Selecting the right business partner

Many small businesses have more than one promoter. Frequently it is team of two or three partners – sometimes more.

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

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.