Bootstrap before looking for funding

My September column in Mint.

Over the last several years many aspiring entrepreneurs have met me for advice – be it at business schools, through TIE, at conferences, at business plan contests or by simply sending me a mail and asking for time. Almost all of them have had an idea, a half written business plan – for which they were exploring the possibility of raising capital. Most believe that without committed funding by a venture capitalist they cannot start or will not succeed. Most struggling entrepreneurs would believe that it’s great to raise venture capital at the start – but is it really?

While many successful companies did raise venture capital early in their life cycle, yet there are many more that did not – Microsoft, HP, Dell are three such examples. Closer home Infosys, HCL and Reliance and many other first generation successes were bootstrapped and built the hard way. The fact is that most successful companies and most successful entrepreneurs reached where they have without raising venture capital.

In the company where I work – we managed to get external funding only after we had bootstrapped for ten years.We were delighted to raise capital when we did. However in hindsight, it was the bootstrapping experience that taught us valuable lessons that saw us through the later years.

There are many learnings you get by bootstrapping.

First bootstrapping is a test of commitment – if you are really committed to your idea you will muster up the courage to quit your salaried job, put in whatever little capital you have or can raise from friends and relatives, tighten your belt and somehow begin to execute your idea. If you aren’t willing to bootstrap then question your entrepreneurial motivation. VC’s understand this and they prefer to invest behind good teams that are bootstrapping rather than behind professional managers who are still in secure jobs but have a nifty powerpoint presentation.

Bootstrapping helps you to validate your concept for yourself, your team and prospective investors. Validation of the concept would mean that the startup team is in place, the product is ready and there are a few paying customers who are happy with the product and are willing to buy again and recommend it to their friends.

Once your concept is validated investors come in with much greater confidence and give you a much higher valuation then they would have at an earlier stage. You get to keep a larger share of your company for the same money. Most entrepreneurs don’t realise the importance of this until much later – should the company go on to become valuable.

Bootstrapping makes you stretch 24x7. It makes you think about survival, about how to break even, about where the next rupee is going to come from and about where it should be going or not going. You innovate more, you prioritise and focus on the essentials. You manage your cash flows better, you go out into the field and sell to customers yourself and you put in twenty hour workdays if required. It instils a culture of frugality in the company. This is a priceless asset.

At Naukri when we were bootstrapping, we had to break even to survive. We found ways of doing that - somehow. So by the time we raised money what we had to do was to scale up and enhance a validated business model. The fiscal discipline that bootstrapping enforced on us is now a part of our DNA. It ensured that we went through the meltdown and became profitable with 40% of the capital that ICICI gave us still in fixed deposits in the bank.

Bootstrapping ensures that you recruit missionaries and not mercenaries – after all you won’t have the money to pay high salaries. You will pay then in stock rather than cash – non believers will simply not join you. This core group of believers will be the people who will see you through the tough times that every early stage must go through.

It takes a lot of time and effort to raise money – preparing the pitch and the plan, doing the rounds of the investors and meeting the interested ones several times, negotiating and signing the term sheet, dealing with lawyers, going through the due diligence and negotiating and signing the final agreement. It is a six month process if you are lucky. This is precious time you can spend instead on building the product, putting together the team and finding paying customers.

And then after you raise the money you have to manage the investor – and that too takes time. The fact is that when you raise money you don’t just get the capital – you also get the capitalist. He will be on your Board and he will have ideas and suggestions to give – it’s called value addition. And he will have disproportionate powers. But you might want to do things your way. In such a situation it might be a good idea to take the business forward till you have something concrete to show and then raise capital.

So, commit yourself, validate an idea, build a team, be an entrepreneur, bootstrap now, raise money a little later.

Entrepreneurship - It's not about the money

I recently began writing a monthly column on entrepreneurship in The Mint. My first piece is reporduced below. What this means is that I will post on my blog at least once a month.

Entrepreneurship is a much more celebrated term today than it was till the eighties. The world has turned around to look up at people who have executed innovative ideas to create value. Entrepreneurship as a career choice has gained social acceptability among the educated middle classes in recent years. I have been on this path for nearly twenty years now. Friends have always ribbed me about the fact that I preach entrepreneurship, but we started a job site - Naukri.com.

Today entrepreneurship is going beyond mere social acceptability and even getting to be fashionable as a career choice. A large number of people are doing start ups – many of them out of a sense of herd mentality, after getting inspiration from hearing the stories of entrepreneurs who founded successful companies. This is a worrying trend.

There is a misplaced sense of romance about entrepreneurship. I would like to caution those considering doing a start up that the early days of struggle of successful entrepreneurs seem romantic to observers only in hindsight. When you are actually going through it – there is a lot of pain. And for every poster boy success in entrepreneurship there are a hundred who are still struggling. The failure rate is high.

The first thing to understand is that entrepreneurship is not about getting rich. Sure if the company you start does become successful chances are you will make money. However that is a happy incidental outcome. It should not be the main object of the endeavour.

If you want to be an entrepreneur in order to become wealthy – my suggestion is don’t. There are very few entrepreneurs I know who succeeded without a longish period of financial struggle, belt tightening and personal sacrifice.

More often than not success will take longer in coming than you think. There will be times when at the end of the month there will not be enough money to pay the office rent and employee salaries – but you will somehow scrape though. There will be times when you yourself will not be able to take home a salary for months. There will be years on end when you will be financially the worst off person in your batch from business school. During these years you will need to make compromises on your life style – the house you are able to afford, the car you drive, the holidays you take, the restaurants where you eat and the schools your children can go to.

And all this without any guarantee of success, in search of the big idea, hoping for venture capital funding – years without any light at the end of the tunnel.

During times like this only your passion, your commitment to the idea and your stubbornness will see you through.

So before making the jump ask yourself a question – will I love doing this for the rest of my life even if I am not financially successful? If the answer is a clear yes – then you have passed the first test of commitment.

Then, when is entrepreneurship a worthwhile career to pursue. If one in hundred will succeed surely it is an irrational thing to do.

You should become an entrepreneur only if you believe that that is how you will find fulfillment.

Entrepreneurship is about freedom, creating, a chance to build a brand, an institution, showing the world a new way of doing something, being your own boss, creating a legacy that will outlive you, identity, making a difference, obsession, ego, having a shot at something big, doing what you love, innovating, doing things your way……..

Whichever way you want to put it – it is about finding meaning in your life.

Yes it is an irrational thing to do – if you are well educated and you have a good career ahead of you as a professional manager.

It is an article of faith. A bit like religion. Or as my friend Nikesh Sinha eloquently put it – it is like falling in love.

It’s an irrational choice.

Lessons of history learnt seven years ago

If experts are to be believed, the Indian economy is entering a phase where money will be slightly tighter than a year ago, growth slightly slower, margins lower and valuations somewhat more modest. While I do not anticipate a meltdown anything like the one in 2000, it is important to learn the lessons of history. On Dec 24, 2000 I wrote the following article in The Pioneer newspaper.


The Story of the Year - The Dotcom Bust

Dec 24, 2000

A little over a year ago, I met a well-known NRI who was visiting India from Silicon Valley.

He asked me how the dotcom I worked for was doing. I proudly told him that we were making a profit, that we weren't running a dotcom but a business, that we actually charged people for our services, that when we had started out three years earlier, dotcoms hadn't been fashionable and that we also intended to be around when dotcoms were no longer fashionable. He told me with a straight face that I had a vision- problem and that I wasn't thinking big enough. If we were making a profit then we couldn't be investing enough in the business. I was crestfallen, for many regarded this luminary as some sort of guru.

A little over a year ago, I thought the world had suddenly gone mad. You could get really serious money on just an idea and a presentation if you told your story well enough, that is. You couldn't throw a brick in this city without hitting someone who had either started a dotcom or wanted to start one or worked for one or wanted to work for one or was funding one or wanted to fund one.

All you needed to talk "millions of dollars" was an expense plan that was outrageous (the higher the expenses, the bigger your vision) and revenue projections that were mostly fiction. The latter were supposed to be worked backwards after seeing which numbers would justify your target-valuation. Valuation was the instrument you measured your manhood with the "mine is bigger than yours" syndrome never mind that the valuation was notional and you could never hope to get that kind of hard cash in your `personal' pocket. All the time of course, you looked people in the eye and said that you weren't in it for the money it was the opportunity to change the world that excited you.

Many wannabe entrepreneurs and their backers failed to understand that there is one set of competencies needed to build a website and another quite different set to run a web-based business. It was assumed that if you could build a good site you would have a successful web business. Frankly, there were too many people chasing valuations and too few actually trying to service customers. Most dotcoms did not have a long- term outlook to their business. Almost all promoters wanted to cash out within a year or two. Fuelling this charge were media reports of Indiaworld selling out to Satyam for Rs 500 crore in cash. That no other entrepreneur in India was able to cash out of his dotcom for a large sum of money, is another matter altogether.

As lakhs of people jumped onto the Great-Indian-Dotcom-Bandwagon in the hope of making millions overnight (not entirely unlike the KBC craze today), I slowly began to come around to the view that perhaps it was I who was old fashioned and the world reasonably sane. Sadly, before I could be completely converted, the Great Dotcom Boom of 1999 had metamorphosed into the Great Dotcom Bust of 2000. The transformation was so sudden that most people went into a state of denial for the first few months "It's a temporary correction, we expect valuations to recover in a few months," went the refrain. As reality begins to sink in and the corpses of once trendy dotcoms begin to wash up on the beach, it is useful for us to collectively contemplate on our respective navels and ruminate on why the dream went so horribly wrong.

The most fundamental lesson from the dotcom fiasco is that, for most of us, there is still no quick and easy way to get rich. Most instantly successful companies take over 10 years in the making. Sadly, even in cyberspace, there is no free lunch. In order to realise value, you have to first create it. You need customers and you need to offer them a value-proposition. You need to sell them something that they want and you need to charge them an economic price for it. You need to provide quality service to customers and you need to focus on terribly unsexy things like the backroom, logistics, fulfilment and customer complaints. You don't need to run an idea, you need to create a business. Most of this stuff is pretty boring and old-economyish – far removed from the dreams of the starry-eyed 20-something MBAs, who were
funded by other 20-something MBAs who worked at the VC firms.

One of the major reasons why the dream went sour is that most dotcoms grossly overestimated the impact the Net would have on India. It was believed that what the Net did in the US, it would do in India. However, the reality check is revealing. The Net has a penetration of 40 per cent in the US and less than 0.2 per cent in India. In other words, 99.8 per cent of India does not have Net access. That is to say, even with a 500 per cent growth in Net penetration, 99 per cent of the population in this country would not have Net access. This would seem to seriously limit the market for products and services offered by dotcoms in India. Of course the Net has not lived up to expectations in the US, even with a 40 per cent penetration.

But then overestimation of market size is not new to India. Remember the myth of the 200 million-strong Indian middle class with the alleged purchasing power of a European country. This myth drew many an MNC to launch luxury products in India, only to learn the hard way that the market size was a fraction of what was believed earlier. Executives in many companies manufacturing breakfast foods, luxury cars, scotch whisky and expensive sneakers will privately testify to this.

Coupled with the overestimation of market size was a rapid overcrowding of the dotcom space without any anticipation of competitor moves. This sort of herd mentality led to a bizarre situation where within three months, the number of women's portals went from zero to fourteen, none of which had a viable revenue model. At least one CEO of a woman's portal has told me that had he known, prior to launch, that competition would intensify so rapidly, he would have shelved his project.

This herd mentality among entrepreneurs was fuelled by competition among VCs to fund dotcoms. There was far too much money and too few good investment opportunities. Purely to get market share, many VCs made sub optimal investments. For a while it looked as if VC grew on trees. Valuations were unreal but the VCs didn't mind, as long as there was someone ready to give an even higher valuation in the next round of funding. It was like a high-stakes game of passing the parcel where as long as the music was playing, nobody got hurt. But then valuations could not stay divorced from intrinsic value for very long and the music stopped, very suddenly.

A problem that industry pundits did not recognise as one, till it was too late was the use of proxies as evidence of success. Hits, page views and visitors were parameters used to value businesses. Whereas conventional logic would suggest that the real health of a business should be measured by revenues, costs and profits. Beyond a point, dotcoms and their cheerleaders were unable to sustain the myth of the validity of such proxies.

Another myth which was perpetuated was that if you spent a lot of money on advertising, you built up brand equity and barriers to entry, which in turn built up your valuation. The net result was that many dotcoms that got funding, spent recklessly on advertising without sufficient scrutiny of how this spending was going to build the business. But that's easy to do with a clear conscience if you are spending someone else's money.

Even companies which had funding, which had built a good site and had in theory at least a viable revenue model, discovered that it takes time to get people to change habits. E-commerce sites quickly discovered that getting visibility and traffic is only part of the story. The reluctance of customers to order on the net without touching and feeling the product limits the potential of e-commerce in this country, at least in the near term.

Yet, there is a silver lining even in this cloud. The dotcoms that survive the shakeout and do not lose sight of their fundamental business objectives, will emerge stronger and thrive. To do that, they will have to understand a few ground realities: They are not running a dotcom but a web-enabled business. The Net is not a business but a channel of communication. That they need to build a business first and build the dotcom around it, and not the other way around. That they need to chase the right metrics - customer satisfaction, revenue and profits are in and page views are out.

That overheads should chase turnover and not the other way around. That a brand is not built by advertising but by customer experience. And that they cannot spend money that they cannot hope to earn.

The dotcom is dead. Long live the dotcom.