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.

Retaining the culture of innovation is a challenge as a start up scales

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.

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.