Sunday, 1 November 2009
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
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
This is my August 2009 column in Mint.
One of the issues that we constantly struggle with, in Naukri, is trying to protect the culture of innovation as the organisation grows larger.
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
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
If you are running a VC or an angel funded start up, it makes sense to pay special attention to managing your investors in a meltdown of the kind we are facing today. When a financial bubble bursts, those who invested at the peak, get really edgy. So, if you raised money any time in the last two years chances are you have a very nervous investor on your board, whose shareholder agreement with your company gives him powers that are disproportionate to the size of his shareholding.
While you are extremely unlikely to be able to raise more money in the near future, what you don’t want is your current investor pressing the trigger and putting a bullet into your head.
So what is it that you can do to manage your investor better.
Investor commitment is very important. If you already have an investor on board it is too late to raise this issue. You should have considered this when you were raising the money. When the going is good you will find that your compatibility is high with all kinds of investors and everyone expresses faith in the India story and your business. When the chips are down is when the investor’s mettle will be tested. In the last meltdown many VCs simply wound up shop and left India. Only very few stayed the course and rode out the bad times. It’s a good idea to have an investor who has a long term commitment to staying in India and doing business.
Spend enough time talking to your investors. Remember there is no such thing as overcommunicating in a crisis. Involve your investors in any key strategic decisions that you need to make. Explain to them the future that you can see clearly, but they perhaps cannot. Recognise the business reality and deliver any bad news early. Investors hate unpleasant surprises and being informed late about anything important.
Remember it is not your company alone. Once you have taken external investment you have to do what it takes to protect the interest of minority shareholders. You cannot jerk your investors around just because you have a majority shareholding. This is what lies at the heart of good corporate governance.
Manage expectations. Try to exceed investor expectations. In general it is a good idea to undercommit and overdeliver. So always be conservative in your projections. Don’t exaggerate to get a higher valuation or to look good today. When we raised our first round of funding we had made extremely conservative projections. Later even during the meltdown we exceeded our projections several times over – partly because we performed well and partly because we had made low projections.
Keep a frugal mindset. Be very careful how you spend money. Demonstrate to investors that you are as cautious with their money as if it had been your own. Lead from the front when it comes to cost cutting. Make a personal sacrifice – take a salary cut yourself before asking others to do so or before downsizing and asking people to go. Shift to cheaper offices to cut costs.
Focus on cash efficient growth and profitablilty. Nothing gives investors more confidence than a business that is turning the corner and is growing fast. What is equally important is cash efficienct profitability. Investors don’t just want to see revenues they want to see profits. And they don’t want to see profits rising along with receivables. They want to see money that is collected and in the bank. So focus on free cash flow.
Regard the investment as debt not equity. While an investor may have taken an equity risk by investing in your company, you must regard the obligation as if it were debt. The investor has put money in your company because he believes in you. You must treat the investment with the responsibility it deserves. If you display this attitude investors may be unhappy with business performance in a slowdown but they will not be unhappy with you.
Finally work on building trust. Spend time on the relationship. Don’t lie - tell it like it is. Never mislead investors. Remember institutional shareholders get more hassled if they learn they have been lied to than if they are told that they may lose some money.
While much of the press in the recent months has focused on job losses and downsizing in Indian industry as a result of the global recession, the real crisis is in India’s engineering colleges, business schools and college and university campuses. Most of corporate India’s work force is still hanging on to their jobs – sure increments are low and some may have been downsized but by and large most people who were in employment are still getting a monthly pay cheque. It is those who are seeking employment for the first time who are struggling the most.
If you leave the top fifty B schools and the top hundred engineering colleges out of the discussion – in most campuses the majority of the graduating class is still looking for jobs and many of those who have managed to get a job have had to reduce their expectations and go for what they could get.
At engineering colleges, the IT Services sector is most responsible for the low off take of graduates. Many IT services companies simply did not go to colleges to hire this year. And those that did go, ended up either withdrawing offers or deferring the joining dates by several months or longer.
At some of the best B-Schools many students are still without jobs, and at others those who have got placed have had to accept offers from companies they would not have dreamt of joining till just a few months back. The situation in the lower ranked B schools is a lot worse. The B-School situation is compounded by the fact that over the last five years the course fees has risen to a level that graduates need to get jobs paying a certain minimum amount to as to be able to repay education loans taken to do the course in the first place.
While this may be bad enough there is worse news to come. While it is hoped that the Indian Economy and the hiring scene in general will pick up in the second half of this financial year – the fact is that hiring at the entry level will pick up a lot later. It has been observed in the past that entry level hiring gets hits first in a slowdown and it picks last in a recovery. Do not expect any great joy in the next placement season.
So what should a fresh engineer or MBA do in the current market.
First accept the new reality. The market has changed and till it changes back for the better you are going to have to scale back your expectations. Internalise this fact. Sure it’s not your fault and this is not what you studied hard for but that’s the way the cookie crumbles.
Be flexible about the industry you wish to join. If IT is not hiring, it is not hiring – period. Either join a smaller company in IT or a start up or else look at other areas. There are many other industries that need engineers and some companies there may be hiring – telecom, manufacturing, chemicals, electronics etc. Be willing to look at something different.
Scale down the bar on salary. The average salary for the graduating class at the Business school where I had studied has gone up by close to forty times in the twenty years since I graduated. And my class mates and I had considered ourselves fortunate and privileged at that time. While twenty years is a long time, a forty times hike in salary during this period is great going by any standard. I am pretty sure the wage inflation in the graduating class of other B Schools and Engineering colleges has been as much if not more over the past two decades. So be happy - you’ve done well. Count your blessings.
Consider other functions and roles. Yes you always dreamed of joining a bulge bracket firm as an investment banker. But those jobs are simply not available any more. Take what you are getting and run with it. More opportunities will emerge as the economy recovers. Till then get some experience under your belt.
Think about a further course of higher study. If the job market depresses you or you are just not able to get what you want - evaluate a further qualification and come back into the job market a couple of years later when things are better.
In short, roll with the flow. Over a thirty year career span what you are experiencing today is only a minor setback.
Friday, 20 February 2009
Last weekend I attended the twenty year reunion of my class at IIM Ahmedabad. It was fun - going back to campus and schmoozing with old friends, catching up on each others’ lives, imbibing bootlegged liquor surreptitiously and also finding time for some serious discussion.
One of the recurring themes in many of the discussions was how so many people in the class had ended up pursuing entrepreneurship as a career – out of 175 in the class more than 35 have founded companies. At least seven of these companies have achieved scale, three have listed and several others are expected to grow big in the years to come.
This is a very high strike rate by any standard. So what is it that made the Class of 89 different.
Unquestionably timing and circumstance had something to do with it. When the economy began to open up in 1991 many in the class were in the right place at the right time. We had gained some work experience, yet were still green enough to not have mentally committed to a long term career as an employee manager. We were earning relatively low salaries (the average starting salary in our graduating class was Rs. 3800/- per month) and so the opportunity cost of entrepreneurship wasn’t very high – we could take the risk and not lose a very fancy salary. When we went out to get business for the companies we started the growing economy gave us the breaks. To a large extent we were products of economic liberalization.
But it wasn’t just timing and circumstance that made the difference. There were other factors at play.
In the eighties the admission policy at IIM A ensured that there was diversity in the class - you had students from different academic backgrounds and different kinds of work experience. There could be a maximum of 50% of the students in the class from any one academic background. This made for a 360 degree experience with several points of view on the table during class discussions. There were a fair number of mavericks and independent thinkers – many of us simply did not want to work as employee managers and we had said so in the admission interview. Today India’s best business schools including IIMA seem to be ignoring the value of diversity in the class. Today, the admission policy at IIM A has changed - 93% of the students in the current first year batch are engineers – a retrograde move. If you reduce diversity you produce clones. And a class of clones is likely to produce fewer entrepreneurs.
The second factor is what we were exposed to at IIM A. There was a whole suite of courses that were relevant to entrepreneurship. In most other B Schools there is one course on entrepreneurship – I ended up doing five such courses. In fact till the early eighties there was even an Entrepreneurship Concentration Package which you could do. There were case studies of start ups and small enterprises – an entire body of knowledge had been created. Today this has expanded into a centre for innovation, incubation and entrepreneurship.
The third factor at play was the demonstration effect. One by one as more and more people in the class started companies, others mustered up the courage to do the same. And we are not done yet. Some more are likely to become entrepreneurs in the future.
So what should a business school do if it wants more of its students to become entrepreneurs?
First admit a more diverse class without compromising on academic rigour. In order to do this do not rely simply on hard criteria such as the CAT score – do a 360 degree assessment of the candidate. The best business schools in the world look at the GMAT score as only one out of half a dozen criteria for admission.
Second create a separate academic department for entrepreneurship and introduce a number of relevant courses in that area. Create and source material relevant to entrepreneurship – case studies, handouts, books etc. Allow students to major in entrepreneurship.
B Schools need to stop bragging about their success using average salaries, people placed overseas and placement rate. These indicate a mindset of managerialism. Instead celebrate successful alumni entrepreneurs. Lionise entrepreneurs who can be role models. The decision to quit a well paying job and start a company is frequently an emotional and irrational one – people need to be inspired to do it.
Encourage frequent interaction with entrepreneurs – let the students know their stories.
Finally the goal of every good business school should be to produce a fair number of misfits – because that is what entrepreneurs are. They do not see themselves fitting into existing corporate structures.
Thursday, 19 February 2009
Teams are important
As Co-Founder and CEO of my company, it is my lot to be the external face of the organization. I frequently go on stage to take the applause and credit for work that has largely been done by other people. In the last three months I have received three awards for achievements in business or entrepreneurship. While I have been recognized ‘individually’ the truth is that the awards were really for what the organization has achieved.
And the reality is that what the organization has achieved is the cumulative result of the efforts of everyone who is working here or has worked here in the past.
It is a myth that entrepreneurs are supermen who lead and build companies largely on their own. In any entrepreneurial company that has achieved some size and scale you can be sure that there is a large and capable team at work with one or maybe two of the promoters being the public face of the organisation.
In fact one of the most important things that venture capital investors look at when deciding to invest in a company is the quality of the team. Not just at the founder or the CEO.
Great entrepreneurs are people who have the ability to make others want to work with them. They love their people and their people love them. They are the glue that binds the team in the start up phase. They are great people managers – maybe even pied pipers. They are prepared to share the wealth and the credit. They are magnets for talent.
At the start use your personal network
The first team will comprise of you and your partners, should you have any. These will be people you know, trust and respect – friends, classmates, colleagues. You have shared an experience. You are all fired up by the idea. You bond well. You will share ownership substantially.
The next step will be to gain the confidence of people whom you know but perhaps not that well - acquaintances, friends of friends. They will join because they will believe in you, your partners and the idea. They will carry the torch with almost the same passion as you do. They will be missionaries not mercenaries – they will take salary cuts and significant ESOP. Frequently entrepreneurs are not able to attract high quality people at the early stages of a business easily. They tend to make compromises only to realize as the company begins to scale up that they should have hired better at the start. Remember to set the bar high even in the initial stages.
Chances are that you will keep the team small till you are cash positive or you get access to capital. A team that will don varied roles – a team of all rounders who will be doing more than one job in the company. They will burn the midnight oil to make things happen. Yet, dependence on you and your partners will remain high.
Managing the team when scaling up
When you raise external funding the investors would want a broad based team to invest behind. This is the time to attract talent you can depend on in future. People who will man the boat, and make sure it sails in smooth and rough waters. This is the time to invest in future CXOs of the company.
As the business grows the team will get bigger and a whole lot of new dynamics will come into play. Processes, HR Policies, Administrative and Legal formalities and most importantly conflict. You will wonder what happened to the magic of the early days. You might even lose a few of the original team members. It will be up to you to create coherence out of the chaos. You will require specialists for every team and they come at a price. Soon, you will cease to be a startup. This is the stage of managing a transition. You will have to learn the art of sailing in two boats at the same time, for there will be the soul of a large company in the body of a startup.
From Entrepreneur to CEO
Finally when your company grows large, perhaps it does an IPO, you will be even more dependent on other people in your team than you were before. It will gradually dawn on you that you are more of a CEO now and less of an entrepreneur. And perhaps you are presiding over precisely the same kind of system that you left in order to become an entrepreneur.
Maybe it’s time to do your next startup!