Entrepreneur 21/10/08

• Turn to Page 2 for the second article of the Vision India 2020 series—Urja.

• Give in your valuable comments at editor. [email protected]

“Without the strength to endure the crisis, one will not see the opportunity within. It is within the process of endurance that opportunity reveals itself.” - Chin-Ning Chu

19 Oct, 2008

The Entrepreneur

ENTREPRENEURSHIP

CELL,

IIT

KHARAGPUR

Making Sense of the Financial Crisis How is it that a 158 year old company, the 5th biggest investment bank in the world, went bankrupt overnight? Why have the TV channels reduced their obsession with Sarah Palin and are now hanging on every word Hank Paulson, US Treasury Secretary, says? Well, first of all while there has been much publicity about Lehman Brothers going bankrupt overnight. The real cause can be traced back by a chain of events that started off as early as 2002, with the US subprime mortgage crisis. The causes for the mortgage crisis are numerous, ranging from poor scrutiny by lenders, lack of regulation, to possibility of insider trading in credit derivatives. This mortgage crisis led to the housing bubble burst in 2006 and also triggered off the global financial crisis. Lehman was greatly affected by this credit crisis due to its large investment in BNC Mortgage, its subprime lender and also its investment in other low rated mortgage securities. Failure to raise further capital and its tumultuous losses, led to its filing for bankruptcy on September 15th. The Lehman Bankruptcy set in a train of damaging events. The $3500bn US money market fund, that banks and companies use for their short term financing got locked. Many Hedge funds that were using Lehman as their prime broker, suddenly found their collateral frozen due the complicated structure of Lehman’s bankruptcy filing. About a week before the Lehman bankruptcy case, the Federal government had announced the takeover (or placing into conservatorship) of two of its biggest government sector enterprises Freddie Mac (Federal Home Loan mortgage corporation) and Fannie Mae (Federal National Mortgage Association). Two companies considered to be “too big to fail”. A day following the bankruptcy filing of Lehman Brothers, came the Federal Bank’s $85 billion rescue package for AIG, the world’s biggest insurer. If AIG had failed, it was said that the average citizen’s savings and checking accounts could be in jeopardy. To

gauge the magnitude of the issue, just try to imagine a situation where, as an ordinary citizen you are not sure if your money is safe in a bank! Other than Merrill Lynch, which was bought over by Bank of America, the next victim of the financial crisis was Washington mutual, the largest US savings and loans association. The bank’s home loan department took a big hit; a hit big enough to affect the $307bn bank. Within 10 days customers pulled out $16.7bn, increasing the urgency for some sort of a rescue act. This was the first case of direct government intervention, where the Federal Reserve put pressure on WaMu to find a buyer, and even went forward to hold a secret auction where JP Morgan was announced the highest bidder. The next step by the US government was the much publicised $700 bn bailout a.k.a the Paulson plan. Most of the $700 billion was to be used by the Federal Reserve and the Treasury to buy out liquid mortgage backed securities. This increased the almost nonexistent liquidity in the market. Let us stop here for a moment. Within two weeks two of the five largest investment banks, two of the biggest GSE’s (govt. sector enterprises) seized to exist and the biggest insurer was saved by last minute government intervention. This is excluding all the activities going on with Wachovia, Britain and Iceland. There is no doubt that the catalyst for the sudden crisis was the bankruptcy of Lehman Brothers. Unlike Bear Stearns which got a lifeline about six months ago from the Federal Reserve, Lehman got no such lifeline. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers”, Hank Paulson, Treasury secretary, said the day after Lehman’s demise. Of course it is arguable as to if things would be a lot better were Lehman Brothers still present. There has been quite some criticism that the government intervention came a little too late. There is also another sect of people who are against Hank Paulson assuming the role of God, with tax payer’s money. Only time will tell if Paulson plan is indeed sufficient to avert a bigger disaster. Next issue: How the US financial crisis affects India directly and indirectly.

- Abhilash B.N www.ecell.iitkgp.ernet.in

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"Business opportunities are like buses, there's always another one coming." - Richard Branson

Vision India 2020: Urja For many years, I had traveled around India and wondered how to take advantage of the tremendous craftsmanship that exists in the depths of India. Whether it is in Nagaland or Gujarat, Kashmir or Bengal, India’s heritage has been rich with artisans. Yet, for all its creativity, the sophistication of design and quality of finish were always elusive. Indian designs were always too complex, too busy. Thus, the potential for a strong international brand that could transcend cultures and appeal to a wide audience somehow eluded India. The answer came to me gradually, and received a propulsion during a vacation in Italy in the Spring of 2007. We were staying with Carol and Ginou in the Tuscan village of San Giovanni d’Asso. One evening, their friend Alessandro came for dinner. Alessandro had been a top executive at Giorgio Armani in Milan, and had traveled widely in India. The question I was asking was also on his mind. And that evening, under the Tuscan moon, Urja was born. Urja, by the way, means born out of creative energy in Sanskrit. Over the next two years, we simply kicked around the ideas, talked with people, and worked on recruiting a core team that could pilot our concept. Our core hypothesis was that if Italian designers were made to work with the artisans in India in various communities, design sophistication could be achieved. We tested this with Lucknow Chikan as part of the pilot. Our Italian designer team in Milan and our Chikan team in Lucknow worked together to exchange design ideas. When the first set of designs came out of this pilot, we were delighted to see the simplification that the Italian team had been able to achieve, without losing the beauty, intricacy, and charm of the original art form. A simple set of the most elegant dress shirts had been created. Alessandro and I were primarily concerned with the fact that Indian designs were too complex for global taste, so this was a major milestone for us to reach to convince ourselves that sophisticated design was, indeed, possible through this cross-cultural exchange. The next two big issues were “cut” and “quality control.” Indian designers had very little experience of what I call “design for manufacturability” that is essential for a scalable ready-to-wear industry to come together. They had experience in designing salwar-kameez, ghagra-choli, or saris, but very little in western clothing. The industry had to be trained in cut and manufacturing to spec. For this, we turned to Alessandro’s contacts in the Italian fashion industry, and recruited a top-notch team of manufacturing experts. Even on the Quality Control issue, we had the Italians train our teams in India.

With those 3 legs of our plan in place, we went and raised money. I convinced Alessandro to forget his retirement ideas, and take the CEO role. French Billionaire Francois Pinault, who also owns Gucci among other fashion brands, funded the concept, and his company became our long term investor through the next 11 years of Urja’s evolution. We created the Urja brand using the Internet, as well as retail channels. Today, we have flagship stores on Champs-Élysées in Paris, Via Condotti in Rome, Fifth Avenue in New York, among others. Our advertising campaign was very Web 3.0. Several of our Italian designers and Indian artisans became celebrities on the internet, since we encouraged them to engage with the customers on social media and the Glam.com network. The side-effect was that we carefully monitored customer feedback, and in fact, engaged customers with our designers almost as pre-design focus groups, online. We learned so much through these interactions, and every time we were about to launch a new concept, we could go back to our core customer base and check the assumptions. One by one, we incorporated Tassar silk from Bengal, Rajasthani Block Print techniques, Dhakai Jamdani fabrics, Gujarati mirror and bnadhni work, Kashmiri shawls, even tribal artisans’ work, into our collections. We paid attention to every detail – from buttons to draw-strings. We had artisans who specialized in making the most unique collections of buttons and cuff-links! Our Italian-Indian fusion brand became a sensation, injecting a sense of novelty and creativity into the global fashion world that had, by and large, become boring. And most importantly, we were able to build a financially sound, compelling business that is now supporting the livelihood of 100,000 artisans across India. Urja, indeed, was born out of creative energy. However, the business was chiseled and sculpted carefully, keeping in mind the core nuggets of our vision: simplicity, detail, sophistication and quality. And with that, we seduced the fashion world.

©Sramana Mitra The author is a well known Silicon Valley entrepreneur who has founded 3 companies, is a strategy consultant for over 70 companies, including SAP and Cadence among others, and the content from her popular strategy blog at www.sramanamitra.com is syndicated by Yahoo! Finance, Indian Daily, etc. She also writes a weekly column for Forbes.

www.ecell.iitkgp.ernet.in

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The world is more malleable than you think and it's waiting for you to hammer it into shape. - Bono

How free software makes money Ever wondered why a perfectly respectable system like Ubuntu Linux ships completely free of cost all the way from Africa? While many people focus on this point, it is actually just a consequence of something elseUbuntu is only incidentally free of cost. Good people donate to it and sponsor its shipping costs because they like it. Ubuntu is “free software” or “software libre”. Free as in freedom, not cost, means 4 fundamental rights: 1. The freedom to run the program, for any purpose. 2. The freedom to study how the program works, and adapt it to your needs. Access to the source code is a precondition for this. 3. The freedom to redistribute copies so you can help your neighbor. 4. The freedom to improve the program, and release your improvements to the public, so that the whole community benefits. Access to the source code is a precondition for this. There are many other free software products that aren’t necessarily free of cost- Ubuntu Linux is only one of them. How do these other companies manage to make money? Traditional software companies create something, package it, and sell it, the same way a vegetable vendor sells vegetables on the street- price per piece. Simple revenue model. How do I “sell” free software though? Certainly not like vegetables on the street, because everyone has the right to redistribute it. So who’s actually going to come to me and pay for it? Well, it turns out that there are many other creative ways to make money. Since the models tend to be complicated hybrids, I’ll illustrate with examples: SpikeSource is an example of a very successful company that follows a pure service model. They specialize in maintenance, certification, and integration of free software into large workstations. They capitalize on the fact that they have the power to study the source code (modifying it when necessary) and pinpoint exactly what went wrong during tech support. Free software typically comes with no warranty of any kind. SpikeSource fills this void for large corporations.

RedHat offers RHEL, or RedHat Enterprise Linux which they build by gluing together various free software components and charge for the service of maintaining it. They capitalize on the fact that they are familiar with exactly what they built.MySQL and Trolltech Qt follow a double-license model. Why would people choose the proprietary license? The proprietary license offers some additional rights over the software over and above the fundamental free software license rights. Yes, it works. The proprietary license is available at a price. Many companies also tend to maintain two versions of their software: a free software “community” version that the community continually improves and a proprietary version that can be purchased at a cost. Zimbra, the email client, is one significant example. Their desktop edition is free software but their network edition for large enterprises comes at a cost. RHEL/ Fedora is another example- RedHat constantly use ideas and code from Fedora, the community edition, to maintain RHEL (No, RHEL isn’t proprietary, but either is it developed by the community). Many free software projects are funded by companies interested in seeing the project come up. SuSe, for example, sponsors a project called OpenSync because they want to see certain features in it that they probably wouldn’t see otherwise. They additionally get some good publicity and a major say in any crucial decision. Instead of creating their own synchronization solution for their operating system, why not sponsor an already ongoing project? It’s far cheaper and they get additional programmer passionate about the software to work on it for free (yes, I worked on it for a while too because I liked it). Just like Google pays Firefox (yes, firefox is free software) to get their homepage opened at startup by default, several companies might have interests in different popular free software. For example, if OpenSync becomes really popular and supports synchronization with Nokia and Sony phones, Motorola will immediately jump in and help OpenSync support their phones by funding the project. Zimbra did so well that it was acquired by Yahoo! in September 2007.

- Ramkumar. R

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"I never perfected an invention that I did not think about in terms of the service it might give others... I find out what the world needs, then I proceed to invent." - Thomas Edison

Why have a start-up in a bad economy The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies. When Microsoft and Apple were founded. As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way. If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders. Which means that what matters is who you are, not when you do it. If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you. Someone who thinks "I better not start a startup now, because the economy is so bad" is making the same mistake as the people who thought during the Bubble "all I have to do is start a startup, and I'll be rich." So if you want to improve your chances, you should think far more about who you can recruit as a cofounder than the state of the economy. And if you're worried about threats to the survival of your company, don't look for them in the news. Look in the mirror. But for any given team of founders, would it not pay to wait till the economy is better before taking the leap? If you're starting a restaurant, maybe, but not if you're working on technology. Technology progresses more or less independently of the stock market. So for any given idea, the payoff for acting fast in a bad economy will be higher than for waiting. Microsoft's first product was a Basic interpreter for the Altair. That was exactly what the world needed in 1975, but if Gates and Allen had decided to wait a few years, it would have been too late. Of course, the idea you have now won't be the last you have. There are always new ideas. But if you have a specific idea you want to act on, act now. That doesn't mean you can ignore the economy. Both customers and investors will be feeling pinched. It's not necessarily a problem if customers feel pinched: you may even be able to benefit from it, by making things that save money. Startups often make things cheaper, so in that respect they're better positioned to prosper in a recession than big companies. Investors are more of a problem. Startups generally need to raise some amount of external funding, and investors tend to be less willing to invest in bad times. They shouldn't be. Everyone knows you're supposed to buy when times are bad and sell when times are good. But of course what makes investing so counterintuitive is that in equity markets, good times are defined as everyone think-

ing it's time to buy. You have to be a contrarian to be correct, and by definition only a minority of investors can be. So just as investors in 1999 were tripping over one another trying to buy into lousy startups, investors in 2009 will presumably be reluctant to invest even in good ones. You'll have to adapt to this. But that's nothing new: startups always have to adapt to the whims of investors. Ask any founder in any economy if they'd describe investors as fickle, and watch the face they make. Last year you had to be prepared to explain how your startup was viral. Next year you'll have to explain how it's recession-proof. (Those are both good things to be. The mistake investors make is not the criteria they use but that they always tend to focus on one to the exclusion of the rest). Fortunately the way to make a startup recessionproof is to do exactly what you should do anyway: run it as cheaply as possible. For years I've been telling founders that the surest route to success is to be the cockroaches of the corporate world. The immediate cause of death in a startup is always running out of money. The cheaper your company is to operate, the harder it is to kill. Fortunately it has gotten very cheap to run a startup, and a recession will if anything make it cheaper still. If nuclear winter really is here, it may be safer to be a cockroach even than to keep your job. Customers may drop off individually if they can no longer afford you, but you're not going to lose them all at once; markets don't "reduce headcount." What if you quit your job to start a startup that fails, and you can't find another? That could be a problem if you work in sales or marketing. In those fields it can take months to find a new job in a bad economy. But hackers seem to be more liquid. Good hackers can always get some kind of job. It might not be your dream job, but you're not going to starve. Another advantage of bad times is that there's less competition. Technology trains leave the station at regular intervals. If everyone else is cowering in a corner, you may have a whole car to yourself. You're an investor too. As a founder, you're buying stock with work: the reason Larry and Sergey are so rich is not so much that they've done work worth tens of billions of dollars, but that they were the first investors in Google. And like any investor you should buy when times are bad. Were you nodding in agreement, thinking "stupid investors" a few paragraphs ago when I was talking about how investors are reluctant to put money into startups in - Contd. on Page 6

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"Running that first shop taught me business is not financial science; it's about trading: buying and selling." - Anita Roddick

Financial Bootstrapping Part 2: Bootstrapper’s business model Even before you start thinking on that pathbreaking idea of yours, you need to think on the area in which your idea lies. It might seem very lucrative in your head, but there might be other factors not related to your enterprise which might drain out all your returns. A golden rule for bootstrapping, according to Seth Godin, is “Avoid great ideas”. A great idea is one which causes an entire paradigm shift and can give rise to an entire industry based on it. This certainly seems to be like an odd piece of advice. Why should anyone avoid going after a path-breaking idea? Remember, you are a bootstrapper; your basic motto is to start from nothing and make it big. In fact, Inc.com lists seven entrepreneurs who made it big after starting in less than $1000. The problem with having a really big idea is its instant universal appeal and the competition which is ready to jump in. A few characteristics of a bootstrapper’s business model are listed below: Profitability, protectibility, self-

priming, adjustability and an optional exit strategy. Other than these basic guidelines, there is no rigid business model to be followed. Once you get that idea, you need to start analyzing your value chain before making your business model. Lets start with understanding the value chain. Working our way backwards, the elements of the chain are: The end user : Identify who is going to be the consumer. Product/Service value assessment: Analyse the worth of the product/service you are offering. Distribution: Where consumers can find your product or avail of your services. Cost of a sale: This helps tell you whether what you are selling is worth it. Next Issue: Start bootstrapping ! Lessons in Marketing and Raising Capital - Vaibhav Sinha

Need Money? Consider these Owner financing • Credit cards • Second mortgages • Personal savings • "Friends, fools and family"

Delaying payment • Negotiate terms • Lease equipment • Selling by commission instead of wages

Minimizing inventory • Using formal routines to minimize inventory needed

Minimization of accounts receivable • Factoring • Reward fast payment • Terminate relationship with slow paying customers

Joint utilization • Share office, supplies,

Subsidy finance • Governmental grants • Research grants

equipment • Share employees

The Entrepreneur team invites reader’s articles for subsequent issues, comments and feedback on the current issue, and suggestions for improvement of The Entrepreneur at:

[email protected] www.ecell.iitkgp.ernet.in

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"Entrepreneurs are risk takers, willing to roll the dice with their money or reputation on the line in support of an idea or enterprise.” - Victor Kiam

Concipio: Business Ideas competition Concipio, the Business Ideas competition organized annually by IIT Kharagpur has come a long way in its endeavor to transform great ideas into successful start-ups. The past years have witnessed start-ups like P2 Power Solutions (P) Ltd. and Intinno Technologies Pvt. Ltd. leave a strong impression in the field of entrepreneurship. This Year, Concipio’08 was launched with an aim to continue the competition’s successful run on a much larger scale. The year 2008 has witnessed as many as 43 submissions in the competition. There has also been participation from the alumni and professors of IIT Kharagpur. The first round of the competition involved ideation, with the participants submitting the executive summaries of their ideas. The results of the first round submission were declared on October 1, 2008. 11 teams have made the cut for the final round. The selected entries are undergoing a mentoring process

under the professors of the institute, venture capitalists and distinguished personalities from the business institutions and corporate world. The number of submissions has increased, but the overall quality of submissions still requires some improvement if having more than one start-up a year is what this competition aims at. One of the mentors of the competition has sent the following message across to the students: “The quality of ideas is amazing, but the candidates need to get acquainted with the various facets of business models. I sincerely believe that major steps need to be taken round the year for students to get acquainted with the entrepreneurship process. Various facets of startups need to be evangelized to the students so that they are better aware and prepared.” This year, E-Cell organized two workshops specifically for Concipio participants: one by Concipio’ 07 winners, Team Intinno and Concipio’05 winner, Mr. Shwetank Jain ( CEO of the P2 Power Solutions (P) Ltd. ) and another on Business Plan writing by the associate members of the Entrepreneurship Cell. E-Cell is also planning to develop a concrete program devoted to the development of the elements of entrepreneurship so as to help the participants give a refining touch to their business ideas. The final round judging of Concipio’08 will take place on November 13, 2008.The winners get an opportunity to opt for Technology Incubation and Entrepreneurship Training Society (TIETS) funding up to I.N.R 15 Lakhs.

Taking Entrepreneurship beyond KGP One of the primary objectives of Entrepreneurship Cell is to encourage students, not just from IIT Kharagpur, but all over the country, to develop a positive outlook towards entrepreneurship. To this end, E-Cell conducted several workshops in different parts of the country, besides lectures and Knowledge Camps in Kharagpur itself. The first of these workshops was conducted at Jaypee Noida on 5th October 2008. Other similar workshops were held at Bhubaneswar, Kolkata, Bhopal, Visakhapatnam and Hyderabad. There, the members of E-Cell explained the meaning of entrepreneurship to the uninitiated. Students were informed about what one needs to keep in mind before venturing into entrepreneurship, such as the SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) of one’s idea. They were briefed on Intellectual Property Rights (IPR), an important facet any prospective entrepreneur should be aware of. Various methods of procuring funds for a start-up, such as

Venture Capital, were also discussed. An idea doesn’t execute itself. One needs a plan to take it to the next level. And this is where a B-Plan comes into picture. Students were told in detail, of the various nuances of preparing a B-Plan and its importance, not only while approaching a Venture Capitalist, but also to envision the future growth of your company. The workshops were concluded with an overview on the activities of the Entrepreneurship Cell. The students were informed about the various events of ESummit '09, such as, Envision, Pensez and Eclairez, and were given an idea of how one can participate in them. The response to these workshops was overwhelming, with packed auditoriums and attentive listeners. This indicates changes in the mindsets of the student community, who are more open to forgo the security of regular jobs and dare to become an entrepreneur.

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THE ENTREPRENEUR

“I liked it so much, I bought the company" - Victor Kiam’s ad for Remington electric shavers

Why have a start-up in a bad economy

CROSSWORD

- Contd. from page 3... bad markets, even though that's the time they should rationally be most willing to buy? Well, founders aren't much better. When times get bad, hackers go to grad school. And no doubt that will happen this time too. In fact, what makes the preceding paragraph true is that most readers won't believe it—at least to the extent of acting on it. So maybe a recession is a good time to start a startup. It's hard to say whether advantages like lack of competition outweigh disadvantages like reluctant investors. But it doesn't matter much either way. It's the people that matter. And for a given set of people working on a given technology, the time to act is always now.

Source: http://www.paulgraham.com/ badeconomy.html Across:

Down:

1: Indian Premier League 4:Current liability of comapany > Britain's GDP 6: Naresh Goyal 7:Titan, Taj Hotels 8:Jawed Karim, Steven Chen, Chad hurley 10: The less famous Steve of Apple

2: Regular publisher of researched and ranked list 3:Originally Bachraj Trading Corporation 4: Putting news first 5:Saif's got beard. No problem. 9: Former name of AXIS Bank

Answers: [Across] (1) DLF (4) Barclays (6) Jet (7) TATA (8) Youtube (10) Wozniak [Down] (2) Fortune (3) Bajaj (4) BBC (5) Lenovo (9) UTI

About Us Entrepreneurship Cell, IIT Kharagpur is a student body which has been started under the vision and guidance of the Sponsored Research and Industrial Consultancy (SRIC) of IIT Kharagpur. In an institution of students with the potential of becoming tomorrow’s leaders in innovation for the country, it is essential to groom these young individuals while they have the time and resources to become capable of handling the pressures, responsibilities and risks associated with entrepreneurship. The basic aim of E-Cell is to provide students with the resources and guidance to be able to be job-makers for the future through effective innovation and sound fundamentals. The primary activities of E-Cell are 1. Organising workshops and lectures periodically for students to create awareness about entrepreneurship. 2. Function as a guide for students with creative ideas which can be transformed into successful companies. 3. Provide mentorship through individuals for students launching their start-ups. www.ecell.iitkgp.ernet.in