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Gazelle Information Technologies: Start Up Growth Doldrums
It was early morning when Kirit Goyal boarded a Delhi-Mumbai flight for a client meeting. Looking out of his seat window, he pondered over the future of his start up, Gazelle Information Technologies (GIT). GIT is an IT Product and Services Company that specializes in the domain of Supply Chain Management. Set up in July 2009, the company had grown from two employees in 2010 to 17 employees in 2012 with offices in Delhi, Kolkata and Shillong. The company was profitable from its first year of operations and sales had grown eight-fold to 4.27 Crores in 2012. The company has now set its sights on achieving a target of 100 Crores in revenues and hiring 200 employees. However, it currently finds itself floating in the equivalent of doldrums around the Equator. GIT needs to find new markets for its products, hire and retain quality talent, and attract investment to fund its growth. Kirit wondered: What will be the source of wind that steers GIT out of the growth doldrums?
Founders
GIT is a first generation entrepreneurship venture of two professionals, Kirit Goyal and Utpal Das. Kirit has an engineering and MBA degree as does Utpal. Kirit had worked with Satyam, GE and ATMI digitizing large supply chains using Oracle ERP, while Utpal worked with McNally Bharat for 14 years before entering the Oracle ERP field for 10 years. He worked with GE, Satyam and Emirates Float Glass as its CIO. Both partners were always motivated to leave corporate life and build an organization of their own. In 2009, Kirit decided to return to India for good and started GIT. Utpal joined GIT as a partner soon after.
Choosing a Core Competency
Kirit firmly believed in developing a core competency to compete in the marketplace. Years of experience with Oracle ERP related products and Supply Chain domain made Supply Chain the obvious choice. Moreover, the field of Supply Chain is still evolving in India, hence there is significant potential for growth.
Kirit’s home city of Delhi was chosen as the location of the company and a business plan was also created for the next three years assuming that the company would raise capital in two years (Exhibit A). The company was initially setup to provide Supply Chain solutions using Oracle ERP related products. The process areas included Sales Forecasting, MRP planning, Production Planning, Maintenance Management. A partnership with Oracle was signed to be able to work on sales leads.
Initial Operations
As planned, the founders set out to seek funding for the venture. They were (mis)guided by the experiences of 1998-2000 and 2005-06 when availability of funding for IT ventures was relatively easier. Many presentations were made to Incubators, Banks, Brokers and Venture Capitalists. Two months were spent on a possible funding from an investor in UAE. In the meantime, GIT started working with Oracle hoping this will provide projects and sales leads.
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Reality Hits
Six months had passed with no success in raising capital. Most banks did not understand the IT services model and meetings with angel networks led nowhere.
Selling Oracle based Supply Chain solutions was not a good business model. Oracle had a weak presence and credibility in India. Further, Oracle as a partner was not helpful for a startup because of its expensive software. Even the biggest companies in India did not perceive Oracle as value for money.
Quick conversions are a myth in Supply Chain consulting.The sales cycle can be as long as a year in this type of concept selling services. This involves long proof of concepts with interval approvals for quantum of funds is often linked to the yearly budget and takes time. The founders realized that they have to change course.
Course Correction
In November of 2009, the founders decided to redo the business model. Rather than selling software, they decided to provide solutions to what they called “Business Pains”. They reached out to Supply Chain Managers with a proposition of providing a complete solution that focuses on people, process and technology. Further, GIT moved away from expensive Oracle software and tied up with lower priced software vendors like Llamasoft and Avercast. GIT also realized that sophisticated software solutions like Demantra required technical and process maturity, both of which were found lacking in big organizations. Hence, GIT developed a planner on demand service that would provide running the process and the software as a service (Exhibit B). GIT moved from selling and using partner products to developing its own products (Exhibit C). Starting with sales forecasting, the product offerings have evolved into dispatch planning, optimization, and mobile based data capture.
This approach of providing a complete solution targeted to specific pains marked a turnaround for GIT. Currently, it serves the likes of Bajaj, Goodyear, Syngenta, United Breweries, USL, Michelin etc. (Exhibit D).
The ‘Doldrums’
The growth in terms of revenue and number of employees is still very small. With age catching up, the fear of fatigue setting in is now on the horizon. The following paragraphs list the challenges being faced by GIT, and certain decisions taken by the founders that have a bearing on company growth.
Initial and Ongoing Investment
Gazelle’s founders were first generation entrepreneurs and like all middle class families, all their fortune was a result of sweat equity. Hence the initial paid up equity capital into the company was the minimum statutory requirement of INR 1 lac. All the growth that had come was from the internal accruals of the company. While being conservative in terms of investment did save the founders from early bankruptcy like so many other startups it also resulted in the following:
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Slow Hiring: Slow or no hiring in the initial years, hence a good core technical team was never
formed. Even now, the company works on founder’s skills rather than employee or team strength. This has resulted in spreading of bandwidth over projects, business development, strategy, administration.
No Office: The Company has not yet invested in a state of the art office. The founders felt that as
most of the work is on client site, and with good commercial space rent hitting the roof, it is better to conserve cash. The flip side was that many potential employees were turned off.
Lower Investment in Intellectual Property: Investment in products was slow and was mostly
financed by projects that were obtained from customers. Till then partner products were used. This has resulted in slow buildup of GIT’s own intellectual property, while competitors may have caught up.
Market for Supply Chain
It was GIT’s decision to stay focused in a niche area, and not to compete with the likes of TCS, Infosys as a commodity player. However, techniques like sales forecasting and optimization are still very advanced and in some cases very limited use in India. Hence the market had to be built by
concept selling. As a result, the number of projects is limited to five a year. The average revenue
potential of a project in India is to the tune of INR 35 Lacs. The main competitors are PWC, Accenture and some boutique consulting firms. While the Big 5 can command upwards of INR 1 Crore for the same work, GIT cannot because of its limited brand equity.
Pricing of the consulting work can be project specific. Some customers may be willing to pay up to INR 50 Lacs for the software and related consultancy, while others may be uncomfortable with INR 15 Lacs.
To overcome this issue, GIT ventured into the Middle East market, and did some good work. The average project revenue can be INR 1 Crore with good margins. However, business development in Middle East is expensive from India. Other potential markets are Africa and USA. However, venturing in any new market would require investment and time of one of the founders.
Talent
Finding self-motivated talent remains a major challenge for the company. The founders experience has been that in India working for an unknown startup is still not fashionable for youngsters (Some even citing reasons such as not getting a good spouse for marriage due to non-existent brand name). Several employees trained by the company used the experience as a springboard and moved on to established companies. GIT experimented with bringing in new partners, but some found the heat too much to handle; expectations of very high salaries and share holdings all pointed to entitlement rather than sacrifice that is required in startups.
Currently, GIT works on the model of hiring fresher’s from second rung institutes and training them for back end work, and using senior free-lance consultants for client facing work.
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Most of the company’s working capital is financed by ongoing projects with thin margins; hence there is no possibility of building a bench. The company only hired the first employee dedicated to sales in 2013.
The Debate
Are GIT’s problems typical for a 4 year old startup? Should GIT stay put and persist with the current business model?
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What will be the source of wind into the sails of GIT that will steer it out of the growth doldrums?
A New Business Model - Should GIT change its business model again?
o Is the business model of GIT fundamentally wrong? If yes, then what is the exit path? If not, then are they not focusing on the right industry pains? What are the pains of the industry that they should focus on?
A New Market - Should GIT expand the geographical reach beyond India? o If yes, where should the focus be, and how will it be funded? What will
be the source of such funds and what should be the deployment plan and the business plan?
o What is the right price for the products and services identified in Exhibit C? Is the company underpricing its capabilities?
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Exhibit A Business Plan Profit and Loss Statement
(USD’000)
Oracle Solutions 2009-10 2010-11 2011-12
Budget Actual Budget Actual Budget Actual
Sales 1,000 2,000 3,500
Gross Margin 500 1,000 1,750
GM% 50.00% 0.00% 50.00% 0.00% 50.00% 0.00%
Staff Cost & Incentive Rent Travelling & Conveyance
Advertisement Interest on Working Capital
Others
Total Overheads 261 - 416 - 548 -
Operating Profit 239 584 1,202
Total Overheads (% of Sales) 26.10% 0.00% 20.80% 0.00% 15.66% 0.00% Operating Profit (% of Sales) 23.90% 0.00% 29.20% 0.00% 34.34% 0.00%
Business Plan Overheads
(USD’000)
Operational Overheads 2009-10 2010-11 1011-12 Remarks
Salaries & Benefits 120 200 250 As per Separate Sheet
Conveyance 1 3 5 Inter Emirates travels
Telephone, Postage, Courier 10 20 30
Traveling 25 40 50 Within GCC & consultants from India
Entertainment 5 5 5 Business Entertainment
Printing & Stationery 10 15 20
Gifts & Donations 5 5 5
Immigration Expenses 10 20 30 Visa & Ticket Cost of Consultants
Insurance 2 2 2
Rent incl. e&w 10 10 20 At SAIF ZONE
Audit Fees 3 3 5 Yearly Audit / Certification
Legal & Prof. Charges 10 10 10 Company Registration & Startup Cost Repairs & Maintenance
Staff Welfare
Misc. Expenses 10 10 10
Staff Recruitment Cost
Training & Seminar - 15 20 Customer seminars @2K per seminar Advertising 10 20 30 Gitex Participation 2009 & other events Salesmen Incentive 10 20 2% incentive on 25% business in 2010 & 2011
Depreciation 1 2 5 On Laptops & Printers etc.
Interest and Bank Charges 22 26 31 Interest on working Capital @9% - National Provision for Doubtful Debt
Doubtful Debtors Provision
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Particulars 2009-10 2010-11 2011-12
Working Cap for business
Debtors at 90 days of Sales 247 493 863
Creditors - (100) (175)
Net Working Capital 247 393 688
Net Cash Generated by Business at the end of the year
- 239 584
Additional Working Capital Required 247 (92) (382)
Interest @9% 22 35 62
Business Plan Cash Flow
PARTICULARS Actual 2009-10
Cash flows from Operating activities Net Operating Contribution Add back: Depreciation
239 1 Changes in Working Capital
(Increase) / Decrease in Inventories
(Decrease) / Increase in provision for Inventory (Increase) / Decrease in Debtors (including PDC) (Decrease) / Increase in provision for Debtors (Increase) / Decrease in Group Company Accounts (Increase) / Decrease in other Current Assets (Decrease) / Increase in Trade creditors (Decrease) / Increase in Other Liability
- (247)
- -
Net Cash provided by Operating activities (247)
Cash flows from Investing activities Fixed Assets (including Capital WIP) Investments
(3)
Net Cash provided by Investing activities (3)
Financing Activities
Shareholder’s Current Account Minority Shareholder’s Current Account
250
Net Cash Provided by Financing activities 250
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Exhibit B Sales & Operations Planning Process
C P F R D ir e c to r CPFR 1.4 Distribute Forecast, Replenishment plan, Executive level summary Weekly Planning
Process
Forecast, replenishment planned orders entered for Appropriate buckets CPFR 1.3
Generate replenishment plan with review CPFR 1.2
Develop enterprise level consensus forecast After Sales Data Inventory Adjustments, On Hands, intransit Product line forecasting, New Item Door Counts,allocat ion plan Updates Actual Sales Data CPFR 1.1 Statistical forecast generated Hyperion Promotions Planning Consensus
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Exhibit C Portfolio of Current Products and Services
Supply Chain Network Optimization Locate Facilities
Match Supply and Demand
Managing Seasonality, and Reduce Carbon Footprint Benefits:
5-15% reduction in SC costs Improved Service Level
Production Planning Optimal Production Schedule Meet Plant Floor Constraints
Benefits:
Improved Throughput Reduced Costs Reduced Throughput Leaner plants Promotion Optimization and Analytics
Decision Support
Optimum Uses of Marketing Funds Benefits:
30% better utilization of funds
Demand Planning Choose best price
Identify Optimal Commission Benefits:
Higher Sales Volume Better Margins Transportation Scheduling
Fleet Scheduling Route Plan/Schedule Benefits:
10-30% reduction in transport cost Increase in on time deliveries
Point of Sale Data Capture Order Quantity
Order Time Benefits:
10-30% reduction in inventory Improved service levels
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Exhibit D Selected Case Studies
Company Benefit
Bajaj Electricals Improvement of Forecast Accuracy of A class items by 30%
Good Year Tyres India Pan India Post GST Supply Chain Network Design.
Reduction of cost to serve for farm tyres by 35%
Nuqul Group Forecast Accuracy improved up to 90% in 45 countries
United Breweries Savings of 125 Crores for yearly sourcing plan
United Spirits Forecast accuracy improved to 90%
