I had mentioned in an earlier column how it is very hard for a large company to be entrepreneurial. And how start ups usually lose much of their entrepreneurial spirit and agility as they scale – the founders usually get involved in other stuff – managing investors, putting in processes, being the public face of the company, managing conflict, hard coding the business model and rolling it out – doing stuff that is supposed to build the organisation and take it to the so called next level.
So while the organisation is getting built – the founders often take their eye off the entrepreneurial ball. This may not happen immediately however over time as the organisation gets larger and more complex to manage it usually happens.
After a few years what was a mission for the small focussed team that started the company becomes merely a job. You are no longer trying to change the world, you are simply going for more mundane things like sales growth, maintaining EBITDA margins, ensuring you meet investors’ quarterly result expectations, employee retention and so on. Things that are traditional and managerial rather than entrepreneurial.
Somewhere when transitioning from a start up to a big organisation – companies run the risk of losing their entrepreneurial soul.
While being a bigger company has many advantages it is important that companies try to also retain the entrepreneurial culture while becoming big.
Basically the problem is that the founding entrepreneurs usually create a cadre of managers under them and not entrepreneurs. There is massive capacity building of people who will execute and not enough of those who will create and build.
Retention of the entrepreneurial spirit has to be driven from the top. The founders have to recognise the problem and be committed to solving it. Although many pay lip service to this very few actually walk the talk.
The first and most important thing to do is to ensure that you hire the right kind of people. You need a rare breed – entrepreneurial managers. People who have the experience of having worked in a large organisation and despite having performed well there are dissatisfied with excessive controls and have a yearning for far greater independence than what they were ever offered. People who are somewhat irreverent but at same time understand the need for organisation building and the right kind of controls for ensuring performance and governance without stifling creativity. All this without compromising on the competencies required to actually do the job.
Such managers are rare to find but if you don’t recognise that these are the kind of people you need you will get them only by accident and then you would not know what to do with them.
Once you have a few of these on board what you need to do is agree with them on expectations and then empower them. If you don’t, you will be wasting a precious resource and chances are they will leave in some time anyway. So give them all the assistance they need and ensure you don’t get in their way.
Of course the risk here is that if you make a wrong hire and then empower that person you could have a serious problem on your hands. However after a couple of mistakes you will soon figure out who the right persons are and what to look for.
You are now no longer an entrepreneur alone – you have to assume the role of creating other entrepreneurs internally.
Close the loop by ensuring you have a generous wealth sharing plan – these are the people who will take the organisation to the next level. Ensure that they are rewarded well for their performance – way beyond market, usually through ESOPs. A performer must never even think of looking elsewhere.
In any company there will be people who will resist the empowerment of others – most notably the people under them. Get rid of the control freaks no matter how good they are technically – in the long run they will ensure that the organisation remains small.
Break up operating units into small teams. Large teams usually create more ground for conflict and creating alignment among a larger number of people is more difficult. Smaller teams work faster. What this means is that you need to get the same output from a smaller team as you would have from a larger team – so you need to raise the bar for hiring and recruit only very high quality people – at all levels in the company.
Finally you need to ensure that everyone has the freedom to speak his or her mind. Encourage a culture of independent thinking with a high tolerance of dissent.
Build an argumentative company.
Thursday, 14 January 2010
Building a Good Board
Putting together the right Board of Directors for your company is an important but frequently postponed task when you are trying to scale up your company.
But if you have received an investment from a venture capital fund chances are you will need to put together a decent Board sooner rather than later if for no other reason than because it is a requirement in the investor agreement.
While there is no one definition of a good Board or a high quality Board member, in general what you need are a set of people who have high levels of integrity and commitment and who collectively bring to the table enough of the right kind of experience in business, finance, corporate governance, marketing and other relevant areas.
Boards can add real value. Many early or mid stage Indian entrepreneurs have a black and white view of a Board – either it should be totally pliable and simply sign off on what the promoter wants or else it will become a pain in the butt putting up obstacles along the way. Therefore they are cagey about Board expansion, restricting it only to family members and very close associates. The right Board however adds value in several ways – it brings together the collective wisdom and networks of a number of very good people leading to better governance of the company and hopefully better strategic choices being made. So seek out and appoint high quality Directors who are genuinely independent.
Appoint Board members carefully. It can be awkward to ask someone to step off your Board. Therefore a wrong appointment can create serious difficulties given the influence a Director wields in the company. Also no really good Director would wish to serve on the Board of a company which has one or two poor quality people. So recruit a Board member carefully – even if it takes more time than you had anticipated. Get to know him or her really well and do a thorough reference check before taking the decision. And set the bar high.
Don’t appoint a Director for name value alone. This is a trap that entrepreneurs in India often fall into. They go after big names assuming that this will add credibility to the company. While that is true, well known people usually have many demands on their time. Also they often have a halo around them which makes their reputation larger than life – their real ability to contribute may be a little less than your expectations. You need Directors who will be able to give you time and mindspace when you need them.
Do it at the right time – not too early and not too late. Putting together a good Board is something you will need to do at some point of time as you grow your company. It is important to do it at the right time. If you do it too early you will end up spending too much of your time managing the Board and too little building the business. If you leave it till too late you may have ended up building the wrong kind of company.
Invest time in working with the Board. Managing a Board and working with it does take time and it consumes your bandwidth. Any Board member worth his salt expects to be given an opportunity to contribute and that’s good for the company. What it means is that you will have to spend time engaging with Board members both during and outside Board meetings.
Choose the right mix of skills and experience. You need to get people with the right blend of diverse skills and experiences onto your board. At Naukri we got onto the Board people who collectively had experience in marketing, sales, engineering, product, venture investing and finance. At least two have been entrepreneurs in the past and have built companies. Several are independent directors in companies that are bigger and perhaps better than ours. Two have over thirty years experience of different kinds.
The chemistry must be right. It is important that you get along with your Board members and that you feel comfortable enough to level with them especially when there is bad news to give. At the same time they must not be your buddies or your cronies.
Remember a good Board is your ally and not someone whose only job is to police you. Often your Board of Directors can save you from yourself.
But if you have received an investment from a venture capital fund chances are you will need to put together a decent Board sooner rather than later if for no other reason than because it is a requirement in the investor agreement.
While there is no one definition of a good Board or a high quality Board member, in general what you need are a set of people who have high levels of integrity and commitment and who collectively bring to the table enough of the right kind of experience in business, finance, corporate governance, marketing and other relevant areas.
Boards can add real value. Many early or mid stage Indian entrepreneurs have a black and white view of a Board – either it should be totally pliable and simply sign off on what the promoter wants or else it will become a pain in the butt putting up obstacles along the way. Therefore they are cagey about Board expansion, restricting it only to family members and very close associates. The right Board however adds value in several ways – it brings together the collective wisdom and networks of a number of very good people leading to better governance of the company and hopefully better strategic choices being made. So seek out and appoint high quality Directors who are genuinely independent.
Appoint Board members carefully. It can be awkward to ask someone to step off your Board. Therefore a wrong appointment can create serious difficulties given the influence a Director wields in the company. Also no really good Director would wish to serve on the Board of a company which has one or two poor quality people. So recruit a Board member carefully – even if it takes more time than you had anticipated. Get to know him or her really well and do a thorough reference check before taking the decision. And set the bar high.
Don’t appoint a Director for name value alone. This is a trap that entrepreneurs in India often fall into. They go after big names assuming that this will add credibility to the company. While that is true, well known people usually have many demands on their time. Also they often have a halo around them which makes their reputation larger than life – their real ability to contribute may be a little less than your expectations. You need Directors who will be able to give you time and mindspace when you need them.
Do it at the right time – not too early and not too late. Putting together a good Board is something you will need to do at some point of time as you grow your company. It is important to do it at the right time. If you do it too early you will end up spending too much of your time managing the Board and too little building the business. If you leave it till too late you may have ended up building the wrong kind of company.
Invest time in working with the Board. Managing a Board and working with it does take time and it consumes your bandwidth. Any Board member worth his salt expects to be given an opportunity to contribute and that’s good for the company. What it means is that you will have to spend time engaging with Board members both during and outside Board meetings.
Choose the right mix of skills and experience. You need to get people with the right blend of diverse skills and experiences onto your board. At Naukri we got onto the Board people who collectively had experience in marketing, sales, engineering, product, venture investing and finance. At least two have been entrepreneurs in the past and have built companies. Several are independent directors in companies that are bigger and perhaps better than ours. Two have over thirty years experience of different kinds.
The chemistry must be right. It is important that you get along with your Board members and that you feel comfortable enough to level with them especially when there is bad news to give. At the same time they must not be your buddies or your cronies.
Remember a good Board is your ally and not someone whose only job is to police you. Often your Board of Directors can save you from yourself.
Sunday, 1 November 2009
Selecting the right business partner
Many small businesses have more than one promoter. Frequently it is team of two or three partners – sometimes more.
As a start up entrepreneur managing your relationship with your business partner is one of the most important and yet the area you are most likely to ignore. You frequently take your partner(s) for granted.
Remember a partnership split is an extremely traumatic experience and can be a serious setback for the business and personally for the entrepreneur.
Why do splits happen and what can be done to prevent them?
Before starting out you need to examine why you need a partner in the first place. Most young entrepreneurs do a start up with a friend or a colleague or a classmate. It is usually not a rational selection of a partner – but simply because you feel a sense of bonding and camaraderie, the chemistry seems right, you have discussed the idea together hence you feel a certain joint ownership of the idea. You want to do it together with a friend. Young entrepreneurs may not acknowledge this but - most often you have an emotional and a social need for a comrade in arms since you are taking a risk and feel somewhat apprehensive of going it alone. And the most natural thing for friends and classmates to do in such a situation is to divide the stock equally among the partners without questioning who is bringing what kind of value to the table.
Of course there are other more tangible benefits of doing your start up with a partner. You get width and depth in the management team – without paying a salary. You are able to pool your meagre capital and share your ideas. You have someone to talk to – and you are able to keep each other’s spirits up in difficult times. You may even be bringing complementary skills to the table. You share the work and you share the risk. And of course you share the rewards and recognition.
So partnerships are natural – people do start ups with others because they feel a need to. It becomes important therefore to ensure that you are selecting the right partner in order to minimise the chances of a future split. Most entrepreneurs do business with people whom they know, trust and instinctively like.
Before deciding to do a start up with a partner you need to ask yourselves some hard questions – Do you have similar values? Do you share the same vision, passion and aspirations for the business? Do you have the same commitment to the business? Will you both quit your jobs and be full time on the business and stick it out without a salary for a couple of years? Do you have a similar work ethic – will both of you be willing to work 24 by 7 if required? How much capital will each of you invest into the business? Are both of you equally competent? Do you bring complementary skills and experience to the business? What will your roles be? Who will be the CEO? Will investors trust each of the partners equally? Do you have similar views on how wealth would be shared with employees and how customers and vendors should be treated? Will you agree on the kind of risks that are reasonable to take? Going forward when the business makes a profit would you agree on the utilisation of the profit? Most importantly are both of you good listeners and accommodative of each other’s views, needs and aspirations?
This may seem like over complicating a simple decision when you are starting out however most partnership splits have their roots in inappropriate selection of a partner in the first place. And you don’t want to learn this the hard way many years later?
Having said that - selection of the right partner does not alone guarantee that the partnership will endure in the long run. Right selection is a necessary but not a sufficient condition.
You need to continuously work on your relationship with your partner. Continuously communicate, keep each other fully informed, spend time together, give each other candid feedback, listen a lot and give each other enough space. It’s like marriage
As a start up entrepreneur managing your relationship with your business partner is one of the most important and yet the area you are most likely to ignore. You frequently take your partner(s) for granted.
Remember a partnership split is an extremely traumatic experience and can be a serious setback for the business and personally for the entrepreneur.
Why do splits happen and what can be done to prevent them?
Before starting out you need to examine why you need a partner in the first place. Most young entrepreneurs do a start up with a friend or a colleague or a classmate. It is usually not a rational selection of a partner – but simply because you feel a sense of bonding and camaraderie, the chemistry seems right, you have discussed the idea together hence you feel a certain joint ownership of the idea. You want to do it together with a friend. Young entrepreneurs may not acknowledge this but - most often you have an emotional and a social need for a comrade in arms since you are taking a risk and feel somewhat apprehensive of going it alone. And the most natural thing for friends and classmates to do in such a situation is to divide the stock equally among the partners without questioning who is bringing what kind of value to the table.
Of course there are other more tangible benefits of doing your start up with a partner. You get width and depth in the management team – without paying a salary. You are able to pool your meagre capital and share your ideas. You have someone to talk to – and you are able to keep each other’s spirits up in difficult times. You may even be bringing complementary skills to the table. You share the work and you share the risk. And of course you share the rewards and recognition.
So partnerships are natural – people do start ups with others because they feel a need to. It becomes important therefore to ensure that you are selecting the right partner in order to minimise the chances of a future split. Most entrepreneurs do business with people whom they know, trust and instinctively like.
Before deciding to do a start up with a partner you need to ask yourselves some hard questions – Do you have similar values? Do you share the same vision, passion and aspirations for the business? Do you have the same commitment to the business? Will you both quit your jobs and be full time on the business and stick it out without a salary for a couple of years? Do you have a similar work ethic – will both of you be willing to work 24 by 7 if required? How much capital will each of you invest into the business? Are both of you equally competent? Do you bring complementary skills and experience to the business? What will your roles be? Who will be the CEO? Will investors trust each of the partners equally? Do you have similar views on how wealth would be shared with employees and how customers and vendors should be treated? Will you agree on the kind of risks that are reasonable to take? Going forward when the business makes a profit would you agree on the utilisation of the profit? Most importantly are both of you good listeners and accommodative of each other’s views, needs and aspirations?
This may seem like over complicating a simple decision when you are starting out however most partnership splits have their roots in inappropriate selection of a partner in the first place. And you don’t want to learn this the hard way many years later?
Having said that - selection of the right partner does not alone guarantee that the partnership will endure in the long run. Right selection is a necessary but not a sufficient condition.
You need to continuously work on your relationship with your partner. Continuously communicate, keep each other fully informed, spend time together, give each other candid feedback, listen a lot and give each other enough space. It’s like marriage
Sunday, 4 October 2009
Entrepreneurship thrives in a recession
The Delhi chapter of The Indus Entrepreneurs recently concluded its flagship event – TieCon, its annual summit on entrepreneurship.
The conference was a sellout. Surprisingly, in a recession year, paid registrations were up by over sixty percent. Hundreds of people paid eight thousand rupees each to attend a two day schmooze fest on entrepreneurship. Clearly interest in entrepreneurship is thriving - never mind the state of the economy.
It is commonly said that some of the best companies in the world have been started or have grown during times of recession. This has been repeated so often that it has now almost become an adage. Examples that are often quoted are those of Google and Federal Express.
Logically any sane, rational person would prefer the security of a salaried job, during a downturn, to the uncertain world of entrepreneurship. After all during a downturn – competition has excess capacity so there is fierce price competition, customers buy less so there is soft demand, funding is very hard to come by and then if you do get it you get poor valuations, cash collection from clients becomes harder and so on. So it should be a bad idea to become an entrepreneur during a recession. The smart thing to do would be to hang on to your cushy, safe job.
The real world however is counter intuitive.
Why is it that great success stories come out of hard times. And why is it that interest in entrepreneurship is up despite a recession.
The reason is that while a recession causes pain it also creates opportunities for small, entrepreneurial companies to prosper and grow.
Take our own example – in the last recession Naukri grew sixty five times in sales during the last recession. It should not have happened – companies don’t hire during a recession. We should have been killed. So how did Naukri grow.
The point is that a recession causes companies to change the way they do things – it is a time of churn. In our case from 2000 to 2004 there was doom and gloom everywhere and companies were downsizing. However many companies that were firing were also doing some small hiring. IT services companies for instance were retooling their skill sets depending on the projects that they had. A company that was letting go of 2000 people because there was no project in hand for those skills was also hiring 200 because they had landed a project for which they needed those people. And because the project was already in hand they needed to hire really quickly – companies could not afford to maintain a bench. In the years prior to the meltdown there had been no firing – only hiring. It had been an era of large benches and excess staff. Now the downsizings made the news headlines but the smaller hiring that was taking place did not.
Added to this was the fact that during a recession companies are very careful about all costs including cost of hiring.
It was this opportunity that Naukri exploited – we went to customers and said “reduce your time and cost of hiring”. This pitch really worked with prospective clients in a recession.
Of course we supplemented this with some really smart new product development and we rolled out a network of sales offices and that really helped us grow too.
But if the opportunity had not existed we could not have grown.
Meanwhile our competitors downsized, they could not raise their next round of funding, some exited India. There was a lot of pain.
We were able consolidate our leadership and really became a dominant player in the last meltdown.
While the recession crippled some in our industry it actually helped us.
So the message is that if you read the tea leaves correctly and are able to spot the right opportunity during a recession and then execute well you can actually win big precisely because there is a recession. If however you are unable to do this you can get hit by a truck.
During recessions industries see a shakeout, a consolidation. Recessions show no tolerance for mediocrity and redundancy. Companies go back to their core and stick to the basics. All businesses that are “nice to do” and not “need to do” are dumped.
It is a time of cleaning up.
Recessions separate the winners from the losers.
The conference was a sellout. Surprisingly, in a recession year, paid registrations were up by over sixty percent. Hundreds of people paid eight thousand rupees each to attend a two day schmooze fest on entrepreneurship. Clearly interest in entrepreneurship is thriving - never mind the state of the economy.
It is commonly said that some of the best companies in the world have been started or have grown during times of recession. This has been repeated so often that it has now almost become an adage. Examples that are often quoted are those of Google and Federal Express.
Logically any sane, rational person would prefer the security of a salaried job, during a downturn, to the uncertain world of entrepreneurship. After all during a downturn – competition has excess capacity so there is fierce price competition, customers buy less so there is soft demand, funding is very hard to come by and then if you do get it you get poor valuations, cash collection from clients becomes harder and so on. So it should be a bad idea to become an entrepreneur during a recession. The smart thing to do would be to hang on to your cushy, safe job.
The real world however is counter intuitive.
Why is it that great success stories come out of hard times. And why is it that interest in entrepreneurship is up despite a recession.
The reason is that while a recession causes pain it also creates opportunities for small, entrepreneurial companies to prosper and grow.
Take our own example – in the last recession Naukri grew sixty five times in sales during the last recession. It should not have happened – companies don’t hire during a recession. We should have been killed. So how did Naukri grow.
The point is that a recession causes companies to change the way they do things – it is a time of churn. In our case from 2000 to 2004 there was doom and gloom everywhere and companies were downsizing. However many companies that were firing were also doing some small hiring. IT services companies for instance were retooling their skill sets depending on the projects that they had. A company that was letting go of 2000 people because there was no project in hand for those skills was also hiring 200 because they had landed a project for which they needed those people. And because the project was already in hand they needed to hire really quickly – companies could not afford to maintain a bench. In the years prior to the meltdown there had been no firing – only hiring. It had been an era of large benches and excess staff. Now the downsizings made the news headlines but the smaller hiring that was taking place did not.
Added to this was the fact that during a recession companies are very careful about all costs including cost of hiring.
It was this opportunity that Naukri exploited – we went to customers and said “reduce your time and cost of hiring”. This pitch really worked with prospective clients in a recession.
Of course we supplemented this with some really smart new product development and we rolled out a network of sales offices and that really helped us grow too.
But if the opportunity had not existed we could not have grown.
Meanwhile our competitors downsized, they could not raise their next round of funding, some exited India. There was a lot of pain.
We were able consolidate our leadership and really became a dominant player in the last meltdown.
While the recession crippled some in our industry it actually helped us.
So the message is that if you read the tea leaves correctly and are able to spot the right opportunity during a recession and then execute well you can actually win big precisely because there is a recession. If however you are unable to do this you can get hit by a truck.
During recessions industries see a shakeout, a consolidation. Recessions show no tolerance for mediocrity and redundancy. Companies go back to their core and stick to the basics. All businesses that are “nice to do” and not “need to do” are dumped.
It is a time of cleaning up.
Recessions separate the winners from the losers.
Friday, 21 August 2009
Retaining the culture of innovation is a challenge as a start up scales
This is my August 2009 column in Mint.
The company is no longer a start up. We employ over 1600 people and have offices in over forty cities. There are more than two hundred people engaged in building and maintain the product offering. There was a time ten years ago when that number was three people.
The top management is no longer engaged with the nuts and bolts as much as they were earlier. There is an organisation to be managed. Large teams are complex animals and managing them does take up time.
Most business managers are now working in a matrix – while they do have teams reporting to them more often than not they have to get work done from people who are not reporting to them - people who are their peers. There are departments – engineering, product, analytics, legal, finance, sales, marketing, UI and QA. And there are process, a prioritised product pipeline and review and co-ordination meetings. Decision making cycles are longer than before – idea to implementation and final release to the consumer can take weeks or for a large job even months. It can get frustrating at times for the people engaged in this task.
We are beginning to understand the complexities of innovating in a large organisation. This problem is not unique – others have faced it before.
Large companies have advantages. They can throw more resources at a problem. They can sustain losses for a longer time. It now takes us five years to get a new business to break even and costs us Rs. 40 to Rs. 50 crores in investments in that time period. Barriers to entry in our business are therefore higher now and that’s a good thing for us. The servant quarter above the garage days are over – unless you have something totally new and disruptive.
Small organisations have their advantages too – they find it easier to innovate because decision making is quicker. They are focussed and agile with small cohesive teams. They move fast. They are not encumbered by complex processes, matrix structures and departments. Frequently they are more capital efficient.
But they do not have the kind of resources or knowledge that large organisations do – our new businesses benefit a lot from our learning in the older businesses. It is the large revenue streams and profits of Naukri that enable us to build high quality teams in analytics, algorithms and QA – expensive overheads that most start ups in India would not usually invest in. Our smaller businesses and our start up investee companies use this capability to create more value for their customers and compete better in the market.
Large businesses on the other hand have legacy revenues to defend and would not want to disrupt their existing successful business models. We know this because we have benefitted precisely because of this against print publications that have tried but not really made a mark on the internet.
Further - a small business in large organisation gets dwarfed. All senior management attention and focus is on the main big business. It takes a courageous manager to head a start up business in an existing large company. All too frequently the best talent is not moved to the start up. After all conventional wisdom says that you must put your best talent onto your largest and most profitable business.
The challenge for any start up as it scales therefore is to retain the ability of a small organisation while simultaneously enjoying the advantages of a big one.
How have we tackled that problem at naukri.
The task for any top management is to recognise this problem and then take a few bold steps proactively to resolve it.
First – ensure that there is an adequate talent pipeline at the second and third levels in every department within the company. Wherever required get high quality talent from outside the company. Basically invest in a talent bench.
When a new business starts - move some of the best talent there and give that business senior management attention. This gives everyone career growth while at the same time giving the start up business a real chance of success, without compromising on the prospects of the existing large business. Reward for milestones other than revenue early on – remember that on a revenue comparison the older larger business will always outshine a new business. If the system ensures that Business Managers use only revenue and profits as a measure of their self worth in a start up business in a large organisation they will be demotivated and probably quit. Celebrate innovations. Punish incompetence and lack of commitment – but do not punish failure.
When innovating on product within a large business – have small high quality teams and empower them. You need to ensure that you have the agility, focus and quick decision cycles of a start up – essentially have a many start ups within a large company.
All this is easy to write in an eight hundred word column – however it is a lot harder to execute. But that story is for another time.
Sunday, 17 May 2009
Entrepreneurs are risk averse
One of the things that I have most often heard being said about entrepreneurs is that they are risk takers. The unsaid implication seems to be that entrepreneurs are dare devils who will willingly defy death because risk is an aphrodisiac for them – they actually seek out and enjoy risk.
Now nothing could be more untrue of most of the entrepreneurs I have known, including yours truly. Every entrepreneur I have known is risk averse. I will go so far as to say that most entrepreneurs are really cautious people – they think a hundred times before making any significant investment.
Entrepreneurs are rational people – they try to minimize risk. What entrepreneurs do is that they seek to understand risk better, they manage risk, they try and mitigate it and then of the various alternative courses of action available they go for that one that carries the least risk.
So how do entrepreneurs go about minimizing their risk when they are starting out? Different people do it different ways.
Some would put aside a nest egg in the bank that would suffice for personal and family expenses for two or three years.
Others would ensure that there is some income coming in independent of the business to run the house with. It could be rental from a property or a spouse’s salary.
Another way to do it would be to do some work that is not the main business but ensures a steady income without being full time – teaching, training, a consulting retainer, periodic short term assignments, writing a newspaper column etc., anything that gets in some small steady income while leaving enough time to pursue the main business.
Many companies pursue one business in the short run in order to get some money for the longer term dream which could be another business. For instance a number of start-ups working on a software product fund the development expenditure by doing software services work early on.
How many entrepreneurs do you know who started their companies from their homes? Who did not take on the overhead of salaried employees early on and instead worked with business associates who got a revenue or a profit share but no fixed salary. Who gave large chunks of equity to early colleagues instead of a salary.
I myself employed most of these methods of reducing risk early on.
The point is that there are hundreds of small ways that start up entrepreneurs reduce their risk. Those that I have enumerated above are only some of them.
I would go so far as to say that entrepreneurs exhibit greater risk averse behavior as compared to employee managers. The reason is simple – it’s the entrepreneur’s own money. It is his life on the line. He has bet his all. He cannot afford to go bust. If he does he will lose everything he has. He will have to start his life all over again. What is more he cannot walk away from his business easily – there are employees and creditors to be paid, and customer commitments to be met. He is personally accountable. Therefore he takes fewer chances.
What I have said is true of many start-up entrepreneurs who do not take external funding immediately. Who try and first bootstrap their companies.
Entrepreneurs who get generous VC funding early on frequently do not display the mind set of frugality that bootstrapping a business instills. They usually don’t understand the value of money and how difficult it is for a business to earn it. Many of the dotcoms that got funded in the last bubble failed precisely because they got too much money too soon. The entrepreneurs did not understand the importance of being tight fisted and minimizing risk. These entrepreneurs ended up taking somewhat injudicious risks – with money they got easily from other people. They were actually not taking a personal risk – they had not bet their own money. Most went back to being professional managers in large companies pretty soon.
But don’t many entrepreneurs choose to leave secure corporate jobs and embrace the uncertainty of entrepreneurship. Isn’t that prime example of embracing risk?
Well, not really. The point is that the lower risk corporate job was not taking the entrepreneur where he wanted to go. He did not want to lead that life. His goals were different. And he believed entrepreneurship would get him there. So once he was clear about his goals he would then go about moving towards them in the manner that minimized his risk.
The point is – entrepreneurs have different goals.
Now nothing could be more untrue of most of the entrepreneurs I have known, including yours truly. Every entrepreneur I have known is risk averse. I will go so far as to say that most entrepreneurs are really cautious people – they think a hundred times before making any significant investment.
Entrepreneurs are rational people – they try to minimize risk. What entrepreneurs do is that they seek to understand risk better, they manage risk, they try and mitigate it and then of the various alternative courses of action available they go for that one that carries the least risk.
So how do entrepreneurs go about minimizing their risk when they are starting out? Different people do it different ways.
Some would put aside a nest egg in the bank that would suffice for personal and family expenses for two or three years.
Others would ensure that there is some income coming in independent of the business to run the house with. It could be rental from a property or a spouse’s salary.
Another way to do it would be to do some work that is not the main business but ensures a steady income without being full time – teaching, training, a consulting retainer, periodic short term assignments, writing a newspaper column etc., anything that gets in some small steady income while leaving enough time to pursue the main business.
Many companies pursue one business in the short run in order to get some money for the longer term dream which could be another business. For instance a number of start-ups working on a software product fund the development expenditure by doing software services work early on.
How many entrepreneurs do you know who started their companies from their homes? Who did not take on the overhead of salaried employees early on and instead worked with business associates who got a revenue or a profit share but no fixed salary. Who gave large chunks of equity to early colleagues instead of a salary.
I myself employed most of these methods of reducing risk early on.
The point is that there are hundreds of small ways that start up entrepreneurs reduce their risk. Those that I have enumerated above are only some of them.
I would go so far as to say that entrepreneurs exhibit greater risk averse behavior as compared to employee managers. The reason is simple – it’s the entrepreneur’s own money. It is his life on the line. He has bet his all. He cannot afford to go bust. If he does he will lose everything he has. He will have to start his life all over again. What is more he cannot walk away from his business easily – there are employees and creditors to be paid, and customer commitments to be met. He is personally accountable. Therefore he takes fewer chances.
What I have said is true of many start-up entrepreneurs who do not take external funding immediately. Who try and first bootstrap their companies.
Entrepreneurs who get generous VC funding early on frequently do not display the mind set of frugality that bootstrapping a business instills. They usually don’t understand the value of money and how difficult it is for a business to earn it. Many of the dotcoms that got funded in the last bubble failed precisely because they got too much money too soon. The entrepreneurs did not understand the importance of being tight fisted and minimizing risk. These entrepreneurs ended up taking somewhat injudicious risks – with money they got easily from other people. They were actually not taking a personal risk – they had not bet their own money. Most went back to being professional managers in large companies pretty soon.
But don’t many entrepreneurs choose to leave secure corporate jobs and embrace the uncertainty of entrepreneurship. Isn’t that prime example of embracing risk?
Well, not really. The point is that the lower risk corporate job was not taking the entrepreneur where he wanted to go. He did not want to lead that life. His goals were different. And he believed entrepreneurship would get him there. So once he was clear about his goals he would then go about moving towards them in the manner that minimized his risk.
The point is – entrepreneurs have different goals.
Monday, 4 May 2009
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