Tejas Networks is bringing credibility to the market: Gururaj Deshpande

Indian-American entrepreneur and venture capitalist Gururaj 'Desh' Deshpande is an investor in Indian telecom networking equipment company Tejas Networks. He is also the company's Chairman. In an interview to Business Today's Goutam Das, he explains why he thinks the company can do well against stiff Chinese competition.

Q. There is clearly some turbulence in the Indian market, with telecom operators not spending on capex over the last two years. Tejas has shrunk from a high of Rs 700 crore. Where do you think the company is heading?
A. The future opportunity for Tejas depends on two things. One is the domestic market and the other one is the ability to penetrate internationally . In international, if you look at all the traditional telecom equipment companies, like Alcatel etc., these companies used to have a huge margin 20-30 years ago. Technology wasn't quite capable of what people needed. So when people invented new technology, they could build a very healthy company with high margins.

Now, there is true progress in technology, but the technology is primarily being pushed to reduce the cost and implement it easily. So it is more cost reduction instead of capability. It is going to be harder and harder for companies in the developed world to build profitable businesses based on technologies. There the market really belongs to China and India. As we know, China has done an amazing job of conquering the market. They primarily did that by preferential market access in China and also the government investing heavily in R&D.

I think the opportunity for Tejas internationally is to partner with lot of these companies in the developed world - we already have a couple of relationships so far - to access that market. Also, access it directly. In the developed world, marketing is expensive so Tejas does it through partners. In the developing countries of Asia, Africa, and the Middle East, they are doing it directly.

The company is doing okay and is growing in this piece of the market, and it needs a little bit more investment in each of these countries. Internationally, the opportunity is really not to invent a brand new technology but to keep up with the technology and have cost-effective solutions that we can partner with the non-Chinese vendors.

Q.What is your sense of the domestic market opportunity in India?
A. There are two parts - one is the market itself and secondly, the ability to do this kind of business. The hi-tech companies in India are just maturing. We went through a huge expansion of the market where technology is being developed, but for other countries. The next big wave has to be India developing technology to solve its own problems. But this issue has two problems.

One is that it is a product business in which case you invest very differently, and secondly, the credibility. Tejas is probably doing a good job of bringing credibility to the market and saying that given an opportunity, people in India can actually develop products that are as good as what you can buy internationally.

If we had spoken to Tejas seven years ago, people would not believe even if you showed them. And India has got some growth left. People are taking about the whole economy, education and information that has to reach every village, the data has to become available on the wireless. All those are creating opportunities and we have to see how all this gets played out. But it looks like that India is waking up to the opportunity of saying we should use preferential market access as a way to build the companies in India.

Q. Going back to the international market, are there any data points that suggest that Tejas is winning against Chinese competition?
A.Yeah. They are in winning in countries like Kenya and Bangladesh directly. When we team up with other companies, they win against Huawei.

Q. I wanted to ask about Sycamore Networks. When Tejas started in 2000, they resold Sycamore's products in India. The company was not doing anything different from Sycamore. How different is the Tejas story now?
A. The magic of was Sycamore was technology. Our revenue growth was just humongous. When people built networks before Sycamore came along, we took forever to get some bandwidth in the US. The magic of this technology of laser beams was that you can send 200 laser beams on a fibre. It became very affordable. To the optical technology, we added the software to bring down the provisioning time from six months to six days to real time. People could get huge amount of bandwidth on the wide area network very quickly, and that sort of started the growth.

So where did the Sycamore story get into trouble? When we had a huge market cap of $40-50 billion, every venture guy wanted a Sycamore Network. There were about 250 Sycamore Networks. And then all the big guys - like Alcatel, Nortel, Lucent - said in two-three years Sycamore had more market cap that they did. They all invested huge amounts of R&D in the same optical technology. And then suddenly, the industry found that the capability of the technology was huge - 200 laser beams on a fibre - and people could barely use five or six. The technology overshot big way in terms of what it was capable of doing and what was needed. When that happens, it becomes a commodity market. When it becomes a commodity market, that's not Sycamore's strength. We saw that structural change and we managed the business profitably, so that the stockholders could get the cash back. We returned all the cash.

So how is it different from Tejas?  When Tejas got started, in the first 18 months, they developed products and helped Sycamore design and instal networks globally. The third piece was reselling Sycamore in India.  I remember the conversation with the founders of Tejas in Mumbai. I said you have two options - either become a part of Sycamore or you can build a product company in India. All three of them said they wanted to build a product company in India. They have stuck with it. Sycamore was trying to do the very high end of the technology, something the world hadn't seen before. Tejas was doing more of a business plan innovation.

Q. What has been your investment in Tejas?
A. It is $30 million or so. I have invested in every round.

Q. Given its technology and its interesting business model, doesn't it make Tejas a very good acquisition fit for some of these non-Chinese companies?
A. May be, maybe not. Part of the reason why Tejas can do all this is because the CTO, the CEO, the senior management are all based in India. I think western companies should be a little careful. In 2000, a lot of VCs in the US said it was a great model - companies would have CEOs in California and the team in India and they said they would go after the Indian market. That does not work. If you want to make 15-20 per cent bottom line on a 40-45 per cent margin, you need a team in India which can sort of drive with their cost models. As soon as you get a western company involved, by the time they make a couple of trips to India in first class, they have blown all the margins for the next two years. For the software industry, it is okay, because margins are high there. When margins are low, you need an Indian management team.

Q. Three years back, Tejas used to talk of going public. That obviously is no longer the talk, which means there has been a re-think…
A. Lot of this depends on your own confidence. This year, they are doing pretty good growth from last year's base. And they see continuing growth for the next few years. But I think it is good for them to actually deliver that growth and then get distracted with bigger opportunities and fundraising.