Products that Created Markets

iPod – ‘Music’ and changed how we listen to music

Xbox and PlayStation – ‘Gaming’ and changed the way we play video games

Kindle – ‘E-Books’ and changed how we read


 

Are you making the next one? Which industry are you disrupting? Which market are you creating? Which product or service are you making redundant?

If you are a corporation and not doing any of these, think again, for soon some one will do it. It might make you redundant.

These are all the result of ‘Corporate Innovation’ and the entrepreneurial abilities of their people. While innovation and entrepreneurship is the talk of the town, is it being spoken off in your corridors? What can you do to make ‘innovation’ thrive in your enterprise?

It is probably the only sustainable competitive advantage!

Think about it.

Corporates must tap academic research

It is a fact that most Universities / Research Labs (publicly funded) produce research, publish their findings and have a roster of intellectual property. This is business as usual for them. They do little in terms of commercialising their discoveries.

Corporations on the other hand have ‘innovation’ as the mandate. They attempt to commercialise inventions and profit out of creating value. Since their focus is on commercialisation, they should not be spending too much effort on ‘Research’, but sadly they do.

Most ‘research’ functions have been blamed for not being effective. This is due to a number of reasons. Lets not get into it. Many corporations also do not have the muscle power to sustain long term research activities either! Hence long term sustainability of corporations is under serious threat. Enhancing innovative ability of their organisations is ‘Top Priority’ for the CEOs / Top Management Teams.

Hence it makes sense for corporations to focus on their core activity of making innovations happen while tapping into academic research for gaining access to new inventions. I recently read an article on this topic (Link: https://hbr.org/2016/04/innovative-companies-get-their-best-ideas-from-academic-research-heres-how-they-do-it?utm_source=twitter&utm_medium=social&utm_campaign=harvardbiz).

There are a lot of reasons why this may be difficult to practice in a developing economy. Here are some top of the mind reasons:

  • Low public funding for research
  • Poor research infrastructure
  • Low quality research output
  • Poorly documented / published research
  • Little research of practical value
  • Little interaction between industry and academia

And so on… But one is bound to be surprised by the number of useful ‘intellectual property’ that lie dormant in our (India) public universities / research laboratories. Some smart companies are already beginning this…

As a corporate looking to stay relevant in the future, it is useful to include scanning academic research as part of your strategy function. Number of interesting ideas are presented in the article cited above.

Read, access and explore the academic world to find inventions that can be commercially valuable for your firm / organisation.

This could be one way of enhancing corporation innovation.

Indian Entrepreneurship: Interesting Insights

Punit Soni, a senior hire from Silicon Valley quit Flipkart. As always there has been a lot of speculation on him and Flipkart. But that’s not the point. Business Insider interviewed him and I find that his answers reveal a lot about Indian Entrepreneurship and Ecosystem. While I let you enjoy the details of the interview (Link: http://www.businessinsider.com/flipkart-punil-soni-explains-why-he-quit-2016-4?IR=T) here are few points worth noting:

  • Indian E-Commerce is a big opportunity; the winner will have to be a large player
  • Innovation in E-Commerce is behind the scenes and its tough work
  • Mobile is a mindset and not a channel strategy
  • Restructuring is a strategic matter
  • ‘I think the Indian Media is a bit of a circus… way too much is written without substantiation’ (read the interview fully before saying anything)
  • Startups and Media should focus on ‘strategy’ not ‘personality’
  • MUST READ: Incident from Bay Area on Hero Worship
  • Its definitely getting easier to setup a company in India, though it can get much better (Government is trying a lot)
  • Valley’s big difference is its support and mentorship; this is lacking in India’s entrepreneurship ecosystem – needs a big fillip
  • A Google / Apple type of Company will come out of India (Optimism in India’s entrepreneurial potential) – lets live up to it.

I know the above is like dissecting an interview, but I think we should learn to read into what is being said. This is only for learning how to improve, not to generate more ‘gossip’, there is enough of it anyway.

Lets not waste the potential of Indian Entrepreneurship

Happy Reading and Happy Entrepreneuring!

Who is stopping you?

I asked one of the students who wanted to be an entrepreneur this question. He tried convincing me that there are innumerable factors (outstanding student loan, family pressure, peer pressure, social needs, etc) around him that’s stopping him. All of which seemed logical. But a personal experience this weekend gave me a strong response to his answer.

I usually like to jog every morning. Since the time I shifted homes, I have for some reason not jogged. For the first week or so, it was all about setting up. Then we had parents, in-laws, the weather was too cold, and then there were too many dogs around the apartments, inability to sleep on time, and so on. All reasons seemed fair and logical. So although I felt bad once in a while for not feeling as fit as before, I could not convince myself to run. This feeling had been welling up inside me for a while now. So, yesterday (Sunday) i got up a little earlier than usual and decided to go jog. It was a lot of pressure getting out of home. There was someone inside me saying ‘Why not sleep? Its Sunday, after all’ but somehow I had decided to step out. That was all that was needed. I loved it. The rest of the day I felt the pain in my body. This morning when I got up my legs were paining like hell. But I told myself, I loved it. So, there I was, jogging again. I think it is difficult to now stop getting out in the morning. Its the same mind at work. Isn’t it?

In this little (rather silly) episode lies the answer to the above question. ‘Who is (really) stopping you?’ Its ‘you’. All others are reasons that this ‘you’ is giving to you. So if you want to start a company, ‘start’, don’t find reasons to delay. As they say ‘life is too short’, why delay to live the life you have wanted. Entrepreneurship is the life that every wo(man) always wants to live. Entrepreneurship is not just starting a company, it is more than that. It is living life to your potential. It is exhausting yourself. It is experimenting. It is joy in the action. It is joy in doing. I have written this in earlier blogs, I have taught this in classes, I have written it in my books, I try to live it in my life.

Try it for yourself. For there is no one stopping you, except ‘yourself’.

Begin!

Career and Job

Nothing has changed. Last week I was privy to some conversations among students passing out in 2016 about placements. As I listened to how they made or are making their decisions on their first jobs out of campus, I told myself “Nothing has changed”. A decade ago my friends and I went through this debate – should we choose a job or a career?

A wise professor of mine had told me that in hindsight he felt that one should always choose a career over a job. But he also told us that he wouldn’t be too surprised if we felt it was philosophical and do the opposite. He told us that he did the same too. While he knew that many of us would not pay heed to his words, he still kept at it. Some of us took his advice to heart – Did what is not normally expected. Went along paths that many thought was foolish (in fact many still think so). But remain happier people and remain younger people than most our age.

But the sad part is that there is no one consistently telling these kids of today, that choosing careers over jobs requires them to make those “trade-offs” (something most never learn in an economics 101 class). Compromising in the short-term seems increasingly difficult as students have large loans to pay-off. They cannot do what even some of us could, a generation ago. Nevertheless let me make another attempt to cajole these young minds to try their hands at doing something unconventional – choose a career over a job.

Now, that looks like one has to give up a job for a career. Absurd, isn’t it? How can one give up a job and make a career – it does not seem possible!! So the point I wish to make is that – it is the order in the choice that is important. Which do you choose first – career or job? Does your career decision drive your choice of a job or a series of jobs eventually makes a career?

The former may require some tough choices to be made in the immediate term. If you take the life of many individuals that you hold in high esteem, you find that they spent the early careers in tough and unattractive jobs. But this was driven by their long term career goals. Hence it did not make them feel bad even when some of their peers seemed to be doing much better then. As they say what matters is where you finish! If there is a role model of yours, look up and read what they did during their initial years at work. See how they made their choices. You will learn to decide how to choose a career and a job. It is not one against the other, but one based on the other.

Think well. Make a wise choice (Career and Job). Live a happy life. Since much of your life will be spent at work, you might as well choose what you love to do. It can have a significant impact on your personal life too.

Happy choosing!

Startup Valuation: VC Method

In an earlier post I had shared that there are number of methods used to value startups. I had promised that I will detail the methods. Here is the first of those methods listed – ‘The Venture Capital Method’ or VC Method.

The introduction of this method is attributed to Professor William Sahlman, who wrote about it in a 1987 case study. Professor Sahlman is famous for his widely used article ‘How to write a great business plan’ in the Harvard Business Review. I have used it as reading in some of my courses too! That’s enough for background and validity!!

The VC Method

The formula used in this method are simple:

Pre-Money Value = Post-Money Value – Investment

Post-Money Valuation = (Terminal or Harvested Value) / (Expected Return on Investment)

Now you need to know what these terms mean, isn’t it? Here they are:

Terminal or Harvested Value: This is the value that the investor expects the startup to have when his/her stake is sold. Now, this could be the next round of investment or after a couple of rounds of investment or when the company goes public or it gets acquired by another company. Whatever be it, the investor must know what will be the value at the point of sale. Usually early stage investors stay only till a couple of rounds of investment. Hence they consider only the value until then.

How do we calculate Terminal Value?

Ans: Any usual finance text book will teach you methods to do this. Simple back of the envelope methods include: number of times sales or Industry P/E times Profit, etc. You can get these data from industry analysts or reports or historic datasets or even from angel associations. Recent investment records from new items can also provide pointers. Always use more than one method and then take average to improve your odds.

Expected Return on Investment (ROI): This is simply the rate of return that the investor expects to make on his/her investment. While it may be easy to think it terms of percentage, strangely investors of this category (startups) think in terms of ‘number of x’s’ or number of times they expect their investment to multiple. For ex: 10x means 10 times, 20x means 20 times and so on. In Angel investing, it is normal to see investors talk about 10x-30x returns. It varies a lot. But considering the risky nature of these investments, one is bound to expect high multiples.

Post-Money Valuation: The value of the startup including the investment made by the investor.

Pre-Money Valuation: This is the value of the startup just before the investment is made by the investor.

Investment: This is the amount of money invested by the investor into the startup.

Illustration:

A startup in software wants to raise 10lakhs. It expects to touch a revenue of 10 Crores in 2 years.

Knowing that software startups are valued close to 2 times sales, the investor expects the harvest value to be about 20 crores. Assuming an average return of 20x, the investor calculates post-money valuation to be = 20/20x = 1crore. Therefore pre-money value is 1Cr – 10Lakhs = 0.9Crore.

Deviation: Lets just understand pre and post money valuation here: If investor considers 1Crore to be post money valuation, then it includes the investment (10lakhs) too. Therefore entrepreneur’s share is 90% and investor’s share is 10%. But if the investor considers the 1Crore as pre-money valuation, then the post-money valuation becomes 1.1Crore. Then the entrepreneur’s share becomes 88.9% and investor’s share becomes 11.1%. Hope you get it!! While the difference seems too small, the trouble is not in the present. Just imagine when you become Infosys at its peak or Flipkart at its peak. Do you think 1.1% ownership can make a difference? I hope I don’t have to clarify this:-)

Continuing with our example:

So, considering that this company in our example is valued at 1Crore post-money valuation, how much percentage should the investor seek to get his 10Lakh investment. It seems that if he takes a 10% stake in the company for his investment and everything goes as per his / her calculation, they will get a 20x return when they exit after 2 years.

This method gets complicated when there are more rounds of investment before harvesting! The current investor will need to factor the new investments too before deciding on how much value the company will have and what stake they will need to keep prior to making an investment. It mathematics. As one of the practitioners suggests, one of the quick methods is to reduce the value by the level of dilution expected in the future rounds. If you intend to dilute 50% before harvest, then decrease value by 50% and so on.

While one can keep on complicating the math, I hope entrepreneurs will get an overview of the method. As with any skill, once you make a beginning (and if it is your cup of tea) you will enjoy the complexities and play the game. I hope this blog will help you move closer to playing the real game.

Try it. Its fun.

MHRD Ranking of Indian Educational Institutions

Ministry of Human Resource Development (MHRD) recently released the list of top colleges and universities. It is probably the first time a Government has taken the proactive step in ranking our educational institutions. This is long overdue!! After seeing a number of rankings every year and wondering why there is little correlation (similarities) across all of them, here is a more authentic listing.

Official Website: https://www.nirfindia.org/Home

The National Rankings of Higher Educational Institutions 2016 is officially out. It contains lists of engineering institutions, management institutions, pharmacy institutions, architecture institutions and Universities. If you are one of these, go ahead and check where you stand.

In many ways I believe this is a very positive first step. It is a wake-up call to our educational institutions that are slowly falling off to sleep. While this should stir healthy competition among institutions to rise higher in their respective lists, what is more important is for institutions to improve their absolute scores. How I wish there would be many institutions fighting for the first spot with almost equivalent scores!

I looked up the scores for Entrepreneurship Development Institute of India (EDII) where I study. We stand #45 in the list of management institutes. While we (www.ediindia.ac.in) can feel proud to have entered the Top 50, I am sure we know there is still a lot of scope for improvement and scale.

Great Going MHRD! While it may not be sweet to all, I am sure a reality check will do good to all involved. Since the ranking will be conducted (perhaps annually) it should keep the institutions in the Top 50 lists to work hard to stay there too. Others are not going to sit and watch. While all can complain how the calculations are not fair, the system is fairly open and hence people can work to becoming better.

Lets hope this is one of those opportunities for India’s Higher Education System to improve and eventually compete to join the ranks of the Top Institutions and Universities of the World.

With lots of hope….