There's Something About Rajesh

Remember Al Gore? Former vice president of the USA in the Clinton administration and long considered front runner to be the next president? For whatever reasons, he never made it. As he once famously quipped, “I am Al Gore, and I used to be the next president of the United States of America.” This may sound uncharitable, but it is difficult to miss the parallels between Gore and Rajesh Reddy.

 

At the peak of the dotcom boom in 1999, he hit the headlines as the next big Indian thing. Unimobile, a company he founded, had five million users across 130 countries using the mobile messaging system he built. “There were bidding wars, people were literally pounding our doors to invest in us,” Reddy recollects. And then, inexplicably, Unimobile imploded.

 

But not before Reddy learnt a few lessons: Senior management must know how to withstand investor pressure without compromising strategy; success takes time. Next, he teamed up with Ashok Narasimhan, founding president at Wipro, and launched July Systems in 2001 to build a “wireless superstructure” — the Holy Grail for telecom companies.

 

When completed, it would allow them to deliver any kind of content practically to any mobile phone using any possible business model anybody could think of. With Narasimhan as the CEO in Silicon Valley and Reddy as president in Bangalore, July Systems raised $8 million in funding from respected VCs like Westbridge Capital (now Sequoia India) and Acer Technology Ventures even before a single line of code had been written.

Since then, most of July System’s original backers quit. There came a time when investors wanted the company sold off to recoup their investments. Worse, most telecom companies wouldn’t touch the “wireless superstructure” with a barge pole. And Reddy has scrambled to put a new model in place.

But you got to give it to the man. He retains the spunk he started out with. He continues to learn from his mistakes. But most importantly, he has just reported his first cash profit, 13 years after he started out as an entrepreneur.

If you don’t succeed twice…
When July Systems started out, Reddy spent the better part of two years developing its software from scratch. To recover the cost of development, he needed to price the product high — as high as $1 million per customer. To sell at these prices, he needed offices and expensive talent. So July opened bases in 10 countries and hired as many senior executives.

Two years down the line, Reddy realised July’s customers could be counted on his fingers. Two reasons: One, most telecom operators like to closely control the access to customers of value added services (VAS) on their networks. That’s because in mature markets, revenues from VAS contribute as much as 25-30 percent to an operator’s revenues. Reddy’s model allowed third-party applications and content find their way to customers directly.

Two, even if they were open to deploying the new software, there were powerful system integrators (SI) to contend with. Like IBM, HP, Accenture and Cap Gemini. They make huge sums of money writing, integrating and managing software solutions for operators. If July Systems got into the game, the same thing could be had at one-fourth the cost. So, on the few occasions when July actually landed a deal, the incumbent SI would force it to embed new features into its existing solutions running within the operator network. This crippled the flexibility of July’s product and prevented customers from seeing its true value.

It was clear survival would not come without drastic changes. In 2006, 10 years after he had started his first company, five years into his second, Reddy started putting together his third business model.

…You try yet again
Keeping the mobile industry as the only constant, he started looking for other customers for July’s solutions. The search led him to American media companies, many of which wanted to harness the mobile phone to reach more customers. “They were treated like chipmunks by mobile operators and made to sell wallpapers, games and ringtones. They did so grudgingly. Because their business was running direct-to-consumer channels, not selling wallpapers,” says Reddy.

Nevertheless Reddy figured that media companies still had three huge strengths — premium content that subscribers want, massive brands and marketing muscle, and in-house ad sales teams that knew how to sell audiences to advertisers. Combined with July’s wireless superstructure they could bypass the operator altogether.

“We flew down to New York and went straight for the offices of Viacom,” says Reddy. After managing to corner a few key executives, Reddy presented his plan. To make it sweeter, he linked 20 percent of his fees to revenues generated from Viacom’s ad sales on the platform. Viacom agreed. By early 2007, July managed to get yet another prestigious client — Fox Networks.

But with profitability still far away and operational expenses shooting through the roof, fissures cropped within the senior team and the company’s board. Most of July’s VCs did not find the new model exciting enough. A few even mandated the board to find a buyer for the company.

Reddy turned for help to Venkat Ramaswamy, co-founder of financial services firm Edelweiss and his good friend for close to 10 years. He, in turn, roped in Raj Rajaratnam, US-based hedge fund guru and founder of Galleon Capital and existing investor Sequoia Capital as the fresh set of investors for the “new July Systems.”

Narasimhan, meanwhile, chose to step back from his duties at July. “Rajesh had matured enough to lead the company,” he said. He remained on as an investor and as a board member.

Reddy retained his offices in the US and India and shut the others down. In three months, he reduced the cash burn by 70 percent and focused on getting in new clients. In the US, it now includes Turner, ESPN, Time, CBS, NBA and NASCAR.

In India, too, July Systems has signed up prestigious media brands like NDTV, Network18 (which publishes Forbes India) and Mint. Sanjay Trehan, erstwhile head of NDTV Convergence, says he admires Reddy’s decision to put his “skin in the game” by going with a revenue-sharing deal instead of a fixed-cost one. Trehan claims July-powerd NDTV mobile channels are already generating profits through ad-sales on a monthly basis and are now “self-sustaining.”

Rahul Pandey, head of Mobile18, Network18’s mobile division, says he chose to sign up with July because of the firm’s keen understanding of the media space, and a clear decision to never aspire to become a consumer channel itself (therefore a competitor to a media channel).

Today, Reddy claims July reaches 25 million users through its clients worldwide and generates over 1.7 billion page views (up from 350 million in 2008). Reddy also claims July Systems has, for the first time, started generating cash profits from the current quarter. Though he refuses to reveal his current revenues, he says July will be “in double-digit million dollar recurring revenues” from 2010 from its existing customers alone.

On record, his new investors say July Systems should be considered an 18-month-old company, and therefore its exit horizon is three to five years away. But in reality, there will be pressure to prove to the world that they can create a successful exit like an IPO at the end of that horizon.

“My goal is to complete a karmic cycle of sorts,” says Reddy. “A lot of people have made bets on me. If I can build a successful business and ensure everybody gets good returns, the cycle will complete and validate me psychologically.”


Profile : Rajesh Reddy, 38

* Never-say-die tech Entrepreneur, adept in raising venture capital
* Founded Unimobile in 1996 (as Grey Cell Technologies) offering mobile phone-to-computer communication, at a time when even inter-operator SMS was in its infancy. Introduced ePage, India’s first email over paging service, with Motorola. Started mobile software company July Systems in 2001
* Named in 2002 by MIT Technology Review as one of the world’s top entrepreneurs
* In spite of Unimobile’s failure, managed to draw in close to $30 million in venture funding for July
* He has now begun his third avatar