Wealth Issue 2017: Comeback Kids

Sanjay Nayak, 53, CEO & MD, Tejas Networks

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‘Even through the dark years, we never felt that the game was over,’ says Sanjay Nayak

In India, if you download a bit of the internet, or make a phone call, somewhere along the way the data is likely to pass through high-tech optical transmission hardware made by Tejas Networks, a 17-year- old Bangalore-based network equipment maker that has braved several calamities including a flood, a fire and the 2G scam to emerge a marquee made-in-India product company that is today building a large chunk of India’s internet broadband highways. “Suddenly, we are in the hottest market for data in the world, the largest free market for telecom. Through the dark years, however, we never felt that the game was over,” says Sanjay Nayak, the CEO and co-founder of a company whose fortunes have turned as dramatically as a Bollywood script.

Tejas’ business was built on solid technology—its CTO and co- founder Kumar N Sivarajan literally wrote the book on optical networks— at prices that could rival those of Chinese manufacturers, who had over the years pared down margins on telecom equipment by nearly 20 per cent, dragging American telecom EBIDTAs down to low single digits. From the beginning, Tejas did things differently. Instead of using a readymade Application Specific Intergrated Circuits (ASIC) chip designed by companies like Qualcomm, Intel and Nvidia, it chose to power its hardware with Field Programmable Gate Arrays (FPGAs), which are more easily reprogrammable and cost-effective because they are mass produced. FPGAs can be programmed to become any kind of digital circuit, for use in devices ranging from a TV and a washing machine to the Mars Rover. “We were the first to try out FPGAs for optical networking. The cost advantage, and the fact that we could programme the software as often as we wanted to, and quickly at that, made them the right fit,” Nayak says. “ASICs take 12 to 18 months to be developed and there is not much tinkering possible after they go into production. With fast-evolving data networks, this was a major problem. And if you buy the chips from other vendors, you have to pay for the IP. Over the years, we have generated over 250 silicon IPs in-house.” For every hardware engineer, Tejas has two software engineers, and its suite of software-differentiated products is among the sturdiest and the most advanced in the world. Its revenues crossed Rs 800 crore last year and it expects to grow 20 per cent year on year. Counting among its customers Bharti Airtel, BSNL, Reliance Jio and other Indian and foreign telcos, Tejas has also supplied equipment to the ambitious BharatNet project to provide broadband internet to all of India’s gram panchayats, and helped connect 40,000 villages so far. It is a key stakeholder in the Smart Cities programme, and has helped lay down 5G standards for the world—a first for India, which had no say in 3G and 4G standardisation.

Post its IPO in June, Tejas has minted at least a hundred dollar millionaires within the company. But some years ago, the company’s fate was shot through with vivid dangers. At one point, cashflows were so dire that Nayak had to wait a week for collections before he could pay the salaries of his 500-odd employees. “From 2012 to 2013, my post-lunch ritual was to review collections with every sales guy. To me, an entrepreneur who has gone through a working capital and cashflow crisis is a real entrepreneur,” Nayak says.

The business was doing well, until it wasn’t. “In 2008-09, we had hit Rs 600 crore in revenues. And we did this by solving the hardest problem first. How do we make money in India, where our spend— mostly manpower—was in rupees and so were our earnings? We managed to solve this problem and then it was a breeze to go abroad, where margins were much higher. And if you’ve built equipment that could sustain in Indian conditions, it is easy to make it work in developed countries,” says Nayak, his voice rent with excitement. “And then funny stuff started to happen. We were all set to file for IPO when Lehman Brothers filed for bankruptcy and the world markets crashed. There were to be no IPOs through the subprime crisis, so we decided to wait it out.” But there were other apocalypses in store. In 2009-10, Nortel Networks, Tejas’ biggest international customer, accounting for 40 per cent of its revenues, filed for bankruptcy. And just like that, cashflows tanked, investors didn’t want to back the wrong horse, and the worst was not yet over.

Telcos did not buy for two-three years. From Rs 600 crore in 2008-09, our revenues fell to under Rs 200 crore

Perhaps the sharpest shard in Tejas’ emotionally freighted story was the 2G scam. Government telecom spends took a dive, and private players who had already spent too much bidding for spectrum and were at risk of their licences being cancelled, froze their capex. It was a blighted time in Indian telecom history, and Tejas was badly hit. “BSNL and other telcos that were a big chunk of our revenue did not buy for two-three years. From Rs 600 crore in 2008-09, our revenues fell to under Rs 200 crore. We had raised a little money, about $24 million, from Goldman Sachs before the planned IPO in 2007, and now, even as we were making losses, we decided to use the money left to rejuvenate our products.” It was a bold call. From 2011 to 2014, the world had begun moving from voice to data. 3G and 4G were evolving, and transmission equipment had to transform to carry data. Even the most high- tech products of Tejas were creaking at the wheels. “In a year when we sustained over Rs 50 crore in losses, and made less than Rs 200 crore in revenues, we decided to invest Rs 60 crore in R&D,” Nayak says. Tejas grasped the nettle, continued working on the transport and data layers of the FPGAs, and tried to solve problems like how to reroute a call through another network without dropping it, and how to enable selling data packs of every possible granularity instead of having to choose between 10 MB and 100 MB.

Investors in Tejas believed they had a solid business, and stood by it through tough times. Cascade Capital co-founder Gururaj ‘Desh’ Deshpande, a dotcom boom billionaire and brother-in-law of Infosys co-founder NR Narayana Murthy, who was a key investor in the company, was unfazed by the low tide. After the IPO, Deshpande still owns about a 20-per cent stake in the business. Intel Capital, Goldman Sachs and Mayfield are among the other investors in the firm. “We are the only professional tech product company to be listed on the market. We have no promoter,” says Nayak.

His is not the ersatz wisdom of an entrepreneur chasing a moment of perfection. “We knew we could not give up. We were in it for the long haul. And I mean, what else could go wrong?” Plenty, as it turned out. In 2011, one of Tejas’ bleakest years, Cyclone Thane hit southeast India, submerging coastal belts including Pondicherry. Tejas had a manufacturing facility in Pondicherry on account of tax rebates in an SEZ, and it went under water for 15 days, destroying precious equipment. “We recovered some money from insurance but our supply chain was completely disrupted,” says Nayak. In an effort to consolidate its offices, Tejas moved its entire team to a facility in Electronics City, occupying the 3rd to the 5th floors of a building. Then the unthinkable happened. In early 2013, a fire engulfed the whole building, burning down all of Tejas’ labs, perhaps worth hundreds of thousands of dollars. “Thankfully the IPR was backed up on remote servers,” he says, “Silver lining.” On an emergency basis, the company found a new suite of offices, 75,000 sq ft in a building that it shares with Infosys. “Everything that could go wrong went wrong. When I told our story to investors on our IPO roadshow, one of them said, ‘You are making it all up, aren’t you?’ Because the truth was so much stranger than any fiction could be,” Nayak says.

An entrepreneur who has gone through a working capital and cashflow crisis is a real entrepreneur

In 2014, with 3G and eventually 4G adoption in India, and a diversified international customer base, Tejas’ star was on the rise again, albeit slowly. It is tempting to romanticise its dark years, but that would be a mistake. Nayak says they took it a day at a time, believing opportunity would present itself somewhere down the line. Few narratives of a business in India unravelling and rebuilding itself are so touching. Through it all, Tejas never fired anyone, a mark of its probity, and continued to innovate. “We realised that we had a fundamental advantage working from India. We could do five times more R&D for the dollar in India than in the West. So although we spend 7 to 8 per cent of our topline on R&D, it is equivalent to an American company spending 35 per cent. This is how we manage to have a 20-plus per cent EBIDTA last year,” Nayak says. In the past year, Tejas added 100 people and Rs 400 crore in revenues, crossing Rs 800 crore in total revenues. “That’s the beauty of a product company, isn’t it? In an IT services company, you hire by the thousands, but you also get paid on time, you get paid in dollars while you pay your employees in rupees. The product business is a whole other beast.” With a 15-18 per cent share of the Indian optical networks market, and drawing 35 per cent of revenues from global clients, Tejas is on the right track. “4G is good for us, 5G even better. With fast internet, people are consuming 1GB of data per day rather than 1GB in a month, and we are building the enabling networks. With smart cities, and BharatNet, it looks like we are in the right business,” Nayak says. Many of the 5G standards in optical transmission have been contributed by the Tejas team, so the company is equipped to handle the transition to 5G even before it happens.

The company is now involved in evangelising around India’s ambitious digital governance and infrastructure projects, the importance of digital security, and the product startup ecosystem in general. “BharatNet is the world’s largest network on optical fiber. And what works in India will work in Southeast Asia, Africa and Latin America. If we take what we have developed in India—the whole stack, from Aadhaar to the physical infrastructure—to the world, it’s a huge export opportunity,” Nayak says. He is co- chairman of India’s Telecom Equipment and Services Export Promotion Council (TEPC). Nayak walks us through an outlandish room with astroturf and cardboard buildings, and all manner of sensors, to show us how smart cities work. “It’s all about how many sensors you can use and how intelligent they are, and all of this is only possible through data.” At Tejas Networks’ labs, thousands of metres of yellow optical cable lie in spools, transmitting several TBs of data through sleek network boxes. Nayak talks excitedly about the tech—still a geek at heart, he went to North Carolina State University, where he was recently inducted into the ECE Department’s Hall of Fame—and how it powers the modern universe, and how important it is to secure it. “I expect to see many companies sprout in this space in the years to come,” he says. “India needs to build product brands that are globally relevant.”

Tejas doesn’t spend a whole lot on marketing. Its logo, in fact, is a somewhat pixilated rangoli. “We are working on branding for the international market, but we don’t want it to be something flimsy. We’d rather ride the Make In India wave, and sell India to the world, and ourselves as enablers of this new era,” Nayak says.

Nayak went to school in Raipur, and then to the Birla Institute of Technology, Mesra, before heading to the US for his MS. Upon graduation, he joined a startup called Gateway Design Automation— the inventor of Verilog simulation language and software— which was later acquired by Cadence Design Systems. Nayak was Cadence’s first employee in Delhi. In 1995, however, he went back to the US, working for a company that got acquired by Synopsys. From 1997 to 2000, he ran Synopsys India out of Bangalore, before starting up. “For all our ups and downs, I wouldn’t trade the experience of running Tejas for anything,” he says. “Of the first 200 employees, 120 are still with us, several of them had moved back from the US. This level of talent accumulation is hard to see in India,” he says.

“The domestic market for technology products is opening up. Tejas Networks is the harbinger of this change,” says Sharad Sharma, co-founder, iSPIRT. “Their success will be an inspiration to many for years to come.”

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