Crossing the 50 Crore Chasm

Anand Deshpande and Ashok KorwarApril 2011

Workshop to help

Companies grow from Rs. 10 Crores

to Rs. 50 Crores

Know our biases …Our view from the fish tank.

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Ashok Korwar

• Independent management consultant based in Pune

ashok@yourgrowthcatalyst.com

• Professor at IIMA, 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 DirectorPersistent Systems Limited.

• Persistent is a 6000 person; Rs. 850 Crore NSE/BSE listed Company.

• Techie background

– B. Tech, MS, Ph.D. all 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.

Rs. 50 Crores

Rs. 50,00,00,000

Rs. 500,000,000

Rs. 500 Million

Rs. 5 x 108

As of May 30, 2010

• Infosys Rs. 5 Crore in 1991 and Rs. 50 Crore in 1995.

• Cognizant

• Persistent did Rs. 10 Crores in 1999-2000 and Rs. 50 Crores in 2002-2003

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’sTheory 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?

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?

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..

HOW DOES IT HELP..?Ok, so I found the constraint..

Constraint Is also Lever

What should the CEO focus on?

Goldratt’s 5 step process

1. Identify the constraint

2. Squeeze the most out of the constraint

3. Subordinate everything else to the constraint

4. Elevate the capability of the constraint

5. Go back to step 1!!

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!

Define the Battlefield.. To YOUR advantage

Your elevator pitch: Framing is key..

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

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

• Competitors are extremely useful for FRAMING!

Home in on the differentiation..eg

• Market alternative: BPOs who are struggling to handle complexity

• Product alternative: like XYZ, the market leader in workflow

• Except that we are optimized for PPP pain area

• And we have the entire package ready

Example: Intuit

• For the bill-paying member of the family

• Who is tired of filling out the same old checks month after month

• It is a home finance program on your PC

• Unlike ‘managing your Money’ which is a financial analysis package

• We are optimized for home bill-paying

(from Geoffrey Moore, Crossing the Chasm)

In this growth phase..

• CEO’s number one job is..

Win that first big deal ..

Systems and Processes will get aligned to win it, to execute it..

The mountain will teach you what you need to know to climb it..

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 businesses 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 hungryteam that wants to go for it!

• 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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Profit is an opinioncash 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?

Avoid borrowing from amateur money lenders.

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

Understand the VCs 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

Establish a network of mentors you trust.

Leverage Your Board.

Independent Directors: your advisors and critics!

Select Independent

Directorseffectively

Who can

Commit time

Have expertise that aligns with the needs of the business.

Are passionate about your business

Not just because they are

X Famous

X Relatives, friends

X Customers

Ensure that you have the right Capital Structure to scale

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!

Technology Market Development Life-Cycle

Do…

• Pragmatists reference Visionaries?

• Conservatives reference Pragmatists?

How do they Behave?Visionaries

• Can see the business value of a new product or technology

• Want to be the first

• Willing to champion a small company, if they see a fellow-visionary

• Are often highly ego-centric

• Don’t really care whether support exists or not (that is an SEP)

• Not price-sensitive (probably grabbed someone else’s budget anyway)

• But very heard to please: vision, after all!

• Project by project mode

• In a tearing hurry

Selling to Visionaries

• Give them the importance (they think) they deserve! Assign high-level executive to work directly with them

• Be willing to modify your product or service to suit them

• Manage expectations!

How does one find Visionaries?

• Industry conferences

• Often they find you, through their contacts in technology companies

How do they Behave?Pragmatists

• Want to buy from established leader

• Will take risks if required but will monitor, mitigate.. So don’t like single vendors

• Suspicious of breakthroughs, want to move step by step

• Want to standardize, standardize, standardize..

• Usually network with peers in their own industry

• Have the big budgets!

Selling to Pragmatists..

• Reassure them that your product/service will not disrupt their platform

• SoA

• Guarantee support and service

• Create competition if necessary!

• Create alliances to reassure them..

Technology

Product Market

Company

experimenters

visionarypragmatist

conservative

BEST WAY TO BEGIN AND GROW IS…

Find One Good Customer and Grow With Him !

But remember to protect your IPR!

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Selling to Big Companies is

important.

How to Win and Keep BIG

Customers

Steve Kaplan

The Difference Maker

http://www.differencemaker.com

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You’ve Got to Believe

Elephants need you, too

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Six Keys To The Elephant

1. One and Done• You’re going to be working very hard

for one shot at a potential client – and if you blow it you are done.

2. Priority One• Lavish plenty of attention on your

Elephant.

• Make the big Company looked after and cherished. Return calls speedily, Answer questions quickly. Address problems immediately.

• Be kind to your Elephant, and it will be kind to you.

3. Whatever it Takes• Throughout the Company, new

opportunities await, some of which seem removed from your core area of business.

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Six Keys to the Elephant (2)

4. Long-term vision• Pigs get fat; hogs get slaughtered

• Don’t get greedy. View your customer as a long-term relationship.

5. Breath of Fresh Air• Having fun is good for business.

Having fun – and showing it – is a great way to distinguish yourselves from your competitors

• Potential customers should feel that working with your business is a pleasant experience. It strengthens the relationship.

6. Partners• Seek ways to help your elephant

streamline its operations and save money.

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Looking the part

• Perception is one of the

rules – you may not be a

fellow Elephant, but if you

can play the part, you are

half-way there.

• Think Elephant

• Act Elephant

• Be Elephant