Transformational Entrepreneurship: First Success and Beyond

India would be the USD 10,500 billion Real GDP economy by 2035, becoming the third largest in the world in another 25 years, according to projections by Goldman Sachs. This transformation would be powered by high growth rates of around 10 percent over the next few years. Such growth would require something beyond the normal economic activity. Experts who study qualitative transformations would hypothesize that a large burst of entrepreneurism in India would be the factor that would drive the extraordinary economic transformation. Government policies and individual aspirations should therefore focus on better understanding entrepreneurship as a driver so that the future economic potential is realized in full.

Entrepreneurship has several hues. Each has its context, relative to the industry and the entrepreneur. A study of the possible types and typologies of entrepreneurship would help the nation channel its entrepreneurial energies in a positive manner. Choosing the right mix of entrepreneurship would create new industries faster, and reinforce the established industries better. While ideally there is no one best entrepreneurial type, it would make sense to rank order different entrepreneurial types in terms of relative context and potential. Prior to such an exercise, however, we would need to define who is an entrepreneur in terms of certain basic profile. While the basic definition of an entrepreneur remains as someone who creates an enterprise out of gutsy ideas, minimal resources and maximal passion, there are other perspectives too.

Defining the entrepreneur

Besides the above characteristics, an entrepreneur can be viewed from two perspectives. The first is the attribute perspective. An entrepreneur is one who has competencies that are deployed with confidence and are sustained by conviction. This contrasts with the profile of a professional who could have competencies but not have the confidence to deploy them or the conviction to sustain them. A manager or leader, for example, may have access to the competencies of other professionals, and even run the enterprise play more as a call of duty despite having less of confidence and conviction. An entrepreneur, on the other hand, needs core competencies, confidence and conviction as a combination that drives entrepreneurial passion.

The other view of entrepreneur is that he or she is a professional, manager, leader and humanist, all rolled into one. An entrepreneur, like a professional, is always ready to roll up the sleeves and put the shoulder to the wheel. From making own coffee to drawing own designs, nothing is infra dig for an entrepreneur. An entrepreneur is also a manager, but more so a leader. He can inspire confidence by his vision and by walking the talk. The other essential role of an entrepreneur is that of humanist. An entrepreneur needs to have a larger purpose than just making money; he needs to convince his team, especially in the startup period that the mission he has embarked upon is of national or social importance. Only by being a humanist can an entrepreneur integrate a larger purpose into his endeavor.

Entrepreneurial typologies

There are also two basic entrepreneurial typologies, both of which are technology-dependent. In fact, there can be no entrepreneurship without technology. No entrepreneurial venture has ever prospered with only management, and without technology. The first type, then, is based on organic technology; technology that is developed and owned by the entrepreneur. All successful entrepreneurial ventures which became industry making or industry leading companies have been based on unique technologies of their founding entrepreneurs. Clearly, the greater the influx of scientists, engineers and technologists into entrepreneurial mainstream the greater would be the value creation in the economy.

The second type is based on inorganic technology. In this model, a non-technical entrepreneur makes a deal with a technical professional or in-licenses appropriate technologies, nationally or internationally, to overcome the lack of organic technologies. Needless to say, the inorganic technology route is less certain and more expensive than the organic technology route. There are, however, circumstances when combination of organic commercial enterprise and inorganic technical expertise also makes for a winning combination. Possibly, the increasing orientation of non-technical post graduates from premier management institutes towards the entrepreneurial mainstream would help the entrepreneurial movement in the country equally well.

Scoring the initial success

India’s success with entrepreneurial efforts, especially those of first generation enterprise, has been patchy. For one highly successful Orchid Pharma or Gitanjali that made the mark in their respective global markets, or a few other food services ventures that scored successes in the local markets, there have been several others which floundered along the way. A study of such failures indicates lack of a clear strategy and an inadequacy of execution as the two primary reasons. Strategy for an entrepreneurial company must address a clear short term market need that can be fulfilled and monetized. Long term mega strategies would fit ill in a startup entrepreneurial format. By choosing any one of three generic strategies of cost leadership, product differentiation and niche, but certainly not all, the entrepreneur can score the much required initial success. This strategy selection needs to be fortified with execution leadership.

Orchid Pharma, for example, succeeded by focusing on the niche format from the inception; a niche of relative exclusivity in product space, and a clear understanding of the drivers for such exclusivity such as technology, quality, investment, global orientation and people. Once the initial success was posted, the company was able not only to replicate and extend the niche strategy but also experiment with product diversification, with more investible resources and cost leadership becoming available to drive scale. On the other hand, a few other entrepreneurial companies in the pharmaceutical field and BPO space failed to consolidate their early gains because of an attempt to follow a medley of strategies, made worse by indifferent execution, from the beginning. Initial success of entrepreneurship, therefore, needs a carefully calibrated “limited gains – solid foundations” strategy for sustainability.

Beyond the first success

While the first success is in itself a formidable challenge, growing beyond the first success is also an equally tough challenge for the entrepreneur. For the new generation Indian economy, past entrepreneurial success is no indicator for future entrepreneurial path. This is majorly because of the structural changes that are taking place in the Indian economy. The new Indian economy is not merely one of cost leadership, import substitution or export competitiveness. Not many, for example, predicted even a couple of years that there would be a larger number of smart phone introductions than low cost phones each year or that mobile phones would ever be manufactured in India. These and several other high end products offer enormous potential to develop high technology hardware and software for the new generation of techno-commercial entrepreneurs. At the same time, there are areas of the economy which are crying for attention such as genuine micro finance, low income health solutions, universal primary education, nutritious packaged food, multimedia in education and so on which make a perfect canvas for the new breed of techno-savvy social entrepreneurs.

Entrepreneurs now seeking fresh successes beyond the first need not, and should not, repeat or replicate the past models that were operationally relevant in the old Indian economy. Even if necessary, entrepreneurs should be prepared for changing their canvas after the initial success and adopting a different strategic direction. Many successful entrepreneurs baulk at that challenge; strange as it may seem many entrepreneurs are not keen to restart their entrepreneurial base from a zero base, albeit in a different field, after the first success. Several successful entrepreneurs would prefer to build future successes on their first successes. While this is not an incorrect strategy, and is certainly full of economic logic, entrepreneurs also must realize that they would be missing on great opportunities due to their diffidence to reinvent themselves.

Dilemmas of entrepreneurship

Transformational entrepreneurship is easier aspired for than actually achieved. Entrepreneurs typically face dilemmas on paths to follow after the first success, each with its pros and cons. There are at least four ways the paths can be deciphered. Entrepreneurs can be stay-on or move-on entrepreneurs; they can be deep divers or wave surfers. In their approaches they can be either scalar or vector. They can be serial entrepreneurs or stable entrepreneurs. They can be industry specialists or conglomerate seekers. The unique and distinctive entrepreneurs in the entrepreneurial class would have a mix of all these approaches. Transformational entrepreneurship indeed requires much more creativity, effort, diligence and effort than the first entrepreneurial venture.

Stay-on entrepreneurs stay committed to being entrepreneurial in thinking all through their life. Move-on entrepreneurs see being entrepreneurial merely as a transitory phase in life. While initial or subsequent failures could make some entrepreneurs move-on entrepreneurs, whether being a stay-on or move-on entrepreneur has to do more with the combination of competencies, confidence, conviction and passion that one possesses as alluded to earlier. Typically, stay-on entrepreneurs tend to be not only more tenacious in their entrepreneurial mission and more successful in their first ventures but also have an enabling family environment that has greater sustainability in the face of entrepreneurial risks.

Deep-dive entrepreneurs are those who challenge the classic limits on industry definition. An entrepreneur manufacturing alternators, for example, would not see the product as only one entrepreneurial opportunity, rather he would see each sub-component, be it shell, the wiring, the contact points, or the electronics of the alternator, as an entrepreneurial opportunity providing value enhancing scope for business expansion. Typically, such entrepreneurs utilize points of inflection in product and process technologies to deepen their understanding of new entrepreneurial opportunities. The wave-surf entrepreneurs, on the other hand, adopt a different approach of broader coverage. The manufacturer of alternators, for example, would move on to other electrical and electronics systems, and would avoid deeper integration into any one product.

Scalar entrepreneurs are typically scale driven. Vector entrepreneurs are conscious of the direction they take as well as the scale they reach. Scalar entrepreneurs tend to take on any opportunity as long as it provides scale; emphasis tends to be on magnitude rather than on a cohesive thread of strategy. The approach of Sahara group to take on anything from airlines and media houses to townships and consumer products on a grand scale is an example. In one way, scalar entrepreneurs tend to develop conglomerates randomly, with high risk, associated also with a need to exit some. Vector entrepreneurs are clear that scale needs to be sensible from the point of view of product, process or customer. Sahara group’s exit from airlines business and Jet group’s acquisition of Sahara Airlines brings out the scalar-vector differentiation clearly.

Serial entrepreneurs are classic wealth creators, usually for themselves, with no emotional attachment to their ventures or domains. A typically modern Western phenomenon, serial entrepreneurship has started influencing the Indian entrepreneurial psyche too. True serial entrepreneurship is based on the premise that a venture that has been successful up to a particular level in the hands of an entrepreneur would be more competent in the hands of a larger player who can take it to full potential. Serial entrepreneurship which is based on opportunistic exit as in the case of Ranbaxy in India shakes the investor and employee confidence in the long term sustainability of vector entrepreneurship in an emerging economy. Stable entrepreneurs, on the other hand, tend to be vector entrepreneurs driving logical integration or related diversification through measured steps.

Domain entrepreneurs are the most common breed of entrepreneurs. They stand specialized in their chosen or starting field and build scale and scope in that field despite the several other domains that may emerge from time to time. The growth of such enterprises therefore tends to be economy or market linked. The domain entrepreneurs need to be technologically savvy to survive and grow. Conglomerate entrepreneurs, on the other hand, pursue a deliberate strategy of entry into each domain that opens up with the times and growth of economy. In the past, conglomerate entrepreneurs tended to move into all the licensed domains as they came to be opened up, and thus register success after success. With only a few domains remaining to be opened up, today’s conglomerate entrepreneurs would need to possess better capabilities to read technological and market signs.

‘Mix and grow’ entrepreneurship

Given that entrepreneurship is in itself an artful science of coping with uncertainty, it would be inappropriate to postulate that any particular model or combination of models would drive India’s economic transformation. Clearly, however, no single model of entrepreneurship helps entrepreneurs post sustained successes beyond the first success. The most successful model could be to become a vector entrepreneur in a chosen field, and build scale and scope with the help of entrepreneurially oriented professional managers. The entrepreneurs should then ideally move on to new fields of diversification, replicating in each field the vector entrepreneurial strategy. This is the model successfully established by India’s major entrepreneurial groups such as Tata, Birla, Murugappa and Ambani groups. In contrast, entrepreneurs such as Bajaj chose to stay focused as domain specific vector entrepreneurs. The mix of domain-vector and conglomerate entrepreneurial strategies, however, provides the maximum potential for larger market presence, faster growth and more dominant contribution to the larger society.

The ability of an entrepreneur to adopt the vector-conglomerate model clearly depends on the entrepreneurialism that he is able to develop in his professional team. Vertical integration in the vector entrepreneurial phase and related or unrelated diversification in the conglomerate entrepreneurial phase are proportionate to the entrepreneurial energy of professionals. Each Tata group company, for example, has had at least five to ten senior leaders with demonstrated capability and track record in taking entrepreneurial decisions for new products and new facilities or acquisitions. The stay-on entrepreneur should, as part of the first success, develop his leaders as professional entrepreneurs with the space to take decisions on new businesses. Similarly, success in the conglomerate phase would depend on the ability to co-opt proven entrepreneurial leaders. Reliance groups’ successes in conglomerate diversification in new fields such as petro-chemicals, oil refining, oil and gas exploration, telecom services, power sector, infrastructure, media, financial services and retail space are as much due to the Ambani brothers’ reinventing their entrepreneurial energies as due to their successes in getting the right kind of entrepreneurial leaders. More Indian entrepreneurs need to take note of these successful approaches to help India become the third largest economic power by 2035 as forecast.

Posted by Dr CB Rao on March 13, 2011

Enigma of Entrepreneurial Energy: Defying the Laws of Entropy?

Given my association at senior levels with entrepreneurs and entrepreneurial organizations, I am often asked the question “who is an entrepreneur”. Often, my answer has been that an entrepreneur is one who creates something out of nothing. I however realize fully that such a simplistic definition hardly does justice to what makes an entrepreneur or what an entrepreneur makes for the society or economy. Clearly, an entrepreneur creates wealth with his products and/or services that are innovative, exciting, outstanding or novel, that are developed, manufactured or delivered with very lean start-up resources, amounting to nothing more than his or her ideas and some savings. It is this unique characteristic that positions entrepreneurs in a class of their own, relative to common citizens, professional managers, governmental administrators, industrial leaders and academic scholars.

Much has been written about the skills, capabilities and attributes that characterize entrepreneurs. Two critical attributes of long standing entrepreneurs are irrepressible passion and boundless energy. Passion to achieve goals of distinction and energy that drives all actions towards the goals shape entrepreneurs into what they are. Mostly however it is the entrepreneurial passion that is spoken of and entrepreneurial energy rarely finds mention. If passion is the spark, energy is the fuel for entrepreneurial ventures. As automotive and chemical engineers are aware certain fuels and chemicals can spark themselves into high energy combustion by themselves under high pressures and a spark by itself can ignite only ignitable fuels or chemicals. Passion dims without energy, which possibly explains why entrepreneurs, as they mature, fail to translate their continued passion into sparkling ventures as they once could do.

Entrepreneurs have great expectations of themselves and their organizations. They expect their organizations to clone them in terms of passion and energy. In doing so, they ignore the differences between passion and energy on one hand, and themselves and their organizations on the other. Passion is akin to motivation while energy is very much the motive power. It is possible for individuals to be energetic but not necessarily passionate, and vice versa. Passion provides the aspiration but energy leads one to achievement. Bereft of passion, sheer energy can drive results provided the entrepreneur sets a goal model. In sum, the energy quotient of the entrepreneurial system rather than its passion equation drives the growth and sustainability of an entrepreneurial organization.

Entrepreneurial potential and paradox


Entrepreneurship is full of potential and paradox. Nations are made competitive by entrepreneurship. New ventures are established and additional jobs are created by entrepreneurs who eschew traditional jobs and push the envelope with their passion and energy. Sunrise sectors in advanced markets and growth sectors in emerging markets offer full potential for entrepreneurial play. Product innovation, manufacturing efficiency, and delivery excellence, either singly or in combination, help an entrepreneurial venture to succeed. Clearly, as a global economic system the full entrepreneurial potential is not yet tapped because advanced countries are unable to spark entrepreneurship in mature sectors while emerging countries have no roadmap for creating crucibles of entrepreneurship in sunrise sectors. While the high cost advanced countries may never be able to reenact entrepreneurial play in mature and commoditized sectors emerging markets have all the potential for broad based entrepreneurial play in sunrise sectors. To achieve this potential two paradoxes of entrepreneurship must be well understood and squarely addressed.

The first paradox is that entrepreneurship tends to be inversely proportional to scale. The faster and bigger an entrepreneurial enterprise becomes the lighter its entrepreneurial passion becomes and the colder its entrepreneurial fire becomes. From Microsoft to Google and from Sony to Ford, industrial history has several case examples of scale diluting entrepreneurship. There are several reasons for it. As entrepreneurs create industries out of their ventures they also attract follow-on entrepreneurs and competitors. As they grow organizationally, entrepreneurs integrate more managers than entrepreneurs in their organizational eco-systems and consequently become more deliberative and administrative in nature than intuitive and impulsive. Start-up entrepreneurship has more of goal directed execution and less of strategy driven execution while scale-sufficient entrepreneur firms become more process-dependent and less goal-inspired. Retaining entrepreneurial culture as an entrepreneurial firm grows is a daunting challenge for the entrepreneur.

The second paradox is that entrepreneurship is rarely linear. If the information technology leader of India, with a start-up investment of USD 10,000 in 1990 by its founders could become a USD 5 billion enterprise by 2010, with a net profit percentage of 27, cash and equivalents ratio of 70 percent and fund raising capability of say another 5 billion it does not mean that the firm can automatically grow to a USD 100 billion enterprise by 2020. The reason is that entrepreneurial organizations as they grow become stymied by the growth boundaries of the industries and their markets. Neither arithmetic nor geometric progression in entrepreneurship would be feasible in entrepreneurial organizations unless entrepreneurs overcome the constraints of scale sensitivity outlined above and pursue out-of-the approaches to achieve market hegemony. The challenge of achieving exponential growth would be next to impossible, however, passionate an entrepreneur is, and competent his organization is.

Limits to growth, ebbing passion or eroding energy?

Not enough research has been conducted as to why fiery entrepreneurs who created rapid growth organizations out of next to nothing fail to replicate their entrepreneurial magic proportionately either in scale or scope. While the above hypotheses offer several plausible explanations, possibly there could be other reasons as well. A natural inclination to seek a better work-life balance, a satiation of capitalistic thrust that triggers entrepreneurial urge, a failure to get synergistic technology or business partners, a changing macro-economic environment or a desire to self-actualize in areas other than corporate or industrial development could be some other reasons. Whatever be the reason, entrepreneurs in aspiration-driven and potential-plenty emerging markets should not forget that they are instruments of national wealth creation, and the nation cannot become a superpower unless the entrepreneurial fervor is personally maintained and/or is strongly institutionalized. There exist two ways to achieve this.

Entrepreneurs who are intent on retaining the individual charisma of entrepreneurship have few options other than becoming serial entrepreneurs. Successful serial entrepreneurs bring up their firms to critical scale and leave them in the hands of larger investors or partners, unlocking value and cashing out the stake, generating larger corpuses for subsequent ventures. This strategy is particularly relevant when their core entrepreneurial capabilities are not industry or technology specific or when the industry itself is on a mode of continuous expansion. India has its shining examples of serial entrepreneurs, for example Jerry Rao, the former Citi India head who set up Mphasis and is now in the fourth act of being a champion of affordable housing,GR Gopinath who founded India’s trail-blazing low cost airliner, Air Deccan and is now the creator of Deccan Express Logistics, and K Ganesh who recently sold his stake in his online educational venture, TutorVista, following three other exits in the past. That said, serial entrepreneurship is unlikely to be a major phenomenon in the Indian entrepreneurial scene which is marked as much by emotive attachment as by growth passion.

The second sustainable approach for institutionalizing entrepreneurial fervor lies in morphing firms into conglomerates. This unique method of institutionalization of Indian entrepreneurial spirit is best evidenced by Tata, Birla, Bajaj, Reliance, Essar, Dhoot, TVS, Murugappa, Apollo, and various other individual or family entrepreneurial ventures which became major conglomerates. From a simple strategic business unit (SBU) approach at the firm level to a diversified conglomerate group approach, there could be enormous opportunities for fervent entrepreneurs to co-opt other capable entrepreneurs to let them start up and grow such SBUs and constituents firms as future conglomerates. Institutionalization of this approach needs a breed of professionals who are fired with entrepreneurial passion and energy as much as individual entrepreneurs are. As one dwells on this approach, it is enigmatic as to why conglomerate entrepreneurship has been a preserve of entrepreneurial families rather than individual entrepreneurs. There is a need for conceptualizing and analyzing the entrepreneurial paradigm in a totally different perspective that emphasizes energy rather than passion as the key constituent.

Entrepreneurial thermodynamics

Although entrepreneurship is seen largely as an organizational or behavioral phenomenon, the challenges and paradoxes of sustainable entrepreneurship can be better understood in a thermodynamic perspective. All things in the observable universe are affected by and obey the laws of thermodynamics. Entrepreneurial systems are no exception. If entrepreneurial energy is considered the heat of a heat engine, the laws of thermodynamics apply strikingly to systems analysis of entrepreneurship. Entrepreneurial energy provides the power to performance of a start-up firm. Just as temperature, pressure and chemical potential of a heat system dictate the thermodynamic behavior of a heat engine, energy, passion and competencies of an entrepreneurial system dictate its behavior. As an analogous concept, entropy is a thermodynamic property that is a measure of the energy not available for useful work in a thermodynamic process such as in energy conversion devices, engines, or machines. Such devices can only be driven by convertible energy, and have a theoretical maximum efficiency when converting energy to work. During this work entropy accumulates in the system, but has to be removed by dissipation in the form of waste heat. Many entrepreneurial systems are affected by the entropy caused by the lag that typically exists between the passionate fast-forward of the entrepreneur and the conservative status quo of his leadership and managerial team.

When I postulate that an entrepreneur is one who creates something out of nothing, evidently I challenge the first law of thermodynamics, which is an expression of the principle of conservation of energy. The law expresses that energy can be transformed, i.e. changed from one form to another, but can neither be created nor be destroyed. It is usually formulated by stating that the change in the internal energy of the system is equal to the amount of heat supplied to the system, minus the amount of work performed by the system on its surroundings. However, to the extent that a successful entrepreneur draws more than proportionate output from lean inputs, whether meager financial resources, insufficient talent pool, indifferent regulatory policies or inadequate market perception, a true entrepreneur challenges the first law of thermodynamics. Drawing lessons from this, however, entrepreneurship in India would fly even higher if financing options for entrepreneurial firms are expanded substantially, talented people opt enthusiastically to support entrepreneurs, regulatory agencies provide fast-track, single window support to start-ups and expansion projects, and customers encourage indigenous entrepreneurial product and service offerings.

No two entrepreneur systems can be alike. This is because no firm, much less an entrepreneurial system, is insulated from the external eco system (as in a thermodynamic adiabatic process). Adiabatic processes of thermodynamics between two specified states of a closed system specify that the net work done is the same regardless of the nature of the closed system and the details of the process. Entrepreneurs who refuse to be insulated and introverted and in contrast excel in interacting with the eco system and in influencing to achieve positive outcomes achieve superior results. Successful entrepreneurs need to be seen, felt and experienced by various stakeholders, from employees to investors, from domestic associates to international partners, and from local governments to central government to reinforce faith in entrepreneurial capabilities. Entrepreneurs have to be sensitive to external eco systems to manage their expectations in a non-adiabatic fashion.

Systems of entrepreneurial energy calibrate with the second law of thermodynamics as well. The second law of thermodynamics is an expression of the tendency that over time, differences in temperature, pressure, and chemical potential equilibrate in an isolated physical system. From the state of thermodynamic equilibrium, the law deduces the principle of the increase of entropy and explains the phenomenon of irreversibility in nature. The second law of thermodynamics, also known as the law of increased entropy postulates the loss of matter and energy gradually over time. Usable energy of a power system is used for productivity, growth and repair. In the process, usable energy is converted into unusable energy. Thus, usable energy is irretrievably lost in the form of unusable energy. The greater the unusable energy the greater would be the inefficiency of the system. Entropy is defined, in practical thermodynamics, as a measure of unusable energy within a closed or isolated system (even, the universe as the ultimate example). As usable energy decreases and unusable energy increases, "entropy" increases. Entropy is also a gauge of randomness or chaos within a closed system. As usable energy is irretrievably lost, disorganization, randomness and chaos increase.

The second law of thermodynamics has several lessons for entrepreneurial organizations. Just as no heat engine is one hundred percent efficient, no entrepreneurial engine is totally efficient. It would be inappropriate on the part of entrepreneurs to equate their organizational energy levels to their individual energy levels. Smart and practical entrepreneurs, therefore, work to accept the theory of entropy and work towards minimizing the heat loss rather than expect the organizations to outperform their own energy levels. The second law implies that heat can never move from a colder body to a hotter body. So is it in entrepreneurial organizations; organizational teams would sap the energy of an entrepreneur unless the teams themselves are made up of high energy, entrepreneurial members. The need to look beyond the founder’s capabilities and build a high performance team, preferably also an entrepreneurial one too, is evident for the long term sustainability of entrepreneurial organizations.

The third law of thermodynamics, though much less known relative to the other two laws, is equally important for entrepreneurial organizations. It states that the entropy of a heat system attains zero when the system reaches the absolute zero temperature (Kelvin temperature of minus 273 degrees centigrade). The third law of thermodynamics means that as the temperature of a system approaches absolute zero, its entropy approaches a constant (for pure perfect crystals, this constant is zero). A pure perfect crystal is one in which every molecule is identical, and the molecular alignment is perfectly even throughout the substance. For non-pure crystals, or those with less-than perfect alignment, there will be some energy associated with the imperfections, so the entropy cannot become zero. Drawing an analogy, if an entrepreneurial organization becomes a pure perfect crystal organization, ie., an organization in which each employee has at least the same energy and talent level as the founder-entrepreneur then the entropy or loss in the system would become zero. As we can appreciate, such a pure perfect crystal organization is an impossibility. Entrepreneurs would do well, however, to seek high energy levels within their organizations to the best extent possible, providing opportunities of empowerment and business building to such members. Otherwise, as with Google and other entrepreneurial organizations, high entrepreneurial energy individuals would migrate to establish their own ventures.

Minimizing entropy and maximizing energy usage

The laws of thermodynamics are absolute physical laws - everything in the observable universe is subject to them. Like time or gravity, nothing in the universe is exempt from these laws. Human and corporate entrepreneurial systems are no exception. The laws of thermodynamics, the law of energy conservation, the law of energy loss and the law of zero entropy, urge the entrepreneurs to look beyond themselves and model their organizations around the core concept of entrepreneurial energy. Neither egoistic defiance nor fatal compliance to the entrepreneurial thermodynamics would ensure sustainability of entrepreneurial energy. Institutionalization of entrepreneurial energy through structure and talent optimizes entrepreneurial thermodynamics.

Posted by Dr CB Rao on February 7, 2011

From Start-up to Maturity: Indian Entrepreneurial Challenge

Indian psyche is unique in that it follows an icon as much as it chooses independence. Indian corporate saga is an equally unique amalgam of followership and independence. The growth of Indian enterprise is founded on an entrepreneurial rush into an activity that is opened up. The evolution of industrial structure in India is based on a continuous expansion in the number of firms in the fray rather than a structural consolidation at any point of time. The Indian corporate sector therefore faces a challenge as firms struggle to transform themselves from start-up stage to maturity state, some passing successfully through a growth phase, and some failing to. The challenge if left unaddressed could affect entrepreneurial development, and eventually the competitiveness of the Indian corporate sector.

The Indian industrial evolution

The Indian industrial start-up model, as elsewhere, was fuelled by entrepreneurial energy. Even when India was under foreign occupation, in the 1800s and the early 1900s, Indian industrial start-ups were established by the Tatas and Birlas, with their enterprises becoming large industrial groups over the years. Post-independence, successive government policies enabled and encouraged establishment of scores of cottage and small scale enterprises in India. Some of these served larger firms as suppliers and vendors of materials and components while several other start-ups sought a direct go-to-market strategy, with varying degrees of success.

An introverted India, even post-independence in 1947, rarely encouraged free entry and exit, expansion of scale and induction of technology in its industrial and economic policies. As a result, companies stagnated and became less competitive, relative to global trends. At the same time, licensing regulations inhibited global corporations from entering into or expanding in India. On a helpful side, process patent policies (as in some other countries) ensured freedom for domestic companies to reverse-engineer global products for Indian markets. The Indian automobile and pharmaceutical industries became, for example, the epitome of low-scale, domestic-oriented direct to market fragmented industrial structures of the 1960s and 1970s.

There emerged a new Indian entrepreneurial wave from the 1970s (Ambani founded Reliance, for example). Technology induction and assimilation blazed new paths from the 1980s (Indo-Japanese automobile collaborations such as Maruti-Suzuki). Entrepreneurs and corporations were rid of controls, and certain industries started becoming global leaders in certain sectors from the 1990s (TCS and Infosys, in Information Technology). Increasing confidence in Indian competencies and policies from the 2000s and post-patent harmonization assurances led to great global interest in India with a better awareness of the competitiveness of Indian enterprise. Simultaneously, Indian industrial groups and larger Indian companies became globally aggressive, entering overseas markets (directly and through partnerships), acquiring overseas units and marquee brands.

The Indian start-up model

From a protected, regulated domestic regime, the industrial paradigm in India evolved into a liberalized, competitive globalized regime in the 2000s. The models that helped Indian start-ups to enter and stay fixed in scale and scope are becoming less tenable. The Indian start-ups are today verily at cross roads, with choices between smug stagnation and tough transformation. Yet, the continued proliferation of owner-managed companies and small scale enterprises with dated technologies indicates that a new start-up model is yet to emerge.

The Indian start-up model is highly domestic market oriented and self-reliance inspired. While start-up firms would not be averse to being suppliers to larger firms, especially in sectors such as engineering and automobile, the overwhelming preference seems to be on direct go-to-market strategies. This enables firms have a quick market-oriented entry in any industrial segment but also limits the ability of entrepreneurs to create stable, growth or niche models that could be more vibrant technologically and commercially in the long term.

The missing dimensions in the Indian start-up scenario relate to inadequate access to technology, insufficient financial resources and overwhelming reluctance to consolidate. The first two factors dictate the pace with which a start-up in India is able to navigate to, and through, the growth phase while the last factor dictates the ability of a start-up firm to stay on course in the growth phase or navigate the maturity phase. Typically, a start-up in India would have the capability to move from a USD 1 million to USD 100 million annual sales but lack the capability to move beyond without dedicated efforts to manage the three dimensions of technology, finance and ownership.

An examination of the Western and Japanese models of start-up could provide guidance for new development models relevant for Indian start-ups.

The Western and Japanese start-up models

The Western and Japanese start-up models are typically based on pioneering pieces of technology or market creation. While it may be tempting to relate this to the fact that all modern technologies emanated in the West (largely USA or Europe) or in Japan it is the start-up intent that made the difference. Entrepreneurs with truly ground-breaking products in the West or in Japan or Korea went on to make their start-ups into mega global enterprises. However, there are certain typical nuances of technology-led start-up development that are different.

Not all techno-entrepreneurs in the West were or are keen to build their start-up enterprises into mega enterprises. Entrepreneurs in the West see creation of commercial value (for themselves) more important than either reaching the market or expanding the scale of the enterprise. Entrepreneurs see technology as a concept to be commercially proved at their hands rather than converted into commercial saleable products in their hands. Entrepreneurs benefit from an equity environment that provides multiple-series funding. Finally, entrepreneurs are willing to monetize their technologies and firms to generate surpluses for new endeavors. Ownership and management are treated as very important in the start-up phase but are considered expendable for leading into the growth and maturity phases.

The techno-entrepreneurs in Japan are different. They tend to innovate for larger industrial firms or trading groups and in the process help create multi-level business arrangements. The start-ups set up by the techno-entrepreneurs typically grow with the larger firms and groups, and become global enterprises in their own right. The entrepreneurs are typically attached to their technologies and family presence but are also able to evolve to the higher levels due to the synergistic relationships. Typically, the larger firms in Japan respect the origins and independence of the smaller suppliers and desist from the Western temptation of acquiring promising technologies and firms. Instead, the accent is on letting the smaller start-ups grow into mature, innovative enterprises.

A hybrid model for Indian start-ups

Given the constraints the Indian start-ups face in accessing technology, finance and markets, and the attachment of the entrepreneurs to continued ownership of the firms they founded, a hybrid model is relevant for Indian start-ups. Assuming that a base level of promoter and external funding is arranged, typically, start-ups fall into one of the three categories: those that make better use of available technology, those that make their operations more competitive and those that access certain market segments more creatively. Needless to say, firms which achieve a virtuous combination of technological innovation, operational efficiency and market penetration would be in a position to drive into a growth phase on their own. The hybrid model would be relevant to start-ups having competencies in one of the three dimensions.

Firms which are technologically innovative need to aim at achieving the earliest proof of concept, following which they should be prepared to license or sell the technology to larger firms which can take the product to the market. This phenomenon is widely prevalent in the West, especially in technology and biopharmaceutical fields, and needs to be adapted to the Indian situation. Firms which have pieces of market would do well by either taking in products from other start-ups or providing market access to larger firms. Firms which are operationally efficient must focus on gaining market access in partnership with larger firms having Indian and global market presence. This could enable a longer independent functioning to such firms, enabling growth journey on their own.

The hybrid model for Indian start-ups thus envisages growth through inorganic relationships across fragments of value chain rather than through organic end-to-end value chain. Many Indian start-ups in India have evolved into mid-sized firms through such relationships. Still some decisions have to be customized: for example, the scale and scope of such relationships, whether such relationships would need to be limited period relationships or permanent relationships, and whether the end game is surplus generation through value monetization and exit as per the Western model or lifetime domain commitment.

Founder-Manager transformational issues

Part of the evolutionary response would emerge from how the founders of the Indian start-ups manage the entry, growth and maturity phases of an enterprise. Entrepreneurial firms tend to be typically founder managed. Investors gain confidence with the founder being in total control of the enterprise while the employees get inspired by the leadership of their founder. As enterprises move into growth phases, investors need to let go of their control on the founders, and the founders need to let go of the control on their enterprises. As an enterprise becomes larger it needs to organize itself into organizational and business units that can be driven by independent managers to generate greater value.

While no professional manager can bring the passion and feel of a founder-leader to an enterprise, start-ups need to find ways and means of institutionalizing the entrepreneurial passion and feel through diversified professionalization. Indian start-ups which moved into the big league have done so not only on the basis of technology-efficiency-market grid but also due to organizational development. Serial entrepreneurship could well help Indian entrepreneurs to continue to feel their passion with newer enterprises while helping their earlier enterprises move on their own steam.

The suggested organizational model is based on the unique Indian psyche that complies as much as it commands; that follows as much as it leads; and that is as much professional as it is entrepreneurial. Compensating any limitations it has, the Indian employee base is driven by a deep sense of loyalty and frugality that can be leveraged by placing capable people in commanding positions. The success of large Indian private and public sector corporations is related to the diversified ownership model that is extended to individual organizational units of an enterprise.

Science and finance for start-up transformation

Start-ups need access to science and technology. Indian entrepreneurs are adept at adapting technology, enhancing efficiency and perching their firms on market niches. They are, however, diffident in taking science and technology from Indian research laboratories. For example, there are over 40 specialized laboratories under the umbrella of the Council for Scientific and Industrial Research (CSIR) as one of the largest publicly funded research network in the world. In addition, institutes of higher learning such as Indian Institutes of Technology and Indian Institute of Science have cutting edge researchers. These competencies can be leveraged to establish new drivers of growth through win-win commercial arrangements. Indian start-ups can place a just small proportion of the risk on using and developing indigenous science and technology to secure cost-effective business development. There is a great potential for Indian science and technology that is waiting to be captured.

Western and Japanese angel investors and private equity funds can achieve substantial returns by considering multi-phase investments in Indian start-ups that could transform themselves into future growth engines by utilizing India specific science and technology. There is tremendous potential that is untapped in social and industrial infrastructure, as well as rural and urban development. A comparative inventory of small enterprises in US, Europe and Japan with those existing in India will indicate the enormous possibilities.

Central and State Governments in India have traditionally supported start-ups by policy measures. Newer and more creative measures are required. Encouragement of single person companies, creation of financial exchanges exclusively for start-ups, channeling of a certain proportion of CSIR research effort for small enterprises, creation of start-up finance divisions in all banks and financial institutions, exemption of small enterprise promotion and management from complex legal hurdles and encouragement of mentoring of start-ups by working executives, all of these supported by governmental policies, could add up to a great entrepreneurial start-up movement in India.

Posted by Dr CB Rao on May 9, 2010

Nano to Mega Entrepreneurial Spectrum: Need for Financial Entrepreneurs

Enterprises emerge from entrepreneurial energy. Entrepreneurs fight against odds to create entities that can convert ideas into products or services. An entrepreneurial journey involves several challenges including, but not limited to, the conceptualization of the entrepreneurial initiative, arrangement of finances, assembling of the team, establishment of the project, delivery the product or service and finally earning of reasonable returns to please the shareholders. These core, critical steps in the journey of an entrepreneurial enterprise also need to be consistent with the capabilities and potential of the entrepreneur. There is little clarity on when and how the challenge for entrepreneurial journey ends and the quest for enterprise sustainability commences.

The popular appreciation of entrepreneurial effort tends to be limited to first generation enterprises which have achieved scale and scope, with high visibility in media. Despite such enterprises achieving a significant success relative to the starting milestones, the pressures are ever higher on them to grow beyond boundaries, in a virtually limitless process. In this endeavor, the true creative spirit of an entrepreneurial venture gets overwhelmed by the clinical intellect and aggressive force of such companies pursuing scale and scope. Pursuit of scale and scope no doubt transforms the entrepreneurs heading such firms into global business leaders but also limits them from institutionalizing their intellectual talent on a wider entrepreneurial base, as a national comparative advantage.

Infosys insight; foresight for growth


A brief study of Infosys Technologies Limited, India’s leading information technology corporation, and their founders offers certain unique insights and possibilities in this complex interplay of enterprise and entrepreneurship. Infosys was founded in 1981 with a very modest capital of USD 250 by a team of seven software engineers, led by the founder N R Narayana Murthy. The company was in many ways a pioneer in leveraging Indian software talent for providing global information technology solutions. With a singular focus and a creative global delivery model, Infosys never had to look back in its growth journey. Today, Infosys is a NASDAQ listed global IT and Consulting Services corporation with 105,000 employees, revenues of US$ 4 billion and market capitalization of approximately US$ 27 billion.

Of the seven founders, N S Raghavan retired from the services of Infosys in 1999 as its joint managing director and went on to become a mentor for several entrepreneurs. N R Narayana Murthy continued to nurture Infosys into a global corporation as its chairman, and more recently as its chief mentor. Logically, a large global corporation such as Infosys with excellent revenue and profitability would have the ability to encourage entrepreneurial entities all across its value chain, and possibly would have created platforms for various entrepreneurs dock in with the company. Yet, N R Narayana Murthy has recently set up a Rs 6 billion (USD 133 million) venture capital fund called Catamaran Investment Pvt Limited, headed by him to encourage entrepreneurial venture, across sectors.

The establishment of the Murthy-Catamaran venture implies that even a global company cannot do more than encourage ancillary entity development in its own value chain, while an entrepreneur who grew such a company can possibly contribute to more broad-based entrepreneurial development as an entrepreneur rather than as a corporate honcho. Indications are that Catamaran would be sector and scale agnostic while investing, which is an encouraging sign. Going beyond Infosys and N R Narayana Murthy, however, one needs to recognize that entrepreneurial development could occur in different configurations and formats. Entrepreneurs who tasted success have now the opportunity and option to provide a discrete institutional structure, distinct from the firms that they founded and grew, to provide a genuine and powerful thrust to entrepreneurial development in the country.

Scaling and scoping; pathway to growth

Any enterprise emerges and grows on only two fundamental dimensions: product (service included) and market (geography or customer segment included). Depending on the product range and market spread enterprises get positioned in terms of scale and scope. The modernization of the corporation on a number of collateral and enabling factors such as technology and organization has to only serve these two fundamentals. While the entrepreneurial spirit of discovery of product and market niche has always been an integral part of social and economic development, the emergence of the modern corporation has sought to substitute that spirit with systematic quest.

It is imperative that entrepreneurial effort is viewed independent of scale and scope as the overwhelming factors on one hand, and technology and organization as the differentiating factors on the other. India has traditionally given considerable importance to the development of cottage and small scale industries, essentially through investment and tax incentives. Evolution of large scale industry has been seen as a logical pull for further development of such smaller enterprises. Yet, the whole cottage and small scale enterprise movement has got grounded over the years due to the enterprises failing to appreciate the product-market interplay. There is a need to redefine the enterprise hierarchy to identify where and how different generations of entrepreneurial effort fit best.

From nano to mega; a wide enterprise spectrum

Entities which cater to one product group and one small homogenous market segment are best termed as nano enterprises. We see nano enterprises all around us but fail to appreciate how the entrepreneurial effort is surviving despite lack of attention to it by the formal economic system. The vegetable cart vendor who serves the neighborhood homes, the tailor who meets the clothing needs of the location and the corner grocery shop which provides the food and family items, for example, constitute nano enterprises. A nano enterprise is usually operated by only one individual, the founder or the owner.

A printer who prints multiple products for multiple clients with a printing machine and a small team of assistants, a restaurant which provides multiple cuisines for a multi-ethnic population, a boutique which caters to multiple clothing styles constitute the next level of micro enterprises. When these are upgraded to a network in each case with better technology and logistics support for larger multi-location coverage they become small scale firms; a desktop networked printer, a chain of restaurants and a designer clothing studio cum boutique, for example.

A publishing cum printing house, a pan-Indian fast foods restaurant and an apparel manufacturing company all of which in modern times require modern technologies, trained work force and capable management represent medium scale enterprises. All listed national companies with highly organized research, manufacturing and marketing capabilities are the typical large companies; for example, a multimedia corporation with core competencies in print or television media, a ready-to-eat foods company and an end-to-end textile and apparel company. Blue chip companies and giant corporations in diverse industrial segments corporations, with global scale and scope, constitute mega corporations.

The efficiency with which each enterprise operates (for example, the number of households the vegetable vendor can cater to in a day) and the speed with which a firm can morph from one stage to the next higher stages (for example, leap from being a cart vendor, grocery shop and tailor to becoming a retail chain) is a function of entrepreneurial energy, duly supported by finance and management. The indigent nano entrepreneur, if equipped with a semi-motorized cart, can cover more neighborhoods. Finance and management can make an aggressive local retailer become a national multi-brand retail chain.

Idea to enterprise; passion to performance

From the yesteryears’ business magazine idea to yesterday’s direct-to-home television, true entrepreneurial effort is not one of a product or service whose time has come but of an idea which has been thought of ahead of its time. With the explosion in knowledge levels and the implosion in customer needs there exist today far more product and service ideas than at any point of history. Mentorship and financing are two critical inputs which can help the nano, micro and small enterprises get established first, and later become medium, large and mega enterprises. While large firms have the necessary track record and competencies to raise resources for new entrepreneurial ventures in their quest for growth, nano, micro and small firms need explicit, dedicated and empathetic support.

India does not have angel investors. The financing and investment eco-system in India is not specifically geared to spot entrepreneurs and help them translate their ideas into enterprises or organized activities. Established venture capital firms and private equity funds cater to large firms, and only occasionally to medium firms. In India, nano, micro and small firms can emerge and survive only based on conservative bank priority funding. India therefore needs a wholly new genre of entrepreneurial financing, whether it is a uniquely Indian type or an established Western type. There is a need for a new breed of financial entrepreneurs to emerge to lead a whole new entrepreneurial revolution in India. Several alternative models, all of them, relevant to different types of entrepreneurial initiatives need to be simultaneously considered.

(a) Individual financing model

The ability to finance nano entrepreneurial ventures exists among all earning members of the society, especially the high net worth individuals (HNIs). The investment required for a vegetable vendor to acquire a modern cart, for a tailor to add a multi-purpose sewing machine and the corner grocery shop to have its own brand of home foods would not exceed Rs 10,000 in each case, which amount is entirely within the means of any earning individual with high savings potential. HNIs more particularly could keep a target of creating a nano-entrepreneurial venture each year and leave their stamp on the history of entrepreneurial development. Even retired personnel can reinvest a small part of their retirement proceedings to set up their own nano enterprises, be it a corner shop or a core service for the community.

Extending the concept further, gated communities and apartment associations which would have a larger access to collective resources and provide a captive user need basket can help establish nano-entrepreneurial ventures that meet the community needs effectively. From a security service to a mechanized laundry and from a library service to a documentation service, opportunities for creation of nano ventures by residential communities are indeed plenty. As these gated communities develop into new suburbs and mini-cities the nano and micro foundations of business can indeed grow over time.

(b) Corporate catalyst model


Major corporations, given their organizational infrastructure and market reach as well as their financial capability can contribute impressively to the entrepreneurial movement directly and indirectly. The logical way, as discussed in an earlier post, is to convert or let go fragments of their value chain or operational spectrum as nano- or micro-entrepreneurial ventures. This is a natural and economical way of creating entrepreneurial value while enhancing cost-competitive position of the company. Each function or domain of a firm, for example, research, manufacturing, marketing, supply chain, human resources, accounting, information technology and clinical trials offers scope for creating entrepreneurial outfits for outsourcing of fragments of such domains.

Yet another way is to leverage a corporation’s resources to reach out to wider population, create awareness and harness passion, in association with Non-Governmental Organizations (NGOs) and Not for Profit Organizations (NPOs). The success of the Teach India 2009 campaign organized by the Times of India media group in association with select NGOs in bringing together educated experts to teach underprivileged children is proof enough. Corporations can undertake equal aplomb entrepreneurial initiatives utilizing their resources. In addition to individual corporations industry associations such as FICCI, CII and ASSOCHAM can play a catalyst role by creating divisions for entrepreneurial projects.

(c) Not-for-profit organization model

Not-for-profit organizations (NPOs) headed by passionate leaders can spur and support entrepreneurial initiatives. Bharat Yuva Shakti Trust (BYST) is a trend setting model in this context. BYST is a non-profit organization headed by Lakshmi Venkatesan and set up for providing end-to-end support for disadvantaged micro-entrepreneurs in the form of loans, mentoring, networking and marketing. The young micro-entrepreneurs are nurtured until they reach a level where they are not only self-sufficient, but they in turn make a valuable contribution to the society through creating wealth and employment.

Nationally, BYST has supported 1900 micro-entrepreneurial ventures, employing over 20,000 people and providing training to over 75,000 people. BYST has both rural and urban training programs covering six major regions of India. The Confederation of India provides the infrastructure and administrative support to BYST. BYST is also networked with international organizations that are aligned to similar objectives. A high point of BYST is its ability to bring business and industry experts into its programs of mentorship for the micro-entrepreneurs. This “beyond the financing” strategy provides the requisites competencies to the micro-entrepreneurs and enables sustainability to their ventures. For a country as large as India, there is potential for many more NPOs organized on the model of BYST to support nano and micro enterprises.

(d) Microfinance corporation model

The Grameen Bank was founded by Muhammad Yunus in Bangla Desh to provide tiny loans for the poor to enable self-employment. The success of the Grameen Bank and the global recognition it secured is reflective of the potential of directed micro credit. Over a period of 12 years, the Bank created over 6 million active borrowers disbursing over 900 million in tiny loans. The pioneering work in employment generation touching the lives of the poorest of the poor fetched for Yunus and the Grameen Bank the Nobel Peace Prize in 2006. Today the Grameen Bank has become more diversified in its product offerings, leading to greater generation of wealth for its customers.

Extending the concept further, a bank dedicated for creation of micro-entrepreneurial enterprises can lead to creation of millions of micro enterprises in India. Potentially, banks and specialized institutions such as Small Industries Development Bank of India can lead this micro-enterprise initiative by transforming their respective priority banking arms into divisions of nano finance and micro finance for appropriately scaled entrepreneurial enterprises, with a new direction. While rural banks did get set up in India even decades ago, their inability to lead an entrepreneurial revolution is related to adoption of policy driven big bank mores rather than entrepreneurial risk taking approaches. A new format and approach for micro finance corporations is called for in India.

(e) The Murthy-Catamaran model

The Catamaran Venture Capital fund was set up by Infosys founder, NR Narayana Murthy and his wife Sudha Murthy by selling their shares constituting a small part of their shareholding in Infosys to raise Rs 6 billion (USD 133 million). This amounted to 0.43 percent of the total capital of Infosys. The move by Narayana Murthy is a trend setter for successful entrepreneurs to share their wealth and expertise to reinvest in others’ entrepreneurial ideas and create wealth for others and the society. The companies listed in the National Stock Exchange of India have a combined market capitalization of over USD 1 trillion. A sale of even 0.5 percent of the capital could lead to a massive USD 5 billion fund that could be set up to several Catamaran style venture capital funds.

Assuming that promoters have on average over 25 percent of the overall capital structure of the listed companies, successful entrepreneur heads of Indian corporations have in their hands a huge funding potential to support millions of micro, small and medium scale entrepreneurial enterprises. It is hoped that the entrepreneur-heads of all listed companies, including public sector undertakings would dedicate at least 0.5 percent of their respective companies’ shareholding to support entrepreneurial ventures. When this scale of finance is coupled with their personal commitment to mentor budding entrepreneurs a sea change would occur on the entrepreneurial scene. It is to be hoped that several other successful entrepreneurs as well as corporate group heads would replicate or improve upon the Catamaran model.

(f) Western venture capital model

Venture capital firms entered the Indian industrial scene in the 1990s in a big way along with the economic policy liberalization. Their entry was pursuant to a decision of the Government of India to allow foreign finance companies take stakes in the Indian companies. Taking small stakes of 10 to 25 percent in the capital structure of new as well as fast growing companies, venture capital firms enabled a number of first generation enterprises strengthen their equity structures and also list themselves on the bourses. Venture capital funds enable companies achieve the crucial leap from a modest beginning to a modern era, accessing technologies or markets through their financing. As companies are not typically listed at that stage, venture capital firms take stake based on stock pricing negotiated with the promoters.

While venture capital firms serve a valuable purpose their emphasis on growth and exit at attractive valuations, through listing or further sale to other strategic investors tends to distort orderly growth of companies. Typically, venture capital firms help establish medium scale enterprises with their investments ranging between USD 10 to 50 million. Venture capital firms tend to be sector-savvy, betting on sunrise and entrepreneurially driven sectors. India’s IT and pharmaceutical sectors in the 2000s benefitted from venture capital investments. Potentially, venture capital can support India’s drive into sunrise sectors such as biotechnology, nanotechnology, healthcare, education, alternative fuels and clean technologies, providing confidence to entrepreneurs move into such sectors. That said, unless the Western venture capital funds tie up with Indian groups the ability to take risks relevant to the Indian scenario could be weak.

(g) Global private equity model

While venture capital and private equity funding is seen to be synonymous, private equity funds tend to favor listed companies for their investments. Most private equity firms enter established firms through preferential allotment of new shares to themselves at prices that reflect market valuations or reflect specific premiums based on their insights into business plans. While venture capital firms provide growth capital, private equity players provide funding for a variety of purposes including growth capital, capital for retiring debt, mezzanine funding and acquisition war chest. With investment ranges from USD 50 to 200 million, private equity firms can truly shape medium scale enterprises become large corporations. However, the global economic downturn of 2008 and 2009 saw the weak foundations of organized venture capital and private equity industries.

The established private equity industry has global investors. Their investments are subject to returns to their investors, some of them extremely large and powerful ones such as global pension funds. In good times these private equity players are nation, and sector agnostic, seek a diversified investment portfolio and display a penchant for globalization of their portfolio firms. In difficult times, however, they tend to be extremely cautious. It is time that Indian financial institutions, gratuity and pension funds, mutual funds and provident funds as well as large public and private sector groups created India’s own private equity behemoths.

(h) State as super equity player

As large firms grow larger, many grow beyond the reach of even large private equity players. Large firms and private equity players manage the situation be creating subsidiaries for newer activities and channeling equity flows. In countries such as India where government owned public sector undertakings (PSUs) occupy commanding heights of the economy State has to assume the role of a super public equity player or venture capital player, with respect to the PSUs. Several corporations in infrastructure sector have emerged due to such public investments by the Government of India. These, in turn, have led to creation of new strengths in the economy, which the private sector or the overseas players would have considered to be either beyond their means or their risk profile.

While a school of thought questions the efficiency and appropriateness of a large PSU sector, there is no denying that but for such investments many mega corporations in oil, gas, refining, power, power equipment, locomotives and other investment intensive sectors would not have been established. The induction of new technologies and establishment of new industries with uncertain commercialization opportunities requires massive investments which only governments are willing to make. The Government of India’s disinvestment plans could unlock e easily USD 10 to 20 billion depending on the PSUs chosen for disinvestment and stake sale levels. Though the Government plans to dedicate the proceeds to social service programs it would be equally logical to channel at least 50 percent of the proceeds to setting up new PSUs in long gestation, high technology sunrise sectors. Such an approach would provide technological assurance and employment security to the nation. An alternative could be for the listed PSUs to issue additional shares at premium to strategic investors and initiate such new generation enterprises.

(i) Government policy liberalization

Indian Government has helped the growth of medium and large scale sector by the policies of economic liberalization initiated in 1992. Despite continued prevarication over the last few years, further liberalization is expected with a special focus on infrastructure sectors, supporting high capacity entrepreneurial investment by Indian and foreign corporations. Yet, liberalization policies in projects of social infrastructure continue to be bureaucratically governed with the objectives of supervising quality, eliminating exploitation and protecting public safety. Projects in sectors such as education, transport, healthcare, banking and retail are singularly affected by such policies. There is a need to find new liberalization formats that support entrepreneurial spread.

The new Companies Bill is expected to give a fillip to entrepreneurial activity with the One Person company provisions. This laudable reform in company law may not result in the desired boost to entrepreneurial activity if social infrastructure sectors are rigidly governed by bureaucratic barriers to entry. Much of the liberalization responsibility in this sphere rests on the State Governments as well. The governments need to establish single windows to facilitate setting up of One Person companies in a host of fields. The objectives of ensuring quality and safety are better served by establishing technology bodies to supervise quality and safety rather than by controlling entry.

Summary

Entrepreneurial energy can take shape in terms of entities with highly variable scale and scope. From nano to mega, enterprises can be positioned and grown depending on the applicable product-market scope in each case. While there are several financing models available to finance varied types of entrepreneurial ventures, the new Catamaran venture capital model being pioneered by N R Narayana Murthy, the founder of Infosys is of great significance. This model involves successful investors raising money by selling a small portion of their holdings to set up venture capital entities which will offer not only finance but mentorship by the successful entrepreneurs. Individuals and corporations can also play catalytic roles in enabling entrepreneurial ventures in different capacities. Also relevant are financing models of not-for-profit type and microfinance corporation type. At the other points of spectrum established venture capital funds and private equity players have to rework their models and become more entrepreneurial by themselves. Indian mutual funds, pension funds and provident fund organizations as well as corporate groups have to set up India’s own venture capital and private sector funds. At the apex level the Government has to rediscover its role as a super venture capital investor, gaining additional financial capability from the envisaged PSU disinvestment program. Financial entrepreneurship has to be seen as the trigger for emergence of a full spectrum of nano, micro, small, medium, large and mega entrepreneurial entities in India.


Posted by Dr CB Rao on January 14, 2010

National Entrepreneurial Culture: Systemic and Mindset Factors

Widespread industrial and economic development of a nation is triggered by entrepreneurial initiatives in the country. India which is recognized today globally for its educated and hard working human resource base needs to focus its sights on harnessing entrepreneurial spirit for enhanced economic and social development. This paper discusses several approaches to ignite the entrepreneurial spirit with widespread positive impact for India.

Entrepreneurship defined

An entrepreneur is someone who starts his or her own business, especially when such activity involves risks. The risks relate primarily to market acceptance of business proposition, arrangement of requisite capital, creation of organization and uncertainty of financial returns. An entrepreneur mitigates the risks by developing a unique proposition for his venture in terms of product or service innovation and / or cost arbitrage relative to a larger organization. The combination of innovativeness and competitiveness that is implicit in an entrepreneurial activity acts as the key trigger for broader industrial and economic development.

A study of industrial history points out that each and every global corporation has had its roots in entrepreneurial activity; from Henry Ford’s Ford Motor to Akio Morita’s Sony. That said, it has also been a natural phenomenon for established business houses to start their own entrepreneurial initiatives through diversification projects. While such initiatives lack the main ingredient of a typical entrepreneurial activity viz., personal risk-taking of a promoter, such growth initiatives do involve risks on other multiple dimensions, and contribute in an equal measure to accelerated industrial and economic development.

Entrepreneurship in curriculum

The Indian education and social system is typically geared towards secured jobs, particularly in large organizations. Educational streams are pursued based on potential employment opportunities, regardless of the aptitude and flair of the students. Very few, if at all, of the students are tuned towards starting their own business enterprises. It is important therefore that Indian curriculum from the early schooling days incorporates entrepreneurship as a core subject of curriculum. History has instances of brilliant inventors, whether Alexander Fleming who discovered Penicillin or Graham Bell who discovered telephone, laying foundations of great business empires. The Indian educational system needs creative economic historians who can interpret the history of industrial innovations and business creativity across generations, and identify core entrepreneurial initiatives that transformed business and economy over time.

As a student progresses from a school to a college and later to a professional institution and a university, it becomes appropriate to inculcate the entrepreneurial approach through specific projects. The project work that needs to be undertaken by a student in a real life or in a business setting in partial fulfillment of the graduate or post-graduate study requirements provides an important avenue for entrepreneurial development. Unfortunately, this system has been reduced over time to a grudgingly tolerated formality by both the academic institutions and business undertakings. There is a clear need to revitalize and redefine the system of project work to fulfill a larger entrepreneurial purpose that it can truly deliver.

A reputed business school in India has recently initiated a process by which some of its students could work with industry icons as their understudies. This practice, the school felt, could enable them gain valuable insights into leadership styles. What is perhaps even more urgently required is a system by which graduate and post-graduate students are encouraged to work on establishing pilot scale industrial or business projects based on co-guidance from the academic institutions and business enterprises.

Teams of people from technical and managerial disciplines from within an institution as well as from different technical and business management institutions (say, from IITs and IIMs, to start with) can combine to undertake such projects. This methodology would, of course, require a sea change in how the institutions approach the project work as part of their academic curriculum and how they would provide credits to individual and group work. A revitalized academic industrial initiative of entrepreneurial projects would prepare the students exceedingly well on the entrepreneurial journey.

Entrepreneurship at work

Much has been written about how an executive, manager or leader in an established undertaking also could be entrepreneurial at work. It is possible and desirable for one to be an entrepreneur at work notwithstanding the fact that one is bound by structure, systems and processes in taking decisions and executing them. Being an entrepreneur does not mean being all alone, taking all decisions individually or taking risks all upon oneself. Even an entrepreneur would need to create a vision, strategy, structure and process with a team and raise finances through articulation of the concept to the potential stakeholders. The challenge for an executive at work to undertake new developments, construct new projects, introduce new products or foray into new markets is no different. The challenge even for a corporate executive is one of identifying a new domain based on one’s own experience, expertise, risk-taking ability and communication skills. Entrepreneurial executives can help companies expand and diversify their businesses, reaching higher career heights in the process.

Entrepreneurship at work does, however, require an appropriate organizational eco-system. Entrepreneurially vibrant organizations, in fact, are distinctly differentiated from bureaucratically pedestrian organizations. Leaders and managers in entrepreneurial organizations tend to encourage scientists, technologists and other professionals take risks in setting up new projects or venturing into new domains. There exists palpable latitude in such organizations towards forgiving genuine mistakes or accepting unanticipated outcomes. This objectivity nurtures the ability of people to undertake risky but potentially rewarding projects. Such organizations balance the rigidity of structure and process with the flexibility of innovation and creativity. This requires an organizational culture in which the entire leadership team is committed and aligned towards being entrepreneurial at work. Usually, such total entrepreneurial alignment within the top leadership is not possible given the multiple backgrounds from which various leaders come from. As an alternative, organizations could create entrepreneurship councils as a formal means to encourage executives, managers and leaders take entrepreneurial decisions, as distinct from those related to regular operations and normal business continuity projects.

Entrepreneurship at the helm

One would imagine that having an entrepreneur at the helm is one of the best ways to promote the continued entrepreneurial growth of the corporation that he helped to conceptualize and grow. One may even conclude that an organization which has an entrepreneur-founder at the helm as the Chief Executive Officer (CEO) would be the most entrepreneurial, always exploring new avenues. Unfortunately, however, several entrepreneurial organizations as they grow larger tend to become deliberative, if not bureaucratic. They tend to take strategic decisions (for example, integration, diversification, divestiture and acquisition) in a structured manner within the defined industry boundary. The entrepreneur who is also the CEO in such organizations gets bound by accountability to his shareholders and investors and finds it difficult to take apparently radical business and investment decisions, especially if they are unrelated to the current business, in an entrepreneurial manner. Getting stuck as an entrepreneur at the helm of a corporation is possibly not the best way to replicate, in broader domains and with greater resources, what the same entrepreneur could achieve in a much narrower domain and with a much smaller resource base.

The logical solution for the entrepreneurial plateau in decision making seems to lie in each entrepreneur making a decision on continuing to be an entrepreneurial leader vis-à-vis a professional leader. Whether to head and manage his corporation or remain a mere investor turning over the reins of his corporation to a full-fledged professional is a healthy dilemma which every entrepreneur must face from time to time. Remaining as an entrepreneur, choosing to move away from day to day management, would help the entrepreneur to refocus his energies and resources on newer entrepreneurial ventures. The business models, investor regulations and economic system that dominate the Indian business system are unfortunately not conducive to entrepreneurs to establishing newer ventures. In addition, the Indian entrepreneur tends to get emotionally and physically attached to the company he created, often failing to see the larger role he could play in national wealth building. The American culture, on the other hand, is one of entrepreneurs creating value, monetizing it and moving on with new business lives. The American entrepreneurial culture has clearly led to a continuous creation of newer and more challenging businesses of greater value in the US economy. This is perhaps a more appropriate model if India has to utilize effectively its scarce entrepreneurial talent. A true entrepreneur would need to be a serial entrepreneur rather than a static entrepreneur in this model.

Entrepreneurship as CSR

To provide a sustainable fillip to the entrepreneurial movement in the country, corporations need to take up development of entrepreneurs as a corporate social responsibility (CSR). Apart from encouraging induction of entrepreneurially trained graduates and post-graduates into companies, and enabling entrepreneurship at work, corporations need to take up molding of entrepreneurs as a core social responsibility. This could occur in two ways, both of which are mutually supportive to each other. In the first method, each corporation vows to develop at least a few entrepreneurs out of its workforce or from the general public by outsourcing some of the tasks which it has been doing by itself. For example, a company which has been doing all its equipment maintenance itself may choose to let its maintenance chief form an entrepreneurial venture that maintains facilities and outsource the activity to him. There are similarly several possibilities for large companies to outsource their broader supply chain management activities (including materials planning, procurement and logistics activities) or corporate services activities (including recruitment, accounting, audit, customer relationship management) to entrepreneurial ventures led by their own executives. While such activities may run the risk of breeding collusive cronyism, true entrepreneurial spirit should see such ventures break free of their sponsors and growing on their own sooner than later.

The second way of corporate entrepreneurial responsibility is to reach out to the wider society and enable members of the society to set up their own enterprises. Corporations adopting their neighborhoods can help the citizens set up a slew of social and economic ventures based on their capabilities. From simple social activities like tailoring and retailing to more involved infrastructure activities like education and business, corporations can, through their corporate social responsibility arms, contribute to an indigent society evolving itself into an entrepreneurial society. As industrial firms seek to expand aggressively through new industrial campuses and economic zones, the need to support the society with more sustainable means than one-time cash remuneration for the acquired land is self-evident. Typically, companies undertake varied corporate social responsibility activities only. Upon securing of their business models and operations as is evident by the contributions made in this sphere by established companies. However, by integrating corporate entrepreneurial responsibility as part of their entry strategy in new green field projects the companies can seek synergy between industrial development and social equity.

Summary

With over ten million graduates, post-graduates and research scholars graduating annually from colleges, institutions and universities of higher education in India, the potential to develop and unleash the entrepreneurial energy of the vast educated work force is immense. Even if a small percentage of the educated human resource base opts to establish its own entrepreneurial ventures, the employment and development triggers for the Indian economy would be immense. This, however, requires significant systemic and mindset changes. From ingraining self-reliance and entrepreneurship as an early family and educational ethic to the development of an industrial and economic system that encourages entrepreneurship both at work and outside work a host of systemic and cultural changes are required to achieve the full potential of a highly literate and highly entrepreneurial educated India.


Posted by Dr CB Rao on January 11, 2010