Saturday, 22 May 2010

When to jump

The question I am most frequently asked by students of business schools and engineering colleges who are aspiring to be entrepreneurs is – When is it the right time to become an entrepreneur? Should I do it straight after college or should I work for a few years first?

The truth is that there are success stories of all sorts. There are those who have done it after working for a few years as managers in companies – the Infosys founders are an example. Then there are people who have done it straight out of college – my good friend Kunwar Sachdev of SuKam invertors is one such. And there are those who have dropped out of college to become entrepreneurs – Bill Gates is the most famous name that comes to mind. There are people who do college and entrepreneurship side by side – Michael Dell’s story of how he founded and ran Dell from his college room is famous. Finally there are those who became entrepreneurs without even going to college or completing their school education – the best known story in India is of Dhirubhai Ambani.

There is no one right answer to these questions however you can always find an example to support whatever point of view you support.

The argument in favour of becoming an entrepreneur straight out of college is that once you are in a job and you get comfortable with the idea of a regular salary you will find it extremely difficult to quit do a start up. This is especially true if you are from a premier institute and earning a high salary in a well known company. It becomes worse if some years have elapsed since you finished college and you have now bought a car and a house and have EMI’s to service. And later on when you have got married and started a family it becomes nearly impossible to quit – you crave security.

The single largest reason why people give up on their entrepreneurial aspirations and continue is a job is delay in breaking out after college.

The argument in favour of working for some years in a job before becoming an entrepreneur is that you improve your reality check. It is well known that the Indian education system does not provide a great reality check to students. It takes several years of working after college for graduating students to figure out how the real world actually functions. You learn to work as a subordinate before you become a boss and that experience is important when your company scales up and you are managing a larger team. You acquire skills on the job that you would have otherwise not have. You meet customers, get an insight into their needs and an understanding the market. You get to know about business opportunities. You learn about processes and good practices that are useful years later. You build your network and credentials. In summary, working for a few years will increase your chances of success once you do become an entrepreneur. The flip side is that if you get into a good job and work there for a few years you may never actually quit to become an entrepreneur.

My view on this is that you should become an entrepreneur only when you are ready. I had worked for five years before I quit and became an entrepreneur. And in hindsight I would not do it any other way. I needed those five years to learn and mature and become a better people’s person. And you will know when you are ready. You inner voice will compel you to do it.

The other time to become an entrepreneur is when you have such a compelling idea that you are totally convinced that it is now or never. Bill Gates often cites this when he talks about his decision to quit college and found Microsoft. He could see the PC age coming and he just had to be a part of it but felt it would pass him by if he spent another three years in college. He just had to do it then.

Sunday, 16 May 2010

Dont expect the government to fund start ups

Time and again I am asked questions by young people about why the government doesn’t do more to help start ups. Why, for instance, doesn’t the government fund start ups? This question is usually asked by people who have some sort of a sense of entitlement and they believe it is their right to get funding from the government for their enterprise.

This sort of attitude is a throw back to twenty or thirty years ago – to the days of nationalized banking.

There are enough private sources of risk capital available now for the government to not do this. Apart from Venture Capitalists, there is even an emerging category of Angel investors.

Admittedly early stage capital is still somewhat scarce but it is there if you knock enough doors.

The easiest thing to do is to ask the government for a dole or a subsidy. However actually extracting it from the government is usually a very bureaucratic and time consuming process. And taking money from the government does require skills that are not the same as those required to build world class products for customers.

If your start up really deserves funding chances are that you will get if faster from private sources than from government.

And if after trying from many places you fail to obtain funding then the market is giving you feedback – listen to it. Perhaps your project actually isn’t the sort that will get funding or you need to achieve some more milestones before you approach an investor.

Whatever it is the fact is that every start up will not receive VC funding. Less than one in a hundred business plans gets funded. It must also be remembered that most successful companies did not receive venture investment. So the belief that you cannot succeed without venture capital is somewhat misplaced.

The entrepreneurial eco system is Darwinian in nature – and that is the way it should be. Only the fittest will survive. Some start ups will die – sounds harsh but that is good for efficiency. The ones that do make the cut however will go on to become large valuable businesses.

The mindset of those who want government funding for startups hasn’t changed twenty years after economic liberalization -we want free markets when it benefits us and we want govt. intervention when we are at the receiving end of free markets.

There is no such thing as risk free entrepreneurship. It is a requirement of entrepreneurship to bootstrap, sacrifice, do more for less and struggle for financing. That experience creates a mindset of frugality and a laser sharp focus on only that which is essential. It is scarcity of capital and the accountability that a free market imposes that leads to capital efficiency.

The role of the government should be limited to creating the right environment for a healthy entrepreneurial eco system rather than taking direct financial risks in commercial enterprises. This would mean creating the right regulatory framework.

One useful rule for the government to follow is to let markets work when they are doing a good job and intervene only when markets fail.

There could be a case for the government to intervene where private venture capital or angel money does not reach rural areas, under developed regions of the country, the bottom of the pyramid or other sectors where there could be large social impact. However even these projects – to scale and impact the lives of a large number of people would necessarily have to be financially viable and generate a positive return on capital.

Therefore even where the government does intervene the filters of what projects should be backed and which should not, should be very discerning and the process well managed.

Thursday, 14 January 2010

Keeping the entrepreneurial flame alive

I had mentioned in an earlier column how it is very hard for a large company to be entrepreneurial. And how start ups usually lose much of their entrepreneurial spirit and agility as they scale – the founders usually get involved in other stuff – managing investors, putting in processes, being the public face of the company, managing conflict, hard coding the business model and rolling it out – doing stuff that is supposed to build the organisation and take it to the so called next level.

So while the organisation is getting built – the founders often take their eye off the entrepreneurial ball. This may not happen immediately however over time as the organisation gets larger and more complex to manage it usually happens.

After a few years what was a mission for the small focussed team that started the company becomes merely a job. You are no longer trying to change the world, you are simply going for more mundane things like sales growth, maintaining EBITDA margins, ensuring you meet investors’ quarterly result expectations, employee retention and so on. Things that are traditional and managerial rather than entrepreneurial.

Somewhere when transitioning from a start up to a big organisation – companies run the risk of losing their entrepreneurial soul.

While being a bigger company has many advantages it is important that companies try to also retain the entrepreneurial culture while becoming big.

Basically the problem is that the founding entrepreneurs usually create a cadre of managers under them and not entrepreneurs. There is massive capacity building of people who will execute and not enough of those who will create and build.

Retention of the entrepreneurial spirit has to be driven from the top. The founders have to recognise the problem and be committed to solving it. Although many pay lip service to this very few actually walk the talk.

The first and most important thing to do is to ensure that you hire the right kind of people. You need a rare breed – entrepreneurial managers. People who have the experience of having worked in a large organisation and despite having performed well there are dissatisfied with excessive controls and have a yearning for far greater independence than what they were ever offered. People who are somewhat irreverent but at same time understand the need for organisation building and the right kind of controls for ensuring performance and governance without stifling creativity. All this without compromising on the competencies required to actually do the job.

Such managers are rare to find but if you don’t recognise that these are the kind of people you need you will get them only by accident and then you would not know what to do with them.

Once you have a few of these on board what you need to do is agree with them on expectations and then empower them. If you don’t, you will be wasting a precious resource and chances are they will leave in some time anyway. So give them all the assistance they need and ensure you don’t get in their way.

Of course the risk here is that if you make a wrong hire and then empower that person you could have a serious problem on your hands. However after a couple of mistakes you will soon figure out who the right persons are and what to look for.

You are now no longer an entrepreneur alone – you have to assume the role of creating other entrepreneurs internally.

Close the loop by ensuring you have a generous wealth sharing plan – these are the people who will take the organisation to the next level. Ensure that they are rewarded well for their performance – way beyond market, usually through ESOPs. A performer must never even think of looking elsewhere.

In any company there will be people who will resist the empowerment of others – most notably the people under them. Get rid of the control freaks no matter how good they are technically – in the long run they will ensure that the organisation remains small.

Break up operating units into small teams. Large teams usually create more ground for conflict and creating alignment among a larger number of people is more difficult. Smaller teams work faster. What this means is that you need to get the same output from a smaller team as you would have from a larger team – so you need to raise the bar for hiring and recruit only very high quality people – at all levels in the company.

Finally you need to ensure that everyone has the freedom to speak his or her mind. Encourage a culture of independent thinking with a high tolerance of dissent.
Build an argumentative company.

Building a Good Board

Putting together the right Board of Directors for your company is an important but frequently postponed task when you are trying to scale up your company.

But if you have received an investment from a venture capital fund chances are you will need to put together a decent Board sooner rather than later if for no other reason than because it is a requirement in the investor agreement.

While there is no one definition of a good Board or a high quality Board member, in general what you need are a set of people who have high levels of integrity and commitment and who collectively bring to the table enough of the right kind of experience in business, finance, corporate governance, marketing and other relevant areas.

Boards can add real value. Many early or mid stage Indian entrepreneurs have a black and white view of a Board – either it should be totally pliable and simply sign off on what the promoter wants or else it will become a pain in the butt putting up obstacles along the way. Therefore they are cagey about Board expansion, restricting it only to family members and very close associates. The right Board however adds value in several ways – it brings together the collective wisdom and networks of a number of very good people leading to better governance of the company and hopefully better strategic choices being made. So seek out and appoint high quality Directors who are genuinely independent.

Appoint Board members carefully. It can be awkward to ask someone to step off your Board. Therefore a wrong appointment can create serious difficulties given the influence a Director wields in the company. Also no really good Director would wish to serve on the Board of a company which has one or two poor quality people. So recruit a Board member carefully – even if it takes more time than you had anticipated. Get to know him or her really well and do a thorough reference check before taking the decision. And set the bar high.

Don’t appoint a Director for name value alone. This is a trap that entrepreneurs in India often fall into. They go after big names assuming that this will add credibility to the company. While that is true, well known people usually have many demands on their time. Also they often have a halo around them which makes their reputation larger than life – their real ability to contribute may be a little less than your expectations. You need Directors who will be able to give you time and mindspace when you need them.

Do it at the right time – not too early and not too late. Putting together a good Board is something you will need to do at some point of time as you grow your company. It is important to do it at the right time. If you do it too early you will end up spending too much of your time managing the Board and too little building the business. If you leave it till too late you may have ended up building the wrong kind of company.

Invest time in working with the Board. Managing a Board and working with it does take time and it consumes your bandwidth. Any Board member worth his salt expects to be given an opportunity to contribute and that’s good for the company. What it means is that you will have to spend time engaging with Board members both during and outside Board meetings.

Choose the right mix of skills and experience. You need to get people with the right blend of diverse skills and experiences onto your board. At Naukri we got onto the Board people who collectively had experience in marketing, sales, engineering, product, venture investing and finance. At least two have been entrepreneurs in the past and have built companies. Several are independent directors in companies that are bigger and perhaps better than ours. Two have over thirty years experience of different kinds.

The chemistry must be right. It is important that you get along with your Board members and that you feel comfortable enough to level with them especially when there is bad news to give. At the same time they must not be your buddies or your cronies.

Remember a good Board is your ally and not someone whose only job is to police you. Often your Board of Directors can save you from yourself.