I think THereform i Am case

I think THereform i Am case - Transcript

Ittiam Can India spawn a billion dollar high tech leader
Written by Philip Anderson
Srini Rajam walked into the Descartes Room of contributed by Ittiam Systems offices and noticed that someone had left his mobile phone lying on the long table Like all of the rooms at Ittiam the conference room was named after a philosopher and on this typically balmy January day in Bangalore Rajam was in something of a philosophical mood He noticed that the
phone was a Nokia model and the thought occurred to him that Nokia in a way represented his dreams for the venture he had co founded in 2001 If a typical technically savvy person were asked to name a technology company in Finland he surmised he or she would think of Nokia If one were asked to think of a technology company in India he or she might think of Infosys or of his old employer Wipro the two leading giants in computer services best known for business process outsourcing Rajam had great respect for both but in his lifetime he also wanted to see India known for producing leading edge technology He and his co founders had left Texas Instruments to pursue such a dream
By early 2006 Ittiam had made a name for itself as a leader in a narrow but vital technology sector intellectual property converted into software for digital signal processing DSP chips Ittiam had been named the world s most preferred supplier of intellectual property for SP s in a worldwide survey of DSP professionals in 2004 and that was something to be proud of India had long attracted leading multinationals to locate R D facilities in India tapping into the country s deep pool of technical talent now Indian owned companies like Ittiam were gaining recognition as technology providers Ittiam s software underpinned some of the coolest consumer electronics devices on the markets such as handheld media players and video phones that communicated over the Internet
However Ittiam itself was known only within the community of experts in digital signal processing applications Rajam dreamed that just as Nokia had made Finnish technical prowess well known Ittiam would help the words made in India stand for cutting edge excellent technology In the longer run Rajam wondered how would the firm have to evolve to realize this vision
Ittiam s growth to 2006 Srini Rajam had been influenced by some successful entrepreneurs he had met early in his career but he did not seriously begin to think about starting a company until 2000 some 15 years after he had joined Texas Instruments He muses I come from a typical middle class family and most of the Ittiam founding team is like that A new breed of entrepreneurs in India is starting up with absolutely no family background in doing business You can call us the zero generation of entrepreneurs since there is no track record of entrepreneurship in the family My brother is a senior vice president with a Japanese company my sister is a housewife almost all the Rajams are employed by other people India has some traditional entrepreneurial communities for example the state of Gujarat whose people often become entrepreneurs by default Southern India in general has not been very strong in such traditional entrepreneurship but people like Narayana Murthy have broken that stereotype Most people like him came from the conservative middle class where the best thing is to get a good job preferably a government job
Ittiam was founded in early 2001 by five engineers who had many years of experience working
with one another at Texas Instruments TI Rajam stepped down as Managing Director of TI India to start the company and was joined by Andrew Bhagyanathan Sattam Dasgupta Ravishanker Ganesan and Shantanu Jha Two other former TI colleagues Rohit Buva and Vikram Bose joined soon after and the seven formed a close knit management team throughout Ittiam s first five years Their shareholdings along with that of the people of Ittiam referred to as Ittians constituted a majority of Ittiam s equity in 2006
Each of the five original founders put in some seed capital to launch the enterprise which they
named Ittiam as an acronym for Ren Descartes famous assertion I Think Therefore I Am
The name was meant to convey what each founder saw as Ittiam s fundamental competitive
advantage the brainpower of its people Ittiam had nothing to sell except the product of pure
thought its intellectual property The team rented a business center started basic programming operations began looking for clients and put advertisements in the paper seeking skilled employees Rajam recalls
What I remember about the early days of Ittiam is that there is absolutely no job definition for an entrepreneur I was the lead founder so I became the CEO and other founders became vice presidents but in the initial period there is nothing like order or definition It is an absolutely free environment and it s up to you to make the maximum use of it Vikram called me the chief sales engineer since I went to most customer meetings I had the most contacts so it was like being a sales guy All of us were HR guys interviewing people Everybody did everything to get the company going Sattam created our office space in the most unique way doing a facility manager s job You are trying to create a company and every aspect of the company is important You have to make sure that collectively people are taking care of everything You end up doing what is not already being done and if you are the CEO some
of the things you do are not so interesting You have to do whatever it takes and have no hang ups
Rajam remembers the company s first year fondly because Ittiam had to build a business up from nothing He recounts In India being the head of TI for the country is seen as a cherished
position but when you become an entrepreneur the next day you are walking into a two person business center and you can t even get a coffee without going to a restaurant You have to do it for love no one should become an entrepreneur unless you want to do this sort of thing and go through the struggle If I could repeat one year it would be 2001 It is the most important because that was when we got the real experience of being entrepreneurs You are nobody and you are not valued for your name or background only for what you do The customer wins we got in 2001 like Silicon Labs and Sony we got with nothing and that is why I value them so much The mindset the spirit and the desire to like those niggles and struggles
is what is important if you want to be an entrepreneur The track record that the founders had built up during their years at TI helped them open the doors of potential clients and potential investors Ittiam s credibility was boosted vastly when in April 2001 it received 5 million in first round financing from Global Technology Ventures GTV 1 a Bangalore based venture capital investor The team chose GTV in large part because it established an immediate rapport with managing partner V G Siddhartha Says Rajam He had gotten in touch with me as soon as TI and I announced in November 2000 that I was leaving to start a company He comes from a modest background and received the entrepreneur of the year award himself from the Economic Times in 2003 for his Caf Coffee Day chain He also funded MindTree which is a well known firm in the Bangalore IT industry We chose GTV even though I was talking to other prestigious venture capital firms because I could see the same spirit in Siddartha that we had the passion to do something quite new from India s viewpoint Other VC s wanted us to keep services as a fallback they wanted a safety net that would put us back in the mainstream if we faltered selling intellectual property He bet on our idea and said he had already funded a lot of services companies so do this and succeed or we ll give it up Without him we couldn t have started Ittiam since he thought exactly as we did We also needed someone who was well funded but who could act as quickly as an angel investor does Some of the other VC s go through several months of process after our initial discussions he
did the term sheet literally in one day
During its first three years Ittiam built up a steady stream of products in the audio video VOIP and wireless LAN arenas Digital signal processors are general purpose devices that require software to perform specific functions such as playing a video or connecting to a wireless network Ittiam provided the software that device manufacturers packaged with DSP s to power systems such as video players or broadband modems Ittiam licensed its software to its customers and retained the rights to this intellectual property IP Almost all of its revenues stemmed from developing and licensing original IP though occasionally Ittiam charged customers for services needed to customize or modify specific packages
Ittiam swiftly built up a reputation among companies that used DSP s in their products In 2002 it introduced an MPEG 4 based audio video system and a VOIP signal processing subsystem In 2003 it introduced key software for 802 11 WiFi wireless LAN systems In 2004 it introduced three complete prototypes reference designs described below a portable media player a video phone that used Internet Procotol and a television set top box that used Internet Protocol The company turned profitable by April 2003 and closed the financial year ending March 31 2004 with revenues of 4 78 million and a net profit just over 1 million By 2005 with 28 patents filed more than 75 customers worldwide and over 160 DSP system experts employed Ittiam had become a force to be reckoned with in the DSP world It was named one of Asia s 100 hottest privately held companies by Red Herring magazine and received an award from the Indian government as first among the fastest grown small and media enterprise companies
In December 2004 Siddartha persuaded the team that it was time for Ittiam to raise expansion capital from a large institutional investor Says Rajam We had turned profitable and announced it so we didn t need capital to sustain our basic operations Our revenues were sustaining 100 people and we could have continued forward this way but GTV said we needed to grow faster If you want to grow you need new products you need to hire managers in places like Taiwan or the US and you need to leverage up your strengths We decided we d accept dilution and we talked to a lot of venture capital firms Bank of America believed that what we want to do is achievable and said they d be with us for five or six years in order to create a leading technology company from India The valuation and the terms and conditions worked out well and they matched our long term vision Their Managing Director for Asia and their chief investment officer who works out of Chicago both offered to be on our board showing how much importance they associated with the investment even though it was not such a big number at 6 5 million
In 2005 the company re organized to reflect changes that had occurred and that were anticipated in the DSP sector Ittiam s System on a Chip SOC unit headed by Ravi Ganesan focused on wireless LAN applications and other opportunities to develop silicon IP described below The media processing business unit under Shatanu Jha concentrated on audio visual applications such as personal media players or digital cameras A new media streaming business unit was formed to push the VOIP business to the next level encompassing products such as the
IP video phone the IP set top box and various forms of media distribution over the Internet This is led by Sattam Dasgupta Says Rajam We realized that a lot of applications would lie at the intersection of multimedia and communications we saw a lot of activity cutting across this area So we created a third business unit for media streaming applications We call it media over IP it includes streaming voice or video over IP networks Sattam took that over while Ravi and Shantanu swapped divisions so each could keep aware of challenges in other businesses Now we have three business units and each has its own embedded engineering
From the start Ittiam intended to license intellectual property instead of performing contract
programming for customers The venture s founders wanted to create a great Indian technology company not just another services company Rajam also had practical reasons for preferring the licensing model explaining In a services model you undertake a project and are well paid for it but there is no IP right that stays with you The customer owns everything and you can t
reuse anything you created You cannot sell the same component or system to another customer you do it once and get paid once You can negotiate price but you do not grow from strength to strength
In contrast you try to resell IP that you own as many times as you can The catch is that one particular customer may not pay as heavily as a service customer would have They might pay a fraction of what it cost you to create the IP Over its lifetime you hope you get more value When we create IP we try to come up with an idea of the fair market value today for it A service model may say that 20 people worked on a project for a year so pay an amount based on that but we need to establish a market value
Ittiam came up with a model for charging customers that was meant to give them a choice of how much risk they wanted to bear Rajam amplifies Say the market value for a personal media player design with 10 algorithms is 500 000 The customer can pay that up front and do what it likes with the design having no further liability to pay anything more to Ittiam However many customers especially in Asia don t have that kind of money and they are not sure whether their product will succeed So we ll share risk by having them pay a fee up front say 100 000 and then a royalty based on every unit they sell that was produced with our technology
We ll take a fraction up front and hope the rest will come over time From their viewpoint we are sharing the risk they bear the damage is capped at 100 000 if they don t succeed Of course we hope we ll earn much more than 500 000 if they are successful
Ittiam s founders aimed for a revenue mix of about 2 3 licensing fees and 1 3 royalties Says Rajam It s kind of a sweet spot When royalty revenues dominate it means you are living on your previous designs not creating enough new designs For the future of the company you should be getting licensing revenues that represent new customers for the future
Ittiam s top management team felt that their venture investors had a right to expect the firm to reach a size by 2009 or 2010 that would permit them to exit if they wished If Ittiam had revenues by then in the vicinity of 25 or 30 million they believed an initial public offering IPO on the Mumbai stock exchange would be feasible If the market capitalization were in the 100 150 million range in line with comparable valuations elsewhere in the world the investors would enjoy solid returns The investors might choose to delay an exit until the company had achieved another leap in valuation but management was firmly committed to ensuring that the investors would have an exit option within a 3 4 year time frame
Yet Rajam believed that even in 2007 Ittiam should think ahead about how to achieve its long term goal building a well known highly respected Indian technology company by 2015 Says Rajam We didn t leave TI to achieve the shorter term goal Our passion was to create an Infosys equivalent in the technology sector If you try to characterize that point it may be very high We also have commitments to hit an intermediate target along that road Accordingly he wondered whether after several years Ittiam would have to change its business model moving beyond licensing and royalties He comments If you think about the maximum height of our current business model a good example would be ARM2
They have 150 million in revenues are a good respectable size and 2 3 of world s mobile phones have ARM IP inside They have influence people respect them and look forward to their road map In a sense if we create a company like that it is a world class technology company even if the size is not that big In six years the Ittiam team had shown how entrepreneurs could take advantage of India s brainpower to build a profitable company that was a leader in its technical area Executing the present business model in order to grow the business to a critical mass was the order of the day in 2007 Yet Rajam wondered what Ittiam might be doing in 2012 in order to pursue the founders dream of building a made in India technology company with a billiondollar market capitalization