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Are spin-outs the way to go?

The following article, by N. Sriram, originally appeared in the latest quarterly India VC Report

On May 4, 2006, when all commercial activity in Bangalore came to a standstill thanks to a general strike (“bandh”), Rajiv Mody, Chairman and CEO of Sasken Communication, and Sudhir Sethi, Managing Partner of IDG Ventures India, met to discuss an innovative idea: is it possible to spot product areas where Sasken was not adequately realizing the potential and spin them out into a separate corporate entity?

Over the next six months, after considerable research and several meetings later, five areas were identified as worthy of spinning off from the Bangalore-based provider of embedded communications technology solutions. After some more filtering, machine-to-machine (M2M) communication emerged as the top contender segment that Sasken should spin out. Between November 2006 and April 2007, the business plan was firmed up, potential customers and markets were identified. The next step was to pick advisors, employees and, of course, the CEO.

In June 2007, Sasken and IDG announced that they were together investing $6 million in the new entity christened ConnectM Technology Solutions. Kumar Prabhas, a senior executive at Sasken, was named ConnectM’s CEO.

In a sense, ConnectM has been given everything it needs to succeed on a platter. Even a potential exit strategy for the VC - since Sasken has reserved the right to fold ConnectM into itself.

Spin-outs like this indeed seem to be a convenient solution for a key problem facing VCs in India: how to put larger sums of money to work in a situation where the average start-up requires far less than the $5 million or more that their fund sizes dictate they deploy per deal.

There however seems to be one key problem: in a spin-out situation, who exactly is the entrepreneur - with “fire-in-the-belly” and all that – who is supposed to be the heart of any successful startup?

Sudhir Sethi of IDG counters this, saying that a senior executive, when made a CEO, realizes the opportunity to create a large company and works as aggressively as an entrepreneur. In ConnectM’s case, Prabhas was picked as the CEO after short-listing candidates from outside Sasken as well.

Sethi also suggests that the issue be looked at from a different angle: how should a medium size company grow? And points out that the spin-out route provides an alternative, without the company losing market leadership. "Also, the time taken to complete the quality cycle will be reduced", he says pointing out that ConnectM, within three months of inception, has completed the execution of a project precisely because it hit the ground running.

Explains Prabhas, ConnectM’s CEO, "The rationale was to explore verticals outside of telecom, while still leveraging the communication expertise, global reach and mature policy and processes of Sasken. All ConnectM offerings are new, as they address vertical markets that Sasken never addressed."

ConnectM’s progress will indeed be interesting to watch.

What do you think about the opportunity to do spin-outs in India? Do send us your views at feedback@ventureintelligence.in

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