Wish List for Budget: Unleash the Entrepreneurial Spirit

The maiden budget of Narendra Modi Govt. is about to be presented in coming days, and as usual, there is loud chatter and demand around raising tax limits, allowing greater tax exemptions, as well as various other tax sops demanded by industry bodies. It is not that these demands are made for the first time; but being Shri Modi’s first budget, the expectations are much higher than ever before. While the aim of a national budget is to present checks & balances of annual revenue along with expenditure and provide an overview of the overall economic health of the country, the annual budget for all practical purposes should go a little beyond that. Since it shapes up the long-term behavior of the public at large by way of taxation, policies, etc., solely focusing on increasing tax limits, etc., is akin to demand allocation of medical leave while what one needs is a lifestyle change to get on their feet!

Hence, rather than doing short-term adjustments related to taxation, etc., Modi govt has a great opportunity to use the budget for changing the fundamental way the Indian Inc. behaves and operates. Following are the fundamental changes needed to transform India from being an emerging market to a super economy on steroids. These key three basic ingredients are:

Focus on Building and Creating Trust

India is a trust deficit society where not a single paper can move without getting notarized by some nondescript shop in some corner of some court.

This basic approach of “trust no one” has resulted in a regime which has loads of laws designed to plug any hole and has ended up doing more harm than good. For example, the new Companies Law 2013 has just added to the woes where it has now become impossible to start a company without spending a fortune on accountants and company secretaries.

Somehow in India, the lawmakers and bureaucrats work with the fundamental belief that every private enterprise has been started with the core aim of committing fraud, launder capital, evade taxes, and commit financial crimes until and unless proven otherwise, and it may come as a great shock and surprise to our giant army of babus that private companies/business – big or small – do add to the wealth of the nation and contribute in their own way in building the nation. The aim and objective of any government are to keep its citizens happy and to help them achieve this goal rather than doubting every motive and treating every enterprise as a den of crime. Hence, the government needs to behave in a more mature way and adopt a more adult approach when it comes to the treatment of companies, instead of having a parental attitude towards everyone.

Foster Entrepreneurship / Encourage Failure

A society/nation is carried forward by the tribe of risk-takers and not by the army of clerks and babus. In not so distant a past, England, being a tiny island, ruled over the world on account of its tribe of risk-takers, and today, USA dominates the world on account of new companies/technologies.

Unfortunately, in India, we reward mediocrity and continuity, and punish risk-takers, as the cost of failure is very high. Try to close a company after a failed business!!! One will end up spending more money and time closing a company than in starting a company. Compliance and taxation liabilities further sink down a struggling company. Moreover, there is hardly any incentive for starting companies. The budget should reward entrepreneurship and allow failures to happen. Taxation rules for enterprises doing up to 5 Cr top-line should be simple, as they are not in a position to manage compliance cost, unlike bigger companies. Opening & Closing of companies should be simplified and made cost-effective. There shall be less tax-filing hassles for companies which have paid up capital of INR 5 Cr or less and are of less than 5 years of operational life.

Bring Accountability / Transparency

India is the land of regulators. For everything to work right, there is a regulator, and every year there is demand for more regulators, and just like it happens for every person in power, regulators’ demand for power just increases year after year, and Yes, all power without any accountability / answering to the public.

Hence, while increased regulation has increased the burden on companies/individuals multi-fold in terms of costs / increased paperwork, there is hardly any empirical evidence of regulators being effective or not being misused by vested interests, since there is zero accountability.

Its high time the new govt makes regulators accountable for actions taken and shall be responsible for all power being demanded by them, as lack of accountability breeds corruption and creates an unbalanced power structure. Until and unless accountability is brought into the picture, frauds like NSEL / Satyam, etc., keep on happening and regulators, rather than being conscience-keepers of the nation, would keep on behaving more in the line of SS/Gestapo and focus on harassing entrepreneurs/companies.

Till these steps are taken, budget in India will remain just an annual accounting exercise without unleashing the untamed spirit of the country.

This article was reproduced and was published in Economic Times.

The Song of an Entrepreneur

Awesome poem by Milton Berle. Captures the mind of an entrepreneur –

“I’d rather be a could-be if I cannot be an are;
because a could-be is a maybe who is reaching for a star.
I’d rather be a has-been than a might-have-been, by far;
for a might-have-been has never been, but a has was once an are.”

Of Entrepreneurs, Artists and Signals from the WhatsApp Acquisition!!!

19 Billion, the price Facebook paid for WhatsApp acquisition!!! So while the whole world is still grappling with the price points, pattern seekers amongst us are trying to figure out the perfect template / the secret sauce. (Un)Fortunately, patterns are loud and clear ~ “Pure product obsession / total disregard for market shares, revenue or break-even.” Social media is already abuzz with news about the handwritten note by Brian Acton, Co-founder, to Jan Koum, CEO, about “No ads, No games, No gimmicks!” that has already acquired cult status in the community. The other company that displayed such a mad obsession about ‘Product’ was Apple, which achieved spectacular success as well even with such a limited range of products.

So the big question is – if the wheels are turning and from MBA madness of value creation for stakeholder, are we now going back to the product? Or let me put it this way – Are we now going from number crunching science to the purity of art? James Joyce once remarked that The Artist, like the God of creation, remains within or behind or beyond or above his handiwork, invisible, refined out of existence, indifferent, paring his fingernails.“ Somehow Jan Koum, Brian Acton, Steve Jobs, etc., seem more like artists than anything else and that poses a real challenge to all of us, the template chasers; how to design a template to create a masterpiece of art?

For entrepreneurs, the choice seems pretty simple and logical, that is, to be an artist, as that is what the template says, but things might not be so straight after all.

In a way, artists have always thrived when there is a patron; be it a king or some support system, which allows them to pursue art without worrying about day-to-day cash flows. Interestingly, in modern times, Venture Capitalists have taken up the role of erstwhile kings, where VCs now help entrepreneurs to perfect a product without worrying about revenue or cash flows. But in a ‘no king scenario’ or in absence of ‘VC ecosystem’, one shall rather be a trader than an artist; but then as Joyce points out, a true artist shall be indifferent to the winning itself.

So overall, the signal is loud and clear – that in times of excesses where the patron is either a king or a VC, the artist is going to win, and win big, when capital is not a constraint. While in ordinary times, it is the trader who is going to win, and win big.

Hence, let us raise a toast to these times of excesses, the VCs, and Yes – Oh those mad artists!!!

2014 : Economic Crisis at the Gate

The year 2014 onwards, one is bound to see India facing its worst economic crisis, irrespective of the fact whether Mr. Modi becomes PM or not. Since it is the first time India will face an economic crisis without any luck or local stimulant as Manmohan Singh’s actions (or rather lack of them) have exhausted India of any option, and India is staring at serious crisis without any arrow in its quiver. With 6th Pay Commission stimulus tapering off and with the almost negligible capital formation for last few years, attempts of bringing back growth by having same old & tired textbook measures – like interest rate cuts – are not going to yield any positives. The author argues that the only way India can escape this crisis is by building consumption in short-term and capital formation in long-term, which means taking extraordinary counter-intuitive measures like deflating real estate sector and boosting SME/manufacturing/infrastructure by simplifying rules/reducing the interest rate. 

2014 is here and somehow things look a lot better than what they were six months ago. Political change is in the air. AAP party, in a historical mandate, has been sworn in Delhi, and Raghuram Rajan, the new RBI Governor is making all the right noises. Suddenly from the despair of 2013, we seem to usher in a new year with a lot of positive vibes and hopes. No longer are talks of Indian rupee hitting a new low or Sensex collapse ruling news channels but newspapers are filled with reports of growth in hiring, salary increments and SENSEX hitting 25,000 by May 2014.

In fact, there is a wide-spread hope and belief that Indian economy will go in further overdrive if Narendra Modi / BJP gets the decisive victory which is, at best, a wishful thinking, and at worst, simply a mirage. This thinking stems from the fact or view that India was able to manage earlier economic disturbances on account of smart leadership maneuvers, and hence, coming crisis can also be taken care of by the sheer leadership of Narendra Damodar Modi. Before jumping to such conclusions, probably one needs to understand the Indian context and earlier brushes with economic crisis faced by the nation in a post-liberalized world.

India, despite being one of the ancient civilizations, has a very short history of being an independent state and even shorter history of being a liberalized economic market. This means that as a nation we have hardly any experience of boom/bust cycles as pre-1991, average household budget used to follow Hindu rate of growth governed by a monthly quota of ration and benevolence of state, while post-1991 India has just seen a phenomenal increase in overall wealth and conspicuous consumption.

Though post-1991, India did face an economic crisis in 2001 and 2008, but due to a variety of unintended situations, all these crises failed to make any impact as details below.

Dotcom Bubble and 2001 Economic Downturn

Post-liberalization (1991), the World and India stared at its first recession at the beginning of 21st century, when the dot-com bubble collapsed and 9/11 attacks happened, bringing global economic engines to almost a halt. However, other than some offer withdrawals at Indian management institutes, 2001/02 recession didn’t impact India at all for a variety of reasons. A lot of levers got in play to push the Indian economy on a growth trajectory despite the overall slowdown. Of all reasons, the foremost engine driver was BPO/KPO sector which not only created huge job opportunities in major cities but also absorbed the pain caused by the slowdown of IT industry. While BPO/KPO sector was keeping job growth fast and driving export income, on the domestic front, Infrastructure (road/port, etc.) and telecom sectors were taking shape.

The NDA Government, led by Prime Minister Atal Bihari Vajpayee, focused on building world-class roads all across India and rolled out the golden triangle. On the other hand, the entry of MTNL in mobile services with incoming calls becoming free led to price-drops and super explosion in growth of subscribers.

These two factors, i.e., improved road infrastructure and growth in telecom subscriber numbers, unlocked constraints in the economy and in fact paved way for one of the biggest GDP expansion India had ever seen, and year after year India clocked 7%+ GDP growth. This super rocket growth helped SENSEX break every record every quarter and India joined China in being the darling of fund managers on Wall Street. Billions of dollars were raised by funds to participate in India story. In a way, India had arrived on the world economic stage.

2008/09: Subprime Mortgage Crisis and Lehman Brothers’ Bankruptcy

While India was marching ahead to glory, far far away, USA was busy rediscovering nirvana in housing/mortgage driven by cheap Greenspan dollars whose solution for every problem was a little more liquidity. However, the party soon ran out of fuel and the world was hit by one of the biggest financial crisis with stalwarts like Lehman Brothers going bankrupt and 100s of banks in the US collapsing under subprime load. The whole world went into crisis except one country – India. While the majority of people were led to believe that India survived on account of the leadership of then economist PM; however, the truth is India survived the aftermath of Global Recession more by luck than any other thing, and least by Govt actions.

In 2006, Indian Govt without any idea of the upcoming 2008 financial crisis, set up 6th Pay Commission to review and revise the salary of Govt employees. The Commission came with its report in 2008 and released arrears in 2009-2010. This commission impacted almost 20 million Govt employees (Central and State Govts) and resulted in an annual increase of INR 12,561 Cr per annum (USD 2.5 Billion per year) and one time arrear of INR 30,000 Cr (around USD 6 Billion). As expected, this worked as mini-stimulus, as almost all of it went into auto and housing sector. The table below is almost self-explanatory where one can see growth in sales of passenger cars which witnessed the largest increase of 27% in the year 2009/10 and 2010/11, while the commercial sector was hardly growing. 


However, lack of any new initiative and slowing down of the economy due to policy paralysis resulted in almost zero job growth scenario and impacted car sales. Automobile sector faced slower growth in 2011-12, which turned into negative growth as automobile sale decreased every month in 2013.

2013 Onwards: Of NREGA / Fiscal Deficit and Real Estate

The year 2009 saw the re-election of Dr. Manmohan Singh led Congress Govt, which made analysts believe the beginning of another golden era since the government was no longer at the mercy of mercurial left parties and a prison to their economic agenda. It was expected that government emboldened by its electoral win, will unleash economic reforms, which coupled with GST and DST will catapult India much ahead of China.

However, in a karmic turn of events, all deeds of UPA I came to haunt UPA II. Bad moral hazard expenditure, like NREGA, increased labor cost for marginal farmers, thus created supply-side challenges while 6th Pay Commission returned to haunt Govt in the form of the high fiscal deficit which ballooned to 6% from earlier range of 2.5% to 3.0% in 2006.

Hence, despite all the talk of big revival and growth, India, in fact, is in the middle of a crisis as is evident by the following:

  • The automobile sector is seeing negative growth: 9-month consecutive drop in sales. Leading companies like Ashok Leyland, Tata Motors, etc., are cutting production schedule and realigning workforce.
  • Telecom sector after posting consecutive growth is now slowing down and is no longer front end driver of the economy.
  • Infrastructure remains in the middle of nowhere as no large projects are being announced while earlier projects which had absorbed billions of dollars are yet to see the light of the day, thus creating a real crisis for investors as all invested capital remains locked as an unproductive asset.
  • PE funds who had invested big time in Power / Infrastructure and roads in 2007-09 are yet to see any return of capital and majority of investment remains under water.
  • PSU banks, which helped real estate sector weather the storm in year 2009 by restructuring loans and saved it from big crash, is again staring at next level of restructuring, since the real estate players got greedy post-2009 and led to a price growth of 3x in the last 5 years and focused on EBITDA protection rather than cash flow management.

Real Estate – The Double Whammy

Real estate in India remains an interesting asset class, which has given best returns among all asset classes since 2000 and continues to rise despite the call of bubble burst now and then. In a way, the real estate sector in India, while showcases success and growth, also symbolizes as whatever is wrong with the Indian economy. Today, the real estate sector poses the following challenges:

  • Very high housing prices in comparison to median earning. Housing in India is expensive or at par with housing cost in the developed world.
  • Debt level at real estate companies is at an astronomically high level where some of the companies, like Jaypee Infratech, have a very high level of debt posing a systemic risk to Indian banking sector, as noted by RBI Governor in a recent statement.
  • Real Estate sector growth has to lead to jumping in housing prices by 5x to 10x in last 10 years while rentals have also jumped by the same level, though salaries have not kept pace at the same level. Today, the majority of free cash flow at the household level is going either in EMI payment or rent, which is restricting discretionary spend and thus creating a slowdown in consumption.

Road Ahead

As one can see the Indian economy is facing a unique crisis of having high inflation and very low growth. This unique scenario has made limited options available to RBI, which anyway never moves beyond Keynesian models. High inflation will eliminate the possibility of a rate cut as there is this naïve belief in India that low-interest rate will fuel inflation and will further impact growth. The powers in finance ministry need to understand that India is not west and does not have the luxury of enormous resources as well as well-oiled supply chain. Inflation in India is not a function of more demand but supply-side constraints, which becomes worse with higher interest rate and crony capitalism.

The only way Indian economy will find wings again is if real estate sector collapses (price reduction of 30% to 50%) and help to unlock all productive capital locked there and manufacturing becomes friction-free, which is the elimination of red-tapism and paperwork for small and medium enterprises.

So in a nutshell, RBI and finance ministry need to reduce interest rates for SME sector and agriculture while doing away with housing loan interest tax breaks, increase interest rates for housing by at-least 300 basis points for the additional house. Till this is done, the local economy will remain sluggish and will not witness any fundamental shift at grass-root level and 2010-2020 will be more of a lost decade than an Indian decade.

We All are Hitler, We All are Buddha

We all are Hitler, we all are Buddha,
It is not they are some other,
It is just we, who vacillate between one and the other,
Is it a moral choice to choose one,
Or just inability to choose one?
B’coz somewhere deep down there,
We are still the one, with mistaken identities –
We are all Buddha, we are all Hitler.

                                                   ~ Written in 1999 at Mumbai 

An Entrepreneur’s Diary… Thoughts on a Long Road to Building that Next Big Company!!!

Came across this piece by Diana Nyad who swam from Florida to Cuba (full 53 miles) at the young age of 64.

I think nothing captures the struggle of an entrepreneur more beautifully than this note by her where she captured the ordeal of swimming for 15 hours. I think every entrepreneur will recognize this pattern where he struggles with short-term reality to achieve long-term dreams.

“Imagine swimming continually for fifteen hours. Fifteen hours in rough, cold ocean water. Fifteen hours of unconsciously doing the same stroke that you have been doing since you were 10 years old. You can’t hear because of the caps, and you can’t see because of the dark, fogged goggles. You can’t think because the human mind is not geared to focus for any lengthy period of time, so your thoughts drift into delirium, and soon, time is more distorted than ever. As far as you know, you are in the middle of nowhere, and any effort you might produce to stroke again won’t necessarily bring you any closer to your goal, because much of the time you can’t remember what the goal is. It is clear that your ordeal is without end, and there is only one thing you somehow sense — that the choice to abandon the struggle and climb aboard the ship would be to fragment your pride beyond repair. Survival is keeping one’s dignity intact.”

Source: The New York Times

अग्निपथ! अग्निपथ! अग्निपथ! – The Startup Anthem

वृक्ष हों भले खड़े, हों घने, हों बड़े

एक पत्र छाँह भी,

मांग मत! मांग मत! मांग मत!

अग्निपथ! अग्निपथ! अग्निपथ!

तू न थकेगा कभी!

तू न थमेगा कभी!

तू न मुड़ेगा कभी!

कर शपथ! कर शपथ! कर शपथ!

अग्निपथ! अग्निपथ! अग्निपथ!

यह महान दृश्य है

चल रहा मनुष्य है

अश्रु-स्वेद-रक्त से

लथ-पथ! लथ-पथ! लथ-पथ!

अग्निपथ! अग्निपथ! अग्निपथ!

(Poem by Harivansh Rai Bachchan from “Madushala”)

Apple iPhone 5C: Return of the Ordinary

Steve Jobs is gone and is gone forever. Nothing more can reinforce the fact in our subconscious than the release of Apple iPhone 5C by Apple Inc. (AAPL) on 10th September 2013.

Apple, to most of us, is almost the final word when it comes to product design, seamless consumer experience, imagination, and yes, perfection. All this was achieved by not aiming to make analysts and strategists happy, but by completely focusing on user experience with Apple products – starting from packaging to fonts to the casing to design to overall manufacturing and feel of the product.

All this core user experience was achieved not only by keeping the focus on every aspect of product design/manufacturing but also keeping the number of products low. Apple is probably the only company in the world with such a large balance sheet size (USD 424 Billion Market Cap, 37% EBITDA margin, USD 170 billion cash reserve) and such a limited range of products and equally limited models. Probably tells us a thing or two about focus or rather Zen-like-focus!!!

However, the launch of iPhone 5C changed everything and suddenly Apple 5C symbolizes everything which Apple was not.

Describing the Zen of Steve Jobs, Jeff Yang in his weekly column “Tao Jones” describes the impact of Zen teachings in Job’s work and style, and how Jobs was proud of things that Apple didn’t do as he was of the things it did. One of the things which Steve Jobs definitely didn’t like was having a bunch of never-ending models designed to capture every segment of the market.

With the launch of iPhone 5C, Apple has moved from user obsession to market obsession where it no longer aims to delight its users but wishes to service number-crunching analysts in order to justify its share price/market cap/valuation and those crazy EBITDA multiples.

Hence, iPhone 5C is not the continuity of the same series of models but rather symbolizes the break from whatever Apple has been so far, and in one stroke, Apple ceased to exist as a bold company driven by a Zen practitioner, which dared to imagine the future and create it.

Instead, now the boardroom is filled by a timid group of managers who find the legacy too big to hold and wish to get comfort from analyst reports, focus groups, journalist views, and hide behind the fig leaf of banality, and aim to build by not imagining but looking at everybody else for guidance. In that sense, Apple of yesterday is gone forever and is taken over again by the era of ordinary, which touched Apple in 1985 and almost killed it, but for Steve Jobs. Alas – he is no more!

RIP Steve. RIP Apple.

Why has India Failed to Produce Tech Giants like Apple, Google, Facebook, Twitter, etc.?

This was a question asked at Quora about the failure of India in producing tech giants.

While there have been many answers with the focus on obvious villains like the Indian education system, lack of vibrant technology market, risk-averse VCs, and Blah! Blah! Blah! I think the root cause is much deeper and fundamental.

First, I think the obvious villains are too obvious like in any crime thriller and do not point to real symptom/villain, and second, I am not so negative on Indian education system as the popular wisdom would like us to believe – that Indian education is that bad as far as basic issues are concerned. Given the success rate of entrepreneurs and their ability to create mega large companies in a complete resource scare situation, one can’t just conclude and say that Indian education system has been a failure. I don’t know if the American education system works, given the academic performance of American children in Maths, Science, and Humanities these days!!

Basically, lack of great product companies like Apple / Google / Facebook in India points to a much deeper and fundamental problem and relates more to culture and society than the mere education system.

The bigger issue is that we as a nation/society have never valued craftsmen/artisans, or in a nutshell – product makers. As a country, we have respected/valued traders/money-owners or managers more than anything else, and have continued this tradition of following generalists than craftsmen (No wonder generic degrees like BA / MBA have been more popular in India forever).

The aspiration to be a project manager rather than being a hardcore coder is just not limited to the software profession only but is fundamentally prevalent in all walks of society. Where we as a nation always celebrate the king/minister or bureaucrat but rarely the architect or craftsmen – be it Sambhalpuri / Banarasi weavers, or brass craftsmen, or a passionate creator, or even the architect of The Tajmahal!!! It is Shah Jahan‘s Tajmahal and not Ustad Ahmad Lahori’s Tajmahal.

Hence, in India, everybody is aspiring to be a supervisor or manager or project manager, rather than being a great machinist, a great brick-layer, or a great coder, because as a society the respect goes to the person who doesn’t do things by his hands, but to the guy who supervises, and majority of the time, practically knows nothing. Unlike the Western world where the business was driven by craftsmen themselves – be it Samuel Colt or Louis Vuitton or Ford Motors, In India, business was always driven by a money-owner with little understanding/respect or liking for the craft. All that mattered was money and profit margin, and hence, India achieved huge success in the service industry as all you needed here was to hire a battalion of people and drive them without going deeper in the craft.

The other minor issue stems from the fact that as a society, we do not celebrate or accept failure. Given the resource scarcity, it’s not appreciated that a person can be callous enough to try many options and waste resources rather than focus on making good of whatever he has got. Hence, just 15-20 years ago, changing job was almost unheard of.

And these two factors have created a situation where there is very less focus on craftsmanship and more on trading, with limited risk-taking appetite and intent to destabilize the status quo, and that reflects in the lack of great product companies in India. However, last 10-15 years have caused a significant shift in behavior patterns and clear-cut changes are visible.

So for a country where the VC industry is less than 10 years old, mega products giants will come, and probably with changing times, this will change as well.

(This question was asked at Quora where it received some 44 responses. The above post in my answer to that question.)

(Source: quora.com)

Startup Pitch: An Insider’s Guide on What Do VCs Want?

As a VC, we suffer death by PPT (on a cue from Alexei Kapterev) almost every day. Every month, we see 100s of PPTs and attend many events where again one is drowned by pitches and more pitches… all vying for a time which is equally captured by e-mails / social chatter and other noises.

However, the majority of those (almost 99%) become dead on arrival or rather lose the plot in next 60 seconds. A lot of them are great business ideas or have better teams but all is lost in enthusiasm/eagerness to impress or in storytelling. Given the constant bombardment of pitches, a lot of startups don’t get a second chance to pitch again and lose a great momentum as a result.

This presentation is just an attempt to guide entrepreneurs to weed out unnecessary details and focus on the core belief of the startup. You might be having the next best idea, but if you are not able to put things forward succinctly, chances are that you might miss the bus, and we as investors might end up doing Type I / Type II error, as the case may be.

Remember – your first pitch is not about getting a cheque but is all about getting a second meeting, so work on the pitch to get attention / second meeting rather than drowning in details and losing the plot. Hope this pitch gets your attention or at least tries to achieve what I am preaching (or maybe I also lost the plot!!! ;))

Startup Pitch: An Insider’s Guide on What do VCs Want?