These columns were written after I visited Gujarat at the end of 2001 during a survey of information technology. Gujarat did not figure on India's technology map then, so I was surprised to find entrepreneurs trying out various unusual things. Varshney, an academic who has set up a series of venture funds, was particularly interesting.
I A day with a venture capitalist
Vishnu Varshney claims to be India’s first venture capitalist. Gujarat Venture Fund (GVFL) was set up in 1990. Of its equity, 39 per cent comes from Gujarat Industrial Investment Corporation (GIIC), 11 per cent from Commonwealth Development Finance Corporation (CDFC), and the rest from companies domiciled in Gujarat. CDFC’s participation and the fact that GIIC is a minority investor give Varshney a degree of autonomy, which he values and defends. If his fund had been a subsidiary of a government, his job would have been impossible: like UTI, IDBI and IFCI he would have been forced to give money to politicians’ and bureaucrats’ favourites, and his fund would have been driven into sickness. An occasional bootlicker CMD may be hauled to jail; but otherwise one who does the rulers’ bidding is also protected from the consequences of his mistakes. Varshney is not; and that makes his task difficult. Not that ministers have not tried to intimidate him; Varshney has stories of one who believed that the function of public institutions was to profit his friends and benefactors. He put some unholy pressure on Varshney. Fortunately he did not last; and ministers like him are still not too frequent in Gujarat. So political patronage and interference are not Varshney’s biggest worry.
The law and order machinery works well enough in Gujarat and has been of great use to Varshney at times. He tells of a client who proposed to set up an industrial plant. As soon as he got money from GVFL, however, he cancelled the order for machinery and misappropriated the money. Varshney managed to have him put behind bars, and even recovered some of the money. But dishonest applicants are one of his biggest worries. Since a venture capitalist invests in equity, Varshney does not have the recourse to assets that a creditor has. There are ways of getting a better title, for instance by assignment of mortgage on fixed assets. But provided the capitalist decamps at an early stage, without creating assets, he can run away with money, and pursuing him requires much skill and luck.
The risks of financing a lone adventurer would speak for the financing of already established industrialists. But quite apart from the fact that it is not a venture fund’s function to finance them, funding them has its own risks. The greatest risk is that they will siphon off the money. If they have other businesses, it is easy for them to transfer money out of the company funded by the venture capitlist into their other businesses. Constant surveillance and strong accounting structures can help, but cannot prevent all misuse. Besides, a new enterprise can suffer even if it is not milked. An entrepreneur looking after a number of businesses may give more attention and energy to one, and the others may suffer. The best candidates for venture capital are novices who have only one idea and one passion.
But such nouveaux entrepreneurs often have little beyond an idea. I encountered one who had an excellent idea. Son of a jeweller, he worked in a family shop selling Tanishq jewellery. Then he got the idea that spectacles were also a form of adornment which could be sold like jewellery. So he manufactured really beautiful spectacle frames - gold frames worth Rs 15000, smart dark glasses, ornamental frames for fashionable women. Splendid idea, but then came the question of how to market them. Local optical shops, bent on volume business, were not interested in selling such expensive frames. The demand for them was not large enough to justify entire shops; even if it did, the capital required would be huge. Taking exclusive space in existing shops was a possibility, but its economics was uncertain. So a great product reared at the hurdle of marketing.
Individual entrepreneurs, however talented, cannot be expert at everything. Most people who come to Varshney have a scientific background and come with a technological innovation; of marketing, personnel management, accounting or dealing with excise inspectors they have little experience. So GVFL must hold their hand, often for long; it must fill the gaps in their skills.
For this the fund employs about a dozen project managers. Most are in their twenties or thirties; many have degrees in management, with a sprinkling of accountants and engineers. Why not older or more experienced ones? Because the first thing competent Gujaratis want to do is to get out of Gujarat. They prefer the bright lights of Bombay and Bangalore, or go abroad. Some may be wanting to get away from their parents and families; some may not like prohibition; some may look for better schools for their children. These factors matter. But the most important factor is that Bombay and Bangalore have bigger companies that offer bigger salaries.
Having young project managers has its advantages. They are energetic and enthusiastic. They are generally too young to be corrupted. In the venture capital business it is too easy to get emotionally attached to the clients and their businesses; there is a real risk of conflict of interest. This is where having young project managers helps. A degree of heartlessness is necessary in a venture capitalist; if a business has poor prospects of success, a venture capitalist must throw out the entrepreneur and give it to someone else, or pull the rug and get out. With whom to do this, and when, are matters of fine judgment; it is easier to mould the judgment of younger people. But it is clear that the present management structure throws a disproportionate burden on Varshney; from the point of view of building up deputies and delegating to them, Ahmedabad is not a good location. Admittedly, Varshney’s young people would develop faster and go farther if they were allowed to make mistakes without having to take the rap. But if GVFL is to expand, it will need either strengthening at the senior level or greater delegation or both.
But management structure is not Varshney’s biggest problem. To succeed, a venture capitalist must recycle his capital. He must nurture new businesses, make a success of them, and sell off his stake in them, so that he can take his capital to new businesses. The ideal way is to take a company public and sell off the venture capitalist’s stake to the public. Since 1996, however, there has been no market in India for small and new companies. So exit is Varshney’s biggest problem. Is anyone interested in getting into exciting startups? Varshney is your man.
II Gujarati information technologists
IT in Ahmedabad? Sounds like an oxymoron. But consider Pratul Shroff. After doing an MS in Cornell, he joined Daisy Systems, which was a pioneer in chip design and a forerunner of Intel. A dozen people from that original group started off on their own, including Vinod Khosla. But Shroff came back to Ahmedabad in the late 1980s. He started making industrial controls. But they were not exciting; he sold the business to his partner, and hibernated for a year.
Then he started e-Infochips. Chips are being designed to control ever more functions. Mobile telephones are an example; but the same kind of intelligent operation is being embodied in many other SOCs – systems on chips. Pratul designs such chips. He employs 70 persons –all locals; he offered them a chance to stay at home, and they took it. He does not pay them as much as they would get in Bombay or Bangalore; but he offers them personal growth and a long-term vision. To train people for what he needs, he has started Caloris Institute and gives an ASICS chips course. He has set up an office in California to do onsite work for clients; it also enables him to give his people jobs in the US, and exposes them to the Californian work environment and market. In two or three years he expects to build up valuable intellectual property blocks.
Chirag Patel is just into his thirties. He did an MBA from Loyola University, and then worked in Login Computer Systems, an IBM subsidiary that helped mid-sized companies set up systems. He returned in 1993 to join the family business of cotton ginning and oil milling. He worked there for four years. Then he joined up with two childhood friends to start Net4Nuts.
The business of Net4Nuts arises from Chirag’s experience at Login Computer Systems. Big US companies have used computers for a long time, and with them, several generations of software. Its modernization has yielded Indian software companies much business. Small companies do not have such an inheritance. They also do not need elaborate software internally. But they could use software to interact more easily with suppliers and customers. This is the kind of software – christened Avtaar – that Net4Nuts has designed.
If Chirag is a son of an oil miller, Nimit Parikh – not yet out of his twenties – is the son of a crane manufacturer. His father went to the engineering college in Ranchi; after graduating he joined Heavy Engineering Corporation, which had just been set up. Ten years later, HEC was floundering. Jagdishbhai left and set up a crane business near Anand in 1973. The seventies were a boom time for Gujarat; Anupam sold cranes mostly in Gujarat. The eighties were a lean period. Then by the 1990s, Jagdishbhai was joined by his two sons – first Hemal, and then Nimit – and their wives. In the last five years, Anupam has improved its technology with help from Kühnezug. It has replaced the heavy girder that supports a workshop crane by a pipe deformed into an oval; and the weight reduction has permitted the deployment of a lighter travelling motor. It has also worked out a way of transporting a crane in a knocked-down condition and erecting it in situ, thus saving on costs and hassles.
Nimit did CAD/CAM in college; when he joined his father’s business, he implemented it in-house. Earlier, an order required days of engineering and costing calculations before it could be turned into specifications. With the new software, these calculations take a couple of minutes. The software selects girders and designs that give the required strength at minimum cost, gives the most compact layout, and turns out the elaborate circuit diagrams.
Having automated the design part of the crane business, Nimit developed software ambitions and set up a B2B web site for the engineering industry. But the industry has been in trouble throughout the 1990s; the site failed. So now Nimit has gone back to what he did for the family business, and is setting up ERP systems for bigger engineering companies; the strong point of his product is that it cuts down on the time and the degree of interaction between buyer and seller that is required to convert an order into detailed specifications.
When I go to London, about the first thing I do is to buy a telephone card for 5 Pounds; I can use it everywhere, and it generally takes care of my phoning requirements during a short trip. Suppose one could buy cash cards just as easily, and use them to buy anything in any shop – just imagine the convenience. That was the idea that occurred to Ashesh Shah of E Cube India Solutions in Baroda; by now he has gone much further. He designs cards that can perform any or a combination of operations such as the following. A bank may sell a card for Rs 500, which would be accepted by shops just like a credit card. This is a highly profitable business for a bank – it gets cash straightaway and pays it out over the next few days or months. Or take GSM cards that go into mobile phones; the phone operators could and do offer air tickets and banking services on them. Both they and the service providers make money. Or a corporate may issue a card to every employee that embodies her privileges – her expense account, access to the company doctor, canteen, library etc. And the system generates all necessary records of privileges used. Or a group of shops may sell cash cards that can be used only in those shops; the card embodies an automatic loyalty programme. And any of the above cards may be accepted by shops, ATMs, or automatic vending machines. Ashesh has tried out the concept with a local cooperative bank. But he is not in the business of selling smart cards; he is focused on designing them. He has teamed up with a number of American and European companies specializing in allied technologies, and is designing cards for clients abroad.
Finally, I come to Chirag Mehta of Icenet, an ISP that has captured a third of Gujarat’s market. Though he graduated in engineering from the local LD Engineering College in 1984, he joined the family business. But then his friend Hemant started an ISP operation in New York and Hawaii. When the ISP business was opened up in India in 1999, Chirag got a licence and hooked himself up to Hemant’s 10MBPS earth station in Hawaii to avoid VSNL’s absurd charges. He bought up 100 km of cable networks to get away from MTNL’s high prices. He used the cables to nurture cybercafes. And he developed software; today, India’s major ISPs use his billing software. Thus he started with a business into which 135 operators jumped in; today he is far ahead in terms of returns. That is Gujarati enterprise.
III Old and new economy in Gujarat
Last week I wrote about Anupam Industries in Anand, run by J C Patel and his two sons, Hemal and Nimit. It makes cranes - an old economy business if there was any. But Nimit, the younger son, has set up Anupam Infosys, implemented ERP in Anupam Industries, and is selling electronic business solutions to engineering companies. Is this just another example of the Gujarati penchant for mixing up incompatibles, or can the old and the new economies be combined into something strangely profitable? I visited a few new old economy companies to find out.
The most interesting one was 20Micron in Baroda. Its managing director, Chandresh Parikh, worked in Africa for many years, first as an R&D manager and later as managing director. Every mine generates mountains of waste. As a chemical engineer, Parikh saw an opportunity in them. Ground fine, many of them have a use. Sindoor is a microfined mixture of lime and turmeric. Talcum powder too is a microfined dust. When you buy oil paint, you may not realize that three-quarters of it is dust, called filler to fool you. Furniture is no longer made of wood. First industrialists took the sawdust arising as waste in sawmills and mixed it with resin to make board. Then they started grinding up such inferior wood as of mango and making board out of it. Now Parikh has produced a board in his laboratory that is 98 per cent dust - it just looks like wood, and does the work of wood without being it.
Here, in 20Micron, was combined one simple idea - microfining - with some good chemistry to create a successful business. It looked so easy that I asked Chandreshbhai if there was not some hidden formula. I discovered that he is a good amateur magician, and could make a living as one should dust prove unprofitable; maybe that is the secret of his success.
But information technology? Of course he uses computers - who does not these days? - and internet. But they have not had any decisive impact on his business. It was about making a large variety of highly standardized dusts from minerals strewn all over the country and selling them to an equally disparate group of customers - process control, product testing, and old-fashioned marketing are the keys.
Or take Rajan Harivallabhdas - the only descendant of a business dynasty I met this time. The extended family divided up the assets in the 1980s; apparently it did not leave Rajan rolling in money, and he needed to make a living. It happens that groundnut oil mill waste contains tocopherols and sterols. So Rajan set up a company, H K Finechem. Its basic asset is a distillation column. He started feeding it with greasy oil mill waste and making a feedstock for vitamin E. The main customer, a multinational, has stopped buying recently, so Rajan is exploring new markets. But a distillation column is a refinery in miniature - it can be used to isolate the components of many mixed-up liquids. So now he is using it to make dimer acid and monobasic acid. Again, a simple idea - distillation - and a nose for markets.
And then, Kirit Jhaveri of Marc Walker Opticals. As his name indicates, he comes from a jeweller family. His family specialized in a certain line of jewellery which is traditionally Rajasthani. Then Gujarati women started going modern, and the demand for old-style jewellery declined. So the Jhaveri family took a franchise for Titan. During the days of old-style controls, Titan ran rings around the incumbent HMT, and with its better designs and aggressive marketing, rapidly built up market share; its franchisees shared in its success. Then came the great wave of watch smuggling, and established watch companies suffered. Titan went into branded jewellery - a great idea, but because of the malpractices rampant in the gold business, it made only slow progress.
Based on his heritage of jewellery and watches, Jhaveri got the idea of spectacle frames as a fashion statement. He makes fashionable frames of gold and valuable alloys - I even saw one made of wood. Fashion is still new to India, and there are no established distribution channels for it, as distinct from channels for clothes, frames, shoes etc. The frame market itself is in a flux. During the years of import restrictions it came to be dominated by cheap frames made by the small-scale sector. Customers had plenty of choice, but there were no established brands. Then, as in watches, came a flood of imports, mainly Korean, some coming in legitimately, some smuggled. They have wiped out a good portion of the second-rate small-scale production. But Jhaveri still sees a market for quality frames such as his. According to him, Indian consumers buy 339,000 frames a day or 125 million frames a year. Most of them buy cheap frames worth Rs 150-250; but a quarter of them can pay for better looks and quality. The Indian population is aging, so the number of old people who can afford to pay more and who feel the need to look good will grow. So Jhaveri sees a bright future for his frames selling at Rs 10,000 and more.
Finally, Suresh Saraf of Saraf Foods in Baroda. He makes freeze-dried foods. He is himself from Rajasthan, but chose southern Gujarat because of the variety of fruit and vegetables it grows. But south Gujarat is also the home of the petrochemical industry, and where there is a chance of either chemicals or chemical smells getting into the food, it is a wrong location for fine foods. Finally he homed in on a place west of Baroda. He runs a scrupulously clean outfit: the vegetables are washed three times with distilled water before being fed into the vast freezing rooms, and are untouched by human hand. He gave me packets of baingan bharta and gajar ka halwa - all you have to do is to mix them with water and heat them, and you have the absolutely original taste. But he has no local market. I would think that was because we have such a large force of female cooks, free of cost. But Suresh says it is because there is no industrial market for fruit and vegetables. The EU standards are so strict that a lot of the produce cannot be sold to the final consumer. So misshapen apples or undersized potatoes are sold to processors at much lower prices; that is why processing is profitable. But our retail prices are lower than European wholesale prices; that is why Suresh has found a market in Europe - for onion flakes.
So there is still a lot of enterprise in Gujarat, and it has little to do with the new economy. But it is still going places because of ingenuity and a nose for profit.
