EMOTIONAL PURSUIT
While starting up, the initial
emotion many entrepreneurs face is fear. For many a hopeful entrepreneur, the
initial reactions are mixed, ranging from “probably it is not the right time to
start-up” to “may be it is impossible for me to start-up,” primarily due to the
opinions you hear from the investing community. Phrases like “we invest in only
50 million dollar companies” or “we look for a management team with track
record” or “we are not funding now” send a shiver down every potential
entrepreneur’s spine.
This is a reality today. The
market situation is such that you may not get funding. But I want to pose the
question “is there life without funding? Can you start a business without
funding?” I say that it is possible and one need not lose heart. Garage
start-ups were always the time-honoured method of starting up. I am not making
a case for bravado. It is quite likely that most of you may not start up
immediately. It might not even be the most ideal decision. But the option to
start-up immediately exists, is possible, and can be done. What you have to be
aware of are the logical issues arising from a decision to start-up
immediately, its implications, and how you can manage them.
At the end of the day,
entrepreneurship is not a cerebral kind of pursuit you can put inside
management matrices and analyse—it is an intensely emotional pursuit. You can read up on management
literature, you can get the theory but it is really a gut-wrenching kind of an
experience. It will take everything out of you and very rarely will you be
prepared on the emotional front—which is really the most important aspect.
A typical management framework
will highlight the following likely steps: you analyse the opportunity, you
find out the idea, start the company, go through a ramp-up process and finally
do an IPO. That is true. But what does it feel to actually go through the
steps? From my experience and those of people I know, most entrepreneurs tend
to go through certain stereotyped phases. I have found this out from personal experience,
from other people who have started out, and from those people who wanted to
start out but could not.
CONFUSION
The first stage which I call as
the stage of confusion is one where you have the intense desire to start-up.
You might not be very sure how you will start-up and thus have a very high likelihood of going
through this phase of confusion. Betraying my MBA background, I have tried to
divide this into the three “F”s — Fright, Flight, Fantasy.
Fright
The first phase is fright. If you
have always been a performer from an academic background where failure is not
tolerated and you have never failed in your life, the first question always
is—will I fail? The second question is: “my colleagues are getting into a
corporate job. From the first month onwards, they are going to get paid an
amazing amount of money. I do not know what my future is. Will I lose out?” In
our parent’s generation, all of us have heard horror stories of “uncle x” or
“cousin y” who miserably failed in business. Your nightmare will be whether you
will be this generation’s
example. Your fright will lead you to rationalize thus:
“maybe I will start in a corporate job first and then I will actually start
out.”
Flight
The second phase is what I call
flight. Your idea may be good but there is no guarantee of success. Your
inability to find a “guaranteed success plan” leads you to flight from idea to
idea. You suddenly get a brainwave and you become extremely excited. You think
that this idea seems to be good but the next day you wake up and talk to some
people and suddenly realize that it may not be so great. You get depressed. You
jump to a second idea and repeat the entire cycle. You keep on hunting for that
perfect idea. Stories like “this friend of my friend started a business and it
is doing 100 million dollars now” or a cover page on the “youngest billionaire”
frustrates you no end since these people have somehow crossed the threshold and
are on the fabulous shores of success. You keep on thinking, “why am I not
getting the idea? Why can’t I focus on something?”
Fantasy
The third stage is fantasy. If
you are one of those people who are not starting with a clear idea, you might
start fantasizing and rationalizing that whatever idea you have is actually the
killer idea. This is a dangerous stage. When people tell you that your idea
will not fly, you disregard it since it is your baby and it is really the only
idea you have. You mould your perception to suit the situation.
CROSSING THE THRESHOLD
Probably 80 per cent of would-be
entrepreneurs would not cross the three stages discussed above. People who
manage to cross this threshold have made the first serious step. What happens
after you cross the three stages? Again I use MBA speak—the three “Ps”.
Peer Pressure
The first is peer pressure. You
decide to break the news to your family and loved ones. They are not likely to
be thrilled. You start facing resistance and start thinking, “should I really
start out?”
Procrastination
The second phase is
procrastination. The impact of your decision slowly starts sinking in and you
suddenly become aware of industry pundits who claim “entrepreneurship is at an
all time low” or “corporate jobs are the best bet now.” There would be this
study from a leading international management school which claims that there is
a close correlation between the timing of start-ups and IPO performance which
ends by saying “you should not start now, start three years later.” So lots of
people postpone the decision and think about going for a second MBA in the US.
Poverty
The third stage is poverty. You
start planning out your financial requirements and you suddenly realize that
you may not have enough money saved up. So how do you survive? You start
thinking: “may be I should work for eight months and save up.”
But, when it comes to-crunch,
only you can find the answer. The question is a Hamletian “to be or not to be.”
Really, there is only one way to do it. Starting up is like jumping off a
cliff—you close your eyes and do it. There is no other answer. If you want to
start, just do it. But it does not mean that you just blindly jump. Before
jumping off, we have to pack some practical baggage and what are those?
First, definitely a parachute!
Carry at least six months of financial expenses. This is important when you are
starting out since you will be generating clarity for yourself. When you are
looking at opportunities, the last thing you want to worry about is survival
money. Questions like “how do I get my food? Can I pay my rent?” should not be
a drag on you.
Second, develop an activity plan
for the first month. The first 30 days would be full of confusion and there
will be a million things happening. So, before you actually are in that stage,
try to chalk out a 30-day activity plan which will make your transition into
entrepreneurship easier.
Third, carry plenty of “hope.”
Ninety-nine per cent of us start out with dreams of striking success
immediately. The reality is that it rarely happens. When it does not happen
immediately, hope is the only thing which will help you carry on. However,
there is a rider—use your “hope” wisely. When you are in the market for six
months and you keep getting negative reactions, hoping against hope can be
dangerous and can easily turn to “blinders.”
Finally, pack up your “ideals”
and stow them away. The market is cruel and your only objective is to survive.
Do not throw them—you will get the opportunity to use them later. But, do not
ever confuse your ideals with your main objective. You might want to be a
philanthropist, you might want to help people—but first you have to survive. I
have seen enough people who try to implement their “ideals” before they survive
and end up with neither ideals nor a business.
START-UP: KEY ISSUES
How Do You Set Up a Team?
Two important aspects are
composition of the team and delineation of responsibilities. If you start out
fresh, most often your team would comprise friends where everyone is equal. You
tend to confuse friendship with professional equality. Everyone in an organization
cannot be equal. If the line of responsibility is not clear, how does the
organization take decisions? Is there one person with whom the buck finally
stops? We need to realize that responsibilities can never be equally shared.
You need a leader. If something is not working out, there has to be someone who
will stand up and say, “I am responsible.” And, when it comes to the crunch,
somebody has to say, “this is the way we will do it, may be it is wrong or may
be it is right. This is the only way to go ahead.” I am not advocating
autocracy but a clear understanding—not only an intellectual understanding but
also an emotional understanding that when it comes to the crunch, there is one
person who will take the call.
With start-up among friends, the
first and foremost rule is “do not start off with clones”. Most of us are
friends because we are from the same background with the same expertise. That
does not work in a business setting. The whole idea of a team is to complement
each other. So the first rule is to try and get variety into the team.
How Should Equity be Divided?
Let us look at a situation where
four or five of you are starting up. How will you divide equity? I recommend
unequal sharing of equity. The leader should have the highest equity even if it
is higher by one share. A company cannot be run as a cooperative. Higher
responsibilities have to be matched with larger equity. For most of us, it is
an extremely difficult step to take since it is counter-intuitive and does not
feel “right.” When friendship is involved, it can be quite difficult.
When and How Should You Go for Fund Raising?
A fundamental question today’s
entrepreneurs face is whether to start with or without funding. As I read
somewhere, the three traditional sources of money are friends, fools, and
family. You can still start a company with these three options.
However, if you decide to go for
fund raising, guard against unscrupulous financiers. When you are young and
desperately want to see your ideas succeed, you can make a wrong choice and get
eaten up. People might tell you “I will give you x amount and I will take 75
per cent of the company.” And, you might take the money rationalizing that “you
still have 25 per cent of the company.” If you really require large funds for
starting up, may be this is the only way to start out. But, in that situation,
you should go to people with track records instead of “fly by night” operators.
However, if you can generate revenues by less capital-intensive service models,
why should you raise funds?
Do You Consider “Equity” as Cash?
In the initial stages,
entrepreneurs need advisors, lawyers, and “contacts” for business development.
One common mistake is to overuse the option to pay for service with your
equity. When you are starting up, equity seems the cheapest currency.
Unfortunately, as the company keeps growing and valuation changes from a
notional valuation to a real valuation based on revenues and cashflows, the
true value of equity becomes clear. You should conserve equity to the maximum
extent possible.
FIRST THOUSAND DAYS
Let us assume you have crossed
all these hurdles and have actually started out. What happens now? Once the
business starts, there is a saying that “the first 1000 days define success or
failure.” It is in these first 1000 days when you really experience the
emotional roller coaster associated with entrepreneurship.
Initial clients take advantage of you:
You will struggle very hard to
capture clients. When you are starting out and have no track record, clients
are unlikely to pay market rates. When you go to a client, he immediately
thinks, “here is a bright young guy, I can get a project out of him by paying
him Rs 100,000 when I am paying an existing guy Rs 1 million.” So he will tell
you to do the project for him at Rs 80,000. At that point, what do you do? You
have a company to run. So you go ahead and do it.
You will constantly fight this
pricing war. The only way to get out of this pricing cage is to grow stronger
and stronger till one day the equation changes. Obviously, this is applicable
only to a garage start-up. If you have sufficient financial muscle, you will
not necessarily go through the
above experience. I am narrating the worst-case scenario.
You face delays in payment:
It is a truism that the strong
crushes the weak. You do not get paid on time. They will tell you “I will give
you Rs 100,000” but at the end of the day, they will not give even Rs
80,000—that too after a three month delay. What can you do? You have to face it
and understand the fact that this is the name of the game. You cannot get
depressed about it.
You become Jack-of-all-trades:
When you are starting out with a
small team, you have to be jack-of-all-trades. Unfortunately, you cannot have a
specialized finance or an operations guy. You might have to do accounting,
coding or whatever the situation calls for—the bottom line is this : nothing is
beneath dignity. At the same time, you necessarily have to be the master of
all. There is nobody else who is going to stand up for you. If your accounting
is not done properly, if you have not planned your cashflows properly, you
yourself will pay the price.
Have your priorities clear:
I had this interesting
experience. We went to the office of a newly funded company and we were
actually amazed to see a state-of-the art “recreation room” filled with dart
boards, TT tables, video games, etc. The company’s argument was “we want to
keep our employees happy. They need to be motivated so that tehy can both party
and work hard”. The company did not have a single product or any revenue in its
books. It later faced cashflow problems and was on the verge of closing down.
The moral of the story is— have your priorities clear. Dart boards can happen
later. Your first priority is to succeed. Make money. All the rest flows
automatically. This is obviously not to say that you cannot have employee satisfaction
programmes or benefits. But you have to spend money appropriately—if you do not
absolutely require a glass-fronted, four-storied corporate house—do not take
it.
Change is constant :
Everything changes constantly.
You will change. Your original ideas will change once they hit the market and
your business itself might change. You have to be flexible. Typically, you
start off with an idea and hit the market. You might succeed or realize that
probably it is not doing very well. You still keep on thinking that the market
is just not “seeing” the true value of the product. You do not change. You
become so wedded to your idea in its original form that you cannot do anything
else. You will fight on this sinking ship and see it go down.
On the other hand, if you are intelligent enough to listen
to the market signals, you might realize that your product is not what the
client wants. You realize that adding two extra features can make you succeed.
You change your plans and hit the market once again.
Changing relationship dynamics:
When you start out, you tend to
form a very close-knit team—almost a family. But, over time, people change and
some of them might leave. It might be because you cannot pay salary on time or
things are not working out as expected. A typical entrepreneurial reaction is
to go into depression. You tend to think, “he/she was my friend, he/she was my
family, how can he/she leave?” This is going to happen to all of us. The
earlier we learn to accept this reality and be focused on our objectives, the
better it is.
You are not your own master:
There is a common feeling before
you start up that once you are an entrepreneur you are your own master: “I do
not have a boss. I can do whatever I like.” I can guarantee you one thing—if
you start coming to the office at 12 noon, your employees are likely to be
there only at 11.45 am. If you take a vacation, they will also demand a
vacation. Your responsibilities are going to be the sum total of the
responsibilities of the organization. There is no running away from that. Your
responsibilities will increase rather than decrease.
“HARD” ISSUES
Finance
You start a company, you have a
product, you have a solution. You go into the market and slowly money starts
coming in. Typically, what happens now? The first flush of money makes you lose
your balance—you may buy a swanky car, move into a plush office, and have an
acre-wide director’s table. You think that your investor will support you even
if you run out of money. You have made your first critical mistake which is not
building up a war chest to tide over bad days.
You have to understand this vital
point—“cash is king.” Only after you go through a cycle where you do not have
cash would you actually understand the importance of this truth. Even if you
cannot appreciate its importance today—hoard cash during early days. If you are
one of the lucky few who built a company without going through a cash flow
crisis, you will find one day that some unfortunate decisions you took have
impacted your cash flow and led to a crisis. On that day, you will realize that
even though you have clients, even though you have built up your reputation,
even though you have employees — they are of no avail when you run out of
cash—because cash is the life- blood of an organization.
If cash is king, then debt is the
prince. Even if you have investments from a venture capitalist, do not blow up
your investments. I am assuming that you have a product or a service that is
capable of generating a cash flow. Go and raise debt. Put the investment money
into a fixed deposit and raise a loan against that. Do everything possible to
stretch your cash—your margins might suffer, but it will be for a worthwhile
cause.
Marketing
You should hit the market early.
Many entrepreneurs succumb to the temptation to keep on refining their product
or service instead of hitting the market early. This is especially common if
you are developing a technology product. You must realize that market is the
truest advisor you can get. Even if it is version 0.9, go to the market and
test it out. The market might give you signals that ‘feature x’ is not right or
‘feature y’ is required or the pricing is not right or even that the entire
product is of no value. If you realize
that early enough, it is better for you.
Secondly, getting your product to speak for itself is the
most efficient marketing method. If you do a good job with the first client, he
will talk to five other people. You can then leverage this cycle.
Thirdly, you should not use
expensive options when cheaper marketing options will suffice. You should do
cross-selling, cross-subsidization, partnerships, in fact, anything that can
give you reach at low cost.
Technology
Technology can be one of the most
powerful weapons an entrepreneur can have to steal a march over competitors. If
you build appropriate technology to reduce your costs or improve quality, you
have a very powerful asset for success. However, the operative word is
“appropriate.” I knew this example of a company which started off with a
sizable investment. The first thing it did was to make a website with the
latest technology and host it with the most advanced hardware available which
cost it Rs 6-7 million. Almost 50 per cent of its investment was put into a
website to which customers never came since they could not spend enough on marketing.
They ran through 60 per cent of their investment in just the first three
months.
Essentially, your motto should be
: if having cutting edge technology is
not critical, low tech is high tech. If you can work on 486 machines, work on
them. However, if technology is a core focus, by all means, go out and build
technology which is better than your competitors.
Partnership and Alliances
Partnerships and alliances are
theoretically very useful. However, for a start-up, when you are small, it is quite difficult to build any kind of
meaningful partnerships or alliances.
To have real partnership, you
need to own something of value. Ideally, both of you also need to be of
comparable sizes. In the initial stages, you are unlikely to have anything of
value to a large partner — your discussions and meetings frequently come to
naught. So, before you get into partnering, figure out whether you have what
the other guy wants. That is a useful lesson we learnt the hard way—krills are
good only as food for whales. It is much better to grow fast and then talk as
equals.
THE JOYS OF ENTREPRENEURSHIP
In the midst of all the gloom and
doom, is there happiness? Yes, there is! You slowly start seeing your dream
take shape. You see clients starting to show respect, you get excited about new
possibilities, and new faces join the organization. You realize that you are on
a winning track. So, during your initial 1000 days, what is your primary objective? Your
objective is to grow at any cost. Grow, grow, and grow more. You should do
whatever is required during the first 1000 days. You have to work very hard—that
is the only way you can succeed.
GROWTH
Suppose you are one of those
lucky few that have made it through the first 1000 days. You have actually
built a company which is showing profits. You
can see a healthy client list, your revenues are
increasing, and your company is taking
shape. Then comes the difficult part.
I have heard from people that the
most difficult part in the lifecycle of a company is when growth happens and
success is at hand. Even moderate success can be dangerous. In the initial stages,
things are so tough that you are just trying to survive and nobody has any time
to think about anything else. When money comes in and you feel the survival
pressure lifting, suddenly, egos start kicking in.
Apparently, Indian entrepreneurs
are happiest during tough times because this is something that really gives
them moral courage and certainty. When things are bad, they will fight. But,
they cannot handle success. They go to pieces at the first sign of success. The
moment money comes in, they will take an extended vacation, join industry
association, and will generally do everything but focus on the business. This
invariably ends up in disaster as business goes down and clients suffer. The
organization achieves a fraction of the potential it could have achieved if
sustained focus had been generated in growing the business.
So, the first question an
entrepreneur should ask himself is—“do I want to grow? What is it that I want
to get out of entrepreneurship?” You really do not have to go through growth
pangs if your psyche is not built for that; you have to decide whether growth
is right for you and be prepared for the issues arising out of growth.
Second, if your objective is to
build something substantial, something really world class, you should not lose
focus. Great companies are built by continuous effort which pushes the
organization from moderate success to great success.
Third, to keep growing, you have
to constantly separate out the investor in you from the “entrepreneur-manager.”
Your returns are going to come not from salaries but from appreciation of the
equity. While your role as an employee in the initial phases of the
organization is critical, in the later phases, your role as a financial
investor becomes more and more important. On many occasions, your equity
appreciation might happen through somebody else playing the role of a CEO or a
Chief Marketing Officer. You might be most effective as a sleeping partner. You
have to learn to let go and start trusting other people. Only when you separate
your two roles would you realize that your potential returns could be hundred
times more than what is evident today. You will then have the motivation to
focus on organizational growth on a sustained basis.
The fourth issue is recruitment
and retaining. You always go through a chicken and egg situation where good
people would not join you because you do not have money—but to generate money,
you need good employees. You have to break out of this vicious cycle by
necessarily building enough money via internal accruals or by getting an
investor. Only when you break this cycle can you get to the next level.
Fifth, as your company keeps on
growing, your importance as an individual to the company inevitably keeps on
diminishing. Your organizational evaluation and reward structure needs to
reflect this reality. Initially, you would have brought in all the business but
today your marketing chief is bringing all the business. So, you may not
continue having the same equation you had in the initial days. If important
people in your organization do not have equity, you have to give them equity.
This ensures that they are aligned to a common organizational vision.