‘Any fool can raise startup’s  valuation by pumping in cash’

A large figure with a cap and floral shirt, Rekhi appears disinterested, eyes half shut, head tilted. That notion is quickly dispelled as he picks a thread in the conversation and starts making sharp observations on everything from India’s yo-yo telecom policies to Masayoshi Son’s misadventures with an oversized SoftBank fund. In between, he excitedly spots a mongoose in the field and draws everyone’s attention to it.

Not many would do what Rekhi did at 75: he took a flight from San Francisco, landed in Hyderabad in the early hours, and drove to his Bay Area friend and fellow investor Raju Reddy’s home town in Telangana to support a social entrepreneurship project.

From the moment he arrives, Rekhi is surrounded by locals and visitors. He pays as much attention to IIT Hyderabad’s founding director Uday Desai as he does to a Nizamabad school student showing off a 3D printing project.

A buffet dinner at a school campus follows a fireside chat at the Nizamabad chapter of The IndUS Entrepreneurs (TIE), a Silicon Valley networking and mentorship organization Rekhi co-founded in the early nineties. Reddy finally drags him away for a much-needed night’s rest.

That energy and enthusiasm, combined with endless intellectual curiosity and a raconteur’s love for storytelling, gives a clue to what made him succeed, first as a pioneer among Indian-Americans to adopt the Silicon Valley way and then as a mentor to other Indian entrepreneurs, including Reddy, who followed his lead.

MENTORING MANTRA

“I enjoy it when I learn something new from entrepreneurs, new thinking, new ways of doing things," Rekhi tells me over lunch when I get a chance to sit beside him. “You see a new idea and ask questions to learn more. In the process, you’re also making that person see it from different sides."

He has been doing this from his early days as an investor and a mentor at TIE after packing his bags from Novell, which had acquired his company Excelan. “When I talk to 10 entrepreneurs and see 10 different ways of doing things, I cross-breed ideas, asking if they had thought of doing it this way or that."

Another attribute is his “radical candour", which he practised intuitively, long before a book by that name became famous. Many entrepreneurs who come to him puffed with their ideas might go away deflated after hard questions, but they would be better for it.

“To simplify business is a big part of my approach," says Rekhi, citing the example of one of his early bets as an angel investor: Exodus, the internet hosting company founded by K.B. Chandrasekhar and B.V. Jagadeesh in 1994, which was listed and was a $20 billion company at its peak. Although it collapsed after the dotcom bust, Rekhi is said to have turned his $200,000 investment into a $100 million exit before that.

“The Exodus business plan was very complex at the outset. They wanted to do data centres, manage the customers’ servers, develop applications, maintain the applications. I kept saying that’s too complex, let’s simply do data centres. I simplified their business 99% and by doing that, the company took off like a rocket."

BOLD BET

Rekhi has a remarkable success rate of 40% as an angel investor, compared with the usual venture capitalist (VC) hit rate of 10-20%. He invested as an individual in 50 startups, 21 of which gave him exits through IPOs or acquisitions, including Raju Reddy’s Sierra Atlantic that Hitachi bought. It’s still a coin toss. “I can never tell which entrepreneur is going to succeed," he says. “I can usually tell who’s not going to succeed after meeting a person. Despite that, 60% fail."

In his own case, the ability to foresee which technology would click and being bold enough to bet on it made him succeed as an entrepreneur. It’s hard to envision that in the 1980s era, before the advent of the internet. The PC revolution had arrived, and it was clear to Rekhi that networking the computers would have a multiplier effect.

Ethernet had evolved as the hardware standard for connecting computers, and Intel was developing networking chips. But a trio of Indian engineers—Kanwal Rekhi from IIT-Bombay, Inder Mohan Singh from IIT-Kharagpur and Naveen Jain from BITS Pilani—jumped the gun with their startup Excelan, which was the first in the market with networking boards.

Apart from the speed of their hardware design, they picked TCP/IP as the software protocol for networking, even though Intel, Xerox and Digital had adopted other protocols. The US army had developed TCP/IP for its Defense Advanced Research Project Administration (DARPA) network.

“It was designed for an unreliable, slow network, whereas Ethernet was very reliable and fast. So, putting TCP/IP and Ethernet together wasn’t considered smart because they were mismatched," recalls Rekhi. “But my reasoning was simple. TCP/IP worked with all computers and operating systems. So if I made it work with Ethernet, I would have an instant solution for a lot of customers, " he says. TCP/IP went on to become the standard protocol for the internet. The rest, as they say, is history.

UNICORN MYTH

Coming to the present, Rekhi likes the India-to-global story with enterprise software. But he remains sceptical of the VC-driven consumer internet play in the domestic market despite Walmart’s acquisition of Flipkart, which he feels is a one-off. “I’ve looked at Oyo, Paytm and others. None of them is becoming a profitable business, but the founders are living very well. Vijay Shekhar Sharma of Paytm has bought a $12-million-dollar bungalow in Delhi, right?" He feels it’s one thing for a publicly listed company like Amazon to have grown with losses in its initial years, because it was under the close scrutiny of market analysts who had access to company financials. It’s another matter when a private company grows with mounting losses and increasing valuations. “Any damn fool can raise a company’s valuation" by pumping in money but that doesn’t make a sustainable business model, he feels.

So, he’s not surprised by reports that Masayoshi Son’s SoftBank is struggling to raise a second fund because investors aren’t seeing returns from the supposedly new model of mega bets by the Japanese giant. “Everybody, including the founder, was selling WeWork equity. He (Son) was the only investor who kept raising the price." That ended badly, and Rekhi feels a similar fate awaits the SoftBank investment model.

Sumit Chakraberty is a contributing editor with Mint. Write to him at chakraberty@gmail.com.