Basab Pradhan's blog
I attended TiEcon Delhi for a day in October. The energy in the main hall and the deal-making in the lobby outside, spoke volumes about how hot the Indian venture scene is. I met old friends as well as some new entrepreneurs. And came away with much to chew on.
Startups in India have opportunities and challenges that are quite different from the ones in the US. Ditto for VCs. A few observations:
From time to time you hear some government minister or bureaucrat in Delhi making a proclamation that the FDI limit (Foreign Direct Investment) on such and such industry has been raised from X% to Y%. The press dutifully covers it, the Communist parties huff and puff about it and another credit is chalked up on the Indian government’s liberalization scoreboard. But most people like me, remain uninformed about the issues behind the decision.
Last week’s post on IndiaPost raised quite a storm of comments. Some of them were supportive of my central thesis that for Indian citizens to get better public services the issue of labour flexibility within public service organizations is the most important one to address. Many were not. Of these some thought that IndiaPost has actually done well, given the circumstances, and that I was looking at the glass half-empty.
So for a change, let’s look at the glass half-full. Let’s talk about some Indian startups that are being noticed.
An article on the Indian Postal Service in the Wall Street Journal (subscription required) portrays the service so pathetically, it almost reads like a children’s book describing a distant kingdom where everything goes wrong all the time. Unfortunately, this is no fairy tale. It is very, very real.
Here are some damning stats and facts about Indiapost:
Property rights form the fundamental bedrock of capitalism. In a capitalistic society an individual’s right to own property and dispense with it as he deems fit, must be protected. Only then is the individual encouraged to invest money and effort to add to his property. (Here the term property applies to all assets, not just real estate)
If India is to keep the momentum going on its recent economic growth, it must strengthen the pillars that hold up the edifice of capitalism in the country. Property rights are the most important ones. There are many laws like the rent control act that impact an individual’s right to property. In some cases, the inability of the state to protect its citizens’ property may be construed as something that erodes property rights. I see labour inflexibility in India in the same light. Many will not agree with me on this. I believe that shareholders of a company ‘own’ the company. Not allowing the company to conduct its business as it deems fit, including hiring and firing employees, is in effect constraining the shareholders’ rights to property.
You may have heard of this adage – Any press is good press. In this new world where news is not news until the blogosphere gets a hold of it, I propose that we retire it. Its a quaint idea but its time is past.
On August 14th Dell announced that it would recall 4.1 million lithium ion batteries made by Sony. Then news weighed heavily on the already drooping stock price of Dell and seems to have had some impact on Sony’s as well.
The other day I had to create a user id on an Indian financial news web-site. I wanted to create a portfolio that included mutual funds and Yahoo Finance doesn’t cover Indian mutual funds. The portfolio worked alright, but eventually I decided to keep it on Yahoo Finance after all. That should have been that.
But then I started getting email from that web-site. One email a day about products, investment ideas and news summaries that I had no interest in. I did not opt to get these emails. That was foul number one.
It’s been a long time since my last post. Perhaps too long. Things have been busy at Gridstone Research, the startup I work for and blogging had to take a back seat for a while.
So to make up for it, here’s a meaty subject. Why do people in different professions get paid what they get paid? It’s an interesting subject and I thought I would find some research on it on the internet, but I couldn’t. There’s a lot of data on what people get paid in different professions, but the question we are trying to answer is why.
Let’s first clarify the question at hand. We are not dealing with executive compensation here, although that is quite an interesting (and topical) subject in of itself. We also know that in any profession the higher you sit in the organization chart the more you get paid (generally). What we want to compare here is compensation in different professions – investment banking or software sales or retail bank front office – taking out the effect of position and years of experience. We will ignore stock option related windfalls, which are anyway becoming rare. And for this piece, we assume that we are comparing professions in the same city, so there is no cost of living impact on wages.
After all the assumptions in the last para, you are still left with a significant variation in compensation both at entry level (out of college or business school) or at any time marker after that. The question is why? What makes some jobs worth large amounts of money while others are so-so?
Here’s my hypothesis. If the person in a job can directly impact the company’s profit in a significant, measurable way that job will get paid more than someone in a job that doesn’t.
That sounds almost like a truism. But let’s examine more closely what it means. An example will make it clearer.
Take the job of a Portfolio Manager (PM) at a Mutual Fund. The PM decides which stocks to buy, hold or sell for the Fund. He almost entirely determines how the Mutual Fund performs. If the Fund performs well, its shareholders make higher returns than other comparable funds. The word spreads and more money pours into the Fund swelling the management fee that the Fund Management firm charges. The average mutual fund in the US had assets of $1.05B and expenses of 1.25% in 2005. A 25% increase in assets increases the firm’s fees by over $3 million which should largely drop to the bottom-line. As you can see, the correlation between the PM’s decisions and the business outcomes are very high. Also, and importantly, there are few if any other things that matter. Unlike in a manufacturing company where many people contribute to the value and quality of the product, the PM might depend upon the recommendations of the Fund’s Analysts who research companies, but he makes his own final decisions. Random events or luck play a minor role, especially if these events impact the benchmark as well.
The PM’s job therefore fits our criteria perfectly. He directly impacts the firm’s profits in a significant, measurable way. Not surprisingly, the Portfolio Manager for a Mutual Fund in the US is a highly paid job. Many of them take home over $ 1 million.
Sales people in most industries that sell to businesses tend to get paid more. What predictions can one make about compensation in the Sales profession using my hypothesis? A Sales professional will be paid more when Gross Profit (or Contribution) per Sales professional is higher (significant impact to profit). A salesman for Boeing should therefore be one of the highest paid salesmen in any industry. Also Revenue Producers will be paid more in the Professional Services industries where the Partner or the Banker is the product himself. The client often knows and trusts the Partner or Banker and will give him the deal because of him and not the company he works for (direct impact). Therefore, Management Consultants, Lawyers and Investment Bankers all get paid oodles of cash.
A school teacher’s job is a tough one. They mold young minds. A good teacher can be a glorious thing for a young student. What can be more important than this job to both individuals and society? Yet school teachers are paid very little in almost every country. I have often struggled with this paradox. Why wouldn’t we pay school teachers more and get the best we can for our children?
Let’s take a school teacher’s job and evaluate it against the criteria in our hypothesis. A school teacher definitely directly impacts the outcomes for particular students. This impact can be undoubtedly significant. You might decide to become a writer because of a superb English teacher, or totally lose interest in Biology because of lousy one. However, a school teacher in the US typically works for a public (government) school and not for a business. And the outcomes for students discussed above are not exactly measurable outcomes. So a school teacher’s job doesn’t fit the criteria in our hypothesis on a couple of counts. So school teacher salaries will predictably be low, attracting average talent and with lower incentives to excel.
On the other hand, consider the teachers in Delhi’s IIT coaching classes. Their outcomes are very measurable – the students’ JEE rank. The students’ JEE rank drives both the enrollment in the coaching classes and the fees per student. No wonder these teachers can take home as much as Rs. 15 lakhs a year, a salary that an ordinary school teacher in India can only dream of.
I think the hypothesis in general works. But like most things in the complex world of business, it’s hard to make rules stick. There are always eddy currents that produce exceptions. If you find any, let me know.
The airlines business is a complex one. The pity is that most airlines
reflect the complexity in their business onto their dealing with passengers.
Passengers like me hate it.
I am planning a trip to the East Coast (I live in the San Francisco Bay
Area). The trip is a 3 city trip over 4 days. I generally prefer to do my
own travel planning. When I was at Infosys, I would talk to our company travel
agent. Now, in a startup, I find it easier and cheaper to do my own
travel bookings on the internet.
So far, all my trips to New York have been on JetBlue. They have convenient flights and low prices. This time I
need to go to Boston and Chicago as well and so JetBlue won’t work. So
I go to Expedia.com and check out the flights. My conclusion after 45 minutes
of research and copious note-taking – if I want to minimize my travel cost, I
will have to travel on 3 different airlines and fly in and out of different New York airports.
For most airlines, pricing is a game of revenue maximization. Here are some
tricks of the trade:
1. If you book your travel early you get a cheaper fare. Everyone uses this
one, including Southwest Airlines.
2. Refundable tickets cost more than non-refundable. Again, very widely used.
3. Take a hub, dominate traffic in and out of it and charge the earth for it. New York to Boston round
trip from two different New York airports can be $200 or $600 based upon the competition on that sector.
4. Round-trip fare is heavily discounted versus point to point.
5. Saturday night stay-over reduces the fare quite a bit.
There are countless other tricks that are all designed to maximize revenue.
Optimization engines and pricing rules in the innards of airline pricing
systems are some of the most complex you’ll find in the business world.
As a passenger I hate this whole system. I hate it that it takes me 45
minutes to do my tickets. I hate it that even after that, I don’t know if I
made the right choices. I hate it that I can’t travel back on a different
airline that has more convenient flights without paying a hefty premium for it.
And I cannot develop a trusting relationship with an airline who charges my
$600 when an equally good (or equally bad, depends on your perspective) airline
is charging a $200 fare for the same itinerary.
So here’s my question to these airlines. Do their fancy price optimization
algorithms put any value on what I can only call torturing the customer? I’ll
bet they don’t because they have no way to measure it or put a value to it. The
reason simplicity in business is so rare is that there are no good ways to
measure the cost of complexity. And so your finance types in the company can’t
put it into their cost-benefit analysis spreadsheets.
Complexity costs. Customers like simple products – simple to use, simple to
understand. They like simple pricing models where the price is linked to the
value they receive. This is not just true about simple-minded consumers. Business
buyers like simplicity as well.
Southwest Airlines is a company that I truly admire. The genius of Southwest
Airlines is in how they have become the most important airlines in the US by
simplifying it for their passengers and for themselves. In the morass of
complexity that is the American airlines industry, Southwest Airlines is a
shining beacon of hope. Not only is their pricing dead simple, everything about
the airlines is that way. They fly only Boeing 737s. This simplifies, crew
scheduling, training, aircraft maintenance and spares. They have only one class
– coach class. There is no seat assignment. It’s first come first serve. And
their frequent flier program is a tribute to simplicity – 8 round trips and you
get a free roundtrip to anywhere they fly. You would need a full book to fully
document the frequent flier program of United Airlines.
No wonder Southwest Airlines has delighted customers and a growing business.
Its market cap at $12.64B is way above much larger airlines like American
Airlines and United. They understand the virtue of simplicity. They understand
that it not only makes for happier customers, it also makes operations run
cheaper and faster.
Now if they’d only fly to the airports I need them to fly to.
In big business the phrase ‘cost of doing business’ is often employed to justify a cost that is deeply embedded or can’t be justified on an Return on Investment basis. Sometimes it truly is necessary. Often it is just handy management jargon to keep something from being cut by the accountants.
In a startup, on the other hand, the cost of doing business has a very real meaning. It in fact means exactly how it reads – the cost of running the startup. In management speak this is often referred to as the ‘burn rate’. And I am here to tell you, that the cost of doing business for a startup is going down fast.
There are many trends that impact the cost (and ease) of doing business for a startup. The two that I think are particularly pertinent to the cost of technology are – open source software and usage based pricing. Sometimes both these things get combined.
Let me give you an example. As an ex-head of Sales, I believe in a company acquiring good habits on Sales process early. Ergo, we use a CRM system at Gridstone. When making the choice for a CRM system we never even considered licensed software. If we had, I suspect it would have cost us several thousand dollars per user per annum, for something with the functionality that we need. We probably would have needed outside consultants to implement it adding more to the cost and time to value. Most startups nowadays don’t even consider that option.
The next option, which is very popular today is salesforce.com which is a hosted internet application. The company is very successful and is growing like a weed. Their price for the Enterprise edition – $900 per user per annum. Simple to implement. Good service. Works like a charm.
We were almost going to go with salesforce.com when we heard about this open source CRM software called SugarCRM. SugarCRM is also a company. I think the way their business model works is that they, and outside collaborators, work on the open source version of Sugar, which of course is free to use and comes with the source code for others to tinker with. But SugarCRM the company also develops add-on modules like Sugar-Outlook integration that are not open source and are priced per user per month. Sugar also offers hosting and training services around SugarCRM. If we wanted to take the full hosted solution with add-on modules, we would get an excellent CRM system that matches salesforce.com in functionality for the price per user of $480 per annum.
Now SugarCRM is open source and anyone is free to use it themselves or host it for others for a fee. There are dozens of hosting service providers who will host SugarCRM for you. Some of them even have add-on modules. And you won’t believe the prices. The service provider we finally went with charges us $5 per month. Not $5 per user per month. $5 per month period. For the usage it allows, for us it practically means unlimited users! Plus the price includes hosting for a few other applications as well. It’s a brave new world!
Now technology costs are not the only costs for a startup. All costs related to people, office space aren’t going down. But tech costs are a major component of the costs especially for early stage startups. For two guys in a garage, the quintessential valley startup, their runway is now much longer than it used to be. In the future more tech companies like Flickr will be going straight from garage to selling the company. It is ironic that this should be happening in an environment where venture capital is so abundantly available.
6 am pacific 