinea pigs, hamsters and birds, every once in a while,” adds Preeti.

Opportunities beyond pet-grooming Apart from setting up pet groom-

Scooby Scrub, New Delhi

TailWaggers, Mumbai

Fuzzy Wuzzy, Bangalore

Customer proﬁle: Class no bar Film stars, Industrialists, Housewives, Teenagers, etc Average grooming assignments (annually): 3,000 pets Services Offered: Shampoo, hair & skin conditioning, teeth brushing, nail cleaning & clipping, ear cleaning, blow drying & perfuming, and more Special Packages: Aromatherapy oil massages and rinses, anti-fungal skin treatments, tick & ﬂea treatments, hair coloring, detangling, etc

Another opportunity lies in starting lodging services for pets, as people look for a clean, safe and loving environment for their pets, when they go out on vacations etc. Running a doorto-door pet grooming service could also be a good option, although many pet groomers claim that grooming a pet in their own familiar territory can be quite challenging.

How big a market is this? The pet industry in India is estimated to have a revenue potential of Rs 350 crore, out of which Rs 150 crore is attributed to the medical, grooming and immunization segment. According to the Research and Consultancy Enterprise (RACE),

ing parlors, there are many off shoots in this segment that can be explored. Setting up pet grooming training schools is one such opportunity. Such a school could have the possibility of attracting not only potential professional pet groomers, but also other pet lovers and owners who want to know how they can keep their pets healthy and well groomed.

On an average we only groom about three pets every day, though there is a demand to take in more. Pets don’t understand as humans do and it is difﬁcult to make them sit quietly. The entire process requires a lot of concentration and is time consuming. — SANJIV & PREETI KUMAR OWNERS, SCOOBY SCRUB FEBRUARY 2008 81

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With a growing number of pet loving families, there is a tremendous scope in this ﬁeld. However, you cannot treat pet grooming as just another business. A genuine love for animals and patience is required to thrive. — YASHODHARA HEMCHANDRA OWNER, FUZZY WUZZY PET GROOMING PARLOR 82

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the consulting arm of the Institute of Management Technology (IMT) in Ghaziabad, there are about 2.2 million domestic dogs in Indian households, with the population increasing by around 26% a year. According to DARE estimates, the total market size of the

pet grooming industry in 2007 was Rs 132 crore. This is expected to grow to Rs 299 crore by 2010.

Do I need to get certiﬁed? Not really. A formal training or certiﬁcation is not as important as having

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passion for pets. “All you need to be is a genuine animal lover with lots of patience and dedication. Certification helps you learn the correct method but you have to be an artist to visualize and create an anatomically correct dog, close to the standards as possible,” says Yashodhara Hemchandra, who along with her two daughters – Rishya and Radhiya – run the Fuzzy Wuzzy Pet Grooming Parlor in Bangalore. Yashodhara has been dealing with pets for almost three decades now. She claims that her kennel – Yashbans – which she started much before taking to pet grooming, is one of the most reputed in the country. Her experience in dealing with dogs of diverse pedigree made her task easy when she opened the pet-grooming parlor. “You need more of a heart, than a business mind to be in this profession and it really does not matter what your qualifications are. I was a vet assistant and also worked with an NGO In Defense of Animals (IDA), before I opened my salon in 2001. I did do a vet assistance correspondence course from America, but majority of what I learnt was through trial and error. I constantly read books and browse the net to keep myself abreast of industry trends,” says Gauri of TailWaggers Salon, based in Mumbai. Preeti of Scooby Scrub was a teacher and her husband was a banker before they decided to give in to their passion for pets and went to an institute in Bangkok to get formal training. The 8-month training was an hour session everyday, but the couple worked long hours to finish the training in three months.

How do I develop a good clientele? Besides following the traditional method of advertising, one should keep in close contact with local vets and pet

shop owners, as they play a signiﬁcant role in referring their customers to pet grooming salons. “We share a symbiotic relationship with veterinarians where we refer clients to them if they are in need of clinical treatments and they refer the clients to us for regular grooming and hygiene,” says Gauri. Preeti of Scooby Scrub Parlor got a majority of her customers from her pet food and accessories shop – Petbytes. She now caters to around 4,000 customers, and the ﬁgure is rising sharply. Yashodhara from Fuzzy Wuzzy Parlor also claims that her clientele is growing everyday because of word of mouth. “It started with people seeing my well groomed and gleaming dogs at the dog shows, but now my business is growing only because of the satisfaction of my clients and their recommendations to their family and friends,” she says.

What challenges will I face? Getting equipment for pet grooming can be a hurdle. Although there are various brands here like Dabur and Ayur dealing in pet products, pet-grooming equipment is not as readily available. There is a plethora of equipment, products, and accessories that are required to set up a pet-grooming parlor. These range from cages, clippers, dryers, tables, tubs, blades, brushes, combs, scissors, dental, ear and nail care products, sprays, shampoos, conditioners, detanglers, bandanas, bows, collars etc. However, these are not easily available in India and need to be imported. Imported scissors, dryers and special grooming blades are expensive. One blade costs around Rs 6,000 and wears out in about ten uses. Yashodhara says “I use the most reputed, and ﬁnest products which I person-

Although, we do get a good share of Bollywood clientele, from Salman Khan, Preity Zinta to Fardeen Khan and Esha Deol, our customers come from all walks of life, ranging from the elite to the middle class. People are now beginning to realize that grooming is a necessity and not a luxury. — GAURI KESKAR & URMILA DHABOLKAR, OWNERS, TAILWAGGERS SALON ally bring with me during my various trips abroad for dog shows and grooming exhibitions.” However, customers don’t realize how much money goes into equipment, and often question the high cost of grooming. This gives rise to another challenge, which is justifying the grooming costs to the clients. Because some ﬁnd the pricing ‘absurd’, they tend to shy away from such parlors or go for a kind of grooming service that comes cheap rather than what is apt for their pet. People are not ready to spend as much on their pets, and hence making them realize the importance of their pet’s DAR E hygiene is a big challenge. FEBRUARY 2008 83

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/investor of the month

Srini Vudayagiri Lightspeed Venture Partners

ompared to the dot-com boom days, has there been a signiďŹ cant change in the way the VC markets are operating? There have been some critical changes in the market in the last seven-eight years. Take the Internet market in India, there has been a huge leap in the number of users. Today, we have anywhere between 40-45 million users going to 100 million users in the next four years. The domestic market in absolute numbers is interesting, while as a percentage of population it is still small. Talking in general about the entrepreneur community, one can say that there is a strong sense of learning from the past experiences. Are there any speciďŹ c changes in the type of entrepreneurs out in the market, between then and now? We have seen some good trends there again. One such trend is Indians returning from other countries. The trickle has become at least a small stream now if not a river. Every year a few hundred thousand Indians are coming back. These people have a soft

FEBRUARY 2008

Srini Vudayagiri is currently Managing Director at Lightspeed Venture Partners. Prior to this, he was Director at Thomas Weisel International, and before that, Associate Director, South Asia of Intel Capital. Thus Sriniâ&#x20AC;&#x2122;s Venture interests go back a long way to before the dotcom boom and the bust. Srini has worked with boards and senior management in Subex Azure, Nipuna, Netkraft, Career Launcher, First Leasing, Lanco Kondapalli Powerand BPL Cellular amongst a host of other companies.

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/investor of the month landing in India. Let us say that the person was working in a large multinational company in Europe or United States. All of them have had the opportunity to transit into the Indian operations of the company. Therefore, this person was a part of say IBM in United States but he can now become a part of IBM in India, and because he is an Indian, he already has an understanding of the culture. He then works for about four to five years in an exciting environment. The fact that he is doing well financially combined with the experience that he brings from abroad gives him the flexibility to think out of the box and become an entrepreneur. One other change that we have seen is the fact that salaries in India are going high, and going up every year. People who have been in middle or top management in the last 4-5 years have been able to have good amount of savings, maintaining their lifestyle and even after upping their lifestyle. These factors are giving them the flexibility of becoming an entrepreneur. Added is the fact that there is this huge demand for middle and top management talent pool. Entrepreneurs do realize that even if things are not working out for them, there is still a significant opportunity awaiting him in the corporate world because of his previous work experience. Some time ago, it used to be difficult for this person to go back into the corporate world if he did not succeed as an entrepreneur. The chances of being accepted back are higher, so the risk of entrepreneurship goes down significantly.

markets. Having said that, it is up to the individual fund in terms of what calls do they want to take. I do understand that for some of the very specific funds, such as a predominantly Internet focused fund, the timeline is very crucial. When such funds have a time of just one year to go through the investment phase and have already run through four years into the fund cycle, they are compelled to make some calls which valuation wise might be higher than what otherwise one would be comfortable with. Similarly, India might be a missing link in certain funders’ portfolio. I think it is up to the individual fund to maintain discipline – 'If I think that a particular segment of the market in India is overvalued; do I have the investment discipline to say that I will not do this investment at this valuation.' In our case, we have a common pool of capital. It is not an India specific fund. It is a global fund which has the flexibility to invest all over the world, specifically in four geographies – India, China, Israel and US. If we see that any particular geography is overheated, we could look at the flexibility of investing somewhere else, rather than taking a sub-optimal decision of putting money in one place or one sector. How would you compare the Indian entrepreneurial ecosystem with China and Israel? I think both the entrepreneurial as well as the investment ecosystems are more evolved in Israel, as compared to India – at least in early stage investment, because VC funding

investor of the month In a potential investment, what do you look for? If we were to draw a list of top ten things that we look for in a pitch, the top eight will be the team itself. What is the credibility, passion, experience, expertise, vision and commitment that the team has? All of us investors believe that you can make a not so good idea work with a good team, than the other way around. So, team is the one critical thing that we look for. Nineth would be how large is the opportunity in the Target Addressable Market (TAM)? In this, one critical factor is whether the entrepreneur is creating a market, or an existing pain point. If it is an existing pain point, then how differently is the offering placed – based on either packaging, pricing, etc. The last factor would obviously be their execution capability to take the business to a critical TAM. Even if the TAM is large, he needs to become a significant player within that market. There are some who feel that there is too much money in the market and even bad projects get funding. Is it true? how difficult is it to find good projects? It is a global phenomenon that there is liquidity in all the

started happening there much before it started happening in India. Hence, they have a longer record of accomplishments in terms of looking at investments. In addition, the typical US silicon valley based VCs have been in Israel for close to 15 years now. By deﬁnition, the domestic market in Israel is small. Most of the Israeli companies are looking at global markets, speciﬁcally the US market in terms of technologies, medical devices, etc. Thus the mindset, the ecosystem, and the community there have been closely related to the US market. Compared to China, the early stage ecosystem in India is more mature. The reasons are manifold. India is good at IP (Intellectual Property) led product companies; there is a perception that there are better IP protection laws here, etc. In India, unfortunately, when VCs started investing in 1999-2000, we had the dot-com crash and the global meltdown hitting the VC community in India early in their lifecycle. Many of the funds back then did not manage to get even one exit. Hence, they went into a shell and only started coming back since the last few years. Typically, how do you plan an exit in investment? What sort of exits do you prefer? FEBRUARY 2008 85

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/investor of the month

I think the most preferred, efficient and transparent exits would be an IPO. The idea in this being that the IPO is also driven by the secondary market conditions. However, having said that, we do build our exits sector by sector. For instance, for some of the Internet and Mobile companies, we believe that strategic exits, being a part of the larger play -- like a larger company coming in and buying them out., are more predominant and probable than an IPO. Whereas, for nontech companies like power-cable companies, or construction companies, and such, by definition they can become a sizeable player of a few hundred million dollars and they become ideal for an IPO. We keep options open. What we do not try to get is trying to cap the return what one can make. So we do not have a really structured exit option. The need of the investor to exit and the entrepreneur’s need to keep the equity seem to become a point of conflict; how do you deal with this? At the time of investment, obviously, there is a dilution sensitivity. As an entrepreneur I think, “I have build this company, I own it, and I am now looking to raise some money externally”. Facing the fact that I now have to part with some stake, say 10-15%, to the investor is a gradual learning process. It is a thinking and rethinking process that entrepreneurs go through. Among the technology companies

More than in 50% of the cases, either in the ﬁrst phone call or in the ﬁrst meeting, the project will not pass the internal benchmarks, because of either the valuation or the sector, or the team. In the cases where one is making serious effort, to take it through the entire process it take about 8-12 weeks, in an early to growth stage investments. One caveat that I would want to make here is that extremely mature investments, like QIB deals and pipe deals, they tend to happen in a shorter period, between 4-6 weeks. Typically, how long do you remain invested in a company? What is the kind of returns that you expect? Since we are an early to growth stage fund, our typical engagement model is reasonably medium to long term. We have instances where we have stayed in companies, not in India yet but globally, close to 7-8 years. Our typical investment horizons are between 4-5 years. At the end of this period, we look at the next logical step, which could be an exit. Given the fact that our benchmarks typically are as that of a VC stage investor, which means we look at upwards of 40-50% returns on an IRR basis. Once the investment happens, what sort of continued involvement should one expect from Lightspeed? We are very active on the strategic front, and not much on

MANTRA/IF WE WERE TO DRAW A LIST OF TOP TEN

THINGS THAT WE LOOK FOR IN A PITCH, THE TOP EIGHT WILL BE THE TEAM ITSELF and professional entrepreneurs, they come to terms with this fact much easier, as compared to family run companies that are in the second or third generation. However, slowly but surely, even the family run companies have started thinking, “Do I want to own 100% of a smaller size of a business?” In addition, the fact is slowly being accepted, that diluting 60-70% of his stake, in order to raise external funds, leads to his business size becoming much larger. They have started realizing that instead of owning 100% of 100 crore, it is better to hold 70% of 1000 crore, which means that their worth becomes 700 crore. It is in the interest of the fund to run through the process with entrepreneur to make this thinking happen. I think conﬂicts happen because not enough time is spent to build that process, frequency and chemistry to say that this is what the investor is trying to build, this is how he could help, and how to work it out, creating value for all the stakeholders in the company. I think it is a question of the investor and the entrepreneur spending enough time to understand each other that is crucial to avoid conﬂicts. On deciding that you want to invest in a company, how much time does it take to complete the process? 86 FEBRUARY 2008

the tactical front. In close to 100% of the cases, we tend to be on the board of the company, as a director. However, this is not the only way we work with the company to create value. We tend to get involved with the management team and board members, beyond the board meetings that happen every quarter. Anywhere between 30-40% of time gets spent in existing investments in terms of creating value. So you can very well imagine our level of involvement. In a week, 2-3 days of my time is spent with an existing portfolio company, either fine tuning their strategies; helping them on the senior level recruitment; helping them with the business plan orientation; make the right business interactions locally, regionally and worldwide; working with the company in organic growth, through M&A etc. In early stage companies, we get involved even in terms of finding the systems and procedures. We know that some of these companies may not even have a fullfledged CFO, Company Secretary, etc in place. We tend to get involved in even looking at that phase and see what are the inefficiencies in the system, what are the loopholes that can be blocked… depending on the stage of the company, we may play different roles, including CFO, board member, DAR E board advisor, etc.

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Storm in a wine glass - Contd. from Pg 15

had recently entered into a manufacturing and supply agreement with Vinsura Wineries, under which Vinsura has agreed to supply bulk wine and offer its bottling facilities to Mandala. Pralhad Khadangale of Vinsura started growing wine grapes in his farms a few years back. He also sources grapes from some 25 other farmer families in Nasik. In 2002, his turnover was around Rs 2 crore. Over the last ﬁve years, it has increased to Rs 6 crore. His wines can now be found in the Taj hotels at Bangalore, ITC and Le Meridien hotels in Bombay and Hotel Intercontinental in New Delhi. Shivaji Aher of Renaissance Winery explains how Renaissance had entered into a contract with a dozen farmers for providing them quality grapes a couple of years back. Since then their own vineyard has entered into production and they started their in-house harvests last year. With bottles imported from St Gobain, labels from Japan and France and corks from Altec, France, Renaissance is taking big strides into the Mumbai market. “Hence, theoretically, you don’t require any land to enter this business,” agrees Arora. 88 FEBRUARY 2008

Setting up a vineyard What if lush green vineyards hold you in awe of their beauty? Wouldn’t you want to own one? If your response is affirmative, you should surely go ahead and get one. A vineyard should ideally be located where the soil is fertile, the climate has a good variation between night and day temperatures, there is access to water, the weather is dry and the rainfall is controlled. The combination of soil, climatic conditions and other factors in a vineyard affect a wine’s terroir. Terroir is a French word that signifies the characteristics of the vine and grapes that grow in a particular vineyard subject to the topography, climatic conditions and soil of the vineyard. A vineyard is said to yield vintage wine if the grapes are all or primarily grown in one specific year. Currently, all the vineyards of the country are located in Maharashtra and Karnataka. Nasik, known as the de facto wine capital of the country, has around 1000 hectares of land under wine grape cultivation; Bangalore has some 200 hectares. The major reason behind this, apart from the favorable climate and land, is the fact that these regions had already been producing

table grapes. Hence, the conversion of table grapes to wine grapes didn’t take much. This implies that a potential vinopreneur can consider places like the hilly areas of the north and northeast as well for setting up vineyards. A large part of the north-east is already producing table grapes. Ideally, around 20 acres should set you off, although people have even started with lesser land. Depending on where you locate the site for your vineyard and current land prices, you could acquire your land from around Rs 10 lakh up to around Rs 2 crore an acre. Once site selection is done, grape selection becomes pertinent, for there are certain kinds of soil that support certain kinds of wine grapes the most. Setting up a winery doesn’t cost much. The equipment required can be imported for around Rs 30 lakh to a crore. Employing the services of a foreign wine-taster, however, can set you back by around $1000-2500 a day, which is why most new entrants shy away from it! However, as long as you’ve got a winemaker worth his/her salt, the tannins and acids in your wine will turn out to be just perfect! Hygiene is, however, a very important consideration.

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opportunity/wine The grapes The most dominant varieties of wine grapes that can be grown virtually anywhere in the world are Riesling from Germany, Sauvignon Blanc from France’s Loire valley and Marlborough in New Zealand, Chardonnay and Pinot Noir from Burgundy and Merlot and Cabernet Sauvignon from Bordeaux. These are known as the Big Six. Apart from these, there are also other varieties such as Clairette, Chenin Blanc, Thompson, Viognier, which are white grapes and Cabernet Franc, Carmenere, Grenache, Shiraz (also known as Syrah) and Zinfandel, which are red grapes. The most popular ones in India are Chardonnay, Sauvignon Blanc, Cabernet Sauvignon, Thompson, Chenin Blanc, Grenache, Shiraz, Merlot and Zinfandel. Some of the basic differentiating factors between the wines obtained from these varieties are acidity, tannins, minerals, fruitiness and alcohol content.

The process It takes a couple of years for the grape vines to grow and take fruit. The first harvest is almost always never used; it takes a couple of years more to get harvests of good quality. Almost 30% of the crop is pruned away during the growing years to enhance the quality of the entire crop. Wine-making, or vinification, starts right from the selection of grapes and ends at the bottling process. Once the grapes acquire maturity, they are ready for harvesting. Maturity of the grapes is usually determined by parameters such as the level of sugar (called Brix), pH level, ripeness, berry flavor, tannin development (seed color and taste), disposition of the grapevine and weather forecasts. The level of sugar in the grapes determines the final alcohol content of the wine and is an indirect index of grape maturity. Harvesting the same crop at different times brings about a difference in quality. Hence, deciding the time of harvesting is rather a tricky issue, usually taken by the winemaker or oenologist, a trained or experienced individual who knows how to make wine the right way. Most

DARE/apple, plum, strawberry wine Himachal Pradesh Horticulture Marketing and Processing Corporation (HPMC) has become the first agency to market fruit wine in Tetrapack in the country. It is currently marketing apple, plum and strawberry wines. Later, diversification to other fruits, like pear, peach, wild apricot, etc., is also planned. oenologists hold a bachelor’s degree in science, majoring in oenology, the science of wine-making. Many Indian vinopreneurs are now employing French oenologists to maintain international quality standards. Harvesting can be done manually or by using mechanical harvesters. Although mechanical harvesting is easier and faster, most premium winemakers go for manual harvesting, that is, handpicking, since mechanical harvesting is indiscriminate and more often than not, loose debris also get included. Harvesting is succeeded by destemming, usually done in a winery, in which the stems are separated from the grapes to control the tannin level and vegetable aroma. For obtaining red wines, the grapes are crushed by mechanical crushers to break open the skins and fermented in tanks. This is an essential step for color-extraction. For white wines, this step is bypassed and the grapes are passed directly to the presses. The wine obtains its color, tannin and flavor from the grape skins. Hence, it is upon the winemaker to decide the time for which the mashed grapes remain in contact with the skin. This is followed by primary fermentation during which specific quantities of yeast and sugar are added at specified temperatures. The fermentation temperatures influence not only the speed of fermentation but also the final taste of the wine. For red wines, it is around 25-28º C, whereas for white wines it is around 15-18º C. The fermented mash is pressed to separate the juice (wine) from the grape pulp and skins, after which it is run through a couple of heat and cold stabilization processes to get rid of sediments and other precipitation crystals from

the wine. This may take close to a week or two. The wine so obtained is then stored in oak barrels for the secondary fermentation process, commonly known as aging. This process may take from three months to a year. The aged wine is then blended or ﬁned by the winemaker as an adjusting measure to remove discrepancies.

Retail Walk into any good hotel or restaurant serving wine in the country and you’re sure to ﬁnd at least one of Sula, Grover or Indage brands. Increasingly, newer entrants are getting a place of envy in the wine lists of the country’s hotels, Reveilo, Chateau D’Ori, Miazma and Vinsura, to name a few. Wine is also used as the ingredient along with sauces in food preparations involving sea-foods or meats. Vindaloo, the famous Goan dish brought to India by the Portugese in the early 17th century, is prepared by marinating red meats in wine, vinegar and garlic. Hotels and restaurants in India have widely begun to serve dishes prepared in wine sauces. Although such dishes are more popular amongst the foreign clientele, if the popularity of the Costolette d’agnello con salsa di vino rosso e ﬁchi secchi (pan-seared lamb chops, with roasted potatoes and red wine) served in Diva, an upscale restaurant in Delhi, is anything to go by, the common Indian palate is getting wine-philic at a break-neck speed! Which opens up one more retail angle

DARE/chilli-factor Ashraf Sharif, owner of Balti Wines, a Manchester-based wine company, has come out with ﬁve different kinds of wines to go with the spicy Indian food served in the UK restaurants. His company has worked with the Food & Technology Department at Manchester Metropolitan University and developed a chilli-meter, or rather a chilli-factor, which rates their wines to provide an index of the kind of food-wine pairing that will work the best! Balti Wines had recently opened its ofﬁces in the US as well and sells its wines in 13 states.

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for the Indian wine-makers—that of cooking-wines! This has the potential of getting your wines at the nearby departmental store, with some help from the government, of course! The retail part, in most cases, is handed over to distributors. Brindco, the largest importer of wines in India, handles the distribution of Sula, Grover and Vinsura. Recently, Brindco acquired a 20% stake in Grover Wines, under which it acquired the marketing and distribution rights of Grover Wines. In fact, Grover now ﬁgures in the wine list of Gordon, the oldest wine bar in London. Some wineries are going the extra mile in making sure that their visibility increases. Yatin Patil of Vintage Wines, recently invited the elite residents in and around Nasik to come and taste their Reveilo wines. Many wineries offer packaged wine tours to corporate and tourist groups in their vineyards. For instance, Grover Vineyards offers tourists a day-long tour in its vineyards, interspersed by tasting of their wines and lunch in a nearby spa-resort. The likes of Infosys and Mico have visited them for this. In the First India Wine Challenge held last year in New Delhi, many Indian brands participated, with Nine Hills of Seagram emerging winner. Participating in such contests, wine fairs or wine-tasting events increases visibility tremendously. Visibility, however, is not all, for as made evident in the India Wine Chal90 FEBRUARY 2008

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lenge, Indian wines are still reeling under quality issues.

Quality The quality of a wine is assessed by its bouquet and taste. Bouquet is the complete aromatic experience that a wine offers to the wine-taster. Wine-tasting in itself is an art. Tasting doesn’t mean simply tasting the wine, it rather implies a thorough sensory examination of the wine, a procedure widely known as the 5S procedure – See, Swirl, Sniff, Sip, Savor. The wine is judged for its appearance, fragrance, taste and after-taste. The key characteristics that a wine-taster looks for are clarity, varietal character, integration, expressiveness, complexity, and connectedness. Clarity is the translucence

level of the wine. Varietal character defines the grape aromas present in the wine. Integration indicates how well the constituents of the wine, namely the acid, tannin and alcohol content, jell in with the other constituents. Expressiveness of the wine is defined as its ability to present all its constituent aromas and flavors clearly. Complexity is determined by the multiplicity of its inherent flavors. Connectedness is how closely the wine seems connected with where it has been obtained from. Each step in the wine-making process influences the quality of the wine. From the plucking of the grapes, crushing and fermentation to the final aging and blending processes, a stitch in time actually saves nine! Harvesting the grape at different times from the same vineyard will yield different quality grapes. The temperature at which the fermentation is done, the kind of additives that are added, the length of the aging process and the blending agents used influence the quality of the wine to quite an extent. The only way that Indian wines can burn a hole in Bordeaux’s pockets is by maintaining high standards of quality. Discerning clientele can always tell good quality from bad. Hence, quality has to be kept high throughout the entire process of wine-making, right from the selection of grapes. Kapil Grover of Grover Wines thinks that the only bottleneck plaguing the Indian wine in-

DARE/the legal take Karnika Seth of Seth Associates, a law firm based in Delhi and dealing extensively with vinopreneurs, explains the legal implications We always advise the vinopreneur to set up a company instead of going for a proprietorship, since it’s not only more professional but also more logical in terms of marketing and brand-positioning. First you need to get a trademark registration. Once your brand is trade-marked, you need to look at the network that you would need of sub-distributors, vendors, etc. You need a manufacturing license and follow the GMP code. Production of the wine is subject to the Indian Standard specification for wines (IS 7058), the Prevention of Food Adulteration (PFA) Act 1954, Standards of Weights and Measures (packaged commodities) Rule, 1977, and the State Excise Duty Rules You need stock and sale licenses for warehousing or distributing the wine. For a vendor, a vendee license is required. There are different licenses for different role-plays in the value-chain, right from growing it to storing it to distributing it and finally, for selling it. For bottling and labeling, the Fair Packaging and Labeling Act of FDA (Food and Drug Administration) of the United States needs to be followed, which makes it mandatory for the producer to maintain a certain level of standard in bottling and labeling the product.

opportunity opportunity/wine wine How was Grover started? We were the pioneers of experimenting with the growing of wine grapes in India. When we started our project in 1981, there were only two kinds of wine grapes in India. We conducted extensive experiments for nine years with 33 different French varieties in Nasik, Narayangaon and other such places in Maharashtra and Karnataka. We finished our experiments in 1989 and got the best varieties of wine grapes in Karnataka. People talk about Nasik being KAPIL GROVER the equivalent of Napa Valley of California GROVER WINES in India. However, Nasik is more suited for somebody who, say, has land lying around there and wants to start something in it. Our provocation was to make international quality wine grape and we did not own land anywhere. We were originally in the business of importing hi-tech equipment, 90% of which was, incidentally from France. So, my dad got to know about French wine and got really passionate about it and even more knowledgeable than most French people. So, we started planting in Bangalore in 1989 and launched in 1992, which makes us 15 years old. We have a joint venture with a very well-known French Champagne company, Veuve Clicquot Ponsardin, and since 1994, our technical consultant has been Michel Rolland, who’s considered to be the absolute No. 1 in the wine-making world. Today, we are at about 1.2 million bottles, and are growing at the rate of 25-30%. We have just taken on a new partner, Brindco, who are handling our marketing and own 20% in the company. We have a financial investor, Jerry Rao, who had picked up 15% stake in the company. We have two new wonderful partners, Veuve remains, and the balance 51% is held by us. How did you raise the initial investment required for starting up? The initial investment was our own. We started with around Rs 3 crore and since we put it ourselves, there were times when we lived absolutely hand-to-mouth. Compared to that, our recent expansion and renovation cost us around Rs 5 crore, and starting April, we’ll have some new tanks and barrels, which is another Rs 1.5 crore. But we started quite small, to the extent that we had to cut down on many expenses to meet the costs. How did you hire Michel Rolland? My father and our wine-maker, Bruno, had visited Michel Rolland. They served him excellent wine and dinner and told him that we were poor people! Michel has a great sense of humor. He said, “I like poor people like you.” He was extremely reasonable and came on board almost free of charge apart from the direct expenses. That is what Michel is like. When his wife and he came over to India, he asked us to just pay for the visit to India and “then we’ll see!” He fell in love with India, Indian food, and liked the Grover family. Michel is not particular about money. How did you get Jerry Rao to invest in you? Jerry had a bottle of our wine with a very close family friend of ours in an Indian restaurant, Tabla, in New York. He saw Nandi Hills written on the bottle, which is where we are. He told our family friend that he had a lot of land in Nandi Hills and would like to grow grapes. So, that was the original context. At that moment, he had told Jerry that we had mandated somebody to offload 35% of the company and bring in some investments and asked him if he was interested. And Jerry was really interested, which is how he invested into our company. How do investors look at the Indian wine industry? Raising money for the wine industry is not an issue, provided you are a serious player. There are some 45 small wineries in Maharashtra, mostly farmer-promoted. The investors might not talk to them unless they are approached seriously. But tomorrow, if I need to raise some money, it won’t be an issue at all.

DARE.CO.IN dustry is good quality grapes. “There is no great wine-maker. There is only great grape,” says Michel Rolland, the world renowned wine-maker and consultant, who is also the consultant for Grover Wines. Indian wines, with their quality-conscious demeanor, have slowly started ﬁguring in the world winescape. “Foreign customers who come to our bar usually go for an Indian wine. Although the ﬁrst time is out of curiosity, the second round is because they like it”, says Manish of Club Bar, Imperial Hotel in New Delhi, delineating a trend that has been largely witnessed in the premium hotel bars of the country.

Partnerships and Venture Investments Like in any other business, investors are smelling money in this one too. Sula had already acquired two rounds of funding. In 2005, it received Rs 15 crore ($3.5 million) worth of venture investment from the private equity fund GEM India Advisors (GIA). In August 24th 2007, it raised Rs 45 crore from Indivision India Partners, Future Capital Holding’s private equity arm jointly with another private investor. Jerry Rao of Mphasis recently picked up 15% equity in Grover Wines. Chateau Indage acquired private equity investments from Anil Dhirubhai Ambani Enterprises (ADAE), which picked up a 9% stake, and Singapore-based Arisaig Partners’ private equity fund, which picked up close to a 10% stake. Mergers and acquisitions are also happening, with Indage taking the lead by acquiring Tandou, an Australian wine company. Indage has reportedly set aside a corpus of $100 million for international acquisitions. The mood is upbeat. The current players have a huge part to play in the sector opening up. There is, however, a need to educate the Indian clientele in the ﬁner nuances of wine drinking to popularize this drink amongst the masses. Perhaps Bollywood can also chip in, much in the same way that Hollywood did for the wines from Napa Valley. “I have been asking Sula to make a documentary on wine-making,” says DAR E Arora. Perhaps a la Chocolat? FEBRUARY 2008 91

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opportunity/services

There is more to a mall

A mall not only offers a great shopping experience but is also a mine of business opportunities /Chhavi Tyagi

t starts right from the point you enter the premises of a mall â&#x20AC;&#x201C; catchy outdoor hoardings, and then attendants assisting with parking of vehicles. At the entry points, guards frisk visitors for security assurance, also installed are CCTVs and surveil-

lance cameras for ensuring a threatfree environment. Then there are kiosks here and there displaying and promoting the latest products. Escalators and lifts for comfort and convenience, with the housekeeping team making sure that the ambience is sim-

ply perfect. Of course, there are those with the walkie-talkies who are always around to help out visitors and deal with their grievances. Ever wondered who is running these shows, behind the scene? More importantly, how big is this business?

Is there an opportunity window? In India, there are three different categories of malls â&#x20AC;&#x201C; Value malls (e.g. Big Bazaar), Value-cum-lifestyle malls (e.g. Pantaloon), and Lifestyle malls (e.g. MGF Metropolitan). Right from the day a mall is constructed, it becomes a mine of opportunities for a lot of businesses. Besides the shops, restaurants, and entertainment hubs, there are opportunities valued well over Rs 50 crore per mall. These are mall management, facility management, creative ďŹ rms, and design houses specializing in mall interiors, promotional events, kiosks, and hoardings to advertise products or services, to name a few opportunities. Considering the ever-growing retail sector and the growing prominence of malls in this sector, let us take a quick look at how big a business can some of these services be.

Mall Management Approximate Market Size: Rs 5-50 crore per mall per annum A mall management company takes care of the entire operations of a mall, which includes procurement of various equipment and maintenance. This means, broadly all the FMB operations (Facilities Maintenance Operations) s u c h a s, l e a s i n g o u t s h o p s a nd advertising space to interested parties, procuring all necessary equipment, to maintaining the mall. To get all of this done, a mall management company usually outsources many of these functions to facility man92

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opportunity/services agement companies that deal in speciﬁc services. As Surajit Mitra, Chief of Marketing, Mall Division, Future Group, puts it, “Mall management encompasses operations, facilities management, security, accounts, common area maintenance, marketing, leasing and all the other functions even remotely related to a mall.” Revenue Generators “Since a mall management company gets involved right from the inception of a mall, we have a pre-launch as well as a post-launch fees. It is usually around 5-10% of the expected rental in the leasing out phase. Then again 5-10% of the total income from the business generated, which ranges anywhere between Rs 100 crore and Rs 500 crore,” adds Mitra. So if we take this revenue model into account, then the income from mall management could range anywhere between Rs 5 crore and Rs 50 crore annually, and that is from just one mall! The biggest advantage in this opportunity is the fact that there is no single mall management company that is into catering to malls other than their own (all the malls have their in-house mall management). However, Future Group is contemplating doing mall management for other business houses.

malls across India. What do they do? “We handle electro mechanical services like ﬁre detection and suppression, power management, access control, water management plumbing, etc. Besides this we also handle business services like guest relations, help desk management, and meeting room management. We also provide soft services like cleaning and pest control, physical and security surveillance, concierge services, and administration services,” says Raghav Iyengar, National Head, Business Development, Vipul Facility Management. There are a few other functions that facility management companies are also taking up. These include conducting research for malls to ﬁnd out their requirements before actually starting to service them. Going one step further, facility management companies are also indulging in providing human resources for each of the services.

Facility Management

Revenue Generators The share of revenue depends on the number of services provided to all the malls in a facility management company’s portfolio. For instance, providing security in itself is a huge business opportunity. Sanjay Katiyar, Regional Head of Topsgrup, a security service provider, says, “We provide security solutions to various companies, institutions, events, etc. We make about Rs 50-55 crore across India, of which 2025% comes from our mall clientele.” When asked about the scope of security business in malls, he says, “Malls is a booming industry and each mall opening creates a huge opportunity space for service providers. As mentioned, a substantial portion of our clientele is in the malls.”

Approximate Market Size: Rs 120-180 lakh per mall per annum A company providing specialized services to malls is known as a facility management company. Mall management companies outsource usually many operations to these companies like parking, security, housekeeping, and cash management. Vipul Facility Management currently provides services and manages 22

Challenges It might sound ironical, but ﬁnding human resources is the main problem faced by facility management companies, the core business of which is providing manpower to their clients. One other problem that is faced by service providers is payment delays from their clients. “Delay in payments is one of the main problems that we face as a

Challenges “The biggest problem in this industry is ﬁnding the right kind of tenants. While leasing out space to tenants, it is important to keep in mind the image that you want to create in the customer’s mind,” says Mitra.

service provider. This affects our functioning severely,” says Katiyar.

Advertising opportunities Approximate Market Size: Rs 20-30 lakh per mall per annum As the number of malls in the country is growing at a rapid pace and with it the number of people visiting these malls burgeoning, advertising and promotional activities in malls have become a hot opportunity. The BTL (below the line) advertising activities have grabbed a 30% share in the overall advertising market from what used to be a space dominated 100% by ATL (above the line) advertising. With companies realizing the importance of promoting their products in a way in which people can actually touch the product and get a feel of it, more and more companies are opting for putting up kiosks and promoting their products, in addition to going for outdoor advertising and promotion. A creative agency takes care of all the aspects of advertising, starting from conceptualizing the advertisement to leasing out the space on behalf of their clients, to putting up hoardings or setting up kiosks or conducting events. Revenue Generators Both outdoor advertising and BTL activities are revenue generators at the malls. Even though outdoor advertisements fetch good business for malls and ad agencies; the revenue percentage shared with the agency is not as much as in the case of a BTL deal. The reason is that in an outdoor advertising deal, the agency simply has to make arrangements for getting space for their clients and putting up advertisements. While in BTL deals, the involvement of an agency is far more than just that, such as conceptualizing ad/event and executing it. Challenges Human resource is a problem in this opportunity area as well. Attrition rates are high as employees keep hopping from one agency to another and there are only a few institutes providing quality education to aspirants. D A R E FEBRUARY 2007 93

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/mentoring

Get guided, without a VC or Angel /Sreejiraj Eluvangal

t was in early 2005 that Dr Shaleen Raizada started getting the lost feeling. It had been six month since Raizada, a PhD from CSIR’s National Physical Lab in Delhi, had abandoned her rather safe decade-long career in government and private sectors to start her own intellectual property consulting. “I decided to start it because I saw there was a clear gap between what the lawyers knew and what the companies knew. We had a good team, a team that could deliver. We were making good documents. Yet we were not going anywhere, our business was not going anywhere,” says the MD and CEO of Delhibased Sanshadow Consultants Pvt Ltd, on track to post revenues of around Rs 5 crore this year. “All four of us were all from professional backgrounds. We were good technical people, but none of us were from a business background, neither as individuals nor as families,” she remembers. Shaleen’s problem is by no means unique among ﬁrst generation entre-

There are many ways for an independent entrepreneur, without VC or angel investor support, to gain from others’ experience and access. Step one is self-help, with the aim being to get a realistic picture of what entrepreneurship involves preneurs who do not have a VC or angel investor to guide them. The movement from an employee to an entrepreneur brings with it unexpected challenges. As Sanjay Anandaram, one of the founders of

Jumpstartup and a mentor to many young businesses says, “The first step is to know what is it that you don’t know.” However, many entrepreneurs have to learn as they go along, sometimes getting caught in a fix with no one to turn to. While Shaleen was lucky to have a friend who soon introduced her to Mohit Goyal, founder of IIS Infotech Ltd (later taken over by Xansa Plc), there are many ways to still find a guide and mentor for your business, even if you do not have an investor in the company. Online resources, institutions, consultants and industry veterans are available to offer advice and vet your ideas, and sometimes even set apart one-on-one time for aspiring entrepreneurs.

Seek, and ye shall ﬁnd There are many ways for an independent entrepreneur, without VC or angel investor support, to gain from others’ experience and access. Step one is self-help, with the aim being to get a

I decided to start it (intellectual property consulting) because I saw there was a clear gap between what the lawyers knew and what the companies knew. We had a good team, a team that could deliver. — DR. SHALEEN RAIZADA MD AND CEO, SANSHADOW CONSULTANTS 96 FEBRUARY 2008

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/mentoring realistic picture of what entrepreneurship involves. “The ﬁrst key requirement is that the person look around what exists in the world of entrepreneurship and see what is available. Ignorance is not an excuse,” says Sanjay, who besides being associated with the fund, is involved with hands-on ﬁne-tuning of many start-up strategies. “Seek out information on basic issues such as what is a business plan, what are the elements that go into it, what are the different ways to raise money. Start talking to other entrepreneurs and to other professionals you might need, such as lawyers and accountants,” he points out. Besides reading and listening, this step also involves attending networking events such as BarCamps and OpenCoffeeClubs, to share experiences and learn from other start-ups.

Getting hands on After basic education and networking with peers, one should try to beneﬁt from the veterans in the industry, people who have built up today’s top companies. While this kind of mentorship is by no means a pre-requisite to building a successful company, it can cut down the time taken to do so, as Shaleen’s experience shows. When it comes to hands-on mentoring, there are three options—TiE, educational institutions, and NEN and individual consultants.

TiE The Indus Entrepreneurs (TiE) was founded in 1992 in Silicon Valley by

After basic education and networking with peers, one should try to benefit from the veterans in the industry, people who have built up today’s top companies. However, when it comes to hands-on mentoring, there are three options—TiE, educational institutions, and NEN and individual consultants a group of successful entrepreneurs, corporate executives, and senior professionals with roots in the Subcontinent. A not-for-profit organization, it helps young entrepreneurs—typically those who have thrashed out a team and a business plan—sound out their ideas and fine-tune their strategies by getting them in touch with veteran industry professionals or entrepreneurs in the field (charter members of TiE). It has around 150 industry veterans as its charter members in its Delhi chapter and over 100 with its Bangalore chapter, two of the biggest chapters for the organization. Annual membership, which enables you to receive mentor-

ship and participate in events, cost around Rs 3,500 in Delhi and 2,500 in Bangalore. “The time to come to us is when you have thought through your idea, you have a business plan and you know how much and where you want to invest,” says Saurabh Srivastava, president of TiE Delhi and a tech entrepreneur and angel investor. While TiE works mainly through networking events, entrepreneurs looking for mentorship can directly approach the TiE ofﬁce and are connected to charter members or gurus, depending on availability, says Srivastava. The mentoring that one gets at TiE is of the classic variety, where an experienced person sits and listens to your business plan and gives helpful suggestions. “More often than not, these people are not directly interested in investing in your company, but if they are convinced, they may help you get funding or give you references,” Srivastava points out. TiE, with chapters in 13 locations in India, works in close association with many VCs and the Indian Angel Network, a group of early-stage investors and funds.

NEN and educational institutions By its sheer size, the Website of the National Entrepreneurship Network (nenonline.org) stands out among the online resources for actual and potential entrepreneurs in India. A relatively new entrant—NEN was established in 2002—the organization has focused on basic entrepreneurship education, rather than hands-on mentoring like TiE’s guru-shishya model. It

Seek out information on basic issues such as what is a business plan, what are the elements that go into it, what are the different ways to raise money. — SANJAY ANANDARAM CO-FOUNDER, JUMPSTARTUP FEBRUARY 2008 97

DARE.CO.IN has points of presence in nearly 300 educational institutions in 30 cities across the country and nearly 40,000 active members. “The traditional mentorship is not enough to meet the need for guidance and education in entrepreneurship in India,” says Laura Parkin, executive director. With its partnership model, under which it ties up with educational organizations and encourages them to create and open up entrepreneur-oriented events and workshops to a wider audience, and a strong online backbone, NEN is aiming to be the wannabe entrepreneur’s ﬁrst stop. “Many requirements don’t need a one-on-one session with a mentor, if it can be done online, for example. It could be just a question. Besides, many important things can be taught in group events,” she points out. In keeping with the focus, nenonline. org is a collection of manuals, tools and tips, links and even interactive avenues for information for the entrepreneurially oriented. While you may get contact information about investors and funds, the strength of NEN is more towards the education side than the networking side. NEN membership is free, but since most of the events and workshops are co-organized by educational institutions, access to all events is not ensured. “We are encouraging our partners to open up their events to the public and more and more, they are willing to do that,” Parkins says. NEN will also start charging for membership once in a few months, she added.

/mentoring The mentoring that one gets at TiE is of the classic variety, where an experienced person sits and listens to your business plan and gives helpful suggestions. The Network has 30 member-institutes in Bangalore and 34 in Calcutta. While NEN has tied up most of the entrepreneurship cells (e-cells) and clubs associated with educational institutions, some of the top ranking institutions have their own entrepreneurship cells and clubs that have made a name for themselves in spreading skills and awareness. The NS Raghavan Center for Entrepreneurial Learning (NSRCEL) at IIM Bangalore, named after one of the founders of Infosys Technologies, for example, has three stages of engagement with non-student start-ups. First is through workshops of two or three hours, secondly through physical counseling and interaction sessions with faculty and outside experts, and then a full-blown incubation option involving hosting of the ofﬁces at the institute’s premises. “There are also two-day workshops on entrepreneur skills, such as business plan presentation, basics of ﬁnance, negotiation and communica-

tion skills, managing growth, etc. Our brief is to support entrepreneurship initiatives in all forms, including that from the general public,” says Prof K Kumar of the cell. Another help centre for aspiring entrepreneurs is IIT Bombay’s e-cell, the organizers of India’s biggest business plan competition Eureka. In addition to events such as Eureka, the students in the cell are setting up a year-round support network for entrepreneurs the Global Entrepreneur Network or GEN. The effort brings together the resources, good-will and network of ecells in the top academic institutions like some of the IIMs, Faculty of Management Studies etc. “The idea is for anyone to post for partners, look for a start-up to join, exchange or even sell ideas and we have a separate mentoring section where we connect you with suitable mentors after some screening,” says Ankit Agarwal, one of the organizers of the e-cell in IIT Bombay. “We also try to make two people available everyday on phone to answer queries from entrepreneurs,” he adds.

Individuals and consultants The last option, and certainly not the least, is to ‘buy’ or seek mentorship from individuals. While it may sound expensive, many consultants are happy to take a small portion of the equity, under 15%, in return for their mentorship. If you are lucky, you may also come across people like Chennai-based Vijay Anand, a serial entrepreneur who divides his time between paid consulting and free guidance and

The time to come to us is when you have thought through your idea, you have a business plan and you know how much and where you want to invest. — SAURABH SRIVASTAVA PRESIDENT, TIE DELHI 98 FEBRUARY 2008

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/mentoring

We don’t need you to have a team or infrastructure or anything else, just the idea. If it impresses us, we will get back to you. If you have the right attitude, we will set up the entire farmhouse for you, and make sure the farm comes up too. — MC PREETHAM IDEA CONSULTANT FOR START-UPS consultations. Anand is also the chief organizer behind Proto.in, a start-up and investor networking event and is associated with IIT Madras’ IT and telecom network TeNet. Associated with more than 80 startups, Vijay is a ﬁrm believer in the value of mentorship. “I have bootstrapped three of my own ventures, and have built close to seven companies from scratch. I know what it takes to build. I have networks going as far as Guy Kawasaki and Steve Jobs. I came back from Canada after setting up my third company because entrepreneurship isn’t easy in India. I hope I can change that. So if there is a team or company that looks like a success story, I am willing to help.” “Building a company alone doesn’t help, you also need to know the right people to make sure that you remain a valid entity in the marketplace and

While 'buying' mentorship may sound expensive, many consultants are happy to take a small portion of the equity, under 15%, in return for their mentorship. that happens with aligning with the right people,” he points out. Of course, Vijay gives free mentoring only if the requirements are small, for extensive consultations, he, like others, charges. “Free stuff has limited value,” points out Sanjay of Jumpstartup, who also

acts as a private consultant, besides his role at the fund. The key value of private consultants is accessibility. “Just send us a 20 slide presentation,” says 26-year-old MC Preetham, software engineer turned Southern Spice VJ-turned idea consultant for start-ups. “We don’t need you to have a team or infrastructure or anything else, just the idea. If it impresses us, we will get back to you. If you have the right attitude, we will set up the entire farmhouse for you,” he says, “and make sure the farm comes up too.” From a naive techie to a conﬁdent business man making his presentation before a VC, Preetham promises the entire transformation in return for 10-15% stake in your company. “We are not long-term investors and cash out at the second round of funding. If you fail, we get nothing in return. That’s a risk we are willing to take,” he says. D A R E

SMS “DARE <your comments, questions or suggestions>” to

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Organizations DARE.CO.IN

covered in this issue, in alphabetic order; ﬁrst appearance

Actis ................................................... 45 Active Worlds ..................................... 42 Adidas................................................ 39 Aftek .................................................. 14 Aglow Engineers................................ 32 Agricultural Development Trust .......... 50 Airtel ................................................. 53 Akshay Pratisthan ............................. 56 AMD................................................... 40 American Association of Advancement of Science ................. 102 Anil Dhirubhai Ambani Enterprises.... 91 Anna University ................................. 24 AOL ................................................... 42 APC MGE .......................................... 76 Apple ................................................. 53 Aptara ............................................. 105 Arisaig Partners ................................. 91 ASSOCHAM ...................................... 58 Aureos ............................................... 46 Ayur .................................................. 83 Bain & Co .......................................... 53 Balti Wines ......................................... 88 Bank of Baroda .................................. 36 Battery Ventures ................................ 46 Bharti Airtel........................................ 46 Big Banyan ........................................ 15 Big Bazaar ......................................... 92 Bihar Development Trust.................... 71 Black Magic ....................................... 76 Black Magic Toners............................ 75 Blind Students Hostel ....................... 56 Brand Science Institute...................... 42 Brindco .............................................. 90 Canaan Partners ............................ 105 Credit Analysis and Research ........... 65 CareerLauncher................................. 18 Chateau d’Ori .................................... 12 Chateau Indage ................................. 13 CLUBPENGUIN................................. 42 Coco .................................................. 61 CoCubes.com .................................... 26 Computer Junction ............................ 76 Cornell’s Johnson Graduate School of Management...................... 16 Credit Rating and Information Services of India ................................ 65 CyberMedia ..................................... 105 Dabur ................................................ 83 Dealogic............................................. 35 Delhi Public School............................ 72 Diageo .............................................. 15 Diva ................................................... 88 Diya Foundation ................................ 56 easysquarefeet.com .......................... 22 Educomp Solutions............................ 65 Erasmic Venture Fund ....................... 47 Facebook ........................................... 39 Fashion Design Council of India ........ 63 Finman Venture Consulting .............. 33 Fitch IBCA ......................................... 65 Florida’s Bollettieri Academy ............. 20 100

FEBRUARY 2008

Food and Drug Administration ........... 15 FoxMandal Little ................................ 70 Future Capital Holding ....................... 91 Future Group ..................................... 93 Fuzzy Wuzzy Pet Grooming Parlor .... 82 GAIAONLINE..................................... 42 Gartner ............................................. 41 Geekdom ........................................... 41 Genpact ............................................. 46 Google .............................................. 47 Grover Wines .................................... 90 Gucci ................................................. 58 Habbo Hotel....................................... 42 Harley Davidson ................................ 52 Helion Venture Partners .................... 45 HPr Horticulture Marketing and Processing Corporation ..................... 88 Himalaya Drugs ............................... 105 Hotel Intercontinental......................... 86 HSBC................................................. 36 HSBC India ........................................ 34 IAN & Proto. ..................................... 105 IBM .................................................... 40 IBM Global Finance ........................... 74 ICICI Bank ......................................... 36 ICRA .................................................. 65 iﬂex .................................................... 46 IIM Bangalore .................................... 98 IIM Calcutta ..................................... 105 IIT Bombay ........................................ 47 IIT Delhi ........................................... 47 IIT Kanpur .......................................... 44 IIT Madras ......................................... 99 IMINT ................................................. 47 Imperial Hotel ................................... 91 In Defense of Animals ....................... 83 Indage Hotels .................................... 13 Indian Angel Network ........................ 97 Indian Institute of Information Technology ....................................... 24 Indian Institute of Technology ............ 20 Indian Wine Academy ........................ 14 Indivision India Partners .................... 91 Indo American Chamber of Commerce (IACC) ....................... 102 Indus Geeks ...................................... 39 Indus World School ........................... 18 Infosys ............................................... 33 Infosys Technologies ......................... 98 Innocent ............................................. 53 INSEAD ............................................. 40 Institute of Management Tech............ 82 Intel .................................................. 21 IT&T ................................................. 105 ITC .................................................... 86 IVCA ................................................ 105 J Sagar Associates .......................... 105 J&K Bank ........................................... 32 Jumpstartup....................................... 96 KANEVA ............................................ 42 Kauffman Foundation ...................... 102 Kesar Dass B & Associates ............. 105

Khera Khud Ashram .......................... 56 KSA Technopak ................................. 62 Le Meridien hotels ............................. 86 Lee Cooper ........................................ 58 Leprosy Home .................................. 56 Levi’s.................................................. 58 Linden Labs ....................................... 39 Manav Seva Sansthan ...................... 56 Manchester Metropolitan University .. 88 Manchester United ........................... 20 Mandala Valley Vineyards .................. 14 Maxwell Industries ............................. 58 Mayﬁeld Ventures .............................. 47 mChek .............................................. 47 MCKS Charitable Foundation ............ 56 MCKS Food for Hungry Foundation ... 54 MGF Metropolitan .............................. 92 Miazma ............................................. 88 Mico ................................................... 90 Microsoft ............................................ 21 Moody’s ........................................... 65 Moove ................................................ 42 Motvik ................................................ 22 Mphasis ............................................. 91 MSRIT ............................................. 104 MTV ................................................... 39 Muskaan Computer Solutions ........... 76 Nalanda Foundation .......................... 18 National Bank for Agriculture and Rural Development ..................... 79 National Institute of Fashion Design.... 58 National Institute of Fashion Tech ...... 58 National Physical Lab ........................ 96 New Era Public School ...................... 57 New Media Consortium ..................... 42 Nike ................................................... 53 Nirma Labs ....................................... 47 Nissan................................................ 40 openPR.com ...................................... 42 Oriental Bank of Commerce .............. 36 Orkut .................................................. 39 Padmaja Financial Services .............. 33 Pantaloon .......................................... 92 Pearl Academy of Fashion ................ 58 Pepsi .................................................. 53 Petbytes ............................................. 83 Pontiac ............................................... 39 Ranbaxy ............................................ 18 Rastriya Pragya Drishti Sansthan...... 57 Reebok ............................................. 39 Reliance............................................. 76 Renaissance Winery.......................... 14 Reserve Bank of India ....................... 79 Reuters .............................................. 42 Reveilo Chenin Blanc ....................... 14 Royal School, London........................ 19 Sage .................................................. 76 Salam Balak Trust .............................. 56 Salesforce.com .................................. 76 Sankalp Winery ................................ 14 Sanshadow Consultants Pvt Ltd........ 96 Saturn ................................................ 53

Satya Paul ......................................... 58 Scion Advertising ............................... 14 Scooby Scrub .................................... 81 Seagram ........................................... 90 Sedna Wireless.................................. 23 Seedfund ........................................... 45 Seth Associates ................................. 90 SIDBI .............................................. 105 SMERA .............................................. 34 Snapple ............................................ 53 Snow Crash ....................................... 39 Software ............................................ 22 Software Technology Parks of India... 24 Spanish design committee ............... 61 Spectranet ......................................... 76 SSN College of Engg....................... 104 St. Stephen’s College ........................ 18 Standard and Poor’s (S&P’s) ............ 65 State Bank of India ............................ 33 Sula Wines......................................... 13 Sun Microsystems ............................. 40 Symphony Services ......................... 105 Tabla .................................................. 91 TailWaggers Salon ............................. 83 Taj Hotels .......................................... 86 Tandou ............................................... 91 Tavant Technologies .......................... 45 Team Computer ................................. 76 Technology Development Board ...... 105 TeNet ................................................. 99 The Momease.................................... 62 There ................................................. 42 TiE .................................................. 102 Tokyo University................................. 44 Topsgrup ............................................ 93 Toyota ................................................ 39 TutorVista........................................... 24 Tyfone ................................................ 45 U21Global.......................................... 39 UB (United Breweries) ....................... 15 University of Miami .......................... 105 US Department of Commerce ......... 102 Veuve Clicquot Ponsardin .................. 91 Viia Dysn Co. ..................................... 58 Vinsura Wineries ............................... 86 Vintage Wines.................................... 14 ViOS .................................................. 42 VIP Group .......................................... 58 Vipul Facility Management................. 93 Virgin Airlines..................................... 53 Virtual MTV........................................ 42 Vishal Retail Limited .......................... 28 Wadhwani Foundation .................... 105 Walmart ............................................. 30 Warner Bros ...................................... 40 Wipro ................................................. 33 World Bank ........................................ 68 World Health Organization ................ 15 Xansa Plc .......................................... 96 Yashbans .......................................... 83 Yes Bank............................................ 49 ZWINKY............................................. 42

People DARE.CO.IN

covered in this issue, in alphabetic order; ﬁrst appearance

Abhishek R ...................................... 104 Ajay Kapur ....................................... 105 Alok Mittal ........................................ 105 Ankit Agarwal..................................... 98 Ankur Gattani................................... 105 Anu Bajjaria ....................................... 54 Asawari Desai.................................... 44 Ashish Gupta .................................... 45 Ashraf Sharif, owner of ..................... 88 Balaji Srinivasan ................................ 46 Bharati Jacob..................................... 45 Bhaskar V Kode ................................. 24 Bipasha Basu .................................... 80 Britney Spears ................................... 80 Choa Kok Sui ..................................... 56 Czepiel............................................... 53 D R Dogra.......................................... 67 Danesh Daryanani ............................. 39 Dasharatham Bitla ............................. 22 David Bohigian ................................ 102 Dev Ganesan................................... 105 Dr Ravi Chandra ................................ 71 Dr Shaleen Raizada .......................... 96 Esha Deol .......................................... 83 Fardeen Khan ................................... 83 Gauri Keskar...................................... 83 H Purushotham................................ 105 Harpreet Singh Grover ...................... 26 Heenu Singh ...................................... 57 Henry Ellis ......................................... 75 Hina Goyal ........................................ 54 Jasmine Kerawala.............................. 61 Jayant Tewari ................................... 32 Jerry Rao ........................................... 91 Jonathan Ortmans ........................... 102 Jyoti Sagar....................................... 105 Kapil Grover of .................................. 90 Kappil Kishor ..................................... 58 Karnika Seth of ................................. 90 Kei Koizumi ...................................... 102 Kimberlie L Cerone .......................... 105 Laura Parkin ...................................... 98 M Mahadev Prashanth..................... 104 M Thiyagarajan .................................. 22 Mark Sherman ................................... 46 MC Preetham .................................... 99 Michel Rolland ................................... 91 Mohd Haroon ..................................... 32 Mohit Goyal........................................ 96 Mridula Bose Sahay .......................... 62 Neal Stephenson ............................... 39 Pandurang Taware ............................. 48 Pankaj Jain ........................................ 33 Paris Hilton ........................................ 80 Philip Rosedale.................................. 39 Prabhakar Tadepalli ........................... 45 Pradeep Gupta ................................ 105 Pralhad Khadangale .......................... 14

Pralhad Khadangale .......................... 86 Prasad Medury ................................ 102 Preeti Kumar...................................... 81 Preity Zinta ...................................... 83 Prof K Kumar .................................... 98 R R Shah ......................................... 102 Radhiya Hemchandra ........................ 83 Raﬁq Dossani .................................... 44 Raghav Iyengar ................................. 93 Rajiv Poddar ...................................... 23 Ram Chandra Agarwal ...................... 28 Raman Uberoi ................................... 65 Ramesh Rao ..................................... 14 Ranjit Chougule ................................. 13 Ranjit Dhuru....................................... 12 Ranveer Kumar.................................. 57 Rashi Gaur ....................................... 63 Reichheld........................................... 53 Rishya Hemchandra .......................... 83 Rodney Ryder.................................... 70 Rohit Chand..................................... 105 Rosenberg ........................................ 53 S Padmanabhan ................................ 33 Salman Khan ..................................... 83 Sanjay Anandaram ............................ 96 Sanjay Katiyar.................................... 93 Sanjay Manchanda ............................ 76 Sanjay Swamy ................................... 47 Sanjiv Kumar ..................................... 81 Satya Narayanan R ........................... 18 Saurabh Srivastava ......................... 102 Shakun Goyal .................................... 54 Shamrao Chougule............................ 13 Shanta Agarwal ................................. 30 Shivaji Aher ...................................... 14 Siddharth Banerjee............................ 41 Snehesh Mitra ................................... 22 Srinivas Chakravarthy........................ 74 Subba Rao......................................... 45 Subhash Arora................................... 14 Subodh Tagare .................................. 76 Sumant Batra................................... 105 Sunil Bhosle....................................... 48 Sunil Pathare ..................................... 58 Surajit Mitra ....................................... 93 Surangna Jain ................................... 54 Survary Miklos ................................... 40 Tushar Pandey ................................... 49 Urmila Dhabolkar............................... 83 Vibhore Goyal .................................... 26 Vijay Anand ....................................... 98 Vijay Bobba ..................................... 47 Vikrant Chougule ............................... 13 Vinod Shastri ................................... 104 Vivek Karunakaran ............................ 58 William Scott Green ......................... 105 Yashodhara Hemchandra .................. 82 Yatin Patil .......................................... 14

DARE is not an acronym. It represents the daring spirit of the entrepreneur. The red color for the R of DARE represents the ﬁre in the belly of the entrepreneur. You could think of the D representing the face, A representing the chest, R representing the belly and E representing the feet of the human body. Hence the red R. The entrepreneur dares to do things. (S)he dares to do things differently

SMS “DARE <your comments, questions or suggestions>” to

56677 dare@cybermedia.co.in FEBRUARY 2008 101

DARE.CO.IN

slug/TiETalk

TiE symposium brainstorms strategies that can drive entrepreneurial growth and identiﬁes the need to revamp the education system /Vimarsh Bajpai

ime is ripe to make courses on entrepreneurship a part and parcel of our education system and to increase spend on R&D to promote innovation. Such were the thoughts that emerged out of a daylong symposium on ‘driving entrepreneurial growth’ held in New Delhi on January 17. The event, organized by TiE in association with Indo American Chamber of Commerce (IACC), saw some of the best minds of entrepreneurial ecosystem discuss issues relating to innovation, education, regulation and capital formation. Saurabh Srivastava, President, TiE Delhi, set the ball rolling as he appreciated the role of the US in setting benchmarks for entrepreneurship. “The US created the most fertile environment for entrepreneurship and innovation, and as a result saw phenomenal growth and progress,” he said. “Over 90% of US companies have less than a hundred employees, and half of the US trade is done by these companies,” he said. He, however, expressed concern over “the protectionist tendencies" creeping in particularly in outsourcing. Prasad Medury, Regional President, North India Council, IACC said “India is hotbed of innovation because of the large amount of skills and intellectual resources present here.” No wonder then, over 300 MNCs have set up their R&D centers in India. He stressed the need for tapping those skills across sectors to beneﬁt the society at large. “An innovative entrepreneurial industry requires technical skills, access to capital, and sound business models,” he said. “It is a $50 trillion global economy that we are living in, and if it continues to grow at 4%, it will double in size to $100 trillion in less than 20 years,” said David Bohigian, Assistant Secretary, US Department of Commerce. He said 102

FEBRUARY 2008

(L-R) Prasad Medury, Regional President, North India Council, IACC; David Bohigian, Assistant Secretary, US Dept of Commerce; R R Shah, Former Member Secretary, Planning Commission; Saurabh Srivastava, President, TiE Delhi; Jonathan Ortmans, Senior Fellow, Kauffman Foundation

the time was ripe for Indian and US companies to build bridges and “continue creating jobs for the future.” R R Shah, former Member Secretary, Planning Commission said “during the 11th Five-Year Plan, the government is looking at setting up eight new IITs, seven new IIMs, and 20 new IIITs.” He said the high number of India’s young population was big positive. Shah said that we were living in a “knowledge society”, thus biotechnology, nanotechnology, information technology, and neuro-networks are “going to be the leaders.” He also said that India could provide the world’s largest clinical data for research. He expressed the hope that in the near future, the country could grow at 10-11%. Kauffman Foundation Senior Fellow Jonathan Ortmans felt that entrepreneurship was more than just a commercial exercise; it affects society at large. Kauffman Foundation is America’s largest entrepreneurship foundation aimed

at catalyzing an entrepreneurial society in which job creation, innovation, and the economy ﬂourish. The session on the link between innovation and education pondered on ways to boost R&D efforts, improve commercialization of both public and private research, increase the diffusion and absorption of existing knowledge, promote inclusive education, and expand the reach of entrepreneurial training and education programs in the country. Kei Koizumi, Director of R&D Budget and Policy Program, American Association of Advancement of Science presented an overview of how the states in the US were competing against each other to develop good innovation policies. He said the US government spends more than $140 billion a year on R&D, out of which more than half goes to the military and the remaining goes to R&D for other national missions such as health and en-

DARE.CO.IN

slug/TiETalk ergy. The US universities seem to the laboratories for R&D, as “several laws encourage universities to commercialize research ﬁndings.” William Scott Green, Dean of Undergraduate Education and Senior Vice Provost, University of Miami, said American higher education was driven by research and innovation. “American education system stresses on discovering something new,” he said, and added that intelligibility was the fundamental goal of any education. He felt that education could play a key role in promoting entrepreneurship and innovation. Rohit Chand, Executive Chairman, IT&T, said the reach of education must increase if India was to make every individual a stakeholder in the development process. He also said that the education system in India was highly “straight-jacketed”, and that innovation and research mindset should be promoted to boost entrepreneurship. He wondered if setting up separate institutes for innovation could help make things better. This opened the ﬂoor for discussion as participants shared the view that the country’s education system needed an overhaul, and should promote research and discovery. The second session discussed the steps that India could take to improve the regulatory environment for entre-

(L-R) William Scott Green, Dean of Undergraduate Education, University of Miami; Prasad Medury, Regional President, North India Council, IACC; Rohit Chand, Executive Chairman, IT&T; Kei Koizumi, Director of R&D Budget and Policy Program, American Association for Advancement of Science

preneurs such as reducing barriers to opening or expanding business, dealing with licenses, enforcing contracts, and reforming bankruptcy regulations. The speakers including Jyoti Sagar, Founder Partner, J Sagar Associates, Kimberlie L Cerone, an American Angel Investor, and Sumant Batra, Managing Partner, Kesar Dass B & Associates, felt that the legal process needed some swiftness, and that archaic laws should be reformed in tune with the changing times. The two Indian speakers acknowl-

Alok Mittal, MD, Canaan Partners; Pradeep Gupta, CMD, CyberMedia; Ajay Kapur, CEO, SIDBI Ventures Capital; H Purushotham, Scientist G, Technology Development Board; Dev Ganesan, Executive VP & CFO, Aptara

eged that the number of cases pending in various courts across the country has to brought down. Cerone pointed out at the best of legal processes in the Silicon Valley such as the presence of special courts in the US to address IP related issues. She said that good bankruptcy laws also made it easy to liquidate non-performing assets, which in turn could be used to create fruitful assets. During the third session on capital formation, Dev Ganesan, Executive VP and CFO, Aptara stressed the role of Small Business Innovation Research (SBIR) set up by the US government. He said something on the lines of SBIR should be replicated in India, and that too on a public-private partnership model. Pradeep Gupta, CMD, CyberMedia Group said the role of angel investing was important in promotion of entrepreneurship. He felt that if tax breaks are made available for investors in small companies, it would also help inject more investment into small companies. He also mentioned about the huge labto-market gap in the entrepreneurial ecosystem, and the need to bridge it. Alok Mittal of Canaan Partners said the Indian government should consider procuring from startup ﬁrms instead of buying only for ﬁrms with substantial DAR E experience in business. FEBRUARY 2008 103

DARE.CO.IN

GenNext Entrepreneurs Entrepreneurship Week aims to both celebrate the opportunities in today’s India, as well as call attention to improving the ecosystem

n February 2, Entrepreneurship Week India will launch across India. Over 275 NEN campuses and beyond will be turning themselves over to entrepreneurship, with students at some institutes running over 50 entrepreneurship events during that one week. Entrepreneurship Week India aims to both celebrate the opportunities in today’s India, as well as call attention to improving the ecosystem. During E Week, students, entrepreneurs, investors, faculty, institute Directors and Principals and professionals come together to build the momentum for an entrepreneurial India. (more at www. eweekindia.org) NEN shares some student members’ thoughts on entrepreneurship and their hopes for E Week:

NEN, the National Entrepreneurship Network, is India’s leader in entrepreneurship education, reaching over 300,000 young people. NEN supports new and future entrepreneurs with information, experts and community. www.nenonline.org We have been doing a whole lot of entrepreneurship activities, events and exercises just to give people in college the awareness about entrepreneurship. But now we’re moving into a totally new dimension; we’re actually taking on projects for the students.

there – people like us – is to take action. That’s going to be the key for India right now. We know exactly how much India needs us right now. I think it’s just about going out there and making it happen. Boom!

Do you plan to start a company some day? Three friends and I are looking to start something by this April. It’s a customs garage – we love cars! It’s a passion, plus there’s an unbelievable market in it right now. We’ve got potential customers already lined up so we know that this will work. What’s your biggest concern about India? For me the biggest issue and concern as an entrepreneur is the infrastructure, and the most exciting thing I see is the fact that the infrastructure issue is ﬁnally being given attention to.

Name: M Mahadev Prashanth, Chennai Age: 21

Your biggest dream for your future? My dream is be on top of the world with whatever I am doing. I want to be a serial entrepreneur; take over a certain market and then shift to another market totally different. Name: Abhishek R, Bangalore Age: 20 yrs. Institute: MSRIT Course of study: Mechanical engg. 2nd yr Family background: Father has his own business, Mother is a homemaker As part of your college e-cell what are you doing? 104

FEBRUARY 2008

What does E Week mean to you? What should E Week achieve? EWeek is going to be one of the things that back me up in my life, like a ﬁling cabinet with 10 to 15 of my life’s most brilliant experiences stacked there. And on top of that I have written the belief: “I can do whatever I want.” My message for all the guys out

Institute: SSN College of Engg. Course of study: Electrical & Electronics engg. (ﬁnal yr.) Family background: Father is a banker; Mother is a teacher How and when did your interest in entrepreneurship start? I got to know the meaning of the word entrepreneurship in my second year when Mr. Vinod Shastri of NEN came and gave a small, low-key talk. That is when my interest really started. What interests you about entrepreneurship?

DARE.CO.IN

NEN: upcoming event E Week India ’08- Closing Ceremony When:

Saturday, February 9, 2008

Where:

6pm onwards, Bangalore

Who:

NEN members or by invitation

Event focus Entrepreneurship Week India is a week-long awareness campaign that celebrates the opportunities in today’s India. The Closing Ceremony ofﬁcially ends E Week, with celebration, performance and music. E Week Champions and Honor Roll are announced at the Ceremony. Champions receive trophies. Co-hosts NEN, over 270 NEN member institutes, Wadhwani Foundation, TiE, DARE, IVCA, IAN & Proto. Sponsors HSBC, Himalaya Drugs, Symphony Services More info at www.eweekindia.org

fritter away our time in discussions and arguments. However, the perspective is changing.

interacting with real entrepreneurs and that’s when my interest really started.

What’s your biggest dream for your future? I want to start my own company one day. I still haven’t found my calling. But when I do ﬁnd it and hope I have the strength to go through with it and not settle down with something that is more secure.

What interests you about entrepreneurship? Fundamentally, the kind of person I feel I am a job was never really something I was keen on. There was also this whole aspect of being your own boss. And also creating value inspires me; I feel I should be something better, something bigger.

What is E Week to you and what you want it to accomplish? I feel E Week is all about awareness and enthusiasm. In this one week the entire country is celebrating this concept. That itself is great feeling. Last year, as soon as E Week got over, for one or two weeks after E Week there was ambitious planning for this year’s E Week. So that way enthusiasm got generated.

What interested me most was that there are no limits in entrepreneurship – no ﬁeld we cannot get into; no deﬁned size of anything that we start, or role, for that matter. We don’t have to be the starter – anybody can be entrepreneurial in spirit. Do your plans include starting a company? I am going to do my MBA now and then I will start off as soon as I get my team. Indian companies, at least the new ones in the products side, are usually an adaptation of something foreign for Indian market. The company that I start will not depend on technology from abroad; it may use it, it may even be based on it, but the dependence will be less.

The most exciting thing about India for you… India is now a land of opportunity and this the time to be and the place to be. The kind of technological advancement and the action that is happening in the economy is something that fascinates me. There is no dearth of ideas in India.

Name: Ankur Gattani, Kolkata Age: 23 Institute: IIM Cal

The most exciting thing about India for you…. The sheer size of India size really excites me -- in terms of people, diversity, opinions and perspectives. There is so much in India. We have markets for everything. That diversity in consumers really encourages me as a future entrepreneur. Your biggest concern about India? We talk too much and do too little. We

Do you plan to start a company? We started in June 2007 – a concept called micro blogging, using online and mobile technology. The idea is that a lot of people want to write about their lives but don’t have the time or ﬂair. So is there a way that you can write in small snippets. We plan to launch the prototype in March 2008.

Course of study: MBA in strategy & mktg (ﬁnal yr.) Family background: Father was a surgeon, Mother is a homemaker How and when did your interest in entrepreneurship start? When I ﬁrst got involved in the e-cell at IIT Bombay, that’s when I came to learn about entrepreneurship. Before that I had no clue about entrepreneurship. Towards the third year I started

What is your biggest concern about India? The institutionalization of support system as compared to the west is still very poor in India. There is also lot of un-employability problems in India. The education system, the support system is not really in place. And something needs to be done. What does E Week mean to you? What do you hope it accomplishes? E Week is like a movement around entrepreneurship; it’s like a week of awakening. I would like to see it becoming a one-on-one networking platform for aspiring entrepreneurs, as well as for students from across the country. That will help in opening up of minds and enabling them to become more conﬁDAR E dent and assertive. Content provided by NEN FEBRUARY 2008 105

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/exit

RECAP

OCT 2007

Entrepreneur of the month – VSS Mani, Just Dial Unique idea of the month – The Royal Time Machine A 19 seater luxury bus, ﬁtted out in an early Mughal setting, with drinks and snacks, LCD screens and multi lingual voice-overs can earn an annual revenue of Rs. 1.75 crore How to get Private Equity A comprehensive primer for those seeking PE. Insights from entrepreneurs who have done it, how they went about it and leading PE funding agencies

The business of better environment Call it a concern for environment or plain economics, many businesses around the world are striking gold in 'green' pastures Generic pharma & patents Will the upholding of Section 3(d) of the Patents Act by the Madras High Court be the end of the battle between patent holders and generic manufacturers Farming for caviar Captive sturgeon farms for caviar could earn millions. Russia, Japan and US are doing it. UAE is following suit. Can we replicate it? Radio cabs: a business of Rs. 7,210 crore

• Case Study- Hidesign • Angel investing in India • Apprentice youself to an entrepreneur Entrepreneur of the month - Shahnaz Husain

NOV 2007

Unique idea of the month - Timond Watches Bitten by the retail bug, Jewellery maker Chain and Chain forays into the competitive luxury watch market with Karan Johar as brand ambassador

How to get VC funding Too many entrepreneurs are chasing too few VCs even as the funding market hots up. Few things to help you improve your chances of getting funded Organic Farming Highly fragmented and lacking mature players with scale, this sector could well offer a few hidden treasures

Dreaming big for Darjeeling If France can build a multi-billion dollar tourism industry around wine and champagne tours; why can't we build one around Darjeeling tea? Opportunities in telecom infrastructure Release of more telecom spectrum to new players opens up new opportunities in the infrastructure space Rs. 6,000 crore in waste management

• Case Study- Ittiam • Prepare yourself to start a company • Women entrepreneurship in India Entrepreneur of the month - Ajay Bijli, Priya Village Roadshow (PVR)

DEC 2007

Investor of the month - Bala Deshpande, ICICI Venture

Unique idea of the month - Babajob.com Three entrepreneurs comine social networking with online job search for the beneﬁt of unskilled workers How to get Angel funding for a startup Windfall proﬁts in carbon trading Kyoto Protocol turns reduction of pollution into a revenue generator Opportunities of Rs. 5,500 crore per year from parking lots

Opportunities in mobile apps New avenues open up for content companies and application developers as bandwidth increases for mobile data

The business of Spas As healthcare moves beyond treatment to wellness and people get ready to pay more for being pampered, this business is set to boom • Case Study- Enchanting India • Manage your team's relationship network • Can you win in China? Entrepreneur of the month - Chetan Maini, REVA Electric Car Company

JAN 2008

Investor of the month - Raman Roy, Indian Angel Network

Alternative Investment Markets All about the sub-set of the London Stock Exchange; what the London School of Economics called the world's leading stock market for young and growing companies Intrapreneurship in Indian companies How it helps both, the employee and employer, unlock their hidden potential and take the innovation route

Opportunities in packaged lunches Changing lifestyles and longer working hours have led to a sharp growth of the packaged food and ready to eat (RTE) meals business in India. Go ahead, grab a slice of the pie! Opportunities in BPO driver training This small segment of the entire gamut of opportunities at BPOs holds a potential of Rs 780 crore by the year 2010

Corporate governance for listed ﬁrms The route to an IPO is paved with tough decisions and a lot of hard work, which needs to be continued even after listing. This piece walks you through the essential compliances to be met pre and post IPO • Case Study- TutorVista • Family Businesses: Growing next gen entrepreneurs • Why entrepreneurs need integrity 106 FEBRUARY 2008

RNI No.DELENG/2007/22197 Posting Date: 5th & 6th of every month. Posted at Lodi Road HPO.

DL(S)-17/3314/2008-09-2010