[YS Exclusive] How to sell your startup and run it too: the extraordinary tale of Sharad Sanghi’s success with Netmagic
How does a young startup survive a tech meltdown and keep going to build not just a profitable business but also generate returns for its investors and employees? How – and why - does a founder sell and continue as CEO in a company that no longer belongs to him with the same zeal as before?
The story of Sharad Sanghi, considered a pioneer in the Indian cloud computing space, serves up lessons for every entrepreneur. His 21-year journey at the helm of Netmagic Solutions, the cloud, and managed infrastructure services company he founded in 1998, is as much a playbook on spotting opportunities where there seem to be none, as it is about having and investing in a vision for the long-term.
That vision has today vaulted Netmagic to the top of the game in India’s public cloud services market.
In an exclusive conversation with YourStory, the Netmagic Founder (now Managing Director and CEO) takes a walk down memory lane, sharing his journey of piloting the company to become India’s leading managed cloud services and hosting provider.
Watch Sharad Sanghi's silent success story
Before that, he steered Netmagic through the dot-com bubble at the turn of the century, helping it emerge virtually unscathed through the downturn that followed.
He then led his venture through several funding rounds, bringing on board marquee investors, before finally selling a majority stake in the company to Japan’s NTT Communication, a leading global IT services solutions provider ranked among the top 100 of the Fortune Global 500 companies.
The 2012 deal marked the first major acquisition in India’s data centre market.
Sharad also has the rare distinction of having renewed his contract with the acquirer of his company to stay on as CEO, even after selling his remaining stake in the firm he founded. He continues to lead it with the same passion and commitment as before, having completed 21 years of doing ‘more of the same thing’ that excites him.
Watch Sharad talk about 21 years of doing 'more of the same thing'
Under his leadership, Netmagic has become India’s leading managed cloud services and hosting provider, with more than 1,100 employees and nine data centers delivering services to over 2,000 enterprise customers across the globe.
Today, Netmagic is also working closely with startups, looking at starting an innovation centre as well as a new venture with NTT.
“There's something new that we're doing constantly, and we have the flexibility to do new stuff. And as long as that continues, I am good. For example, we are starting an innovation center and possibly looking at a new venture along with NTT in the future. This (type of thing) is what keeps me going,” admits Sharad.
In the aftermath of the dot-com bust
Shortly after raising their first round of funding, Netmagic built a data centre in Mumbai. Just when they thought things were ready to take off, the company was faced with surviving through its first real test: the bursting of the dot-com bubble, which saw many enterprises, including Netmagic’s customers, struggle to stay afloat.
Watch how Sharad got through the tough times.
Ask Sharad what kept them afloat and he replies like only an entrepreneur would – a focus on profitability.
“My focus was always on the bottom line,” Sharad tells me in an hour-long conversation that is as insightful as it is riveting. The business of data centres is a capital-intensive one. Each data centre requires an investment of over a $100 million.
“In the initial 15 months, the business was generating cash. So that was one good thing,” he recalls.
When the dot-com bubble burst in 2001, Netmagic was faced with many of its clients not paying them. “At one point, we were down to our last Rs 20 lakh in the bank,” says Sharad.
But fortunately for them, they had started building services vertical too. “We offered to manage the customer’s operating system, database, network security, web servers, and then provide disaster recovery services. That way, we could upsell to our existing customers. That not only increased our margins but also increased stickiness in the business. And that's how we survived,” he reminisces.
But Netmagic didn’t just survive. It thrived.
It then brought on board venture capitalists like with Nexus Venture Partners, Fidelity, Cisco Systems, and Nokia Growth Partners. He subsequently went on to sign the deal with NTT, which is considered one of the successful Japanese investments in India, second only to Suzuki’s. And in doing so, Sharad provided an exit to his early investors.
Watch how Sharad Sanghi onboarded his investors
The acquisition and the exit
“I wanted to build. I knew that the market was just taking off, and I wanted to develop the cloud portfolio. I was not looking to exit completely, but I didn't mind taking some money off the table because then I wouldn’t have to worry about my family. (That way) I could take more risks,” explains Sharad while recalling his decision to sell a majority stake in Netmagic to NTT.
The 2012 acquisition was a sweet reward for the team who had been with him from the earliest stages of building the company as all the employees got what he humbly refers to as ‘a nice exit’.
“Roughly 17 percent was between stock and options. The investors got a good exit and I kept 26 percent, which I sold later because NTT now is in the process of a global restructuring. We are trying to synergize multiple group companies so that we have a common sales (platform) and a common backend not only to save costs from the backend but also to be able to hunt together,” says Sharad.
Watch how Sharad got a successful acquisition
The ‘we’ is unmistakable. He may not own stakes in the company anymore but he’s no less invested in it than he was the day he started it.
Sharad’s story provides an insight into the pros and cons of having a VC and PE-backed venture and a foreign strategic investor. He says,
“The investors were more focused on the topline and speed. They said, ‘Build and business will come.’ The Japanese are more conservative but extremely nice. ‘Let’s look at a 15-year plan,’ they said. I’ve had the fortune of having the best of both worlds. That’s why even after the exit, I am still continuing at Netmagic.”
It is worth going into the details of how Sharad got NTT to invest in his company and subsequently acquire it. Around late 2011, consolidation took place in the data centre space. The world wondered if India could make the most of that trend.
Watch Sharad's talk about the successful exit
“We were probably the only players because the others, like telecom companies, had a lot of other businesses merged in and were also publicly traded. Hence, it was difficult to acquire them. So, we were the only player in town that people were interested in. I remember once somebody called me and said they wanted to meet me for a partnership. In the course of the conversation, they asked if I would be willing to sell some stake in my company. At that time, I politely refused and sent them back,” recalls Sharad.
However, his investors Nexus, Fidelity, Cisco, and Nokia, felt that getting a strategic investor and then eventually taking the company public should be the game plan.
“I just told my investors, ‘Look, I can either spend my time scouting for strategic investment or focus on my business.’ They said that if they (new investors) were willing to pay that value that they expected to get from the stock market, they did not have any problems if I sold my stake.”
These investors did not mind exiting, as most of them had spent four to five years invested in Netmagic by then. As it turned out, it was decided to abort the plan to go public and zero in on NTT.
Giving Raj Dugar of Fidelity and Sandeep Singhal (earlier of eVentures and later a founder of Nexus Venture Partners) due credit for what Netmagic is today, Sharad says: “They guided me through and through, including helping me build my management team.”
Watch what Sharad did as an entrepreneur.
An admirer of the Japanese
Sharad feels Japanese investors are a class apart. He recalls the day they were to meet in Mumbai.
“The city was shaken by the serial blasts on trains. But they did not flinch, and we had the meeting. Anybody else would have avoided coming to the city. They just went about their business normally,” he points out.
This was in stark contrast to another investor who visited them from the US. “We did not shortlist him, because he basically said something derogatory like, ‘I don't know how you guys do business in India.’ I liked the Japanese and their culture. And I knew they would be nice to the employees,” Sharad says.
He also remembers when he met the Japanese Consul General with his global CEO, who was praising how Netmagic was growing so well and how it was one of their best investments. “The Consul General said, ‘Good you told me that because you know people have come to me and said the Japanese lost money on Daichi, they lost money with Docomo, so are you guys still gonna invest?’ So I told them, I've already given them an example of Suzuki, and I'm going to give them an example of Netmagic.’”
Watch Sharad talk about the mindset of an entrepreneur.
What helped make the acquisition a success was a conservative strategy, says Sharad. “I think what we've done is a little bit more conservative and not as gutsy as some of the other (startups). But yes, we are profitable and growing nicely. I think we are probably worth more than $1 billion today. But that’s not the motivation. I'm happy that NTT, a Japanese company, benefited in India and they've been very nice to us.”
The sentiment runs even deeper.
“The last thing I would want is to make an exit myself and then have the company go down the drain. I won't be able to enjoy the wealth. I want the people who invested in me to be successful too,” says Sharad.
In the startup space where usually the B2C players are the demigods, it is interesting to see how Netmagic makes a case for B2B players to emerge as winners in the long run.
Talking about B2C companies and how they operate, Sharad says, “The unit economics doesn't work for many years before it starts working. I just can't do that. But I think you'll start seeing B2B companies now getting their due, especially with software as a service being offered to businesses. There are already some success stories in the space.”
Building a culture, a legacy by solving problems
As an entrepreneur, Sharad has created an enabling atmosphere and culture that has helped people stay on and thrive. Many times, it’s about the right opportunities.
Watch what success means to Sharad.
While doing his Master’s from Columbia University in New York, Sharad worked as a research assistant on a project to network the whole of Columbia University. In the late ’80s, only a few people had such computer networking skills – or the opportunity to develop them. The internet as we know came along only in 1994.
Sharad was one of the handful to get such a rare opportunity, that too at a university like Columbia. “That's how I got the background or the skills that I eventually used in setting up Netmagic,” says Sharad.
When he returned to India in 1995, another opportunity cropped up. Back then, VSNL – then owned by the government - had a monopoly on commercial internet services. “It so happened that within VSNL, they had a routing issue. I approached them through a friend, saying I could fix it. I got that opportunity and eventually a consulting contract with them. So, I started consulting for them and Reliance and a few others,” he says.
But Sharad wanted to start something big. “A consulting business cannot be scaled. In 1998, the government announced that it would allow private players to provide internet services. Also, during this time I was in touch with BV Jagadeesh, the Co-founder of Exodus Communications (who he looks up to as his mentor). He wanted to do something similar in India. The moment the government announced that they were going to privatize internet services, I thought of a business plan for providing internet services for mission-critical enterprises. And that's how I set up Netmagic.”
The circle of life
Today, life has come full circle. Sharad is investing back into the startup ecosystem. He has already invested in five funds to help entrepreneurs and set up the startup challenge for the NTT Team in India. In the works is setting up an innovation center where Netmagic will enable startups to build and showcase disruptive technologies.
Watch: 'From a successful entrepreneur to an investor now'
“We’ve worked with a lot of entrepreneurs in our space. There's Net Monastery and Security Brigade. We've worked with many startups in the storage space and in the disaster recovery space. It helps us innovate and use that technology to provide services to our customers. We are looking at setting up an innovation lab where we are going to invest money and keep an environment for startups to come and play with our technologies.”
Over the years, Sharad says his key learnings have been to first and foremost be customer-centric, respect money and investors, and not give in to cutting corners. He feels the time has come for him to give back to society the way Nandan Nilekani did with the Aadhaar project and now with a new fintech initiative.
Watch Sharad talk about his dreams.
“I would like to contribute back in the area of cybersecurity,” he says.
Given the tenacity with which he built and continues to run Netmagic, I have little doubt that Sharad will do just the same when the time comes to give back.
Until then, as he puts it, when it’s mission-critical, it is always Netmagic to the rescue.
Watch the full interview here.