Technology, Venture Capital, Private Equity

For a long time (in fact even before I joined the PE industry), I used to think about what’s the ideal strategy for making investments (especially PE/VC ones) to earn superior returns, and I had vaguely concluded that deep domain expertise in specific industries was perhaps the only way to beat the market. And a recently released study by BCG reaches the same conclusion. The report concludes that domain expertise and industry networks rather than financial engineering or fund structure is what differentiates top funds from the rest. Frankly, I am quite surprised that almost all funds define their investment criteria by stage and deal size and we haven’t witnessed that many “experiments” with industry specific funds which invest across stages and deal sizes.

Read the rest of this entry »

Last week, there was an extremely interesting exchange of views on Microsoft’s search strategy between Tim O’Reilly and Michael Arrington. See:
http://radar.oreilly.com/archives/2008/05/microhoo-corporate-penis-envy.html
http://www.techcrunch.com/2008/05/25/the-importance-of-a-competitive-search-market/
http://radar.oreilly.com/archives/2008/05/why-search-competition-isnt-the-point.html
Tim seems to think that MS’s efforts are directed in the wrong direction since search as we now know it is essentially a “done deal”. On the other hand, Mike argues that Google is headed towards monopolizing search, which portends ill as far as internet related innovation is concerned and therefore, MS’s attempts to break into search should be welcome by all. I would say, I will have to go with Tim on this one, and here’s why.

Read the rest of this entry »

I was reading a post by Henry Blodget on how Google’s search income is beginning to close in on MS’s revenues from Windows, which is unnerving the latter. In the comments section, there were many who remarked, “Why should MS feel threatened? After all, there is no connection between the two.” However, the fact of the matter is that there is a connection, and nobody realizes it better than MS (the aborted Microhoo endevaour is proof of that) . Ever since the internet exploded as a phenomenon, there have been various attempts to reduce the OS to a “plug-in that will sit below network applications” as Marc Andreessen put it when he set up Netscape. Netscape, Sun and now Google have all sweated it out in that direction. And, surely enough MS has squashed all such attempts. However, Google seems to have attained a position that seems most threatening of the lot for many reasons - a)They have amassed financial resources larger than any other challenger in the past b)they arguably have a better engineering team than MS c)they have a disruptive revenue model, which MS is yet to gain mastery over. In short, they have everything that it takes to launch a serious attack, and that they seem to be doing via Google Docs and the rest. Read the rest of this entry »

Looks like the business world in the US  has taken a penchant for frenzied activity over the weekends.  If it was the Bear Stearns episode a few weekends back, it was the Microhoo - will they, won’t they saga unfolding in all its drama last weekend finally ending pretty unventfully with leaders of both companies calling off the deal and shooting out missives intended to give the impression that the outcome was in the best interest of its stakeholders after all.
And I should admit, I got this one wrong. Given MS’s dislike for being an also ran in any area of high priority for them, and Y!’s own trouble in getting its house in order, I had thought that there was no other choice, but for them to finally come together. I had dismissed the noises made by the managements of the two companies in the interim to be just posturing for valuation negotiations. And that indeed may still be the case.  In my assessment, the companies will probably keep the discussions going in the background (albeit quitely) and may just spring a surprise by announcing a deal some day when nobody was expecting one. The fact that the deal [fell apart] only on valuations (and even here, the gap doesn’t seem unbridgeable) indicates the willingness of both parties to have a discussion in principle.  However, there is a huge joker in the pack, and that is AOL.  If either MS or Y! decide to acquire AOL, all bets would be off.  Can’t wait to see how this game is going to unfold in the near future. Expect a whole lot of twists and turns in this tale before we get to the end.

One of the factors holding back entrepreneurial activity in India has been the lack of enough motivational success stories. An important turning point in the history of PE investing in India was the stupendous success of the Bharti Telecom investment by Warburg Pincus. The multiple times return on capital they earned made other foreign investors wake up and take note of the opportunity here. Similar stories are required in the VC world to rev up entrepreneurial and VC activity in our country. One of the common complaints we hear is the lack of early stage funding in India, though thats changed a lot in recent past with multiple seed and early stage funds coming in. Success breeds success, and in a myriad ways. Lack of enough hi-tech entrepreneuiral successes where startup employees have taken home large sums by way of stock options has also been a deterrant for others to sign up for startups. Hence, a handful of big successes is all that is required to seed the ecosystem of investors, entrepreneurs and also other contributors (read tech staff) to come together to start building great cos.
Therefore, this news item on  UTI’s blockbuster exit from Excelsoft augurs well for investors and entrepreneurs alike. Congrats to the UTI team!

Amidst all the gloomy news coming out from the US economy, the one silver lining has been the uptick that its exports have been demonstrating for the past few weeks. This is mainly attributable to the plunge in the dollar against most world currencies, rendering exports more competitive. Given the recency of this phenomenon, its hard to predict if this is a trend or a mere blip. But, given the fact that the Fed has been working the currency printing presses overtime, the dollar’s value is certainly not heading back north any time soon. On the other hand, rising commodity prices, coupled with the reduction in purchasing power of the dollar is also causing inflation to rise to uncomfortable levels. And with GDP growth also dramatically slowing down, we have the makings of a classic “stagflation”, believed to be a nightmare for central banks for the following reason. Read the rest of this entry »

It goes without saying that recessions by definition are difficult times for businesses in general. Yet, we often hear how some businesses/economies/countries are more protected from recession than others. But, on closer examination, it becomes evident that such defences from downturns are either mythical or marginal at best. The three instances of this from the recent past that readily come to my mind are: the Indian economy, Indian IT companies and Google. Many observers had till quite recently euphorically declared that all of these will not be adversely impacted by any of the weaknesses in the global economy.  The reasons offered may have been different in each case, but the conclusion was the same. However, in each of these, it seems that such enthusiasm was a little premature. Lets take each of these separately.
Read the rest of this entry »

One of the purported strengths of India over China is supposedly our well developed financial and banking infrastructure. Therefore, it came as a surprise to me to learn that 3 of the top 5 banks (by mkt cap) in the world today are from China and the Indian banks are nowhere in the picture. HSBC, btw is the third largest.

See:
http://news.hereisthecity.com/news/business_news/7538.cntns

1. Industrial & Commercial Bank of China Limited - $277.5bn market capitalization
2. Bank of America - $195.9bn
3. HSBC - $176.7bn
4. China Construction Bank Corp. - $165.2bn
5. Bank of China - $165.0bn
6. JPMorgan Chase - $159.6bn
7. Citi - $140.6bn
8. Wells Fargo - $112.3bn
9. Banco Santander - $109.8bn
10. Mitsubishi UFJ Financial - $105.4bn
11. ABN AMRO - $103.6bn
12. UniCredit - $97.5bn
13. Intesa SanPaolo - $89.8bn
14. BNP Paribas - $88.4bn
15. Goldman Sachs - $87.6bn
16. UBS - $84.8bn
17. BBVA - $78.3bn
18. Sberbank - $77.7bn
19. Royal Bank of Scotland - $76.0bn
20. Wachovia - $75.4bn

It’s been one hell of a week for the markets, swinging wildly like a yo-yo and if all that wasn’t enough, in the midst of it, we have the Wockhardt IPO fiasco. I can’t recall any other instance in recent memory when such a renowned company had to withdraw its IPO the way Wockhardt has had to.  While the management of the company has blamed it on the prevailing weak market sentiment, it’s clear that there’s more to it and that someone somewhere was being overambitious. It’s just incidental that I have been contemplating and blogging on the interplay between perceptual (or “synthetic” as I referred to it earlier) reality and fundamental reality, and in this case, its quite obvious that there was a huge disconnect between the two.  
Read the rest of this entry »

Discovered how hard it is to get back to writing after a long break. Hence, the second part of the post on this topic comes after a while. However, developments in the past week have provided the ideal backdrop for this piece. Tata’s launch of the “world’s cheapest car”, Nano and Citigroup and Merrill Lynch hinting at taking larger subprime writeoffs and selling stakes to Middle Eastern and Chinese investors to bail them out of their crises are in my view, not just one off phenomena, but a pointer to a larger reality that is currently unfolding, which is - the shift in the world’s epicenter of economic activity away from the US. Read the rest of this entry »