Crossing the 50 Crore Chasm

Anand Deshpande and Ashok KorwarJune 2010

Workshop to helpCompanies grow from

Rs. 10 Crores to

Rs. 50 Crores

3

Know our biases …Our view from the fish tank.

Ashok Korwarashok@yourgrowthcatalyst.com

• Independent management consultant based in Pune

• Professor at IIM-A, 1990-2000• Strategic Advisor to Chairman of Polaris

Software, 2000 – 2007• Division VP at EDS, Dallas• Ph.D. – UCLA• B. Tech, IIT Bombay

Anand Deshpandeanand@persistent.co.in

• Founder, Chairman and Managing Director Persistent Systems Limited.

• Persistent is a 4800 person; Rs. 600 Crore NSE/BSE listed Company.

• Techie background– B. Tech IIT Kharagpur,

MS, Ph.D. Indiana Universtityall in Computer Science (Databases)

• http://www.linkedin.com/in/ananddeshpande

Believe in nothing, no matter where you read it, or who said it, no matter if I said it, unless it agrees

with your own reason and your own

common sense.

Gautam Buddha

Growing a business is a matter of choice. Before deciding to grow, be sure you know why you’re doing it.

When you visualize,

you materialize!

What is Rs. 50 Crores?

Rs. 50 CroresRs. 50,00,00,000Rs. 500,000,000Rs. 500 Million

Rs. 5 x 108

As of May 30, 2010

• Infosys started in 1981Rs. 5 Crore in 1990-91 and Rs. 50 Crore in 1994-95.

• Polaris started in 1990Rs. 50 Crores in 1998-99

• Persistent started in 1990 Rs. 10 Crores in 1999-00 and Rs. 50 Crores in 2002-03

From Rs. 10 Crores to Rs. 50 Crores:How fast will you get there?

Years CAGR CMGR1 400.00% 14.3530%2 123.61% 6.9360%3 71.00% 4.5721%4 49.53% 3.4098%5 37.97% 2.7187%6 30.77% 2.2605%7 25.85% 1.9345%8 22.28% 1.6906%9 19.58% 1.5014%

10 17.46% 1.3502%

10

50

time

Visualize your Rs. 50 Crore Business

How many units sold?

How many people?

How many customers?

How many projects?

How many managers?

How many sales people?

How does my balance sheet look?

Visualize your business at Rs. 50 Crores

Applying Goldratt’s Theory of

Constraints

http://www.goldratt.com/

Eliyahu M. Goldratt

What determines your speed on the road?

Every System..

• Has one constraint• That chokes throughput• The ‘Bottleneck’

What determines the strength of a chain?

External Constraint?• The market?– Do you have 50% market

share?– If not…

Internal Constraint?• Who will bell the cat?

Constraints …What prevents a bonsai tree from growing?

Policy Constraints ...

Mental blinders we put on ourselves ...

But also the most common dominant constraint..

Policies as Constraints..

• .. I will hire only people from IIT ?• .. every project must earn 40% margin?• .. I can trust only Indians in the field?• .. I can’t pay more than..• …CEO must see every customer

communication• …people must be kept busy all the time..

Identifying Constraints..

• Depends on the business model..

• Use common-sense, it does not take statistical analysis!

• Thought experiment: if throughput goes up by an order of magnitude (10x) where will my system break down first?

• If I strengthen x-function, will throughput go up?

Constraint Is also Lever

What is holding you back? What’s your constraint?

Identify your constraint

How do we select which vendor to work with?

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We do business with people we trust!

For a small company, strategic positioning is critical for growth! Positioning establishes trust.

Small Companies have limited management

bandwidth.

To Grow.. • Vertical positioning is always better than horizontal

• Except in very early stage – technology enthusiasts.

Case Study

• Company Documentum.• $2 million revenue for 3 years in a row• Document management technology

• Potential: all people in all companies who manage complex documents

What did Documentum do?

• Focus on pharma companies, management of regulatory affairs.

• Applications to be submitted to over 100 regulatory bodies around the world!

• Takes one year to submit an application! (not to get it approved, to submit it!)

• Documents come from clinical studies, written reports, mails, databases…

With whose support?

• Technology departments? No – content to work with existing vendors

• Function head and his bosses

In one year..

• Demonstrated that problem could be solved• Signed up 30 leading pharma companies’

regulatory affairs departments• Revenue to $8 million• $25 million the next year

Analyzing Market Share and Segmentation

Defining entirely new markets.

Blue Ocean Strategy.

It helps to catch a wave.

“Simplified” Pencil Sharpener

• Open window (A) and fly kite (B). String (C) lifts small door (D) allowing moths (E) to escape and eat red flannel shirt (F). As weight of shirt becomes less, shoe (G) steps on switch (H) which heats electric iron (I) and burns hole in pants (J). Smoke (K) enters hole in tree (L), smoking out opossum (M) which jumps into basket (N), pulling rope (O) and lifting cage (P), allowing woodpecker (Q) to chew wood from pencil (R), exposing lead. Emergency knife (S) is always handy in case opossum or the woodpecker gets sick and can't work.

Ensure that the troops are aligned with the message!

• What business are we in?• What are our competitive strengths and limitations?• Do we have or can we develop a true market niche?• What do we want to become in the long term?• What is our strategy for competing effectively in our

chosen markets and for achieving our long-term missions?

• What are the critical factors that will makes us successful or unsuccessful in achieving this long-term mission?

• What goals shall we set to improve our competitive effectiveness and organizational capabilities in each of these critical success areas?

Your 30 second pitch

• Framing: the market segment’s pain - : e.g. for BPOs who cant handle the complexity

• Framing: the product/service - : e.g. like leading workflow products

• But optimized for..• And I have the complete

product/service

Your 30 second pitch

• Serving the same need as.. (in some other industry)

• Like.. Established Competitor, only better because..

• Competitors are extremely useful for FRAMING!

Ability to hire peers is the key to success.

Why should someone join you?

Your Company’s culture is the most powerful tool for finding and keeping great employees.

Don’t miss opportunities to reinforce it.

Growing a business can be thrilling!

You must use your

passion to attract!

Wealth in the future?

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What do you really need?You need a small and a hungry

team that wants to go for it!

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• How you think is more important than what you know.

• Pick teammates for what they will do, not for what they have already done.

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• The mountain does not give a damn about your resume.

• Without hunger, both skill and experience will remain in the base camp.

• There is nothing more dangerous than a moderate mountain.

• Only an ultimate mountain can forge an ultimate team.

• The only guidebook to your mountain is the one you will write.

• The best plan is the one that works.

Employee Stock Options are useful mechanisms as an

incentive for attracting and

retaining employees.

10%

20%

30%

40%

Vesting Plan

ESOP Plan Basics

• Shares and Options• Grant Price• Exercise Price• Gain• Vesting Plan• Cashless exercise• Buy back – gain• ESOP Trust

4 years

1936 Indian Olympics Hockey Team

Beyond the leaders; you need a team.

Getting the Organization Structure right is very important but rather difficult.

Hire good people even if you can’t figure out their role.

By definition, they will find a way to contribute.

Difficult Decision:

Should you hire a CEO?

Set up Internal

Systems and Measures

Publish audited quarterly results within four weeks every quarter. Share them internally.

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Understand Cash Flows

Profit is an opinion cash in the bank is fact.

–Old adage

Track what makes sense to your organization and your context.

• Net Profit• Gross Margin• Cash flows• DSO

Finance

• Sales pipeline• Number of sales persons• Sales productivity

Sales

• Number of employees• Attrition• Recruitment pipeline

Employees

Align the granularity of your measurements and your decisions

Does your data help you make decisions?

Build your o

wn dashboard

Avoid borrowing from amateur money lenders.

Do you really need the money? How do you plan to use it?Can you borrow from your customers?

VCs can be good for your business but understand their investment philosophy andmotivation

Beyond money.Be clear and upfront about what you are expecting from the VCs

• Attend Board Meetings• Provide References –

Business Personnel• Help make understand

industry best practices• Freedom to operate• No compete

Understand the Veto Rights VCs will Demand

• Board composition• Change in management• Changes in key resources• Operational items –

CAPEX / loans • M&A• Diversification• Dividend above a certain

level• Appointment of Auditors –

both statutory and internal

Understand and Beware!

Claw back / Anti Dilution Clauses

Drag Along / Tag Along Rights

Restriction on Transfer

Preference Rights

Liquidation preference.

Dividend preference.

1st right of refusal for any new investment

1st right of refusal to maintain their % holding

Conversion to Equity – when? what valuation?

Investor

You

Have clear clauses for deadlock resolution, indemnities and warranties.

Exit is important. VC Funds have a time-frame.

• IPO• Buy back• Sale to third party with right of

first refusal with Promoters

Set criteria for exit and a formulae for valuation

Ensure that you have the right Capital Structure to scale.

Establish a network of mentors you trust.

Leverage Your Board.

Independent Directors: your advisors and critics!

Select Independent

Directorseffectively

Who canCommit timeHave expertise that aligns with

the needs of the business.Are passionate about your

business

Not just because they are X FamousX Relatives, friends X Customers

Exit Option. Merge or get acquired?

Read and understand legal

documents carefully.

Think through indemnities,

warranties etc.

Think long-term. Run a clean business.

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Make your contribution to the society.Commit to Corporate Social Responsibility

Failure defeats losers, failure inspires winners.

– Robert T. Kiyosaki, author, entrepreneur, investor

Go for it!