Monday, 4 May 2009
Managing Investors in a downturn
My March column in Mint
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.
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.
Job hunting in a slow economy
My April Column in Mint
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.
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.
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