Arjun Gupta is a fairly rare birdl on the venture capital scene. As his name indicates, he is from India. He is to all appearances the only Indian managing a venture capital fund; most Indian fund managers represent the old industry capital. Gupta has just paid his fourth visit to Israel, this time to launch the activity of his fund, TeleSoft Partners. For Gupta, such a visit is not a particularly risky experience – he is a mountaineer, who has already climbed over 20,000 feet in the Himalayas, a parachutist, and a diver.
Gupta’s role in TeleSoft Partners is defined as “founder and chief believer (CEO).” This longwinded title is not so unusual in the US, but in Israel it still sounds like something from a completely different line of work. What has belief got to do with economics? Who in the world needs a chief believer?
Gupta explains his title: “More than anything else, belief is the entrepreneur’s engine driving him to success. TeleSoft itself is a start-up that began in my living room. As with most entrepreneurs, setting up the venture required no little personal sacrifice. At the time, I held a very respectable and extremely high-paid position in the George Soros group.”
What was the trigger that made you leave and start a venture capital fund? Why didn’t you join one of the existing funds, like Kleiner Perkins, where you used to work?
Gupta: ”I left because of two important events that took place in the communications world in 1996. The first was the flotation of Netscape, which produced the first effective Internet browser. The second was the deregulation of communications in the US, which gave rise to new service providers. I believed that the combination of the two events would create many opportunities in the new world of communications.
”I had no interest in being in a fund where I would have to invest in information technology or biotechnology. I was only interested in fields relevant to construction of the new communications network. I derived my fund’s name, TeleSoft, from telecom software.”
The portfolio companies contribute to each other
Most US funds have an emphasis on US activity. You stress TeleSoft’s capabilities in Europe.
”To understand why, you have to look at our declared aim. We operate in the communications field. While the US leads the world in most technology fields – it determines the standards and everyone else falls in line – a decades-long tradition leads Europe to adopt different standards from those of the US, such as SDH in Europe, while the US uses SONET. Companies that want to be truly global must therefore not confine themselves to US marketing, but have to develop their products for the European market. When we began in 1997, many funds had no access to European communications groups and companies. Today the situation is different; many funds made an explicit appeal to Europe. For example, Intel Capital has opened a large group in Europe, as has the Benchmark fund.”
Nevertheless, when I look at the fund partners, I see only two with a geographic area next to their names: former director and head of Motorola Ventures’ investment operations in Israel and parts of Europe, Dr. Avi Mazor, and Ron Hiram, whom you have known since working together in the Soros funds. These are the men who will manage your branch in Israel.
”I came here for two reasons. My first three deals outside the US were in Scotland, Germany, and Israel (Lynx Photonics Networks, M.B.) - our declared international scope is based on fact. Israel is very similar to Silicon Valley in its entrepreneurial environment and the rate of setting up technology companies. We have a very great challenge in appealing to Israeli entrepreneurs and bringing local companies to both the US and European markets.
”The difference is that as far as we are concerned, Europe involves two tasks: creating connections to benefit our existing portfolio companies and searching for new companies. I understand that a lot of venture capital has been raised in Israel, but you have to distinguish between high-quality active capital and passive capital. We bring real added value.”
That is a worn out phrase in these parts. What do you actually mean by it?
”First of all, focus. We have defined a very clear framework for our operations – communications. The world is managed by a few networks of people, which can promote our portfolio companies. We are trying to cover all regions. Our funds have received investments from private individuals and from companies in the communications field which are potential customers of our companies, both for their products and for acquiring the companies themselves.”
What distinguishes you from Kleiner Perkins and Sequoia, which have also received investments from leading companies and are also very well connected?
”There are several differences. I estimate that there are several thousand venture capital funds in the US. There are 25 good ones in communications that really understand the field. All the rest are either passive investors or those with a gambler’s attitude. We have segmented the communications world and chosen where we want to invest. We are in direct contact for that purpose with company managers in the relevant fields, who determine market demand. Our focus and connections with key players in the communications industry enable us to gain the attention of both communications equipment companies and communications operators around the world.
”We exploit this advantage to the hilt. Every three months, we hold a meeting between one of these companies and five of our portfolio companies regarded by us as a good match. They sit for half a day, hear presentations, and form their own impressions. This is a very unusual method of operation. In view of the success of the initial meetings, we are now bringing in companies with which we have no direct connection. The success rate is staggering. In some of the meetings we held, a majority of the portfolio companies that participated went on to cooperate with the communications companies.
”When you look at the large funds that have over three times as much capital as we do, but only 10% more partners, you understand the difference. Their partners simply have no time to devote to a company. Many of these funds therefore prefer to work with us in joint investments, trusting our professional capability and the time available to our partner handling the investment. We also understand what it means for portfolio companies to contribute to each other. As simple as it sounds, that is why we organize an inhouse journal to enable each company to present itself, and try to build mutual assistance – a TeleSoft community. I know this is nothing new.”
Your enthusiasm can be confusing. Aren’t you on the wrong side of the table? Fund managers aren't supposed to be on the same side as the entrepreneurs.
”I think I am also an entrepreneur. TeleSoft is my start-up. In 1996-1997, you might have found two Indians in the heart of the industry, in the Kleiner Perkins and Mayfield funds. A huge revolution has taken place in Silicon Valley – a multicultural revolution, similar to what happened in banking in the 1980s, when the industry was hungry for good people and was open to all sorts of people, who would never have gained entrance before. Today, 40% of the companies founded in Silicon Valley belong to entrepreneurs from India. When you go around in the Valley, you get a cosmopolitan feeling; people have come from around the world to realize their dream.”
”The communications sector is very healthy”
Is there a connection between Israelis and Indians?
”The Indian and Israeli communities are similar. They both arrive with a similar cultural background, with a stress on the family and the importance of education. There are a number of technology institutions in India, similar to the Haifa Technion, to which it is very hard to be accepted. Anyone who succeeds, however, has a guaranteed future. The drive to succeed and the willingness to take great risks are also similar, perhaps due to the realization that the formal alternative is even harder.”
How did you happen to make your first Israeli investment in Lynx Photonics?
”Through my good friend Nathan Low, one of the first people to support me. When I set up the fund, Nathan let me sit in his offices for six months, and he was the first fund’s first investor. Nathan is always looking for the next Microsoft, or at least the next Priceline. He has very good connections in Israel. He suggested that I invest in two Israeli companies: in NARUS, which I declined, and in Lynx Photonics Networks, which Walden also invested in.”
In the optics field, in which Lynx Photonics operates, you apparently had your greatest success. Cerent was acquired by Cisco for $7 billion.
”I think we have two companies in our portfolio that will have the same degree of success as Cerent: VxTel and Calient Networks. In contrast to these companies, in which we invested from the beginning, Cerent was founded by Kleiner Perkins, and we invested only in the most recent round in October 1998, when Cerent had difficulty raising $25 million at a company value of $150 million, after money.
”I can tell you that in those days, if someone had come and made the company management an acquisition offer for double that price, it would have been accepted. We did the entire due diligence and Cisco led the round, in which we were the only new investor. They had very good reasons for choosing us as an investor. I notified our investors that in my estimation, they would be issued to the public at a value of $300-500 million, which would double their money.
”In August 1999, however, Cisco acquired them for $7 billion. That was a very unusual transaction by any standard. There were no acquisitions for such sums at that time. Cerent set a record for acquisition of a private company. It was a really unusual sum, but guess what? Cisco has already sold $1.3-1.4 billion worth of Cerent products, so after a year they have already made big money from the deal. I think the decision to acquire Cerent was one of Cisco’s best ever.”
And who created Cerent? That compulsive entrepreneur, Raj Singh, or the fund that invested in him?
”Raj Singh is a great man and entrepreneur, a man of vision. He appealed to the right market – optical networks, but the partners at Kleiner Perkins were the ones who came and expanded this vision and made it what it later became. Cerent would not have been the same company without the partners from Kleiner Perkins. Companies are made by funds.”
It looks like acquisition is an accepted method of growth in the communications field. Are you building companies to reach this position?
”Yes, I think many of our companies will be acquired. That is in line with my historical description of world revolution from the industrial revolution down to the current one, which has been made by outsourcing development. Instead of the developers sitting in companies, they set up their own companies and develop extremely significant technologies in a friendly, efficient environment, unhampered by bureaucracy. That is simply revolutionary.”
How will the difficult situation in the capital market affect the entrepreneur industry?
”When Nasdaq was at 5,000, it was completely irrational. There were companies with totally hallucinatory profit multiples. The irrationality was so great that some entrepreneurs set up three companies simultaneously. From this standpoint, the correction brought the market one step back to reason. Now, however, we have gone too far in the other direction. I assess that things will balance out in the second half of the year. I entered Cerent in October 1998 and exited in August 1999. I don’t expect such quick returns now. A company has to be built over 3-5 years. There is no cause for alarm, though – the new networks will continue to be built in both the West and in the emerging countries. The communications sector itself is very healthy and, in my opinion, not in need of a further correction.”
Published by Israel's Business Arena on February 1, 2001