Prakash Bhalerao is a Serial entrepreneur and Venture Capitalist. He grew up in Indore, where he did his schooling and college education. He shared two memories of his Indore days: He grew up in a school which produced a fair number of politicians: 2 MPs, 4 MLAs and a dozen corporators. Most of these politicians have a very dubious reputation in politics. But what he learnt from the rough and tough environment of school was a fighting spirit. Helped him immensely in his later years. What added to that spirit was being a Maharashtrian in a Hindi speaking state. Here is what he has to say about being a minority – you need to be twice as good in order to be compared favorably to one of a majority. So his fighting spirit got a dose of hard work.
He finished his graduation in Computer Science, in the 1960s, with a gold medal. Professor Niyogi, one of his teachers who had returned to India after finishing his PhD from the US, was fairly creative in his teaching of Computer Science, Now in the 1960’s the only computers that existed in the country were in Mumbai and Delhi. So how does a person like Prof Niyogi teach programming? Well what he did was to ask students groups to write Fortran codes on a piece of paper, these would then be shuffled and redistributed. Each group had to mentally compile the code of the paper that was received and debug.
Prof Niyogi inspired Prakash to carry on to the US to do his further education. His class exercises in Indore helped Prakash immensely when he landed up in the US – and very soon he outshone his entire class. He maintains that even now he can look at a piece of code and decode the personality of the programmer! A summer internship at Digital Equipment Corporation saw him impressing the guide so much, that he was requested to discontinue his Ph.D and join as a CPU (the box not the chip) design department at DEC.
Prakash had a 18 year stint at DEC, seeing the company grow from 1500 people when he joined to almost 140,000 people by the time he left as Vice President in 1989. DEC was the rockstar of the IT industry during those days. Prakash had an intrapreneurial role at DEC, where he started 2-3 divisions and handled engineering and marketing for these divisions at the global level. He talked about his life as an intrapreneur. You got a blank cheque from DEC if management believed in your idea.
Another challenge for an interapreneur is managing the internal environment. One of the interesting anecdotes he related as an intrapreneur at DEC, was getting buy-ins from the legal department for his projects. As can be expected there is a dotted line reporting that Legal has to Division heads, but it is the functional reporting which is dominating. During his head of the division days, Legal department was the bottleneck, as they had to vet every contract that the division would sign with customers. With a lot of divisions competing for their attention, and a very sarkari style of working, inside DEC getting papers pushed in the legal department was a Herculean task. How Prakash managed to woo them, was to use his budgetary IT quota, to replace the antiquated computer systems that Legal had leading to some interesting mutual back-rubbing..
He was associated with the team that made the first VAC minicomputer, and he talked with great nostalgia about the espirit-de-corps of that team. After seeing through more than 30 companies as financier / employee, he maintains this: Show me a great team, and I will show you a great product; Show me a great product and I will show you a great team. Prakash believes that it is the first 5-6 people that a start-up recruits which decide what the culture of the company is going to be. And that decides its success. Case in point being Andy Grove – and the positive paranoia that he drove down the ranks at Intel.
Unfortunately the camaraderie of teams at DEC started going down as the team size grew bigger – and that was probably one of the reasons for DEC’s downfall. DEC’s success became its failure. DEC was used to selling mini-computers at $ 250,000. The mini-computers were 22 board machines – which had a production cost of $ 48,000 – and margins in excess of 250,000. When a competitor – Atlas – arrived and started selling machines at 50,000 – DEC could not get itself to sacrifice. And by the way, Atlas suffered the same fate – losing out to Sun, which in the meantime – lost out to PCs, each time at lower price points, which the predecessors refused to fight on. As companies we need to realize the importance of cannibalism!
Prakash left Dell and joined C-Cube, a start-up, in 1989. This company was partly funded by Kubota. The original plan that this company had was to work on data compression software, The mathematicians who were part of the founding group after 9 months of hard work came up with a lossless compression algorithm where you could end up putting 3 times the data on the same hard disk space. Negotiations started with Seagate, the leading Hard Disk manufacturer at that time. Just when the time came to seal a contract with them, a competing technology based on the read/write MR head came up – which offered a 10X compression, showering cold water on C-Cube’s plans for the business. The team now started to look at areas where their compression techniques could now be used. Some of Prakash’s colleagues had been involved in setting up a new standard for picture files compression – the joint expert group (jpg). Voila! Here was an application that could use their algorithms. The motion jpg (mpg) standard followed for video. The company went on to achieve leadership position as a supplier of technology for the DVD industry – and got sold – landing up a tidy sum for Prakash.
Being at the right place at the right time is important. Prakash attributes 51% of success to luck – and 49% to hard work. He happened to be in Silicon valley in the 1990s – which is when things really took off. He compares this to the Renaissance period in the 1500s in Europe, where there was a convergence of great people at the same place and time. You needed to be lucky to be born in that time and be at that place..
Prakash drew an interesting differentiation between a founder and an entrepreneur. A founder is typically the ideas guy. The entrepreneuer is the executioner – the one who gives direction to the company, who takes it around obstacles and defines the company’s attitude. An entrepreneur is a person who understands her strengths and utilizes them to build on the strengths she does not have.
Another interesting insight from Prakash: In his entire career spanning 30 companies, Prakash has not seen a single start-up company, which 2 years down the line was doing exactly what its Business Plan said it should be doing. First case in point being the example of C-Cube discussed above. There always comes a time when the founders have to put chings to navels and decide to change course. A VC or Angel will only tell you what not to do, what to do has to be decided by the founders.
What do VCs look for in start-ups?
Is the opportunity large?
Is the market confused enough?
Is the team strong?
Is there a clear differentiation in the solution that is being offered?
Of all the above, what is most critical is the last point – which is what most entrepreneurs neglect. In fact Prakash’s rallying call to companies that he funds is – aka Benjamin Franklin – give me differentiation or give me death!
As a VC/investor, he had the following finance model to share: There are 4 phases of investments with a different set of uses and risks that a funded company goes through in its growth phases:
The Angels: Very High Risk – to be used for product validation. An Angel typically invests about 500,000 $ and expects a cash-burn in 12 months. He would not like a company sitting on his cash for 3 years. He wants a go-no go decision pretty fast to find out if he is getting a 20X return or a 0X return. Either you are highly successful, or you go down in flames.. Slow death is not acceptable.
The Series A: These guys will invest around 2-3 m $. They will fund the idea to prototyping stage. The risks are lesser and so is the expectation of returns.
Early Stage: This funding is required to take the product and get it ready to ship to the first customer.
Late Stage: These are what are typically the Venture Capitalists. They use their linkages with bigger industry. Using their brand names it is easy for the company now to get on board skilled management personnel etc. They help customers win confidence in the longevity of the start-up. In a segmentation of customers of a start-up there are 2% who are believers, 10% who are the doubting Thomases, 80% who are sheeps (read blind followers) and the remaining are people who can safely be ignored. The VC chaap works best for the doubting Thomases. And these are not typically the Tatas and Birlas.. They come in only once the 10% chasm is passed.
Public Issue: Is usually considered the time when the entrepreneur rides off into the sunset, sipping champagne in his hill-top mansion as a Ferrari gleams in his drive-way. But reality is that it typically is to raise more funds not to give pay-offs to the founders…
Each of these phases is about 12-16 months, a time period decided by the time that the product takes to move to the next phase.
Prakash classifies Angels in following categories:
Corporate Angels usually the Senior Executive who has never been an entrepreneur but is making enough to take some gambles in industries that he knows something about.
Sleeping Angels who will make an investment and like Rip-van-Winkle fall into deep slumber, waking up at an opportune time to demand their pound of the flesh when the next round of sell-offs is being made.
Hell’s angels who basically make life hell for the founders.
As a founder what you need to realize is that the effort in raising money is the same, irrespective of what the amount is. Suppose you require 300,000. You spend 6 months to a year and raise the money. You run out of it in 6 months. It is now very difficult for you to go back to the market. Your first investor is bad-mouthing you – and you are being distracted from your core jobs of making and selling. So it is a better thing to be realistic. Be aggressive on the spend plans and conservative on the revenue plans when you decide on the quantum of funds you need to raise. In case you are only able to raise part of the funds, keep it in an escrow account – and don’t touch it till your fund raising target is achieved. Remember your job as an entrepreneur is to keep the ideas spinning and the cash flows churning. The moment the cash churn stops, you are a dead duck..
There was an interesting question from the audience about how do you ensure secrecy of your ideas and defence of your IP. Prakash had an interesting reply: He started by recollecting a Chinese saying: If you have to whisper, don’t say it. The other insight: If the start-up’s idea is so simple, that anyone can copy it, then I wouldn’t want to invest in the start-up. I am looking at what entry barriers are you creating for others to come in.
Prakash used an American hockey analogy for start-ups. They need to find where the puck (the ball used in hockey) is. The puck moved from valves to transistors to ICs to microprocessors – moving from companies like Westinghouse to Transitron to Texas Instruments to Intel. Another example of the puck moving was seen in the baby boomer generation in the US. In 1950-55 the puck was with the diaper industry, from 1955-60 with the tricycle industry… and now as the baby boomers become senior citizens – the puck is with healthcare. With the US, Japan, China and European populations ageing, there is a chance that the puck would be in India in 2020-40! When asked about the current place of the puck, Prakash thought in the US, apart from healthcare, it is in social media and green energy. In fact an interesting insight was that it is probably at the boundary of social media and healthcare. An idea that he discussed is about a medical instrument that has seen almost no change in the last 100 years – the stethoscope. An opportunity exists today with the convergence of sensor technology, digitized patient history and data about patient norms. The best part – no clearance required from FDA and its likes!
A few words about Prakash’s subsequent companies. Prakash started his journey as a serial entrepreneur cum VC started with the sale of his first start-up – Ambit Design systems to Cadence for 280 m $. Ambit was involved in chip testing software. His current company Verismo Networks is involved in IPTV. The challenge in the IPTV space is bandwidth. The early stage companies like Infy and Wipro based their businesses around text, which could be moved around at 100 kbps. We are today in an era of 256- 1000 kbpsm, where we can move around stored video (read youtube). The next stages are going to be live video at 1 Mbps and HD video at 5 Mbps. We have live video apps available but typically for mobiles where the screen size is only 5 inch. To get the same working on a 50 inch screen will need 25 Mbps. One of the interesting challenges faced at Verismo was how do you get programmers fired about writing code for 50 inch TV sets, that none of them probably has seen in his lifetime. It is always interesting if the developers of the product are also its consumers…