Posted on

How Acquisitions proceed

Acquisition opportunities arise through design or by chance. As your company profile improves, bigger players may approach you if they perceive a complimentary relationship. That could be a large competitor, who has been losing key accounts to you. An OEM or strategic partner, who observes significant sales resulting from the partnership, may look for vertical integration.

It is also possible to plan for an acquisition once your business has reached a certain scale. The points made above can work in reverse – you can judge which competitor, partner or someone in an adjacent space can benefit from acquiring your product. As part of your roadmap, you can then align your positioning, offerings and client base to be complimentary. By winning deals with some overlap in clients, you can work towards some kind of sales, SI or OEM relationship. After creating a network of senior level contacts inside that organization, you can make an overture for a strategic investment or outright acquisition.

The first contact must be at a high level, preferably CEO, directly or through trusted contacts. Once initiated, an M&A negotiation proceeds like an investment deal. The acquirer has to find your product, leadership team, client base, current revenue and growth potential attractive. You must be convinced that the buyer is the right one in terms of business prospects, culture, and management team.

Negotiations have to proceed in strictest of confidence. The risk is higher for the smaller company – any leak can impact market confidence in your future if the deal falls through. After signing a mutual NDA, both sides share high level revenue and profitability numbers. You may have to part with much more information than the buyer if you are much smaller. Get clarity on mutual synergies in clients and products and future combined roadmap. M&A makes sense if 5 and 2 can result in something more than 7.

The first one or two meetings are usually decisive. It is quickly apparent whether both sides have a similar vision and share similar values. Cultural fit can make or break the deal. With two CEOs used to having their own way, a lot depends on their rapport. M&A deals have fallen through because of ego issues between leaders.

If there is good business synergy, the acquisition amount and terms are discussed. Once there is a handshake on valuation and broad merger principles, a term sheet is signed.

In M&A too, the buyer will assign a team to verify all claims, do customer checks, and examine potential risks or liabilities related to tax, loans, IP, client defaults etc. Any major risks or liabilities discovered during this review can result in the deal falling through or change the valuation. If all goes well, both sides work on a comprehensive agreement to conclude the deal.

Posted on

Product Pricing – The biggest mistake companies make is to fix the price based on their costs

There is no magic formula for pricing a product. You can make a start by getting answers to these queries:

  • Can you estimate the value to customer in terms of increased revenue or cost savings?
  • How does your competition price their product?
  • Should your product be priced higher/lower based on more/less capabilities?
  • What is your total investment and annual expense (development, support, sales and overheads) in building the product? How many copies do you expect to sell in next 2 years?

The biggest mistake companies make is to fix the price based on their costs. The primary reason to be in product space is to generate non-linear revenue based on value being delivered.

Early pricing

Based on competitive pricing and your own value proposition, you can have a pricing band as a starting point. The next decision is whether to be a high volume/low price player or a premium provider. You can then set a tentative ‘list’ price.

Test this pricing with early customers. Be consistent with the quoted list price, but offer variable discounts based on what it takes to win early deals.

When you start selling, you will be eager to win deals, and may compromise heavily on rates. This is natural. Win those early birds with steep discounts, but try and select the right ones first.

Ideal first clients (‘anchors’) are strategically important for their brand value or volume of business. Signing up a well-known company becomes a great validation of the product. Pricing should not stand in the way of closing such deals.

In some accounts, the person you are dealing with will have a certain spending limit. If possible, structure the offering to be within this limit and avoid another level of approval. Occasionally, the customer will tell you at what price they will buy. If it fits into your discount structure, and the business is important at that time, go ahead.

Pricing variables

Payment terms may consist of some advance and rest against deliverables such as installation, customization, deployment and acceptance. Actual payments at each stage can vary from immediate to 45-60 days from date of invoice. Cash flow is an important consideration, so maximize initial payments and minimize invoice to payment time. When finalizing a deal, offer to trade more discount in return for a bigger advance.

If you have a mix of licensing options (permanent, subscription, lite/standard/premium, usage based etc.), it can enable you to offer a broad range of pricing options. This can be useful at times, but can also cause the customer to get more confused. Experiment with two or three choices and assess what is working.

Stabilizing the price

Once you have gained some confidence with customers signing up and revenue coming in, then it is time to adopt a more business-like approach.

If you are getting clients easily, without significant discounting, then your product is probably priced too low. Conversely, if most prospects are not signing up, look for root cause. It may not be the cost – the problem may be in the product, how you sell, or which customers you are pitching to.

Test the elasticity of your pricing with higher rates for the next few prospects. Deals may be delayed or lost at higher price, but fewer deals may still bring in greater revenue. For example, at twice the price, you need half the deals to earn same revenue. Higher rates can delay decision making, while low price means you have to be targeting more prospects.

Theoretically, if you plot quarterly revenues against unit price, it should result in a bell curve. Revenues will first rise with incrementally higher revenue per sale, but will peak at a certain price beyond which it is considered too high by the market. In practice, there are too many variables for such an exercise to be worthwhile.

Instead, experience will tell you what is working. The right selling price is the one when you are winning most customers with low to moderate discounts, and losing only a few. Hopefully, at this price, you are making a reasonable profit too.

With increasing confidence and maturity, you will learn to be patient when negotiating deals. Do not concede on rates quickly. If your product is good, clients will pay. Learn to walk away from a deal if the price is too low.

As your client base increases, the list price, discounts and payment terms will begin to stabilize. However, business is always in flux. Keep tracking factors that influence rates: competition, more value from new releases, cost increases, profitability, deal loss rate, new pricing models etc., and always strive to maximize revenue.

Posted on

Common Questions about Founders

Is there a right age to become an entrepreneur? Any age is a good age. The founders of Microsoft, Google, Facebook started their companies when they were very young. Steve Jobs, who founded Apple at an early age, continued to show amazing entrepreneurial capabilities in his second stint at Apple which began in his 50s. Young professionals in their twenties have amazing energy, and understand the pulse of today’s generation. They can conceive products that others with set thinking cannot. The young have no fear of failure. In the thirties, one has a good blend of work experience, drive, network of contacts and knowledge of the business. Those in the forties and fifties have significant experience, busi- ness connections, understanding of the market, and financial security to risk a start-up. A younger entrepreneur may be more hands-on and seek mentors to provide a guiding hand and connections. Someone older might operate more like a Chief Mentor and get a young, smart team to execute.

Is it necessary for an entrepreneur to have some experience? Is it better to get this at a small company or a big one? The right experience in technologies and domain related to your idea can be a significant advantage. Learning happens in any sized company. By working in an early stage company, you will have lived the pressures and dynamics of building a product ground-up. You understand the importance of being flexible and adapting the product based on early user inputs and competition. At a larger company, you will have experienced a mature organization structure, with different teams focused on specific objectives (engineering, support, sales, marketing and operations). You understand the importance of collaboration, brand building and continuous product innovation to stay ahead of the competition.

Should the founders develop a product related to their previous job? You must be very clear about the terms of the Non-Disclosure Agreement (NDA) signed with your previous employers. Any work, including, but not limited to research, algorithms and source code, that you did for your employers, belongs to them. Even information such as client and employee lists, salaries, contracts, is con- sidered highly confidential. When you exit the company, do not take away anything related to work, whether in printed or electronic form. If you are a relatively senior person in the company, and start a new endeavour in the same space, your previous employer may keep a close watch. This is especially true if your company becomes their competitor. It is best to pick an area that leverages your technical expertise, but is in a different space from your previous company. Maintain a document that is a dated record of how you conceived and built the product. This will enable you to file for patents or contest any legal challenge. NDAs generally restrict any solicitation of employees for at least one year. If several founders worked in the same company, ensure that you did proper suc- cession planning and your exits were non-disruptive. It is best to maintain good relationships with your previous employer. They are part of your professional network, and they could come handy in the future.

Does it help if the founders have worked together for some time? This can be a significant asset. You will have experienced pressure situations together, and learnt to understand each other’s approach and thinking. There is mutual trust and no ego issues. It is good if the founders have relatively complimentary skills and temperaments, but with shared vision and ideals.

Is it okay to include family members amongst the founders or the key team? It depends on whether you want to build a professional organization or a family run business. If the former, any relation or friend should be included purely on merit, meeting the same criteria that you would have from any other founder or hire. Involving a close family member or friend has its merits and pitfalls. A significant advantage is that you know the person, perhaps share a close bond, and have mutual confidence. However, family members and close friends often have in-built expectations from each other. These may be in conflict with deci- sions that need to be taken for the benefit of the organization. At times, other employees may perceive, rightly or wrongly, that family members were granted extra privileges or favours. While many successful companies have been founded by related individuals, there are equally spectacular examples of feuds in family owned companies.

Should the founders and initial team work from a founder’s home? Working from home is fine in the initial days while the prototype is being built. It helps if part of the home can be set up as a small office. However, it is best to shift to an office once there are more than 3-4 people. Working in a start-up means long hours and stress, and separating home from office is important. Home should be a place where you can unwind and leave the cares of work behind.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

Success Factor: Idea with Business Potential

Every engineer dreams of building his/her own product. Most ideas don’t progress any further, either because it was idle thinking, or on further reflection, they become less interesting. When a concept refuses to die, and you feel driven to explore it further, then some basic analysis must follow. What problem does it solve? Who benefits from the solution? Can you quantify its impact on the beneficiaries?

Ideas emanate in a number of ways. They can be a solution to problems that you observed at work or elsewhere. Perhaps you have spotted new opportunities arising from evolution or disruptive change in technology, environment or circumstances. For example, the advent of the PC, internet, and broadband connectivity over the past three decades, led to software that provided unique new functionality (e-mail, internet chat) or simply a new and better way of doing old things (online purchases).

Many companies have succeeded by catching a new technology curve early, and overcoming existing players (Microsoft with PC operating system, Novell with networking, Hotmail with internet mail, and recently SalesForce.com with SaaS).

Responsiveness to technology shifts is not an attribute of only small companies. IBM, for instance, has adapted to several generational changes in hardware and software. After its formal naming in 1924, IBM has seen competitors appear and fade away in the punched card, mainframe, minicomputer, PC, networking and the internet eras. Through them all, it has remained the No.1 technology company by re-inventing itself.

In comparison, here is what the CEO (Ken Olson) of Digital Equipment Corporation (DEC), a mini-computer vendor and strong IBM competitor, had to say in 1977, “There is no reason for any individual to have a computer in their home”.

Not surprisingly, DEC was eventually over-run by the PC revolution. IBM, on the other hand, launched its PC in 1981, and tied up with Intel and Micro- soft, to emerge stronger.

Your generic idea should be transformed into a rough product concept. Entrepreneurs should have sufficient domain and technical expertise to conceptualize how the idea, combined with its practical implementation, can address specific user or industry challenges. You can then, scope the problem and formulate a distinct and bounded solution.

The next step is to explore who your customers will be. At the most basic level, the product should provide a good solution to a known problem for a reasonably large set of people. The product may enhance a capability (what it can do), process (how to do it), performance (speed of doing it), or usability (ease of use) relative to the current methods. It must be reasonably unique and fairly difficult for someone else to quickly emulate.

Ideas don’t have to be unique to be successful. Excel overtook Lotus 1-2-3, the leading DOS spreadsheet, only because Lotus failed to make the transition to Windows quickly.

Sometimes, leaders don’t recognize disruptive changes. In a 1998 paper, Google’s founders described an innovative concept called PageRank, which took advantage of the Web’s link structure to produce a global importance ranking of every web page. This helped users quickly make sense of the vast heterogeneity of the World Wide Web. AltaVista, the leading search engine amongst 30+ others at the time, turned down the chance to buy Google for $1 million, saying spam would make PageRank useless. Yahoo also declined to purchase Google, supposedly because they didn’t want to focus on search, which they felt only sent users away from Yahoo.com.

Size also does not guarantee success. After their search engine and Gmail made Google into a challenger to Microsoft, they attempted to target Microsoft’s cash cow (MS-Office) with an online spreadsheet in 2006. Analysts expected this to eat into Excel (and Office) market share, but the latter continues to dominate. Still, in 2009, this competition forced Microsoft into announcing a future online, free version of MS-Office.

Ideas are like movie scripts. Most of them sound familiar. They are often a combination of previously seen sub-plots, with new twists added. Still, many of them become successful, especially if they have some novelty and are executed well. Even remakes succeed if presented differently. Very rarely do you see a hit movie with a truly unique script.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

A product company can begin earning revenue only after the product is built.

A product company can begin earning revenue only after the product is built. Significant upfront investment is required in engineering and sales. As revenue picks up, expenses continue to mount for ongoing development and sales, and for establishing a new support team. It may take years before the company’s monthly receipts exceed the outflow. This is known as becoming cash flow positive. Adequate funding is therefore critical for a product company to survive.

As a rough estimate, a product business may have to invest anywhere from Rs. 50 lacs to 2 crores (USD 100K–400K) before they start selling. This is assuming that founders take very little salary. If this money is available somehow, the founders can concentrate on building and selling the product. If not, the company is forced to adopt non-ideal strategies. The previous chapter discussed options such as working on the product part-time, or generating cash by providing training, consulting or services. If founders have to multitask, it delays the product further, creating a higher risk for the viability of the business.

In the bootstrap phase, every rupee counts. Each aspect of the company’s operation must be optimally managed. At the same time, you cannot afford to compromise on product quality or delay the time to market. The two previous statements appear to be contradictory, but building a successful business is often about prioritising and choosing correctly between the conflicting demands.

The First Mile: Forming the Team and Signing Up Clients 75

For example, if cash in hand is an issue, PCs can be leased with conversion to ownership after 12–18 months. This is effectively like a loan (the interest is built into the lease cost). Hardware and software licensing cost can be reduced by using a common server and thin client for each engineer. You can have two servers to avoid single point of failure. Only servers need to be upgraded over time.

Making progress with limited funds is a struggle, but somehow enough money has to be made available through personal or angel funds, or some side business. With the right product, and after market validation with good customers and revenue, VC funding may become possible.

Can it be done differently? Let’s return to the film industry example. There are mega-budget movies in which producers spend enormous money on stars, sets, foreign locations and publicity. The film must attract a large audience, and earn hundreds of crores of rupees to become a super-hit. When that happens, the director is in great demand, and lead actors become superstars. If it is a flop, it is the producers who lose the most. At the other extreme, you have niche films that arrive relatively unnoticed or play in festivals. Made from a lean budget, the film may have an interesting script, excellent acting and good direction. The audience may initially be restricted to those who appreciate such movies, but it may grow by word of mouth publicity, making the movie a success.

Similarly, some entrepreneurs have conservative goals. For them, it is a lifestyle choice of being independent and having their own company. You will find many such businesses that are self-funded, largely debt-free, reasonably profitable and generating only modest revenue after several years. They usually provide a mix of services and one or two products. They keep adjusting their offerings over time to adapt to the changing market and available cash.

However, if your goal is to build a really successful company that gets acquired or goes public, then outside investment is almost a prerequisite. It is rare to achieve a revenue ramp that is steep enough to provide adequate cash.

A website offering advice and networking to entrepreneurs, StartupNation has designed an ‘Odds of Success Calculator’. The online tool rates a business based on eight risk factors. Interestingly, none map directly to the product idea. Two each are linked to the management team’s experience and market potential. But as many as four relate to finances: invested capital, difficulty in obtaining funds, quality of financial management, and degree of business planning. This indicates the importance of finances to achieve mega success.

There is no right or wrong goal—you just need to be sure about what kind of company you want to build and proceed accordingly. If you are ambitious, and are in fast growth mode with revenue exceeding Rs. 1 crore, then it’s time to approach institutional investors.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

Platforms and Verticals—What to Build on and for Whom

An important decision is about development and deployment platforms. If your product is targeted for a specific operating system, the choice is obvious. When the solution has to be platform neutral, or if the deployment will be controlled by you (SaaS model), then the common options are Open Source (Linux) and Java or Microsoft Windows. Always keep in mind the Total Cost of Ownership (TCO) for the customer.

Open source in theory benefits from the availability of a huge number of re-usable components and tools contributed by an army of individual programmers. While open source is technically free, limited support and inter-operability between different open source products may lead to higher cost of development and support.

Microsoft now offers free development tools to start-ups for 3 years under their BizSpark program, but licensing cost of servers and other software for product deployment, may be high.
Other issues may impact platform choice. An implementation which is tightly integrated with specific platform features and interfaces will limit your ability to go cross-platform. Conversely, leveraging the tight integration and inter-oper-ability of various servers on a specific OS can substantially increase the product’s value and ease of use.

Web 2.0 ventures and CIOs have new options to develop applications with minimal investment. Salesforce.com is promoting the platform-as-a-service (PaaS) concept, which it says represents the start of Web 3.0. Called Force.com, it enables companies to build and deploy enterprise applications on-demand without having their own infrastructure. Core business applications, such as enterprise resource planning (ERP), human resource management (HRM) and supply chain management (SCM), can be developed in just 5-10% of the time that is normally required for custom development, and deployed almost instantly.

Your OS decision should be driven by business potential. If a specific platform dominates or is acceptable to a majority of your potential buyers, then opt for it. Spend your engineering bandwidth on providing maximum compatibility and inter-operability with other applications on this OS, to improve total value to clients.

Posted on

Product positioning and sales strategy must be approached the way an army fights a war

To position the product, you must first have clarity on the addressable market and its breakdown in terms of different industries or user communities (let’s call both of them as ‘verticals’ for simplicity). Then analyze which of them can benefit the most from your product, where your maximum contacts are, and which has the least competition.

You can accordingly initiate preliminary sales efforts with well-known contacts in verticals that appear to have the best potential. Initial sales in a start-up are opportunistic—you take the business that you get. Yet, over time, you can only gain by firming up your target client base and tailoring your product to them.

Product positioning and sales strategy must be approached the way an army fights a war. It may not be easily apparent which verticals to focus on. In similar situations, armies launch probing attacks to detect weak lines of defence, before deciding on the exact battle plan. Founders can test the market with different customers, who would help them to develop insight into which industries, user communities or geographies have the best potential.

Once weak links are identified, choose initial battles to be on your terms. In the 1971 war, the Indian army avoided enemy troops that were concentrated in cities in East Bengal. They quickly captured the countryside, surrounded the towns, until the enemy surrendered. Similarly, a start-up must spend its limited sales budget to target the right customers.

Positioning and sales are influenced by different factors, some of which are listed below:

Target Market

  • Your product may have the potential to solve similar set of problems for different verticals. However, limited finances will stop you from ad- dressing all of them. Focusing on one or two verticals can result in a more specific solution, thereby increasing total value delivered by the product. This improves the probability of converting opportunities to sales.
  • The best target segments are not necessarily the obvious ones. For example, a vertical may be large but should be ruled out if it has entrenched competitors, less appetite for IT products, remote location etc.
  • Conduct some research by talking to potential clients in various verti- cals, industry experts and reviewing market surveys.
  • Sometimes, you may simply stumble on the right vertical. Initial clients provide the momentum and knowledge base related to a particular industry segment.

Delivery Model  

  • Sales strategy depends on the kind of product: enterprise software for companies, consumer software, web downloads, hosted solution (SaaS) with subscription fee, or an ad-based ‘free’ web portal.
  • Your product may support more than one delivery model. Thus, vendors may target big companies with full-blown enterprise software, while providing a SaaS version for SMBs. Many companies offer a free downloadable ‘lite’ version of the product, which can be upgraded to a paid full version. A free website may charge a subscription fee for advanced capabilities or special content. 

Initial Support

  • Does your product work out of the box with almost no support? Or does it need some customization and training? Is the product serving an obvious need, or does it require substantial education before a client decides to buy the product? The answers will influence the sales model.  

Geography

  • Is your product specific to India or global in scope? Even if global, do you plan to sell in India first? Does your city and region have sufficient opportunities to sell the product?
  • Except with SaaS, targeting and supporting customers outside India can be very expensive. It is best to follow an ‘expanding universe’ model, where initial focus is in your immediate area, followed by proximate locations, and then a global market.

Product positioning is closely tied to licensing model and pricing. We will consider each one individually.

Posted on

Why will Someone Pay to Buy Your Product?

In this blog post, we discuss ways and means to reach out to prospective clients, position the product, license and price it. However, the question that founders must ask and answer convincingly to themselves is the one posed above. When doing this, they must think like a buyer and question every assumption about the product’s value.

There are actually three parts to the question:

    • Who is that ‘someone’ who may be interested in your product?
    • What is in it for them that they will be willing to pay?
    • How much will they pay?

 

Once this is clear at least at a high level, everything else will begin to fall into place. The answers will become more precise as the business grows, and they may also change with competition and shifting circumstances. That is why you must return to this basic query frequently.

Spider’s Web of Contacts

In early stages, founders do all the selling. They must talk to their target customer base early, with initial intent being to validate the product concept. Reach out through your contacts (past employers, family and friends) to those who can provide useful inputs. They in turn can introduce you to others. Set up meetings with thought leaders, but make sure you have a proper meeting agenda. Attend related conferences and industry meets, which present great opportunities to strike up discussions with people in the same fi eld, ranging from CEOs to sales or technical staff. You get to meet many of them in one go. At these forums, even senior executives have time to talk.

One has to learn how to get introduced to people and make an impact. Anand Deshpande, CEO of Persistent Systems, describes his approach, “Since I travel a lot, I meet many people at airports and on flights. I usually try to initiate some kind of a dialogue, exchange cards and have a short conversation. Airport encounters are not conducive to making fancy power-point presentations, so the positive impression has to be generated through something you said or your personality. The conversation has to be two way, and the person should gain something from you. It could be some information, useful tips, advice or an interesting observation.”

Anand also emphasizes the important of generating interest and then building trust. He notes that, “The biggest challenge for an entrepreneur is in getting people to meet you. That can happen through a reference from a mutual contact or your credentials (the academic and software community is closely knit).

People are more approachable at events like technical conferences because they see you as a colleague. They are also more receptive if you have a really compelling product or service to offer. People give work only when they trust you and if the timing is right. Once you get clients, you must take care not to let them down. Trust eventually goes beyond individuals and becomes a brand for the service or product.”

Take every opportunity to build a ‘web of contacts’. The web is woven from the inside out, expanding as you meet more people. Some of them may become future clients, advisors, partners or maybe even investors. Once you have a satisfied customer, get them to recommend at least two other industry contacts. Since your ‘n’ contacts can potentially refer you to ‘n’ more, this web can grow exponentially (square of n) over time if it is managed well.

Some entrepreneurs are very good at networking and take every opportunity to get introduced to people. They follow up on meetings by sending a discussion summary, or just a thank you note. Key contacts get regular emails with significant updates, like a new website, press coverage, or major client win. This communication should not be too frequent to a point where it becomes a nuisance. Surprisingly, there are many founders who don’t keep time commitments, and are poor at responding to e-mails or maintaining contact. Some respond selectively, only to those whom they think will be of value to them.

It is important to be gracious in business. Someone’s ability to help is often a matter of timing. It may be weeks, months or even years before something materializes from a discussion that you had. If you are in regular touch, your time will come.

A venture is said to be in stealth mode while the product is being conceptualized or developed. In those early days, you should be careful to avoid divulging  information to anyone who can become a potential competitor. If you plan to get into detailed implementation and technical discussions with anyone other than investors and prospects, don’t hesitate to ask them to sign a Non-Disclosure Agreement (NDA).

Write down and then practice an ‘elevator pitch’ about your product and company. ‘Elevator pitch’ is a US reference to being able to communicate your product concept crisply to a prospect in the same elevator, in the short time between fl oors. There will be many opportunities, where you will have just those few minutes. So, learn how to distil your product objectives and value in a few sentences.

Anchor Customers

The first few customers are hard to get. There is a temptation to sign up anyone willing to pay. However, you must take a long term view and instead focus on signing the right clients. Approach users and companies that best represent your target audience—let’s refer to them as ‘anchor customers’. An ideal anchor is someone whose name will provide confi dence to future prospects, and whose acceptance of your product establishes your technology leadership.

Anchors may sign up because they are risk-takers, or they have a pressing business need, which your solution can address. Remember that they are investing in you by taking the risk of signing on for an untested product from an unknown company. They will spend time and resources on deploying your software and surviving the inevitable teething problems.

You can acknowledge their support by being fl exible on the pricing. At that point, you probably wouldn’t have decided on the price. For instance, offer to waive license fee for the fi rst 6 months. Say that you will quote them the list price that you will charge other customers, and will let the anchor decide their price.

Anchors as Investors

If you get lucky, the anchor may be convinced that your product can deliver real value, and will support you all the way. They may even pay your full fees, but ask for extensive customization. Some anchors may even want to invest in your company. This can happen with large companies who see the potential for significant financial benefi ts from your product, either through internal deployment, or because it fits into their strategic roadmap in some way.

Both are good situations to be in, but you must assess the following:

  • Weigh the benefit of customization for an early client against the potential delay to the main product. 
  • Product and source code ownership must be retained unambiguously by your company. 
  • Any angel investment proposal should be evaluated on its merits. Do not trade equity just because you are getting a major customer. Their investment may limit your market by turning off the anchor’s competitors.
Posted on

Building the Product Right

The foundation of a product company is in its IP. An idea is only as good as its implementation.

Start-ups face twin pressures of building the right product and doing it in time. The broad contours of the product may be quite clear, but specific features change shape regularly. Things happen simultaneously. While the product is being built, it’s being pitched to prospects, advisors and investors. Based on this learning, entrepreneurs keep tweaking or adding features. There is urgency to build an early prototype for demo purposes. At the same time, everyone’s end objective is a high quality product that is released quickly to generate revenue.

With time-to-market and funding issues, start-ups often take short cuts. Repeated changes in functionality are disruptive. This leads to a defective implementation, requiring substantial revisions or a complete change. Such modifications can ultimately prove too expensive. There is no easy prescription to manage this problem, and we will limit ourselves to a few basic suggestions.

Set up a product management team, consisting of the founders and key architects. The team must spend sufficient time upfront to defi ne key requirements, high level product features and design. A common problem is the tendency to over-design a product. Engineers fall into the trap of ‘feature creep’ in which they attempt to include too much functionality because it is technically exciting. Meetings with prospects and experts lead to demands for new features, and changes to existing ones. Set up a process to register and approve all change requests only through formal review meetings. Limit the scope of the initial release to those features that are critical to sales.

Start-ups should adopt the agile development model, consisting of a series of intermediate releases spaced by a few weeks. Each must have incrementally more features that are fully functional. This enables testing of completed features, in parallel with ongoing development of new ones. Being able to play with intermediate versions brings about confi dence that the fi nal release will be on time and to the desired quality. Other than for embedded products, the user interface (UI) is a critical element of the product. It is also the most neglected. Defining and implementing the UI upfront is the best way for everyone to understand exactly what the product can do and how it will look. A good UI speaks louder than the most detailed requirements document.

Your initial selling will rely on screen mock-ups. This can be followed by UI only demo version, which is invaluable in showcasing the solution to prospective clients and to the investors. User feedback helps refine the product, while it is being developed. This will help it meet the user expectations.

Relying so much on UI means that it should have the highest priority. Engineering teams are not good at UI, but still end up doing it themselves. At most,  they get visual designers who help with screen layout and style-sheets. However, what you really need is a Usability expert as consultant. His job is to understand how customers will interact with the product, and conceptualize screens and navigation, to ensure it’s user-friendly.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

Cloud Services and Mobile Apps

In addition to vendors of traditional on-premise products that are shipped or downloaded via web, a different generation of providers is fast emerging. They are leveraging new technologies and business models, often interchangeably referred to as cloud services, Web 2.0 or SaaS (Software as a Service). (Not all SaaS products are truly cloud based but the differences are not relevant for this discussion.)

SaaS considerably simplifies application deployment and upgrade challenges. Software is hosted at one site (vendor’s own or through a provider). This reduces development cost since the deployment environment is controlled. There is no distribution expense, though deployment charges can become considerable to support a large base of users.

The SaaS model is important for India. Making geography irrelevant, it enables anywhere, anytime apps and services for a fl at world. Indian Web 2.0ventures can now reach out to the world market without the huge cost of sales that enterprise software companies have to bear. They can compete directly against global players.

Cloud services adoption will depend on resolution of a few major concerns. One is security of personal and corporate data in the cloud. Secondly, guaranteed near 100% uptime will be critical for mainstream enterprise apps to move to the cloud. Reliable access will be a big factor in India for a few years, despite the phenomenal growth in broadband connectivity. Uptime has been an issue even in US, with large players like Google and eBay facing major outages in their online services.

The most widely used cloud service is web-based e-mail such as Google’s  Gmail. The standard bearer for commercial SaaS apps is Salesforce.com, which crossed $1 billion in revenue in 2009 in just ten years. It provides web-based Customer Relationship Management (CRM) solution for sales, service, marketing and call center operations.

With over 1.5 billion people going online, SaaS offerings will only proliferate. Amazon.com, which started with selling books over the web to consumers, is now a full-service online merchandise store. Examples in India include IndianRailways.com (train bookings), MakeMyTrip.com (travel services), naukri.com (job related portal) and shaadi.com (matrimonial related).

Similar to cloud services, software apps on mobile phones are becoming more common, driven by the explosive growth in usage. In 2009, cell phone ownership had reached 3.5 billion worldwide and over 400 million in India. Cell phone growth is highest in India, with 10+ million being added each month, cutting across income barriers. The Indian mobile market is unusual in its extensive usage of texting (SMS) and multiplicity of languages. With its ubiquity, mobility and low cost, it is the ideal delivery platform for simple apps (and supporting middleware).

Though SaaS and mobile app vendors often look like a services rather than software firm, they are included in the book because software is the foundation and key differentiator for their business.

There is another reason. With its late liberalization, India largely skipped making huge investments in an entire generation of technology (land lines, minicomputers and even standalone software apps). This proved to be a boon in disguise, and led to rapid adoption of latest advances like broadband and mobile by a booming market. In similar fashion, consumers and businesses may take to this new breed of software products. Small and Medium Enterprises (SMEs) especially benefi t from SaaS by not having to invest upfront in IT infrastructure (servers, software licenses) and buying subscriptions only as required. Similarly, the hand-held is rapidly morphing into a highly integrated device, and is poised to become the key accessory for humans to interface with their environment. The vast majority of Indians will skip the PC and directly use an integrated
device at work and home.

Since the Indian psyche is different, entrepreneurs can build unconventional solutions that refl ect local reality for domestic users. The intersection of new technologies and India’s growth economy has opened a window of opportunity for new firms to leapfrog past existing players with exciting new products.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

Why More Indian Software Product Companies will Emerge

Any discussion about building products from India is lost in the hype and din about India as an IT services powerhouse. However, the mostly unnoticed surge in product start-ups marks the beginning of a new movement, with potential to re-invent the Indian software industry. Emergence of globally recognized Indian product companies will represent the final step in the software value chain. If India can become the hub of the world’s most successful IT services as well as product companies, it can truly lay claim to being a knowledge superpower.

Building products requires a mindset, capabilities and an environment, which is very different from delivering services. Achieving this final frontier won’t be easy and Indian entrepreneurs face major challenges. There are very few role models who have built successful product companies, which limits access to mentors, who can provide guidance. Access to market requirements is difficult, since major consumers of software products are in Western markets. IT spend- ing in India is growing but still limited and global vendors are preferred. Finally, early stage funding is a major problem, and getting engineers to work in start- ups is a big challenge.

An increasing number of motivated entrepreneurs are working to overcome these handicaps, just as founders of services companies did in the early 1990s. A convergence of factors is ensuring the emergence of successful Indian product companies:

  • A large pool of talented engineers and managers who have worked at global companies in India and US
  • The rapid growth of local market and increasing adoption of IT with India-specific requirements especially for consumer facing apps
  • Technology disruptions including the emergence of cloud computing, which make national boundaries irrelevant, and reduce cost of global sales
  • Flair for innovation and risk-taking amongst a generation that has grown up in post-liberalized India
  • Self-confidence that comes from an economy that is the second fastest growing in the world
  • Weakening US economy that is motivating an increasing number of experienced software professionals to return to India

Since services culture dominates Indian IT, the book will continue to high- light how software product companies differ from their services counterparts, and the specific challenges that they must overcome.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

Build it Right, then Sell it to Many (and Keep Repeating)

Building a software product is more difficult than doing projects or providing services. With projects, software is developed to meet the exact specifications of the client. Work begins only when the contract is signed.

The project scope can be defined accurately in consultation with the customer, and deployment happens in a controlled environment at client site, with known hardware and software. Support requirements are minimal.

Changes to specifications, or defects during development or after deployment, usually have limited financial impact. In T&M contracts, the vendor is paid regularly, based on efforts put in. Hence, changes and delays may in fact, bring in more revenue. Fixed price bids usually account for contingencies like delays. If specifications are changed, the vendor can ask to re-negotiate the price. Quality issues may cause loss of credibility, or at worse, project termination and denial of future contracts. 

A product, in contrast, will be shipped to thousands, or even millions of users. Specifications are based on the seller’s understanding of customer needs. Therefore, a deep knowledge of market and domain is required. Clients are not guaranteed, and marketing and sales functions are critical. Selling cycles are longer and more cumbersome.

Quality has to be outstanding, since the product will be used by a variety of users, and on a plethora of platforms and configurations, and not all of it can be anticipated in advance. As the diagram below shows, the cost of fixing a defect increases exponentially depending on when it is detected.

A post-release defect creates negative publicity and costs lot of money. A patch to fix the problem has to be developed and distributed quickly to the users. Even Microsoft has faced this problem repeatedly when hackers have exploited vulnerabilities in its operating systems. In another instance, a US-based personal finance company inadvertently exposed the private account details of several hundred individuals to other users. Such snafus can expose a product company
to expensive lawsuits.

A product business requires highly structured engineering and organizational discipline. Formal reviews are necessary at every stage (architecture, design, coding) to catch deviations from the requirements. Rigorous testing and quality assurance (test/QA) processes should be followed to detect defects before product  release. Test labs must replicate the myriad deployment environments that users  may have. This can become complicated for multi-platform products that support a variety of operating systems (Windows, Unix, Linux) and databases.

The installation procedure must be highly automated and work fl awlessly in all possible system configurations. New versions, patches, and future upgrades must install without any disruption to existing software and data at user sites. A strong support organization (on phone, email or onsite) has to be built.


Unlike projects, there is no end date for product engineering. They must  continue innovating and releasing new versions with more functionality and advanced features, to stay ahead of competition. Product organizations often have a signifi cant revenue component derived from services such as consulting, customization, integration and solutions. Unlike a pure services business, these are used to underpin and drive their product sales.

The ecosystem for products is more complex, consisting of engineering teams, product management, marketing, sales, consulting, professional services, distributors, system integrators, resellers and investors.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.

Posted on

Product Business is Very Different from Services

What is the difference between software services and products? Why is it important for India to be developing products?

First Invest, and Then Reap

The business cycle in a services company starts with sales, and ends with project or product delivery. On the other hand, a product company must first invest in building the solution. Then begins a long and complex business cycle to sell, support and continuously evolve the product. This reversal of sales and engineering sequence has a profound impact on how product organizations get built.

Services industry provides manpower to build software apps and products, which belong to the customer. Typically, IT departments of retail, manufacturing, financial, insurance and other businesses require new applications, or enhancements to existing ones, for in-house use. They turn to Indian companies for design and implementation. Needing long-term support, global product companies establish extension engineering teams at Indian subsidiaries or services companies.

In services, clients own the Intellectual Property (IP). All gains (cost savings, productivity improvements, revenue) and risks are entirely the clients’. The service provider gets paid in proportion to the cost of development, irrespective of whether the pricing model is fixed cost or time and material (T&M).

This means that the services revenue growth is directly linked to number of engineers. The industry’s competitiveness is determined by cost of engineers. But the number of trained software engineers in India, cannot scale indefinitely. Even today, good talent is becoming scarce. Salaries are rising to a point where low-cost economies such as China, Vietnam and Philippines have started to compete. Nevertheless, superior talent, project management expertise, processes, and English language skills continue to provide an edge to India. However, others are catching up, thereby causing a slowdown in the industry’s growth rate.

In comparison, products have the potential to fetch non-linear revenue. A product business creates intellectual property. Once developed, the same solution is sold repeatedly to a large number of buyers.

The graph above shows the famed hockey stick revenue model for a successful product company. A services organization can have positive revenue from day one, and grow very quickly too, but the headcount-centric model will eventually become a drag.

Reprinted from From Entrepreneurs to Leaders by permission of Tata McGraw-Hill Education Private Limited.