As a start up entrepreneur the most important thing you will do once you have hit upon the business idea you would like to pursue, is to put together your team.
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!
Thursday, 19 February 2009
Wednesday, 31 December 2008
Valuing a start up
Assessing the value of a start up is one of the most difficult things to do. Investors and investment bankers may like to give the impression that there is a method to it but the truth is that valuating an early stage company is an imprecise science, that depends on a number of factors some of which have little to do with the intrinsic value of your company and more to do with the environment.
So what do VC’s look at while valuing a company. Most investors give you similar answers –
Size of potential market – Generally the larger the better
Quality of the management team - passionate, broad based management teams with complementary skills and domain expertise preferred
Business model – Who pays and for what? How much will they pay? How scalable is the model? Does head count need to scale proportionately with revenue?
Competitive landscape – it is good to be first mover or at least early mover, however if it involves the creation of a new category or market or a radically new consumer habit then it can be risky. It’s nice if customers are used to currently spending money for the same purpose and your offering solves the problem better and you propose to earn revenue from existing spend budgets. It’s also good if this is a proven business elsewhere in the world.
Stage of company – the earlier the company in its life cycle the more risky it is however an investment in an early stage company can yield massive upside to the investors if it goes on to succeed. In spite of the fact that we were probably overpriced in our first round of fund raising, our investors earned a return of slightly under thirty times over a seven year period.
Quality of offering – This a tricky one. How good is the offering? Will it get traction among customers?
Cost structures and potential margins – How large are the margins likely to be when the business scales up? Will margins increase with scale - does the business have operating leverage?
Market structures and market power - Is there likely to be excessive dependence on a few customers? Can the business build up massive dependency for its services among its customers? Will there be switching costs for customers? Does the business build defensible intellectual property? Will there be barriers to entry for competition in the future?
Basically all these are surrogates by which investors can get some sense of potential return and risk – a peek into the future.
Yet there are external factors which will finally influence whether or not a VC will invest in a particular company and if so at what valuation.
At Naukri, in April 2000, we raised our first round of venture funding at a valuation of around Rs. 44 crores - we had achieved sales revenue of Rs. 36 lakhs in the year gone by and. Sounds insane – well it happened. It was a bubble investment – dotcoms were flavor of the month, investors were competing to give us money (we had two offers on the table and we had spoken to only four investors), the Internet was expected to change the world and everyone was going to get very rich very fast. Six months later as it became apparent that the bottom had dropped out of the dotcom market the company would probably have been valued at around Rs. 2 crores even though revenue was going to more than double over the previous year.
Most investors will deny it but there is some kind of herd mentality among many investors. They compete with each other and they talk to each other. So if one investor makes a certain kind of investment that looks like a smart thing to have done it spurs others on to make investments in similar companies. When dotcoms were in fashion in the late nineties everyone wanted to invest in the internet sector. The ensuing competition resulted in a de facto auction and pushed valuations sky high. And when investors decided that they wouldn’t touch dotcoms with a barge pole, valuations were in the basement for a long long time.
Bubble investments followed by a situation where companies were left with no hope of a second round, subsequent tranches were held back, they were merged, promoters were sacked and replaced by professionals - many simply shut shop. All in all it there was a lot of pain for everyone. Yet the intrinsic worth of the companies had not changed much from the time they received their first round investment till the time they were forced to shut shop.
Irrational exuberance followed by irrational pessimism.
Just as beauty is in the eye of the beholder, valuation is in the eye of the investor.
Thursday, 11 December 2008
Lage Raho
My November column in Mint
So it is a slow down, perhaps even a recession, or if the prophets of doom are correct in their prognosis – it is that once in a lifetime occurrence, an economists delight – a global depression.
Whatever it is, the news is not good for those doing a start up. Not because growth will slow down to under seven percent. But because many start ups are doing innovative stuff where the revenue will come only a couple of years later and they need external funding till then. Funding that has become a lot harder to get as compared to a few months ago.
So as an entrepreneur doing a start up what are the things you could do to cope and ride through the situation? There are no "one size fits all" solutions – each company is different, each market is different. Having said that there are five things you could be doing.
Don’t panic : This is the fifth slowdown I am witness to during my entrepreneurial career over the last eighteen years . All of them have shared the following characteristics – a stock market correction, drying up of capital and credit, a demand slowdown and softening of business confidence. None has lasted more than two or three years. In India a recession means less than five percent growth for a year or two while a slowdown is six percent growth. These are healthy growth figures by global standards, however in an India that has gotten accustomed to nine percent growth it is viewed as a disaster if one were to go by media reports. Sure things are bad in the economy but we have been there before and come out of it. This too shall pass.
Recognise the problem early : Internalize the understanding that times have changed – the party is over. There are many start ups that will not survive the next three years. What you have to do is to ensure that your company not only survives but also grows and thrives. If you don’t recognize the problem early you will not be able to solve it. At Naukri we raised venture capital in April 2000 and the market began to correct almost immediately thereafter. We immediately stepped on the brakes and put all the money into fixed deposits in the bank – we did not spend it foolishly on big budget advertising. The rest of the market was in a state of denial for over six months saying that this was a temporary correction and things would be fine soon. It is because we recognized the problem early we were able to conserve our cash and ride through the meltdown. So assess your situation. Take stock of your cash availability, revenues and expenses. Assume you cannot raise any further capital for the next two to three years and then prepare a plan for survival and growth.
Take colleagues and employees into confidence : Having recognized the problem discuss the situation openly with employees. Let them participate in suggesting alternate courses of action. It helps to have many heads working at the problem. Also you get a buy in from the whole organization. When we tabled the situation the company was in, in 2001 senior colleagues volunteered a 30% salary deferment without being asked – it helped that we had a generous ESOP programme. If people love to work with you and they believe it is their company they will sacrifice without being asked.
Sharpen your value proposition and accelerate the sales programme : This is the single most important thing you can do in a recession. Push back the esoteric products that will bring in revenue after two years. Focus on creating immediate value for customers. Get the sales in today. And then go out and lead from the front and make sales calls yourself. This will not only give you deep customer insights to help you improve your offering continuously but will also motivate the sales team. And remember as the founder you are probably the company’s best salesperson. Build out the sales organization as you get sure about the value proposition you offer to clients.
Evaluate every expenditure : When cutting costs during a recession there are no sacred cows in a start up. Look at every expenditure. Don’t travel when things can get done by email or phone. Stay in cheap hotels when you do travel. Share a room with a colleague. Go by train if you can. Shift to cheaper offices if that is what you need to do. Do barter deals and alliances, wherever possible, if you need to buy something. Don’t spend money on advertising that doesn’t result in sales or enquiries. There are probably a hundred areas to save money if you constantly ask yourself a few questions. Do I really need this? Is there a cheaper way to achieve the same objective? Can I do this later? How will this improve sales? What difference will it make if I do not do this right now?
There is an opportunity in every slowdown. No doubt funding is difficult to get, customers negotiate harder and sales cycles become longer. However competition too gets adversely impacted – and that’s good for you. This is the time to get quality talent into the team – so raise the bar on hiring. More importantly if you spend time sharpening your value proposition and make it more compelling you will find that sales will happen and you have a good chance of sailing through the meltdown. So don’t quit - lage raho.
So it is a slow down, perhaps even a recession, or if the prophets of doom are correct in their prognosis – it is that once in a lifetime occurrence, an economists delight – a global depression.
Whatever it is, the news is not good for those doing a start up. Not because growth will slow down to under seven percent. But because many start ups are doing innovative stuff where the revenue will come only a couple of years later and they need external funding till then. Funding that has become a lot harder to get as compared to a few months ago.
So as an entrepreneur doing a start up what are the things you could do to cope and ride through the situation? There are no "one size fits all" solutions – each company is different, each market is different. Having said that there are five things you could be doing.
Don’t panic : This is the fifth slowdown I am witness to during my entrepreneurial career over the last eighteen years . All of them have shared the following characteristics – a stock market correction, drying up of capital and credit, a demand slowdown and softening of business confidence. None has lasted more than two or three years. In India a recession means less than five percent growth for a year or two while a slowdown is six percent growth. These are healthy growth figures by global standards, however in an India that has gotten accustomed to nine percent growth it is viewed as a disaster if one were to go by media reports. Sure things are bad in the economy but we have been there before and come out of it. This too shall pass.
Recognise the problem early : Internalize the understanding that times have changed – the party is over. There are many start ups that will not survive the next three years. What you have to do is to ensure that your company not only survives but also grows and thrives. If you don’t recognize the problem early you will not be able to solve it. At Naukri we raised venture capital in April 2000 and the market began to correct almost immediately thereafter. We immediately stepped on the brakes and put all the money into fixed deposits in the bank – we did not spend it foolishly on big budget advertising. The rest of the market was in a state of denial for over six months saying that this was a temporary correction and things would be fine soon. It is because we recognized the problem early we were able to conserve our cash and ride through the meltdown. So assess your situation. Take stock of your cash availability, revenues and expenses. Assume you cannot raise any further capital for the next two to three years and then prepare a plan for survival and growth.
Take colleagues and employees into confidence : Having recognized the problem discuss the situation openly with employees. Let them participate in suggesting alternate courses of action. It helps to have many heads working at the problem. Also you get a buy in from the whole organization. When we tabled the situation the company was in, in 2001 senior colleagues volunteered a 30% salary deferment without being asked – it helped that we had a generous ESOP programme. If people love to work with you and they believe it is their company they will sacrifice without being asked.
Sharpen your value proposition and accelerate the sales programme : This is the single most important thing you can do in a recession. Push back the esoteric products that will bring in revenue after two years. Focus on creating immediate value for customers. Get the sales in today. And then go out and lead from the front and make sales calls yourself. This will not only give you deep customer insights to help you improve your offering continuously but will also motivate the sales team. And remember as the founder you are probably the company’s best salesperson. Build out the sales organization as you get sure about the value proposition you offer to clients.
Evaluate every expenditure : When cutting costs during a recession there are no sacred cows in a start up. Look at every expenditure. Don’t travel when things can get done by email or phone. Stay in cheap hotels when you do travel. Share a room with a colleague. Go by train if you can. Shift to cheaper offices if that is what you need to do. Do barter deals and alliances, wherever possible, if you need to buy something. Don’t spend money on advertising that doesn’t result in sales or enquiries. There are probably a hundred areas to save money if you constantly ask yourself a few questions. Do I really need this? Is there a cheaper way to achieve the same objective? Can I do this later? How will this improve sales? What difference will it make if I do not do this right now?
There is an opportunity in every slowdown. No doubt funding is difficult to get, customers negotiate harder and sales cycles become longer. However competition too gets adversely impacted – and that’s good for you. This is the time to get quality talent into the team – so raise the bar on hiring. More importantly if you spend time sharpening your value proposition and make it more compelling you will find that sales will happen and you have a good chance of sailing through the meltdown. So don’t quit - lage raho.
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