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How is it that a 158 year old company, the5
th
biggest investment bank in the world, went bank-rupt overnight? Why have the TV channels reducedtheir obsession with Sarah Palin and are now hangingon every word Hank Paulson, US Treasury Secretary,says?Well, first of all while there has been muchpublicity about Lehman Brothersgoing bankrupt overnight. Thereal cause can be traced back by achain of events that started off asearly as 2002, with the US sub-prime mortgage crisis. The causesfor themortgagecrisis are numerous, ranging frompoor scrutiny by lenders, lack of regulation, to possibility of in-sider trading in credit derivatives.This mortgage crisis led to thehousing bubble burst in 2006 andalso triggered off the global fi-nancial crisis. Lehman was greatlyaffected by this credit crisis dueto its large investment in BNCMortgage, its subprime lenderand also its investment in otherlow rated mortgage securities.Failure to raise further capitaland its tumultuous losses, led toits filing for bankruptcy on Sep-tember 15
th
.The Lehman Bankruptcy set in a train of damaging events. The $3500bn US money marketfund, that banks and companies use for their shortterm financing got locked. Many Hedge funds thatwere using Lehman as their prime broker, suddenlyfound their collateral frozen due the complicatedstructure of Lehman’s bankruptcy filing.About a week before the Lehman bank-ruptcy case, the Federal government had announcedthe takeover (or placing into conservatorship) of twoof its biggest government sector enterprises FreddieMac (Federal Home Loan mortgage corporation) andFannie Mae (Federal National Mortgage Association).Two companies considered to be “too big to fail”.A day following the bankruptcy filing of Leh-man Brothers, came the Federal Bank’s $85 billionrescue package for AIG, the world’s biggest insurer. If AIG had failed, it was said that the average citizen’ssavings and checking accounts could be in jeopardy. To
19 Oct, 2008
T h e E n t r e p r e n e u r
E N T R E P R E N E U R S H I P C E L L , I I T K H A R A G P U R
gauge the magnitude of the issue, just try to imagine asituation where, as an ordinary citizen you are not sure if your money is safe in a bank!Other than Merrill Lynch, which was boughtover by Bank of America, the next victim of the financialcrisis was Washington mutual, the largest US savings andloans association. The bank’s home loan departmenttook a big hit; a hit big enough to affect the $307bnbank. Within 10 days customers pulled out $16.7bn,increasing the urgency for some sort of a rescue act. Thiswas the first case of direct government intervention,where the Federal Reserve put pressure on WaMu tofind a buyer, and even went forward to hold a secretauction where JP Morgan was an-nounced the highest bidder.The next step by the USgovernment was the much publi-cised $700 bn bailout a.k.a the Paul-son plan. Most of the $700 billionwas to be used by the Federal Re-serve and the Treasury to buy outliquid mortgage backed securities.This increased the almost non-existent liquidity in the market.Let us stop here for amoment. Within two weeks two of the five largest investment banks,two of the biggest GSE’s (govt. sec-tor enterprises) seized to exist andthe biggest insurer was saved bylast minute government interven-tion. This is excluding all the activities going on with Wa-chovia, Britain and Iceland.There is no doubt that the catalyst for the sud-den crisis was the bankruptcy of Lehman Brothers. UnlikeBear Stearns which got a lifeline about six months agofrom the Federal Reserve, Lehman got no such lifeline. “Inever once considered it appropriate to put taxpayermoney on the line in resolving Lehman Brothers”, HankPaulson, Treasury secretary, said the day after Lehman’sdemise. Of course it is arguable as to if things would be alot better were Lehman Brothers still present.There has been quite some criticism that thegovernment intervention came a little too late. There isalso another sect of people who are against Hank Paul-son assuming the role of God, with tax payer’s money.Only time will tell if Paulson plan is indeed sufficient toavert a bigger disaster.
Next issue: How the US financial crisis affects India di-rectly and indirectly.
“Without the strength to endure thecrisis, one will not see the opportu-nity within. It is within the processof endurance that opportunity re- veals itself.”
- Chin-Ning Chu
Making Sense of the Financial Crisis
•
Turn to
Page 2
for thesecond article of the
VisionIndia 2020 series—Urja.
•
Give in your valuable com-ments at
editor. theentre-preneur@gmail.com
www.ecell.iitkgp.ernet.in
- Abhilash B.N
For many years, I had traveled around India andwondered how to take advantage of the tremendouscraftsmanship that exists in the depths of India. Whether itis in Nagaland or Gujarat, Kashmir or Bengal, India’s heri-tage has been rich with artisans.Yet, for all its creativity, the sophistication of designand quality of finish were always elusive. Indian designswere always too complex, too busy. Thus, the potential fora strong international brand that could transcend culturesand appeal to a wide audience somehow eluded India.The answer came to me gradually, and received apropulsion during a vacation in Italy in the Spring of 2007.We were staying with Carol and Ginou in the Tuscan villageof San Giovanni d’Asso. One evening, their friend Alessan-dro came for dinner. Alessandro had been a top executiveat Giorgio Armani in Milan, and had traveled widely in In-dia.The question I was asking was also on his mind.And that evening, under the Tuscan moon, Urja was born.Urja, by the way, means
born out of creative energy
in San-skrit.Over the next two years, we simply kicked aroundthe ideas, talked with people, and worked on recruiting acore team that could pilot our concept. Our core hypothe-sis was that if Italian designers were made to work with theartisans in India in various communities, design sophistica-tion could be achieved.We tested this with Lucknow
Chikan
as part of thepilot. Our Italian designer team in Milan and our
Chikan
team in Lucknow worked together to exchange designideas. When the first set of designs came out of this pilot,we were delighted to see the simplification that the Italianteam had been able to achieve, without losing the beauty,intricacy, and charm of the original art form.A simple set of the most elegant dress shirts hadbeen created.Alessandro and I were primarily concerned with thefact that Indian designs were too complex for global taste,so this was a major milestone for us to reach to convinceourselves that sophisticated design was, indeed, possiblethrough this cross-cultural exchange.The next two big issues were “cut” and “quality control.”Indian designers had very little experience of what Icall “design for manufacturability” that is essential for ascalable ready-to-wear industry to come together. Theyhad experience in designing
salwar-kameez, ghagra-choli,or saris
, but very little in western clothing.The industry had to be trained in cut and manufac-turing to spec. For this, we turned to Alessandro’s contactsin the Italian fashion industry, and recruited a top-notchteam of manufacturing experts. Even on the Quality Con-trol issue, we had the Italians train our teams in India.With those 3 legs of our plan in place, we wentand raised money. I convinced Alessandro to forget hisretirement ideas, and take the CEO role. French BillionaireFrancois Pinault, who also owns Gucci among other fash-ion brands, funded the concept, and his company becameour long term investor through the next 11 years of Urja’sevolution.We created the Urja brand using the Internet, aswell as retail channels. Today, we have flagship stores onChamps-Élysées in Paris, Via Condotti in Rome, Fifth Ave-nue in New York, among others.Our advertising campaign was very Web 3.0. Sev-eral of our Italian designers and Indian artisans becamecelebrities on the internet, since we encouraged them toengage with the customers on social media and theGlam.com network.The side-effect was that we carefully monitoredcustomer feedback, and in fact, engaged customers withour designers almost as pre-design focus groups, online.We learned so much through these interactions, andevery time we were about to launch a new concept, wecould go back to our core customer base and check theassumptions.One by one, we incorporated Tassar silk fromBengal, Rajasthani Block Print techniques, Dhakai Jamdanifabrics, Gujarati mirror and bnadhni work, Kashmirishawls, even tribal artisans’ work, into our collections.We paid attention to every detail – from buttonsto draw-strings. We had artisans who specialized in mak-ing the most unique collections of buttons and cuff-links!Our Italian-Indian fusion brand became a sensa-tion, injecting a sense of novelty and creativity into theglobal fashion world that had, by and large, become bor-ing.And most importantly, we were able to build afinancially sound, compelling business that is now sup-porting the livelihood of 100,000 artisans across India.Urja, indeed, was born out of creative energy.However, the business was chiseled and sculpted care-fully, keeping in mind the core nuggets of our vision: sim-plicity, detail, sophistication and quality.And with that, we seduced the fashion world.
Vision India 2020: Urja
"Business opportunities are like buses, there's always another one coming."
- Richard Branson
THE ENTREPRENEURPage 2
The author is a well known Silicon Valley entrepreneur who has founded 3 companies, is a strategy consultant for over 70 companies, including SAP and Cadence amongothers, and the content from her popular strategy blog at www.sramanamitra.com is syndicated by Yahoo! Finance,Indian Daily, etc. She also writes a weekly column for Forbes.
©Sramana Mitra
www.ecell.iitkgp.ernet.in
How free software makes money
The world is more malleable than you think and it's waiting for you to hammer it into shape.
- Bono
THE ENTREPRENEURPage 3
www.ecell.iitkgp.ernet.in
RedHat offers RHEL, or RedHat Enterprise Linuxwhich they build by gluing together various free softwarecomponents and charge for the service of maintaining it.They capitalize on the fact that they are familiar withexactly what they built.MySQL and Trolltech Qt follow adouble-license model. Why would people choose theproprietary license? The proprietary license offers someadditional rights over the software over and above thefundamental free software license rights. Yes, it works.The proprietary license is available at a price.Many companies also tend to maintain two ver-sions of their software: a free software “community”version that the community continually improves and aproprietary version that can be purchased at a cost. Zim-bra, the email client, is one significant example. Theirdesktop edition is free software but their network edi-tion for large enterprises comes at a cost. RHEL/ Fedorais another example- RedHat constantly use ideas andcode from Fedora, the community edition, to maintainRHEL (No, RHEL isn’t proprietary, but either is it devel-oped by the community).Many free software projects are funded by com-panies interested in seeing the project come up. SuSe,for example, sponsors a project called OpenSync becausethey want to see certain features in it that they probablywouldn’t see otherwise. They additionally get some goodpublicity and a major say in any crucial decision. Insteadof creating their own synchronization solution for theiroperating system, why not sponsor an already ongoingproject? It’s far cheaper and they get additional program-mer passionate about the software to work on it for free(yes, I worked on it for a while too because I liked it). Justlike Google pays Firefox (yes, firefox is free software) toget their homepage opened at startup by default, severalcompanies might have interests in different popular freesoftware. For example, if OpenSync becomes reallypopular and supports synchronization with Nokia andSony phones, Motorola will immediately jump in andhelp OpenSync support their phones by funding the pro- ject. Zimbra did so well that it was acquired by Yahoo! inSeptember 2007.Ever wondered why a perfectly respectable sys-tem like Ubuntu Linux ships completely free of cost allthe way from Africa? While many people focus on thispoint, it is actually just a consequence of something else-Ubuntu is only incidentally free of cost. Good peopledonate to it and sponsor its shipping costs because theylike it. Ubuntu is “free software” or “software libre”. Freeas in freedom, not cost, means 4 fundamental rights:1. The freedom to run the program, for any purpose.2. The freedom to study how the program works, andadapt it to your needs. Access to the source code is aprecondition for this.3. The freedom to redistribute copies so you can helpyour neighbor.4. The freedom to improve the program, and releaseyour improvements to the public, so that the whole com-munity benefits. Access to the source code is a precondi-tion for this.There are many other free software productsthat aren’t necessarily free of cost- Ubuntu Linux is onlyone of them. How do these other companies manage tomake money?Traditional software companies create some-thing, package it, and sell it, the same way a vegetablevendor sells vegetables on the street- price per piece.Simple revenue model. How do I “sell” free softwarethough? Certainly not like vegetables on the street, be-cause everyone has the right to redistribute it. So who’sactually going to come to me and pay for it? Well, it turnsout that there are many other creative ways to makemoney. Since the models tend to be complicated hybrids,I’ll illustrate with examples:SpikeSource is an example of a very successfulcompany that follows a pure service model. They special-ize in maintenance, certification, and integration of freesoftware into large workstations. They capitalize on thefact that they have the power to study the source code(modifying it when necessary) and pinpoint exactly whatwent wrong during tech support. Free software typicallycomes with no warranty of any kind. SpikeSource fills thisvoid for large corporations.
- Ramkumar. R
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