Orbit Change Conversations

In recent days I have wrestled with the narrow line that separates perseverance and stupidity. Admittedly this not the first time I am in this situation. I have faced it every time one of my experiments has eventually turned out to be a flop.

Whenever there is a flop I think of Edison’s undersea telegraph. He tried to simulate the electric resistance of a transatlantic cable by using cheap powdered carbon. But this carbon element would keep changing its resistance due to the rumble of traffic outdoors and clattering in the machine shop. Eventually Edison abandoned this effort. However, later, when confronted with the need to improve the transmission of voice over the telephone, he took the principle he had learnt from his unsuccessful undersea telegraph cable - variable resistance - and put it use in the design of a telephone transmitter.

In my own humble way, I too have learnt that no experiment is wasted. It merely adds to my repertoire of mental models and skills. Now only if I was as smart as Edison (particularly in reasoning by analogy), my success rate would go up!

The leveraged buyout experiment
About a year ago, I embarked on an effort, along with a partner based in the Bay area (who, for now, chooses to remain anonymous), to do a leveraged buyout of a small ($300-500m market cap) NASDAQ listed enterprise software product company. The goal of the buyout was to help the company move from a traditional license model to a more annuity based revenue model. This change is hard for a public company to undertake without either folding itself into a bigger player or going private. In fact, to fully embrace this change, the company also needs a set of five other business transformations (which I described, somewhat guardedly, in my July’06 Silicon India article, Breaking Out of the Pack).

We took this thesis and got down to work. We needed to identify promising targets, raise private-equity money based on our detailed business transformation plan, and convince the company to go private. It was a lot of work but also a lot of fun. We got everything in place to make the first bid in late’06. Although things seemed to be going well, we were not able to convince the Board of the target company to bite the bullet (largely due to one holdout Board member!) and the deal went dormant. We primed the pump again and went after our second target recently. But this too fizzled out in these last few weeks.

Time for introspection
Granted we never thought it would be a cakewalk, but to have two promising targets fizzle out required introspection. Was it poor targeting or was it poor timing? If it’s poor targeting, then we should go do it again – maybe we’ll be third time lucky. If it’s poor timing, then trying again is stupidity. After much angst, we have concluded that its poor timing. Although our transformation proposition has legs, it seems that there isn’t enough pain in the enterprise software market (yet) to embrace the radical surgery that we are proposing. Things might be different a year or two from now.

In the context of entrepreneurship the only way to find out if the timing is truly right is to go out and do it. So, I am happy that we tried. Although we learnt that the timing is off, I grew both professionally and personally in the process. I think I have also become more addicted to the concept of bringing about orbit change. In the coming days, I’ll talk about what I plan to do next. Watch this space!

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