Seriously clueless

India, private equity and more ...

Thursday, December 22, 2005


Like all bloggers, its only a matter of time before I write about the MSM! In this case, I'd like to complement the MSM. Personally, I think the two recent sting operations are fantastic. First, the expose on questions-for-cash in parliament. The second one highlighted corruption in the local area development funds allocated to each member of parliament. Such operations not only help apprehend corrupt individuals, but make others think twice before going down this path.

I am a firm believer in the power of a free market. I see this as an indirect effect of free-market-competition in reducing corruption. Liberalize media. Lots of competition. Each channel is forced to innovate. Adopts technology (spycams) and new ideas (sting ops). Gains viewership and ad revenues. Laughs all the way to the stock market. I havent done the math, but would guess that sting ops yield better returns than buying expensive cricket or movie rights. Nothing like making money, with reduced corruption as a side-effect.

Notice that I havent mentioned anything on morals, good-evil, values, ethics and the like. Like everyone else, I cherish all of these, but realize that on their own, these have done zilch in reducing corruption on a large scale. My problem with corruption as much economic as it is moral. Corruption ranks very high on my list of factors hindering India's development. I see this as a tax, that's literally charged as a % of GDP by various government functionaries, eating into funds allocated for infrastructure, rural development, health, education, you-name-it. Even an incremental reduction in this tax will directly add several percentage points to GDP.

I realize that markets are imperfect. We'll always have market failures and distortions. In my own home state, the leading TV channels are owned by political parties. Similar to pathogens, politicians are quick to develop immunity and workarounds against any medicine. They'll get smarter at outwitting spycams. Thanks to the free market, the media will match politicians stride-for-stride, in coming up with better ways of generating scoops. Bribe-takers will have to be more alert than before. The heightened threat of exposure will make people hesitate. I am not naive enough to think that a few spycams will eliminate bribes. However, on the margin, we'll see a decline in corruption. The additional 5% freed up for its intended purpose can make a significant difference.

There are the usual arguments on ethics and privacy, against such sting operations. While these are valid in their own right, I couldnt care less if the outcome benefits efficiency and development!

Wednesday, December 14, 2005


All of us go through those "Why do I even bother" moments. Here's one of mine: It's 9pm. I've just spent the last 3 hours poring over gory legal documents (I didnt know this was part of the job description, when I joined venture capital). Just when I thought I'd seen it all, I run into the following work of art:

Any other acts whatsoever beyond the reasonable control of the Party affected, then the Party so affected shall upon giving prior written notice to the other be excused from such performance to the extent that such cause prevents, restricts or interferes with it PROVIDED THAT it shall use its best to avoid or remove such cause of non performance and shall continue performance hereunder with the utmost despatch whenever such causes are removed; then upon such prevention, restriction or interference as aforesaid arising, the Investors and the Company shall meet forthwith to discuss what modifications (if any) may be required to the terms of this Agreement in order to arrive at an equitable solution.
I read it once. I read it twice. I read it thrice to confirm that this is actually a single sentence. I swear loudly in Tamil (somehow this activity is a lot more fulfilling when done in the vernacular). O@$#$a o@#$a. Finally understand (not the sentence but) why there are so many lawyer jokes.

Wednesday, December 07, 2005

Building India's leading budget hotel chain

We've made our first investment in the Indian travel sector!!! Bessemer has invested (along with New Vernon Private Equity) Rs. 38 crore ($ 8.5 million) in Sarovar Hotels, to build out a chain of budget hotels in India, under the Hometel brand.

The simplest way to express Bessemer's investment philosophy is "We back strong entrepreneurs addressing large markets". Our investment in Sarovar fits squarely with this philosophy.

Sarovar is India's largest hotel chain in the mid-market segment, managing 35 properties in the 3/4-star category. Sarovar's MD - Anil Madhok - has 40 years of hotel management experience, including the last decade as an entrepreneur, having founded Sarovar in 1994. Anil and his team have the unique combination of extensive hotel management experience in India, expertise in the mid-market (as opposed to premium) segment and a successful entreprenurial track-record with Sarovar. They have scaled up Sarovar into India's leading hotel management company in just over a decade.

You've probably read at least one article on India's hotel room shortage (India has fewer hotel rooms than Manhattan)! If you've travelled in India recently, feel free to share your personal anecdote on paying an arm and two legs for a hotel room. India's hotel room shortage is most acute in the budget hotel segment. If you are looking for a hotel room under Rs. 3000/night ($65), you have very few options where you know what you are getting into. Hotels in this price range are highly variable in quality, cleanliness, safety and service. Except for one Tata IndiOne hotel in Bangalore, there are no brands or hotel chains in this segment. As I've written in an earlier post, the largest opportunities in India are for those offering good quality products/services at prices that are affordable to the mass market. Hometel aims to do precisely this.

So, what does Hometel offer? All the basics - central a/c, hot/cold water, TV, direct-dial phone, mini-fridge, tea/coffee maker, writing desk, electronic locks, WiFi - at an affordable price of Rs. 1500-2500 per night ($35-55). What is doesnt provide are the frills - multiple restaurants, large lobbies with chandeliers, swimming pool.

Similar to low-cost airlines, budget hotels need to be designed and operated very differently from their full-service counterparts. Budget hotels are about consistently good service, value-for-money pricing, low capex per room and reduced opex (fewer staff, no-frills). The first two factors ensure high utilization (revenues) and the next two drive profitability. This is clearly an execution game, where Sarovar's expertise is critical.

We believe that Sarovar's team can execute to plan and become India's leading hotel chain in this segment. Sarovar plans to cover both metros and (more importantly) smaller cities where finding good accommodation is even harder. The first Hometel will open in Bangalore in January 2006. Pune, Mumbai, Jaipur and Hyderabad are in the pipeline. 50 Hometels in 5 years is the target. Personally, I think the opportunity is large enough for a lot more!

Press coverage on our investment in Sarovar - 1, 2.

Friday, December 02, 2005

Wise guy

Having written two original posts last weekend, I'll take the easy way out and use borrowed content. I happened to read this interview with Warren Buffet earlier this week. Blunt, simple, witty and wise with his words and thoughts. Here's Warren Buffet (the emphasis is mine) on: Career advice

If you want to make a lot of money go to Wall Street. More importantly though, do what you would do for free, having passion for what you do is the most important thing. … A few months ago I was talking to another MBA student, a very talented man, about 30 years old from a great school with a great resume. I asked him what he wanted to do for his career, and he replied that he wanted to go into a particular field, but thought he should work for McKinsey for a few years first to add to his resume. To me that's like saving sex for your old age. It makes no sense.
When making investments, pretend in life you have a punch-card with only 20 boxes, and every time you make an investment you punch a slot. It will discipline you to only make investments you have extreme confidence in. Big money is made by obvious things. If using a discount rate of 8% vs. 10% is going to make or break an investment idea, it's probably not a good idea.
When Berkshire acquired a 90% stake in NFM in the 80's, Ms. B and I shook hands and signed a two-page agreement. There was no audit of the books, no due diligence, I trusted her integrity. When Wal-Mart sold me one of their operating units, their CFO came to my office, I gave him a price, he called Bentonville [Arkansas - Wal-Mart headquarters], and that day the deal was done. I know how Wal-Mart conducts business [very well], and when we took over the division, it was exactly how they described it. So integrity is a requirement. One of Berkshire's businesses is FlightSafety, the founder is dedicated to preventing deaths, he's not motivated by the next quarter's numbers.
His legacy
I think an example is the best thing you can leave behind. Obviously, you want to leave the right example. I mean, Wilt Chamberlain's tombstone may say, "At last, I sleep alone," and that's probably not the example you want to leave. If what I've done with Berkshire Hathaway - running a unique and independent company in true pursuit of shareholder value - persists and people learn from it to improve the way they invest and run their companies, that would be a fine legacy to leave.
His aversion for investing in technology companies
Technology is clearly a boost to business productivity and a driver of better consumer products and the like, so as an individual I have a high appreciation for the power of technology. I have avoided technology sectors as an investor because in general I don't have a solid grasp of what differentiates many technology companies. I don't know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don't overpay for them. Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles.
He has the honesty to say 'I dont know', in a topic (investing) where he could have gotten away saying any damn thing. Reminds the rest of us of how much we pretend. [Here's the link to the original article. Sorry for not providing this earlier. In reply to one of the comments, these are clearly Warren Buffet's comments. I have no pretense of offering such wisdom. Possibly, I have no wisdom!]