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Nagesh Challa
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Today
I interview Nagesh Challa, co-founder & CEO of
Ecrio Inc.,
and co-founder & former CEO of Nexcom Technology, Inc. I’ve
known Nagesh for over 10 years and worked closely with him
in senior financial and planning capacities at both
companies. He has amazed me throughout the years with his
accurate vision not only of the next technology, but also of
its application in the marketplace. One example is flash
(non-volatile) memories, which are being widely used
nowadays as storage commodities in digital cameras, mobile
phones, digital music players and as USB flash drives. I’m
happy to share what he’s currently working on, his
experiences as a serial entrepreneur, and his outlook on the
wireless market.
Anthony:
Nagesh, can you give us an overview of Ecrio?
Nagesh: Ecrio is a 5-year old
software “start-up." We develop standards-based software for
mobile phones that will be used on the advanced 3G (3rd
generation) networks. By standards-based software, I mean
software that is used to introduce wireless services and
ensure interoperability based on open standards between
different carriers and service providers. Examples of
existing standards-based wireless services are SMS (short
messaging service) and MMS (multimedia messaging service).
These services need to be standards-based so that users
aren’t limited to messaging people only in the realm of
their network operator and are able to communicate with
friends and business associates on other mobile networks as
well.
We’re finally seeing the advanced 3G networks being
deployed by operators worldwide: FOMA by DoCoMo in Japan,
UMTS in the US on the ATT Wireless networks, and others.
These networks are IP based. They support multimedia and
bring broadband to mobile phone users. As a result, there is
a great opportunity to equip mobile phones on these networks
with advanced software that enables services such as Mobile
TV, Multimedia messaging, Audio and Video streaming, and
Push to Talk. This is a very large and growing market that
Ecrio serves. Our products include Push To Talk, Instant
Messaging, and client software that enables new services on
the IP based Multimedia networks (IMS framework).
Ecrio’s target market is well defined: mobile phone
manufacturers. There used to be just 5 or 6 mobile phone
manufacturers worldwide. But now that number has grown
drastically to include manufacturers in the US, Europe,
Japan, Taiwan, China, and Korea. Our customers include such
companies as NEC and Panasonic.
Japan, in particular, is a very important market for
Ecrio as the large Japanese OEMs are looking to supply
standards-based software on their phones to operators
globally. Furthermore, Japanese operators are now looking to
deploy standards-based interoperable services on the new 3G
networks.
Anthony: What is Push to
Talk?
Nagesh: Push to Talk over
Cellular (PoC) is a Walkie Talkie-like experience on your
mobile phone. Nextel has done a good job of popularizing
this service, where you can push a button on your mobile
phone and have a quick one-way voice messaging between you
and someone in your address book. This service is becoming
very popular. Nextel has achieved a high ARPU (Average
Revenue per User) from this service. So other operators are
looking at PoC too, as they continuously try to increase
their ARPU.
The Nextel network is a proprietary one. They were able
to achieve very good performance on their PoC service from a
latency standpoint. This means if you press the button on
your mobile phone, you can immediately establish a
connection. To do that across other networks requires a
standards-based approach, which was a challenge initially.
However, the network technology has improved over the years,
and we are now able to have PoC on regular GSM or CDMA
networks as well. The proprietary network will always
perform best because it's built for a specific purpose and
can be fine-tuned. And while the standards-based networks
may have some performance issues, you’re still able to enjoy
a reasonably good user experience.
Anthony: How did you fund
the company?
Nagesh: We had an early angel
round of financing, which we used to develop our first
product and generate revenues in our first year. We then had
two subsequent larger rounds including angels and VCs. To
date, we have raised about $12M.
Anthony: What is your
outlook on the Wireless Market?
Nagesh: There are very strong
trends in the wireless market that everyone is aware of. The
number of mobile phone subscribers is increasing; so is
mobile phone usage. The mobile phone networks are getting
faster and more sophisticated. And the phones themselves are
becoming more advanced, with a greater software component
and more powerful processors. You are able to do more and
more things with your mobile phone, including email, instant
messaging, video, and Internet access. In some countries,
people first experience the Internet through the mobile
phone instead of a computer. So as the number of services
and products in the mobile area increases, and as mobile
phone manufacturers look to create more and more
differentiation from their competition, it’s difficult for
any one of them to keep up with all the required software.
In the past, they had large R&D teams providing everything,
including the phone itself and the software to operate it.
Today they are moving more towards outsourcing or licensing
some of these products from third parties, especially the
standards-based solutions. And this presents a huge
opportunity for software vendors like us to provide them
with a wide range of software products.
As mobile devices are getting increasingly sophisticated
with more software, instant messaging will become as popular
on the mobile network, as it is on fixed networks. With
presence services, you can see the people who are online and
send them a text message, a picture or an audio clip. You
have the ability to know if your friend is available. On the
other hand, voice services such as voice calling or sending
messages via SMS are generally hit or miss because you don’t
know when someone will hear or read your message. So instant
messaging provides that real-time experience, which is why
it’s becoming so popular.
There will be different types of new messaging services
available. Like Push to Talk, there could also be a “push to
view” or “push to see” service, allowing you to view what I
am viewing at the push of a button because of the camera on
my phone. With more advanced wireless networks and phones,
this kind of service will soon become possible. Overall,
this market will be very large and grow rapidly.
There are approximately 1.3 billion mobile phone users
today, with 150 million new phones
shipping every quarter. And most of these users are in North
America, Europe and parts of Asia. While we have not seen a
deep penetration of mobile phone usage in China, India,
Africa, and many other countries, this is starting to
change. I think that China and India are great examples of
the rapid rate at which this growth is occurring. There are
great opportunities to create new services for these
particular markets, as the volume will be huge. However,
because of the economic differences between some of these
countries and the so-called developed countries, operators
will need to be innovative in coming up with a new business
model and ways to charge for usage per message that would
work well in these new markets.
Anthony: What can you tell
us about your previous start-up, Nexcom Technology?
Nagesh: Prior to Ecrio, I
co-founded a company called Nexcom Technology, which we
started around 1989. It was a completely bootstrapped and
self-funded operation. I had some ideas about how to do
flash memory in a particular way, and how to apply flash
memory, especially in the mobile and handheld spaces. Early
on, I filed patents in this area. As a company we licensed
the technology to a variety of semiconductor manufacturers
and provided them with both the license and services to
create new products. I was granted several patents both in
the semiconductor and the mobile areas. We leveraged our
strong intellectual property position at Nexcom and created
some very unique storage products for handheld and mobile
portable equipment with very high capacities, high densities
and ultra low power. These were the characteristics we
specialized in.
I think one of our major accomplishments was that we ran
the company profitably for about 8 years with no venture
funding. Our financial resources came exclusively from the
revenues we generated from licensing our intellectual
property. This approach certainly had some drawbacks and
limitations.
I’d like to make an important observation, which relates
to this type of bootstrapping technique. Make sure you
clearly separate the intellectual property you're working on
for your customers as a consultant from the technology you
are developing for your own products.
We had our liquidity event late 1997 when we were
acquired by ISSI, a publicly traded semiconductor company in
the Silicon Valley. Returns for the founders and employees
were dependent on when people sold their holdings as the
stock price fluctuated between single digits and more than
$40/share since the acquisition.
Anthony: Can you compare the
two situations at Ecrio and Nexcom?
Nagesh: The Nexcom model was
entirely self-funded and bootstrapped. We could not spend a
dollar until we earned it. We had to watch all our dollars
very closely and work for food initially by contracting our
services to customers. We then used those profits to
continuously develop our technology and build the company.
At Ecrio, on the other hand, we raised money from the start
through angel and institutional rounds and were funded to
develop products.
In the self-funded case, you have the flexibility to make
decisions and the freedom to act on your own. You have a
quick consultation and then you move forward. At the same
time, your flexibility and freedom are limited because you
have very little money to spend. Conversely, when you raise
money and have secured a sufficient amount to fund your
business plan, it’s wonderful because you can then focus
very sharply on accomplishing your objectives. With the
right VCs backing you, you get a lot of support so things
happen relatively quickly. It's great when things go well.
The fundamental difference is when things don’t go according
to plan. Then you're forced to decide on what to do next.
Financially motivated investors - and that’s what they are
by definition - would like you to take more drastic actions
sooner. This can sometimes be good for the company and
enable you to emerge as a stronger business. But for an
entrepreneur, it can be very difficult because it can go
against the entrepreneurial spirit. And that’s always the
tough part.
Anthony: You saw a new
market with solid-state storage many years ahead of its
time. You also developed products for that market many years
ahead. What conclusions would you draw from that experience?
Nagesh: It’s very important as
an entrepreneur to pay close attention to the proper timing
of the market. I don’t know if one can get it right or if
there is a formula for getting it right all the time. But
one has to be constantly looking at that and understand that
customer activity doesn’t necessarily mean there is a real
market, so you need to separate the two.
For example, in one case a few years ago, we had a
tremendous amount of attention given to one of our products
in the mobile space, where all the operators wanted to get a
trial and get things going. At the end of the day, almost no
one ended up buying the product until much later. The
activity of doing a trial on the products, evaluating them,
and submitting RFPs (requests for proposals) doesn’t
necessarily indicate that the market is there. People are
just studying the product and evaluating whether or not it
is feasible to make money with it. One needs to recognize
that for what it is and not mistake it for an actual market
moving forward.
At Nexcom, for example, we created flash memory devices
in 1 and 2 MB densities many, many years ago in a SIM card
format (personal identity module that goes into GSM mobile
phones) with the belief that the SIM cards would become more
and more popular over time. We went out saying that these
would be the ideal platform and format to deliver a very
large amount of flash memory once it is configured like a
disk drive or a floppy drive. While conceptually it was
great, there really wasn’t much of a need (by mobile phone
manufacturers, or anybody else), to have large amounts of
memory residing on these cards. They didn’t know what to do
with it.
Eight or nine years later, we are seeing large amounts of
memory usage, whether it's for digital cameras or mobile
phones. In that respect, especially when we were targeting
the mobile phone manufacturers, it was quite early. It was a
good idea fundamentally, but the timing was off. It's
extremely important to recognize how important the right
timing is for a product or service you create. And while
it's not rocket science to figure that out, it can be very
tricky to get it right. You need to be constantly watching
and make sure that the market is indeed validated. And you
know it is when customers start to buy in volume.
Anthony: You chose to
globalize Ecrio and Nexcom early on. Is this part of your
entrepreneurial style?
Nagesh: Businesses globalize
when they recognize that their markets are not confined to
the domestic geography, but include foreign countries as
well. So they go looking for customers in the global
markets, delivering products to them and supporting them.
We’ve had one important advantage: we were either too naïve
or not afraid enough of going out and looking for customers
anywhere, so we found them all over the world: Europe, Japan
and Taiwan. We’ve always been successful in doing that.
Globalization can be beneficial to a business when done
properly. Many people will advise you to take care of your
domestic market first before going overseas. So if your
product has a broad appeal in multiple markets, it would
probably be better to perfect it first in the domestic
market and then take it globally. Globalizing our businesses
has had the benefit of allowing us to diversify revenue
sources and smooth revenues, as economies grow at a
different pace in various parts of the world.
Anthony: What are your
thoughts on outsourcing?
Nagesh: I believe there are
two approaches: Outsourcing and Off-shoring. Any time you
give work to someone outside your company, you are
outsourcing. So if I hire an attorney from a law firm who
specializes in corporate law, I am outsourcing. If I need a
certain specialty that I don’t have in-house, I would hire
someone outside to do it for me. This makes sense because,
as a small company, it is not economically feasible to bring
some of these functions in-house. The advantage is that you
only get what you need at the time you need it. You are not
saddled with the overhead associated with hiring a person
full-time, but you pay a price for that convenience.
Outsourcing has been around for a long time and is being
used by a great number of businesses, including ours.
The other approach is that of off-shoring, where you go
to labor markets which have economic benefits compared to
where you are today. Basically, you go to areas where you
can buy the same service for a much lower price than in your
domestic market. This is becoming more and more common
nowadays. Software, for instance, is being developed in
India, China, Romania, Russia, and other parts of the world.
We’ve used off-shoring as well, because we’ve been fortunate
enough to have some of our earlier affiliates leave the
domestic market and set up development centers overseas. So
we’ve used them to develop our products cost effectively.
Off-shoring, however, has its own problems. You have to
be very careful and, much like with outsourcing, you need to
have a process to properly manage the relationships, monitor
progress, and have a very clear understanding of what the
deliverables are. It’s very much like managing any other
project within the company. It needs to be done right.
Anthony: What advice would
you give today’s entrepreneurs?
Nagesh: It is very important
for entrepreneurs to not only make sure that the market is
huge, but to also get the right investors to back them.
You need to have a very clear idea of your total
addressable market and customers. It’s easy to lose sight of
the market segment that's buying your product vs. the
general market that may have a loose interest in what you’re
doing. Make sure you separate these two and focus on the
segment that’s buying, because the money will only come from
that segment.
As an entrepreneur, you should have a very clear focus
and understand the financial implications of every step. You
need to develop a solid financial plan and understand key
issues such as: how does the funding work? What does it mean
in terms of dilution? What will subsequent funding rounds
entail? How will the shares be distributed? What are the tax
implications? etc… Put some thought up front into how you
are going to exit and what you are going to exit for. When
starting out, very few entrepreneurs spend enough time
thinking about all these matters, which are extremely
important. Make sure you seek professional advice to help
you understand all the potential ramifications from the
start.
Bio
Nagesh Challa is the CEO and co-founder of Ecrio, a
privately held company that develops and markets
presence-enabled software products for mobile phones and
networks. Ecrio's technology connects fixed and mobile end
points to provide seamless solutions for voice and data.
Ecrio markets its products through OEM relationships with
mobile and enterprise infrastructure companies.
Prior to Ecrio, Mr. Challa founded Nexcom Technology
Inc., a Silicon Valley start-up that pioneered the concept
of mass storage for mobile devices. He assembled and managed
a team of 30 professionals and negotiated several license
agreements with large global OEM's. He successfully sold
Nexcom to ISSI (Nasdaq:ISSI) in December 1997. During his
20-year career, he held various engineering and management
positions with National Semiconductor, Exel Microelectronics
and Catalyst Semiconductor.
Mr. Challa received a BS in Physics from Andhra
University, India, an MS in Physics from Western Michigan
University, and was a graduate student at Purdue University
before starting his career in the Silicon Valley. He has
been granted 19 patents in semiconductors, software and
mobile technologies.
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