Value Added: Betting Big

Here's Tom Heath's latest column on Washington's successful business people:


One of my favorite books is Joseph Frazier Wall's 1970 biography of Andrew Carnegie, who built a steel empire before selling it to J.P. Morgan for $600 million in 1901. I admire Carnegie's entrepreneurial genius, which included rolling most of his profits - sometimes against his partner's wishes - back into the steel business, a practice which built one of the biggest companies of its time.

One of Carnegie's favorite maxim's for business success was "Put all your eggs in one basket, and then watch that basket."

Carnegie made big bets.

So does Piyush Sodha.

Piyush Sodha (pronounced P-Yoosh So-Dah) is an Indian-born electrical engineer who recently joined his friend and frequent business partner, Mark Ein, as an investor and co-chairman in Kastle Systems, the Rosslyn-based building security company. You've heard of Kastle Keys - those computerized cards you slide through slots to get into your building.

I was interviewing Piyush for a short story about joining Kastle when he remarked that he and Ein, especially Ein, have a knack for spotting a good business. The key, Mark once told me, is to find a really good business, then pour in the investments and bet big. Ein often brings in Sodha as an investor to ramp up the business.

"I put lots of money in one place and watch it," said Sodha, sounding just like Carnegie. "I am of that belief."

Sodha usually invests in companies that he manages. The rest goes in bonds or other conservative investments. He doesn't play the stock market and doesn't invest in real estate.

Putting your own money in companies can make you rich, and it also sets the right tone for employees, he says.

"You have skin in the game. You have employees who watch that. They go to war with you. And you work to make it grow. It sets the right tone for my team, my employees and everybody else. You cut a check on one day, and it's not a small check, and you start to work."


Piyush Sodha. Photo Credit: Venturehouse Group Photo

Sodha, 49, says proudly that his companies have minted at least 50 millionaires in the Washington area. "Not that wealth is everything, but you have made people's lives more comfortable so they can be able to do other things in their journey."

To whom do I write the check, Piyush?

Sodha came to the U.S. from India, where he grew up in New Delhi, the son of a physics professor. He won a scholarship to study electrical engineering at Drexel University in Philadelphia because it was the only way he could afford to come to the U.S. He later got an MBA from the Wharton School at the University of Pennsylvania. He also spent a decade in the corporate world: IBM, Booz-Allen, Nortel.

He enjoyed the status the companies conferred on him, but his entrepreneurial itch to be rich wasn't getting scratched. Until.....

"I ran into a guy called Raj Singh at a conference. We started talking. He had a small business in D.C that did radio engineering. This was helping wireless guys decide where to put the cell phone towers. He had a nice niche business, with $10 or $12 million in revenues. I got enamored by that and joined him and in two or three years, he wanted to move and said, 'Why don't you run the company?' It was called LCC International."

Right time. Right place. This was the mid-1990s and cell phone use was exploding worldwide. Some countries were skipping land lines and going straight from messenger to cell phones.

Carlyle Group, where Ein was then employed, signed on as an investor and everyone jumped on board as LCC grew. He also met Richard Darman, a Carlyle Group partner who had served under several presidents, including serving as Director of the Office of Management and Budget under Bush I. Darman passed away in January. ("One of the most brilliant, clear-thinking minds I have ever come across.")

Sodha loves agricultural metaphors, and he applies them liberally to LCC's path upward.

"Basically, we were on fertile land where there was so much abundance of growth, that I'm not sure anyone could have gotten it wrong. The field that you are going to plow needs to be very fertile. The business had the right underlying dynamics. Our job was more as architect/general contractor for the towers. Engineering. What height? How it should be designed? Acquiring the land for the customer and supervising construction of those towers. That was the nature of the business. When they were built, we would drive through cities to make sure there were no dropped calls."

Sodha learned a lot of valuable lessons from LCC. First, although he had stock options and made a nice profit after the company went public,* he resolved to invest big with his own money in the next opportunity that came along. He also learned that there was probably more money in owning and running the cell phone towers than building them. When you own something that people need, they keep paying you again and again. Investors such as Warren Buffett refer to such businesses as " toll bridge" businesses because people keep paying again and again.

By early 1998, his business connections led him to a local software company that helped smooth the task of importing and exporting for businesses. He liked what he saw. The North America Free Trade Agreement was in the works, and international trade was hot. The company had only $500,000 in revenues, so it was small enough for Sodha to buy a stake in it and ride its growth. In 12 months, NextLinx had $18 million in revenue. Ein was a board member.

They split the business into consulting and software and sold the consulting business, which turned out to be a home run for the investors. It was 2000 and Sodha could have retired.

Instead, he dabbled in some wireless businesses. His next big home run was Matrics**. Ein, who works 24-7 at finding new business opportunities through his networking, heard about the technology from a Nobel Prize Laureate and jumped on it.

Without getting into the technology gobbledygook, Matrics provides tiny radio chips that allow stores like Wal-Mart to record every package of razor blades that gets bought at the checkout line, or allows the airlines to record the location of every piece of luggage that passes through.

Sodha joined the company when it was a year old and bought in. In two or three years, Matrics had a backlog of orders that stretched north of $100 million.

"Everybody did very well," said Sodha, including Carlyle, Ein and Washington venture capital firm Novak Biddle.

Then around 2005 comes Cibernet. Let me boil this one down too, for all you fellow non-techies. When you take your cell phone from New York City to London, you change service provider from, say,Verizon to Vodafone. Cibernet manages money between cell phone operators. Simply put, it makes sure each wireless company gets its fair share of the cell phone user's payment. Figure there is $100 billion spent annually on roaming phone calls, and Cibernet, well, made a killing.

It had many of the hallmarks Sodha looks for in a business, so he bought a big chunk. Like he said, he makes a few big bets and watches them closely.

Sodha saw that Cibernet held a perfect niche in a marketplace where cell phone calls were booming and there was no other replacement technology in site.

"The beauty of it was that it was building on the back of $100 billion in telephone calls made worldwide when people travel. We didn't have to tweak it at all. For me, an important principal in spotting a good business is what is the sustainable model the business is built on."

Real estate cycles come and go, commodities are feast or famine, financial services rise and fall on interest rates. But barring a world war or another exogenous event like a terrorist attack, people would not stop traveling and not stop talking on their cell phones when they travel.

"Sustainable. Repeatable. Reasonably predictable," said Sodha.

They tripled profitabilty and hit a grand slam.

Now he is into Kastle Systems, which Ein found and bought more than a year ago from founder Gene Samburg. Sodha thinks there is lots of room to expand beyond the 2,000 buildings where Kastle operates and the 2 million users who have Kastle Cards. Sodha likes the business for the usual reasons. Kastle has a good brand. There is room to grow the technology, adding more options for customers and potential profits for Kastle. And maybe best of all, there is a consistent demand from long-term service agreements where Kastle installs the security system and then collects fees to operate it.

So Sodha has piled in with a big investment. Ein demanded top dollar for an interest in the company. And now Ein is giving Sodha a big hand in running it.

Like Carnegie said, he has his eggs in one basket and is watching it closely.

*Correction: LCC went public instead of being sold, as we wrote earlier.
**Correction: The company name is Matrics, not Matrix.

By Dan Beyers  |  April 15, 2008; 3:45 PM ET  | Category:  Value Added
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Comments

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Fascinating guy - and some interesting lessons for someone like myself who runs his own business. It's easy to take profits and "diversify" into unrelated investments. But the impact of re-investing the primary business can clearly be significant on many levels. Carnegie may have been onto something...

I especially appreciate the insight that Heath brings -- this reads more like a dinner conversation than a staid business profile. And in that way, is more interesting and more "usable."

Posted by: DonM | April 16, 2008 11:46 AM

thanks DonM. Carnegie was a great businessman. He had faults, but was pretty focused.

Posted by: tom heath | April 16, 2008 12:16 PM

Interesting philosophy -- the "all eggs in one basket" approach is somewhat counterintutive in an era where diversification is the assumed mantra for most business interests these days. I guess old-fashioned "sticking to your knitting" strategies aren't so antiquated after all....

PBS's "American Experience" did a really interesting show on Carnegie a few years back -- worth a watch for Carnegie aficionados.

Posted by: Ben | April 16, 2008 3:35 PM

thanks ben. you are right, everyone thinks you should diversify these days, and its still the right way to go for the average investor. but piyush is not an average investor. he does this stuff for a living, and has a strong management position in the companies where he has a stake.i saw the american experience show on carnegie. it was very good. i am not unbiased, as my wife works at the public tv station in washington, WETA. i can't get enough of these business bios. how about you?

Posted by: tom heath | April 16, 2008 4:44 PM

great piece and a big fan of Carnegie!

Posted by: adavis | April 16, 2008 5:20 PM

In 2004 Nobel Peace prize recipient and former Vice President Al Gore co-founded Generation Investment Management to help people and firms use emerging technologies to go "green." It's a noble cause, designed to help save the world from the so-called perils of Global Warming.

But, questions exist as to Gore's real agenda. Is he out to save the world from Global Warming or is he helping to create a market for his emerging business with his Global Warming message?

Enough doubt exists among climatologists and meteorologists as to the real causes of the earth's warming as more than 19,000 of them have signed a petition claiming Global Warming is not man-made.

They claim the warming of the earth is natural and has occurred throughout the earth's history. The atmosphere never rests, warming and cooling over extended periods of time. In fact, many of these petition signers and others say the latest warming cycle has ended with the earth at the start of an extended cooling period. Sun spot activity has declined and the oceans, particularly the Pacific, have begun to cool, leading to an overall downward trend in global temperatures.

Enough questions exist for this topic to be further explored by a newspaper. The debate over Global Warming is not over as Gore and his film "An Inconvenient Truth" and his Climate Project power point presentation insist.

For Gore, man-made Global Warming is a non-debatable fact and, as such, we have a moral responsibility to reduce our use of fossil fuels. But, is it more than a convenience or coincidence for him to have ownership interest in a company, with a Washington D.C. office, that helps people and other companies reduce their carbon footprint?

There is the strong possibility a real story exists here. Get the facts out and let the reader decide.

Posted by: Mark Grossman | April 16, 2008 8:40 PM

What I like about this guy is he doesn't put his eggs in the basket and walk away. He's actually investing in himself in a way and that has always seemed like good business sense to me.

As far as the comments regarding Al Gore, it's clear the poster is a Global Warming doubter. Whatever, Gore wouldn't be the first (hopefully not the last either) to link good business habits and protecting the environment. Even if you don't believe in Global Warming, it's hard to argue with efforts to do the right thing by the planet, to conserve fuel and to adopt policies of sustainability.

My personal business hero is Ray Anderson of Interface, Inc., who has proven beyond a doubt that being good stewards of the Earth doesn't mean you can't do right by your stockholders.

Posted by: EMC | April 16, 2008 11:53 PM

never heard of Ray Anderson. but i am going to check him out. i think the global warming guy who commented wants some pub. i agree with you emc, piyush puts his money where his mouth is. he invests in himself. that's the kind of model i want to invest with.

Posted by: tom heath | April 17, 2008 5:53 PM

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