Varun Dhanuka, MBA '09

Business Politcs - A new course for Sloan?

My first encounter in the real world - Business Politics.

A brief context: After graduation, a few Sloanies and I started a renewable energy consulting company, Geospan Energy Group. Thereafter, we soon landed our first engagement and client through the MIT network. Through this engagement in the last two months, I felt business school armed me with all the skills necessary to succeed except one - Business Politics

Dont confuse business politics with business ethics. Ethics is a big deal and it gets drilled into your head. Politics is a different story.

A big component of my first project has revolved around business and corporate politics, which has led to changing goals, significant rework, and project speculation. I am sure there is something to be learned about business politics that will focus the project towards efficient execution. Or maybe its instinct related? Either way, I will grab a book and try to get smart on this subject.

Before starting this blog, I checked the MIT Sloan course schedule and did not find any course offered on Business Politics. Whether or not Sloan offers courses in business politics, I think it is important to find a class across campus (in the political sciences department) and train yourself.

A side note on the future of the MBA Class of 2009:

I hear that most of my classmates (about 80% of the class) have landed job offers and found nice opportunities to begin their business careers. However, there are several others (I know of 20 classmates) that are doing freelance consulting (this is pretty easy to find through the MIT network) for now and keeping their heads above water waiting for the perfect opportunity. I have just approached my freelance efforts in a structured startup - Geospan Energy Group

Electric Vehicles in China

Two other Sloanies (Salil Gokhale and Andy Hider) and I spent the whole month of January in Hong Kong and China advising a PE group an electric vehicle deal. The PE group is acquiring 8 small companies in China (which we visited and conducted due diligence on) to create a vertically integrated electric vehicle company. The acquisition targets included lithium ion battery company, auto parts companies, design companies, and manufacturing factories.

To see manufacturing and deal execution in China was extremely valuable. From a western viewpoint, I felt that the manufacturing facilities were far more advanced than I had expected at the onset of the project. There were few key takeaways that I have summarized below.

           

Business in China

• Most business dealings are dependent on faith. It is uncommon to ask probing questions but as a foreigner it was easier for me to be ignorant about the culture.
• Size of the corporation is more important than profitability. A low-margin business with higher volume sales is preferred over a high-margin business with lower volume sales.
• Drinking (which I had no problem with) with business partners is a must. Although, the 60% alcohol in the Chinese wine was too much for me.

Cleaner vehicles in China

• The market already exists and the government is accelerating adoption for such vehicles. There are 100 buses running in Shanghai on a combination of Li-ion batteries and ultracapacitors.
• BYD has introduced a $22000 PHEV - 60mile sedan in the Chinese market and is ready to launch the same F3DM model in the US later this year.
• Electric bikes are commonplace. They are cheaper than gasoline powered motorcycles and require no effort compared to the manual bicycle. All in all, a perfect option for the rural and urban low-income population. 
• China is on its way to playing a significant role in the cleaner vehicles market!

Infrastructure in China

• When I landed in Beijing airport, I saw 70% of the gates had no aircrafts taxied. The Chinese overdid the size of the airport in honor of the Olympics, but the airport is top notch.
• The high-speed train from Beijing to Shanghai took us only 6.5 hours and the comfort level was great.
• The locals and residents of China have still not caught up with this rapid infrastructure growth. The people seem to be almost a decade or two behind the infrastructure. For example, there are four traffic police cops enforcing zebra crossing discipline at red light intersections in Shanghai. 

This trip was an eye-opener and I hope to have many more opportunities to unravel the mysterious Dragon...

Is Venture Capital affected by current crisis?

NOT MUCH FOR NOW, is my answer. First it is important to understand the difference between the venture capital and private equity. The private equity model is based on first finding investment opportunities and then raising capital to finance the deal. Therefore, the PE market has been hit by the economic crisis because cheap financing is not available even if a PE firm can spot good investment opportunities. Venture capital does the reverse.

A venture capital firm will first raise enough capital to finance a minimum of 5 deals and then look for investment opportunities. Therefore, even in the current market scenario, a VC has money in his pocket to invest in opportunities. Typically, a venture firm will raise capital every 3 years. Further, the venture firm is obliged to invest this fund over 3 years so that it can see returns on the investment in 7 years (i.e. the longer you take to invest, the longer you will have to wait for the returns). Therefore, it would be incorrect to say that a VC firm is making fewer investments every quarter to extend the life of its fund. 

I agree that new money is not flowing into venture capital because the limited partners are facing a cash crunch. However, there are plenty of funds raised in the bubble of 2006 and 2007 that are looking for investment opportunities. I know for a fact that 5 funds, each north of $400M, dedicated to energy investing were raised so far this year. Looking into the future, I believe that venture capital funding will be hurt if the markets don’t stabilize within a year. For now, I think, any VC using the economic crisis as an excuse is only trying to get better deal terms from an entrepreneur….

Recruiting for Venture Capital

I am a second-year MBA student now (still can not believe it) who is being asked for VC recruiting advice by first-years. So I decided to distill some of these conversations and blog about a couple of key points. It might also help my parents (avid readers of my blog) understand my summer job and future plans :)

Venture Capital is very little Finance - Venture Capital deals more with technology risk, people risk and product market risk. With such unquantifiable risk, financial modeling does not yield a compelling valuation. VC deal valuation is based on "use of funds" necessary to get from this round to the next round of financing. Therefore, as a VC, it is important to be technically sound (which is why lot of VC's hold graduate degrees), and competent at judging people. Financial modeling and the use of finance concepts starts when a company raises Round C financing. At this stage, PE firms start to lead the financing rounds. Keep in mind that this is a very simplistic view.   

Most venture firms do not have job openings in a normal course - Only when a new fund that is significantly larger than the previous fund is launched is an opening created, otherwise the opening has to be created by an extremely motivated candidate. How do you do this? There are several ways an entrepreneurial person can achieve this :) I reach out to venture funds and offer my expertise in the energy space to help out on portfolio companies or perform due diligence on a company. Ventures firms love to have smart students help out because most investment professionals are always over worked. An extra body allows the VC's to evaluate and be knowledgeable about deals that would have fallen through the cracks in your absence. As a result, you tend to become part of the investment team and an opening gets created for you. Disclaimer: I do not guarantee this will work but worth a try...

VC Strategy: Opportunistic or Synergistic?

The cleantech venture industry is in a learning stage and most funds are starting to build their portfolio of cleantech companies. How do you build this portfolio of companies? Do you make opportunistic investments? Or do you make focused synergistic investments? Which of these strategies will provide the cleantech winners? Or does it even matter to be thinking about this question?

Cleantech can be classfied into several sectors (in case cleantech is new to you the sectors would be solar, wind, water, waste-to-energy, storage, carbon management, building materials, biofuels...) In my opinion, building a portfolio with one company in every sector is an opportunistic strategy for a VC fund. On the other hand, focusing on a couple of sectors and attempting to capture the entire chain in this sector is a synergistic strategy. Each portfolio company would then look like a business division of a vertically integrated company. For example, in the waste-to-energy industry I have seen plenty of start-ups with different gasifier technologies. However, they lack alliances for waste sourcing, technologies for waste sorting, and a marketable energy product (i.e. electricity, methane, etc).

Most waste-to-energy companies generate syngas (as their product) with impurities that needs capital intensive cleanup and processes (i.e Fisher-Tropsch, water gas shift, combined cycle) to generate marketable energy products. A VC fund with an investment each in waste sourcing, waste sorting and efficient marketable energy product processes, would have a significant edge compared to its competitors. However, the downside to such a strategy is that good start-ups in a particular space are not always available. This can lead to a sub-standard investment in the space and passing over good opportunistic investments elsewhere. Does a fund risk being synergistic in search of an edge or be content with opportunistic activity? Any thoughts out there?

This upcoming week is my last at Flagship and I have thoroughly enjoyed my experience. My biggest summer takeaway is my tremendously improved ability to work with ambiguity. I am now looking forward to a 2 week vacation in Iceland and Eastern Europe before heading back to school. Details on the trip to follow...

Can cleantech depend on "High Willingness to Pay"?

In strategy class last semester, I understood the concept of business dependency on high willingness to pay or low cost to be profitable. High willingness to pay products are items that command a price premium for superior product quality, durability, customer service, uniqueness, social stature, or other reasons (i.e. Apple, Honda, Rolex, Mont Blanc). Low cost products are items that compete on price by cutting costs through innovative processes, exclusive supplier relationships, off-shore manufacturing, reducing inventory or other approaches (i.e. Food, Airline tickets, Gasoline, Electricity). Can cleantech move into the high willingness to pay category instead of the low-cost category?

Yes, only if businesses are able to provide some value for the price premium. The Toyota Prius, which is 40% more expensive than a comparable car, has done it by giving social stature, an intangible value, to the car owner - "A green person". On the other hand, highway driving habits of the car owner have remained at 75 mph (for almost all Americans) even though fuel consumption is 20% lower at 55mph. Is the person really "green"? measuring by social standards, the answer is probably yes. Why? My contention is that one action (buying Prius) is visible and the other action is invisible (driving habit) to the car owner's social circle of friends and family. Therefore, cleantech businesses can depend on high willingness to pay as long as they can make their product visible to a customer's social circle.

Granted that I was not the most attentive student in Strategy class, I do appreciate the concepts in hindsight (as you can see above). All potential MBA candidates out there, rest assured that lack of attentiveness will get you cold called in class :) And so, I was cold called in strategy class during the discussion of PIE (Potential Industry Earnings) and High willingness to pay. This instance sticks out most in my memory because I fumbled through some non-coherent responses leading to some awkward glances and a final comment from our Professor - "This discussion is not being productive, we need to move on." Everyone in class got a good chuckle out of it :)

Start-up businesses need to be aware of the above concept and have to (in my opinion) accomodate this thinking in their business model. It will make their business profitable sooner, more attractive to investors and sustainable in the long term. 

Not much "venture" activity in India

I was in Mumbai, India last week for a family wedding, when I talked with some local venture capitalists and researchers about the research, development and commercialization scene in India. The discussions made me question if there was a fundamental difference between the venture industry in the US and India. The American venture industry will typically invest in companies with unique or innovative technologies / solutions in exchange for equity in the company. Such investments are risky but provide a huge upside in case of success.

In India, the venture industry is investing in companies that would be considered debt financable in the American context. A typical Indian VC portfolio includes stakes in hotel chains, coffee shop chains, textile companies, clothing designer labels, and hydropower projects. Below are some of the reasons that came across from my discussions:

• The Indian financial industry (i.e. banks) is in a nascent stage, very conservative and not comfortable providing debt financing to small companies.   
• The Indian government R&D spending is about $7 bn (0.2% of GDP) compared to $140 bn by the US (1% of GDP). Further, most of this small Indian R&D budget is being spent on developing facilities and purchasing equipment. There is very little in terms of innovative technologies / solutions to commercialize.
• Given the growth rate of the Indian economy these investments provide healthy returns to venture funds, are less risky and hence make sense for their portfolio.

The VC's have filled this gap for small companies by providing growth capital and forgoing the "venture" nature of their investment strategy. Any VC's looking to raise Indian funds should consider the above and evaluate the expertise they have and the expertise they need to be successful in the Indian environment.

By the way, it was great to be part of an Indian wedding after 10 years and experience the dozen odd ceremonies that lasted 4 days. If you ever get invited to one, make sure to attend!

Energy Industry: What about human capital?

With the Dow moving into bear market, every manager with an investment responsibility is placing it in the energy/cleantech space -- it does look like the safest investment in this market. A friend was recently hired by a hedge fund to invest a dedicated $150 million in venture-backed cleantech companies. I trust there are other investment institutions doing similar things. Given this, there seems to be plenty of financial capital available -- but what about trained and talented human capital. The energy industry went through a hiring freeze in the 90's (the booming tech industry was another factor). This has left a void of talented individuals, both on the technical and management side, in their late 30's or early 40's with enough prior expertise and sufficient remaining work years to build a company. I am spending my summer in venture capital at Flagship Ventures focusing on energy investments and have seen only 3 entrepreneur backgrounds in this space -

1. Entrepreneurs with 30+ years of energy expertise. Cons -- long-term entrepreneur health

2. Entrepreneurs with Hi-Tech experience switching to the energy space. Cons -- lack of industry expertise

3. Smart student entrepreneurs. Cons -- lack of technical and management experience

The New England Clean Energy Council (NECEC) has stepped up to address the lack of management talent through a Fellowship Program that provides training to established entrepreneurs, with a proven track record, transitioning from a different industry into the energy space. But, how do you address the lack of technical industry skill? This in my opinion is a big factor in the slow progress made by an industry that is resistant to change. To me, this is the a cause of the energy industry being termed as a "financial capital intensive" industry.

This has been one of the highlights of my brief VC experience. More to follow.....