Wednesday, July 14, 2010

Venture Capital; Arjun Gupta

Business India, Oct 1-14, 2001,

A peak in the Valley

In the gloom and doom of the economic downturn, is Arjun Gupta another Vinod Khosla in the making?
Shivanand Kanavi

Brief Bio
Born: 1960
1977-80: BA Economics St Stephens College, Delhi
1980-82: BS 1982-84 MS Computer Science, Washington State University, Pullman
1984-87: System Soft Ware Engineer at Tektronix
1987-89: MBA Stanford University
1989-93: McKinsey & Co
1993-94: Kleiner Perkins
1994-97: The Chatterjee Group
1997-present: Founded Telesoft Partners

Arjun Gupta is a climber. He’s climbed with three major Himalayan expeditions to Thalaysagar, Arjuna and Trishul, all peaks above 20,000 feet, when he was hardly 18. Today at 41, he is climbing some new peaks in a place as far removed from the Himalayas as you can get — Silicon Valley.

Does a valley have peaks? It sounds like an oxymoron from a school grammar book. For with the gut wrenching dip in the tech business, there are, amazingly, a few bright spots and smiling faces left. Gupta is one. While many of his ilk have seen large parts of their portfolios vapourise, he’s laughing all the way to the bank, alongwith his partners in the Venture Capital firm, Telesoft Partners. He has successfully made deals worth almost $1.5 billion in the past few months, when there was a bloodbath in the markets, even before the terrorist attacks.

The broadband chip start-up Vxtel was sold in February 2001 to Intel for $550 million (all cash). Another chipmaker, Catamaran, was sold to Infineon – a semiconductor spin-off from Siemens – for $250 million in May 2001. Lara Networks was sold to Cypress Semiconductors in June 2001 for $225 million and Versatile, another chip startup, was sold to another chipmaker, Vitesse Semiconductors, for $267 million a week later. In August, Kyamata, an optical solutions firm, was acquired by Alcatel Optronics for $117 million. All this frenzied deal-making adds up to a cool $1.5 billion. Telesoft partners funded all these companies. Also, Vxtel, Lara, Catamaran and Versatile happen to have Indian founders.

Gupta grew up in Delhi and studied economics at St Stephens. He did not want to be an engineer or a doctor – the traditional career paths for bright teenagers in India. But the events that followed have made him believe in karma. After landing in Washington on a student exchange programme, he ended up doing BS in Computer Science in ’82 from Washington State University at Pullman and an MS in ’84. He then signed up for a PhD at the same University. As part of his MS, Gupta was converting peripherals into network resources. At the PhD level he took up the problem of Utopia that is load sharing—use whichever machine is available on the network. However, his doctoral ambitions were short-circuited by an offer at Tectronix, famous for their oscilloscopes.

“I got an opportunity to implement my thesis on their new digital Oscilloscope. Tectronix was ahead of the game from HP, they grew up to $1.5 billion and then went flat, but HP became a $ 40 billion company.

Tectronix did not take the risks. Silicon Graphics came to them to sell the idea of graphical workstations for $25 million, but they were not interested,” recalls Arjun of his engineering experience.

But Arjun was too much of an entrepreneur-techie. “I was a software engineer at Tectronix. We created a company called Computer Based Instruments, funded by Tectronix. But right after commercialisation they decided that the opportunity was too large to be left to “inexperienced hands” and brought it back into the parent company,” says Arjun. But the disappointment at Tectronix did not deter Arjun. He thought he should get a good grounding in business and hence armed himself with an MBA. He joined Stanford in 1987 and spent a summer at Morgan Stanley, in New York.

Investment banking did not excite Arjun. “It was interesting, but there were hardly half-a-dozen concepts in debt and equity and everything else was a permutation and a combination. It became repetitive,” he recalls. So, after his MBA, he joined McKinsey & Co. They started a new programme to enter the Silicon Valley. But the basic problem was their approach, which was that of a generalist. As a McKinsey consultant, one could do pharmaceuticals today, automobiles tomorrow and so on. Which is fine in mature industries where you apply basic business principles, but in a sector like technology, which is changing at a fantastic rate, it did not make sense. During those four years, Arjun worked full time for two years at Apple Computers and two years at Pactel, a wireless company. Qualcomm’s Irvin Jacob was then hanging around trying to convince Pactel that CDMA is the way to go, and Arjun wrote the first justification for Pactel to fund CDMA.

It did and Qualcomm took off.

Today, some people in the industry are saying that Arjun is another Vinod Khosla in the making. But Arjun himself suddenly turns reverential when you mention Khosla’s name: “Any comparison to Vinod is a total mischaracterisation. He is a giant with a mega firm (Kleiner Perkins). We are merely neophytes that are passionate about helping build great companies. At TeleSoft, I have certainly tried to apply the best practices I learnt from Purnendu Chatterjee, George Soros; Vinod Khosla and John Doerr at KP; Rajat Gupta and others at McKinsey; Bill Ford and Frank Quatrone at Morgan Stanley; and Atiq Raza and Raj Singh, who are friends and serial entrepreneurs.”

So, what are the lessons he picked up from the great and the good? “One definitive thing I learnt from Vinod is that if you really believe in something, then do it,” says he. Arjun’s passion was to start a Next Generation Communications fund and manage it himself. So, he decided to raise money on his own. He knew that without $75 million nobody would take him seriously. But that was a big sum to be raised for someone who was not known. Arjun did not give up. He announced a closing date for the fund and pursued investors relentlessly. “I talked to everybody: Philadelphia Teachers Association, PC, old clients, friends and family. I also found in those desperate days that almost every government in the world has a loan programme for small business, so we looked into that.” Arjun, unlike most Americans, was not deterred by bureaucracy and managed to get $40 million, and he finally ended up with $150 million instead of $75 million.

Thus, Telesoft-I raised $150 million, which returned a 450 per cent IRR! Having built a reputation and success rate raising $500 million for Telesoft-II was not very difficult in 2000. Today, Telesoft Partners has Alltel, Mannesmann and Vivendi investing in it and several institutions as well. “You have got to be smart and work hard but you need the network. If Vinod Khosla wants to get smart about a deal, he makes five calls. And at the end of three days, he will know everything there is to know about a particular technology. But because he has done it for many years, he will have a framework on how to fit it in. I wanted to create a network of Telecom companies. So we wanted carriers, corporate partners like Intel or Spectra Physics, and Institutions. We have proactively gone to semiconductor vendors, carriers and systems guys, and given a presentation on our companies. They choose the startup and we ask the startup people to make a presentation. If they like it, there will be a commercial agreement, an investment or even an acquisition. You don’t need investment bankers to sell a company,” says Arjun, networker par excellence. There are many VCs who talk about the keiretsu model, eco-system and so on, but few are actually able to implement it.

Today, Arjun is not cold calling any one. He has 500 individual investors. They know this is a new fund with fire in our belly. Telesoft’s managing fee is 2.5 per cent and carried interest is 25 per cent. The most reputed funds like Kleiner Perkins, have about 3 per cent managing fees and 30 per cent carried interest, while newcomers charge 2 per cent and 20 per cent respectively. Telesoft has already paid back the government and again took $100 million in Telesoft II. The government recognised that even though Telesoft is not small, it invests in small companies. Now many VC funds have realised it and are using government funds.

Arjun is probably the only VC who prints his successes and failures in his personal CV and in his company’s brochure. It boldly says there have been six write-offs recently and the fund has lost $20 million in those startups. “The probability of failure is very real, so let us get real. What used to take three calls for raising funds now takes seven calls. Today we would rather consolidate than do new investments,” says Arjun.

Arjun’s idealism has not gone unnoticed. Says Atiq Raza of Raza Foundries: “I have found Arjun to be focused, full of confidence and energy, working hard to understand the intersection of business and technology. He is thorough in his business practices. In addition, he is a great salesperson. He is also steeped in idealism. One day, he called me on my cell phone and described a project conducted by Stanford University to reduce military tension and nuclear risk between India and Pakistan. He also told me that he was going to provide 50 per cent of the funding and was inviting me to pick up the remaining 50 per cent. He thought it would be good if the project was funded jointly by an Indian expatriate and a Pakistani expatriate. I did not fully understand the project until later, but I had enough faith in Arjun’s values and judgement that I signed up.” That is tall praise coming from Atiq, a pioneering entrepreneur in the chip industry.

Rajvir Singh, founder of StratumOne, Sierra Networks and Cerent (acquired later by PMC Sierra, Redback Networks and Cisco respectively for a valuation of $12 billion) says: “Arjun will go places. I know him for a long time. He has built a very nifty organisation that is tightly managed by him as CEO. This style has some advantages and some disadvantages as well. He is very hard working and truthful and well connected with telecom carriers. His partner and MD, Yatin Mundukar, provides him great field support.”

Truly, Arjun Gupta is climbing new peaks even when the rest of the industry is in a valley. How has this been possible in a serious economic downturn? Is Arjun a hustler, just a smart deal maker? Obviously, Arjun is a very good networker, but that is not all. He has absorbed what he learnt at the Himalayan Mountaineering Federation in his teen years. After all, mountaineering involves strategic daring and tactical caution, long-term planning of details and short-term flexibility, ability to not only reach the summit but to get back to the base camp safely. And above all, grit and determination.

Tuesday, July 13, 2010

Venture Capital: Vinod Khosla

Business India, Jan 22-February 4, 2001
Vinod Khosla
Shivanand Kanavi

“You can put my name in any search engine and you will get enough material on me, and I have said whatever I have to say in most of my interviews. So you can dispense with the usual questions and fire away”, said Vinod Khosla, when we met him in his office at Sand Hill Road at Menlo Park. The words were not tinged with arrogance but were a genuine attempt at getting to the core issues quickly.

That is how Vinod has made his famous picks : Juniper Networks, Cerent, Sierra, Redback and more. Which, according to Fortune, have made over $16 billion for KPCB, thereby making him “the most successful VC of all times”. Clearly he has gotten to the core of the next generation of networking.

Vinod is famous for his brevity. Rajvir Singh, who has become a fountain of Optical start-ups, recalls how the first thing Vinod advised him in an e-mail when he invested in Fiberlane (later split into Cerent and Sierra) was: "Keep the B.S. out of all communication".

We say amen to that, and give below a few notes from our conversation, albeit pared with Occam's razor:

Money: In 10 years I have never done a rate of return calculation. I have only looked at economic contribution. After all, if you have made economic contribution, then money will come anyway. Many people talk about how much they will be worth. I reject all those who only talk about money. That is Wall Street mentality. It goes against my intellectual curiosity, predicting trends and so on.

Venture Capitalism: It is all about helping entrepreneurs build companies. Juniper is a classic example. When Pradeep Sindhu came to me, he had no business experience. I guided him in building Internet routers and then helped him find the team; I helped him find Scott Kriens. All these things are really hard to do if you are just an engineer, because you have never done anything like this. What we do is help make an idea into a company. It is like being a coach for a soccer team or a football team.

Startups: I do not miss being in a startup myself. It is a lot of work and you get stuck in one area. Technology is moving rapidly in so many areas and I have interest in so many areas. Every two to three years I completely change the area I am investing in. I take a few months off to learn the whole technology and develop a vision of what the world is going to be like - it is literally going back to school – then start investing.

Current interests: Whether it is optical components, which is physics and material science or enterprise software, the only way to do it is to take three months off, learn and come back. My position lets me do it. I have got curiosity. I change my interests regularly when I get bored.
All three of my degrees are in completely different areas. Right now, as hobbies, I keep up with string theory and evolutionary biology.

Big vs small companies: It is not big vs small. People who refused to take risks are losing. Lucent had more talent than Nortel. But Nortel has changed: they have absorbed entrepreneurial culture. Lucent has wrong acquisition strategy and wrong culture. People don’t leave Cisco when it acquires, but they do when Lucent does. It is much harder for big companies but Nortel has done it.

Optical Networking: In both optical and wireless, valuations are hyped and over-hyped. But if you look at the impact they are going to have on society, on the way business is going to be run and so on, then they are underestimated. Investors are like lemmings; suddenly they go from greed to fear.

Indian entrepreneurs: The stockmarket is not a good indicator. Some have built businesses but some have built market caps. It is a bad value system. Issue is what you can create that has lasting value. Desh has real revenue. I like what Desh did. In the end his value will be judged if he makes the economic contribution. That is what Pradeep is doing. Intel, Sun, Dell, Microsft, Oracle all made contributions.

Education in India: A country of the size of India, a billion strong, does not have a major university which is world class and which is leading in research so that it does not have to depend on all the research in US. You have to take a 50-year view of this, not five to ten years. Over the long haul, India has the talent, language (English), enough infrastructure. It will grow in a very, very big way in the knowledge economy. Hopefully, people from all over the world will go to India to do research. That is the genesis of my interest in Global Institutes of Science and Technology.

Role models: I was 15-16 and living in Dehi Cantonment, as my father was in the army. I used to go to Shankar market and rent old issues of trade journals in electronics, which you get free there. I read about Intel being started up by a couple of engineers. That was my dream long before I went to IIT. In 1975, even before I finished IIT, I tried to start a company. Those days in India, it was not possible if your father did not have connections. That is why I resonate with role models. Andy Grove and Intel became role models for me.

Vinod Khosla loves travel and photography. Blown up pictures of his children taken by him are all over his office.