As a partner at Lightspeed Ventures, Bipul Sinha primarily focuses on the software, mobile and internet space, with a particular interest in cloud services and infrastructure and social utilities and apps. An engineer from IIT Kharagpur and MBA from Wharton, Sinha previously worked at Blumberg Capital, Bank of America and Oracle, among others. His favourite hunting ground for entrepreneurs is LinkedIn. In fact, Sinha once reached out to an entrepreneur just two hours after he changed his LinkedIn headline from vice-president of a company to ‘entrepreneur’, spooking him a little. When he is not playing Big Brother in the venture capital space, Sinha is a self-confessed political junkie who predicts that India is headed to a hung Parliament after Lok Sabha elections next year.
As venture capitalists, we are always on the lookout for disruptive technologies, for people with unproven but big ideas. And when your focus is on enterprise technologies, you are working with a vast canvas, which extends from infrastructure technologies such as storage and databases all the way to business applications and analytics. It’s quite different from consumer tech and you have to necessarily look at companies and invest in a very different way.
By definition, venture capital is risk capital for starting a new venture. But in consumer companies, the products are not overly complex — in fact, they are simplistic — and don’t need a lot of capital. What consumer tech companies need is very early experimental capital and then very large scale capital — there are no in-betweens. To my mind, that is not really venture capital; it is angel capital or growth capital. But look at the enterprise space, where people are raising $5-10 million — and you don’t know how far you will go with that $10 million. If you put $5-10 million in the consumer space, you already have the trajectory. In enterprise, even with $5-10 million, you are still very early in the game and there are tonnes of product-market risks ahead. That is why it is real venture capital. And if you see the history of venture capital in Silicon Valley, it was built on these kinds of technologies — the consumer space is a relatively newer game.
Not surprisingly, then, the way you approach consumer tech and enterprise are very different, although with any investment, venture capitalists deal with three fundamental issues. The first is financial risk, particularly when you’re putting in first money and there is no validation. Second is the execution risk and third, the product-market risk. Simply put, you need to build the product, you need money to execute the business and you have to be sure there is a market for the product.
In a consumer play, the product risk is very low — it can be as simple as two chaps who may not have gone to school building an app. But the market risk is really high — nobody knew Snapchat was possible until they saw the app. Now, when you look at Snapchat, marketers say consumers will like the product. But when Lightspeed invested in it, there was no validation that a market existed. And since market risk is high, future financial risk is also high because if the market does not respond, you won’t get money to go on.
In the enterprise space, the situation is reversed. The way enterprises work has not changed fundamentally. What technology is doing is making things more efficient — everything that enterprises did manually is becoming automated and the business is about building workflow applications to improve productivity. The market risk, then, is relatively lower. But the product risk is higher since you need to build an enterprise-strength product that people can run real businesses on.
In search of disruptions
To understand what’s happening in the enterprise space and where the disruptions are taking place, let’s look at the context. The enterprise space can be divided into enterprise infrastructure and application. In the infrastructure space, VMware was the true disruptor of the ecosystem. Instead of tight coupling of applications and hardware, VMware created a fluid mechanism where the application can reside anywhere in the cluster without worrying about the physical hardware it is tied to. What happened as a result was that people started thinking that not just computer memory and processing power, but even other resources that are tied to the hardware can be fluid. The new investment area that started to emerge as a consequence was about providing resources to these applications running within the virtual machine in a way that it is disassociated from the physical hardware that it runs.
This was a theme we started identifying very early on. Nutanix, for instance, was the first company to say you don’t need old-style storage if you are running a virtualised environment; instead, server resources can be pooled to provide new storage.
There was another impact of virtualisation. It is a self-contained entity where everything you do is contained in the closed environment and that idea led to Bromium’s micro-virtualisation technology, which contains everything you do on your laptop in a virtual machine. So, even if you are infected (with malware or a virus or any other security threat), you aren’t infectious — it can’t go anywhere else.
On the enterprise applications side, in the 1990s, the first wave of enterprise applications was all about best of breed. Companies such as PeopleSoft and Ariba were all specialists in one or two areas and had related applications. That gave rise to two issues. The first related to taking data out of this disparate system and doing cross-subject area business intelligence. The second was that these isolated applications needed a suite configuration where you could work with them at the same time. You could take a process order and put that in your finance system; or a new employee had implications both in HR and finance. That is when Oracle and SAP set out to create such suites by buying over relatively smaller players and combining their capabilities.
Fast forward to the present. Now, we have SaaS (software as a service) applications that are again best of breed — there’s Workday providing HR, Salesforce providing CRM etc. But again, no one company has a suite of applications. The issue then is, how do you take these disparate systems and create overlay technologies? Remember, businesses have not changed; what has changed is the way they consume IT services or applications. So, the newer technologies have to made accessible to them so they can run their businesses. Numerify, one of our latest investments, is an attempt in that direction — this is an India-US hybrid company that does cloud-based business analytics.
The road ahead
If virtualisation and Flash are the core drivers of enterprise infrastructure, what we are seeing more and more is a movement towards reduction of complexity and greater ease and standardisation of hardware. Hardware is becoming commoditised. I believe in the not-too distant future, we will have a world where the data centre will be full of standard, x86 Intel boxes and it will be software that assigns roles of computing and storage to boxes. People will buy standard hardware at commodity prices from a number of commodity vendors, just like you buy rice and sugar. The differentiator will be software.
Of course, it is easier to manage a world where one box is network and another box is storage. With software, complexity will increase. So, the next wave will be companies that will simplify the interface for administrators and hive off the complexity of this new software interface. What we are seeing now is a “scrambling for the continent”, where some will say they are software stores while others will offer software networks. But the real battle will be over who can holistically manage the infrastructure. In a way, what we are doing right now is creating all the problems by keeping software, network and storage separate. Later, we will have to find solutions that tie these together holistically.
The trend in the application side of the enterprise business, though, is quite different. Economic cycles everywhere, especially in the US, are getting squeezed — they are shorter and more frequent. That means businesses need to be more agile to react to these cycles. The monolithic systems that were built in the late 1990s or early 2000s took close to three years to implement and put in place. A number of consultants from various countries, such as Infosys and TCS, worked on these projects and made huge amounts of money. The implementation time was so long that businesses couldn’t cope with economic cycles, but there was no alternative at that particular time. Now, with alternatives such as remote delivery and alternative data centres, businesses are no longer managing huge factories of machines. Someone else manages the applications, while they consume them.
In times gone by, if a business wanted to move from one data warehouse to two, it had to hire consultants and redesign the data structure — there would be 50 people working on the project for two years. Now, they can have four warehouses in a few weeks. The economic cycle is going up at present and people want to expand and ascend with it, which is driving fast, cloud-delivered applications. Start-ups in the apps space that help make companies more agile in reacting to business cycles and help create strategic advantages for them are going to win. For instance, B2B businesses are doing more internet-oriented marketing now. Earlier, the marketing team would use a spreadsheet that had Google adwords. Now, they want everything on one dashboard for faster management. And apps that help them do that will succeed.
Enterprise businesses have a longer gestation period than consumer technology businesses. And the inflection points in enterprise businesses usually happen before they go fully public. That is where the investor’s role becomes important in enterprise businesses, especially when the company is in stealth mode. The investor has to be the support function for the entrepreneur, help them hire the right people, identify early customer partners and build credibility. As venture capitalists, we advise entrepreneurs on what to watch out for, and remind them of certain tasks since they’re busy building the companies. The job is sort of like being a doting father. You want to show your children all the options and then step back and let them take decisions. To my mind, this is the most interesting phase of the company. It is also when I am maximally involved. When the business takes off, I cut the apron strings and back off.
