Building India’s First Telco Product Company

The United States has long looked to India for sophisticated software services that can be had at a fraction of the price it would cost elsewhere. U.S. investors, however, rarely bet on Indian-run product companies; solid technologists, they believed, could not compensate for inexperienced management.

Enter Sanjay Nayak, a 19-year tech industry veteran with experience in India and the United States. India-born, Nayak was educated both in his native country and the United States. He has served as a liaison between the countries, establishing and running Indian subsidiaries for top tech companies like Cadence and Synopsys.

Today, Nayak is the chief executive of Tejas Networks, a seven-year-old company he started in Bangalore, the city that is India’s technology center. Tejas designs and manufactures sophisticated telecommunications equipment that carries voice and data over optical networks.

Tejas products have received tremendous customer success in India and internationally. In India, all major telecom networks, including state-owned telecommunications giants like Baharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) and large private operators like Bharti and Tata are using Tejas products to build their next-generation optical networks. Since it is the OEM supplier to multiple global telecom equipment companies, Tejas boasts a significant number of international customers. To date, Tejas has shipped more than 40,000 systems deployed in various carrier networks globally.

“India had all the ingredients we needed to build a great company,” Nayak says. “There was a large pool of talent including people who had worked in U.S.A. and in large multi-national companies. There was a strong domestic market that would be our sandbox for new ideas.”

That is particularly true in telecommunications where India is the fastest growing market in the world with about 7 million signing on for cell phone service each month. Today, about 200 million Indians have phone services, and of that more than 150 million are mobile phone subscribers. Estimates call for Indian cellular subscriptions to reach 500 million by the end of 2010.

Indian telecommunications carriers demand the most advanced technology at the lowest prices – they wanted to pay between 10 and 20 percent less than their counterparts in China, Nayak says. Overhead is vastly cheaper in India than in the United States, and research and development costs are typically between 25 to 35 percent lower. Co-founder Kumar Sivarajan, a former Thomas J. Watson Research Center research scientist, university professor and author of the definitive textbook on optical networking, had mentored the best optical and telecom engineers in the country. Many now work for Tejas.

One of Tejas’ key innovations is in its business model.  The company decided to pursue OEM agreements with large telecommunications equipment suppliers in Western Europe and the United States. The larger suppliers fill out their portfolios with Tejas’ sophisticated technology while Tejas gains entry to their customers without incurring the costs of building and maintaining a direct sales force.  This strategy, coupled with the dramatically lower expenses to develop products in India, has enabled Tejas to achieve profitability with a fraction of the infused capital it would take for a company based in the industrial world.  (Tejas has raised approximately $49 million to date).

Tejas has assembled a blue chip team of investors with deep sector, management and venture capital experience. Early on, Nayak hooked up with Gururaj Deshpande, a legendary India-born entrepreneur known to friends and colleagues as `Desh.’ In 1990, Deshpande founded Cascade Communications, a designer and manufacturer of frame relay networks, purchased for a staggering $3.7 billion by Ascend Communications in 1990. A year later, Deshpande started Sycamore Networks; Sycamore’s 1998 initial public offering raised $284 million making it the most successful initial public offering of that year.

Deshpande and Sycamore made an initial investment of $5 million; the 57-year-old Deshpande today serves as Tejas chairman. In 2004, Tejas attracted the attention of venture capitalist Navin Chaddha, today a managing director of the Mayfield Fund and leader of its India practice. Tejas was Mayfield’s first direct investment in an Indian technology company.