PrintMayfield Fund News: September 2007
In this issue:
• In the News
• Mayfield View: Managing Director Navin Chaddha, with Nikhil Khattau and Vikram Godse
of Mayfield’s India-based investment team.
• Guest interview: C.K. Prahalad, author, consultant, and professor of corporate strategy at
The Ross School of Business at the University of Michigan.
- Community: Yogen Dalal debuts industry blog at Ethernethistory.com
- Investments: 3Par Data files to go public
- Hiring: Mayfield expands its India team.
- Media: Kevin Fong on Mayfield’s China strategy.
- Media: Navin Chaddha on India Trends
- Media: Tejas Networks CEO on IT Trends
Mayfield View:
Managing Director Navin Chaddha, with Nikhil Khattau and Vikram Godse
of Mayfield’s India investment team.
An Independent, Innovative and Inherently-Strong India
India today can revel in its transformation from a third world, agricultural-based economy to an emerging global powerhouse. It boasts one of the fastest growing economies in the world, with a GDP that grew a whopping 9.4 percent last year to hit $1 trillion – and is projected to grow at 8 to 9 percent over the next five to ten years. Its stock market has grown approximately 400 percent over the past 5 years. At the same time, India’s domestic markets have taken off to accommodate a middle-class that’s now 300 million consumers strong. Of India’s 1.1 billion people, half are under 25 years old and 65 percent are of working age. India also graduates several million English speaking students annually and has the world’s second largest number of engineering and science professionals.
Despite all of this evidence of a prosperous, independent India, too many people still equate its economy solely with the strength of its IT and IT-enabled services businesses, pointing to well-known giants like Infosys, TCS, and Wipro. At first blush, this makes sense as analysts agree the market for Indian offshore IT and IT- enabled services will grow to $140 billion by 2014 from its current $50 billion base. The truth is that while India will remain a force in IT and IT-enabled services, the past five years have brought India to the fore in many new sectors, including manufacturing (Tata Motors), pharmaceuticals (Ranbaxy), infrastructure (Reliance), energy (Suzlon), retail (Pantaloon), telecom (Bharti), financial services (ICICI Bank), forging (Bharat Forge), CD-ROM manufacturing (Moser Baer), media (NDTV), and hospitality (Taj Hotels).
India today is the world’s largest manufacturer of motorcycles, the second-largest maker of small cars, and the third largest automotive components maker. Quietly, India has become the fourth-largest pharmaceutical manufacturer, proving its ability to not only produce but innovate with the world’s second-largest number of drug master filings. It’s also the largest CD-ROM maker, and is home to one of the largest forging facilities in the world.
While India’s economy continues to diversify and strengthen, hurdles remain. Infrastructure challenges persist and the race is on to build new airports, roads, dams, railroads and power facilities. Power reliability, living conditions, and road congestion, though improving, still largely fail to meet U.S. business standards. India’s infrastructure build-out, which is only just beginning, is expected to rise to 13 percent of its total GDP by 2008-2009, up from just 10 percent in 2004-2005.
Aside from infrastructure challenges, there are also cultural differences between India and U.S.-based entrepreneurs to overcome, along with differences in government policies, legal, accounting and tax standards. Add to that the time-zone difference and geographic distance between India and the U.S., both which make running a successful venture capital practice for U.S.-based funds in India no simple feat.
Despite these challenges, the potential payoffs in India are clear and the market isn’t slowing down. Today, India has a whopping 9,000 publicly listed companies on the Bombay Stock Exchange. Why so many? First, it's easier to take a company public in India today than it is in the U.S. because although profitability is important, there are lower revenue requirements. This is a similar scenario to that of the U.S. between
1985 and 1994. Investing in India is also less risky when compared to other emerging markets considering a lower sector/stock concentration risk, according to a recent Deutsche Bank report.
All told, a well-educated and trained workforce that’s churning out new products and services to an exploding middle class will provide more than enough opportunity to keep investors on their toes for the next decade. For those brave and savvy enough to navigate crowded streets and red tape, India brings tremendous opportunity and potential rewards.
Guest Interview:
C.K. Prahalad, author, consultant, and professor of
corporate strategy at The Ross School of Business at
the University of Michigan.
C.K. Prahalad, a professor at the University of Michigan Business School, has consulted with CEOs and the senior management at many of the world’s largest multinational companies. In 2004, he published “The Fortune at the Bottom of the Pyramid,” an acclaimed book that has helped launch private-sector solutions to global poverty.
Mayfield: Tell us what inspired you to write your most recent book “The Fortune at the Bottom of the Pyramid,” which argues that multinational companies must revolutionize how they do business in developing countries?
C.K. Prahalad: A lot of my work is with multinational companies in the U.S. and Europe. The opportunity for growth in developed countries for these companies is shrinking. In order to retain a level of vitality these companies need to find new growth opportunities. Simultaneously, 5 billion poor, underserved people who were below the “radar screen” want to access the benefits of globalization. By juxtaposing the needs of the underserved as micro consumers and micro producers with the needs of the multinational companies we can produce a revolution. This was the genesis of the idea for my book. This is becoming a reality. India is a great example of this process.
Mayfield: What makes India so economically unique?
CKP: India has a very active entrepreneurial culture. The opening of the economy has created opportunities for consumer-led growth. India is growing at a 9 to10 percent rate. Further, this is not being fuelled, as conventional wisdom would suggest, by Foreign Direct Investment (FDI). In a reversal of this conventional wisdom, there’s more investment from Indian companies abroad than there is FDI in India. India’s growth is sustainable because it is dependent on local consumption.
Mayfield: Some consider India the back office of the world with its huge off-shoring and services industry, yet you say there is innovation. Where are you seeing this?
CKP: If you want to serve the poor with world class products you have to innovate and create a different economic model. If I want to provide something as simple as world class shampoo and soap at affordable prices to villages I have to invent a single-serve sachet. You sell this for one cent at retail and make a profit. It’s more profitable than selling the same shampoo in a big bottle. Telemedicine is rapidly taking root in India and we’re innovating in healthcare. As India starts to provide world class cardiac surgery for $1,500 rather than $75,000 it will not be long before people from developed countries such as the USA and UK will go to India for surgery. Cell phone usage patterns and applications are far different and in some cases ahead of those in the U.S. Cell phones are used by everyone in India - from farmers to fishermen. Increasingly, it is possible to settle small financial transactions through Internet messaging. Banks in India are using biometric ID on ATM machines. The U.S. will have its Google and Amazon and YouTube, but I would not rule out India as a source of innovation.
Mayfield: How is India progressing with its infrastructure challenges?
CKP: China built its infrastructure before it was necessary hoping people would fill the capacity. India does it the other way around. Until pushed to the wall Indians don’t respond. I expect to see modern highways and airports emerging in the next five years. Any time infrastructure building involves acquisition of land and displacing people, a democracy like India must build a consensus. This is not an easy thing to do. It is a very slow process. I don’t think anyone in India today doubts that they have to reform the system and the economy must become more market driven. The question is how quickly, and what rights of people are likely to be trampled on. If you start looking at India through this lens, the progress being made is quite phenomenal.
Mayfield: How can America’s understanding of India’s culture promote investment?
CKP: At the superficial level India and America are different. India has poor infrastructure and abject poverty. But at a basic level there is a lot more that’s similar. In India, there is individual freedom, a free press and people elect the governments. Indians are very individualistic. We are sensitive to diversity. These are some reasons why American companies have no problem operating in India.
Mayfield: Any predictions about India’s economic future?
CKP: I was one of the first to talk about 10 percent growth for India years ago. Consider 10 percent growth for the next 10 years. India is going to be a very significant market for consumer, industrial and infrastructure-oriented firms. It’s not only the poor we’re talking about either. India as a market will include the very rich and the very poor. The question is how do large firms “straddle the pyramid?” India has more billionaires than Japan right now. You also have people living on less than two dollars a day. The opportunity for entrepreneurship and new business creation is enormous and exciting. I expect start ups to have a field day in India.
