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Strategy for Technology companies – Part I or THE RANT

This is my second post on the technology scene in Pakistan. The series got triggered by a request on a report card for the industry in Pakistan.

Strategy for technology companies is something that has never really been discussed threadbare in Pakistan.  Most technology discussions start with a quick comparison with India (look how big they are and how far they have come), a dismal forecast on hiring numbers (we don’t have enough computer science graduates and/or there is not enough enrollment), a quick bitch about commitment and work ethic on the employee front (everybody leaves for a buck more), and close down with a final weak moan about how the government is not doing enough for us.

So let’s look at strategy. From a purely strategic point of view here are some bold predictions. These should get me into even more trouble than I am already in.

1.       We will never be like India.  For the simple reason that the Indian environment, legacy and economic drivers are very different.  They have numbers, we don’t; they have scale, we don’t; they have a network, we don’t; they have commitment, we don’t. Settle this and get over it. When it comes to a number oriented strategy the Indians or the Chinese for that matter will always win.  Let’s not play that game.

 

2.       One (1) above implies that there will never be a Pakistani Infosys, HCL or TCS. No 60,000 employee company, no sprawling, custom campuses, no pressure to hire 29,000 employees in a single year. Is that a bad thing? If you were thinking of winning that way and leaving your Indian competition in the dust, then yes it is. There is nothing but a dead end in that direction.

 

3.       If there is one technology marketplace in the world that we will or can or should end up like, it is Israel.  The Israeli strategy is a product focused, intellectual capital based, non-numbers game. It is a play on creativity and leveraging their domestic resource profile.  The Israelis are not at all confused about who they are and where they want to be. (That would be us). This is a game we can possibly win.

 

4.       Three (3) above implies that product focused companies like Pixsense, MixIT, Mobile complete, Iscrybe, Kolachi, TPS, Autosoft, Avanza, Post Amazers, etc at some point in the future may sell for a few hundred million dollars each.  Even the largest players in our space, System, Sidat Hyder and Techlogix are transitioning into product focused practices that may not sell in the next decade but can certainly go public at a 100 million dollar valuation within the next 5 years or earlier if they so desire

 

5.       An alternate strategy would be for a private equity fund to buy product companies or portfolios across a niche or vertical market in Pakistan and roll up 5 practices into one firm with a solid end to end product line (thank you Yusuf Jan for this concept though you will hate me for publicizing it). Within the Pakistani market valuation multiples run at 2 – 3 time gross revenues or 8 – 12 times earnings (EBIT or earnings before interest, taxes and distributions). With the right track record – growth, profitability, market share and execution ability you may command a higher valuation.  So if I had a fund of 50 million US dollars that was sitting idle, I would pick four more firms with  complementing product suite, integrate, execute and flip the new and upgraded animal at much higher US and/or European multiples within the next 5 years. My estimated return over a 5 year period would be what VC’s call a 5 or 10 bagger (aka a 500% or 1000% return on your investment).  Part of the jump would be simple multiple arbitrage between desi valuations and gora valuations.  The remaining jump would come from scale benefits on the marketing, research and development and administration side.

Assuming I am right (which is a big if) what are the implications for the industry and the education system feeding it.  

From an industry point of view we need more product focused companies in the funnel.  So if you are pissed at your boss or life in general and are looking for payback by doing your own thing – do yourself and the industry a favor. Do a product focused startup.  Don’t do custom dev, don’t do BPO, don’t setup a call center, don’t run after outsourced work.

If you are looking for ideas, don’t be creative; steal something that has already worked in North America and Europe. Execute it well and you will find that there is a market for the same solutions here.  Payroll processing (ADP), Check Imaging and Reconciliation, Retail brokerage (MixIT, Kolachi), Index funds, Ebay (lootmar), Elance (virtual women network), Paypal (amanna), Monster (rozee, workjunction, Brightspyre)… you get the drift.

Yes it would be nice to have multiple technology parks across the country to support all of the above. Cheap real estate is nice and so are subsidized utilities. But God forbid that doesn’t happen, will it really hurt?  For a product focused company the answer is no. You are looking at gross margins that run at 80%, net margins at 35%.  Saving 5% in rental and another 5% in utilities will certainly help and add value if it is done, but you are not exactly dying for these benefits.  Having said that, there are efforts in the pipeline, National Industrial Park, being one that will come on-stream within the next 3 years in Karachi and select cities in Punjab and NWFP.

My biggest gripes however, remain with academia and parents. 

Academia first.  We need to do a lot more at the undergraduate and graduate level on the entrepreneurship side.  I am not talking about the lone course or seminar or guest speaker on new ventures.  I am talking about a complete change in curriculum that focuses on product development, gorilla marketing, startup finance, and bootstrapping. In addition a change in mindset is required, where Universities do the MIT and Stanford model of encouraging kids to take crazy risks with their idea and supporting them by providing temporary office space, connectivity, accounting, back office and protection from the government (more on this later).  Not the IBA model that says that yes we would like you to participate in a business plan competition, but it would not be appropriate for you to follow this through while you are a student at IBA.

Parents next. I don’t know how to say this. Let me try. You need to stop fucking up your children’s lives. There is more to their existence than joining an MT program at a bank that will most likely be sold in the next 2 years. You need to let them live the life they need to live rather than the one you always wanted to have but were too afraid to ask.  There I have said and it is out of my system.

You may think that I came across too strong. I have my reasons, four of them. Four years ago, I taught a semester long workshop at SZABIST, Karachi, on bootstrapping new ventures.  There were 12 plans. There were four that I would have killed to fund, if only I had the fund. One was an ebay for Pakistan that later became lootmaar.com. The other was a home delivery service, sort of like Webvan for Karachi. The third was the equivalent of a PierOne, the fourth and final was Wimax, four years ahead of its time.  All four were shot down by their families. Adnan and Adeel went to IBM and TPS, the webvan kids went to Unilever and Aptech, the PierOne team went abroad for their MBA and SSGC and of the WiMax kids, Lu switched three jobs before a truck on Shahrae-Faisal drove over the promise in his life.

They may have failed miserably and crashed and burned, if they had tried but they would have learnt enough to come back with a bang the next time an idea knocked on their doors. Adnan finally saw the light, dumped IBM, opted for a fullbright scholarship and has been working fulltime on lootmar for the last one year. He already has an incubation offer and funding lined up.  And he won the Duke Business plan competition plus 100K US in funding for a venture his project team was working on.

The sad part of the story is that this year I taught another 5 day workshop at SP Jain on Entrepreneurship in Dubai. Once again 12 plans came forward.  This was the ex-Ed program so the average age in my class was 30 plus.  All of these students had dreams, but it had taken 10 plus years (in one case 25 years) of their lives to find the conviction to step outside their comfort zone.  Four of them (just like SZABIST) will make it.  The rest will crash and burn or possibly never give it a shot.  My sorrow lies in the ten and more  wasted years of their lives. My only consolation is that I was able to subvert Adnan in four years. And he will either be eternally grateful or never ever speak to me again.

(To read more about Adnan and his story check out http://blog.lootmaar.com).