Old Wine in Old Bottles - Mahatma Gandhi Candle March Packaged as Guerrilla Warfare! “Special Investigation” claimed by Mail Today on a story that Indian Express wrote in April 2011

Old Wine in Old Bottles - Mahatma Gandhi Candle March Packaged as Guerrilla Warfare! “Special Investigation” claimed by Mail Today on a story that Indian Express wrote in April 2011

On Sunday morning I was woken up by an SMS from a close friend “Now we know who funds Kejriwal”. He was referring to a story on the front-page in Mail Today. I don’t get the tabloid and found out about the story only when I called him back.
” http://epaper.mailtoday.in/epaperhome.aspx?issue=4112012

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.

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.

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.

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.

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.

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.

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.

B Schools need to nurture misfits

A common misconception is that the IIM’s do not produce enough entrepreneurs.

Last weekend I attended the twenty year reunion of my class at IIM Ahmedabad. It was fun - going back to campus and schmoozing with old friends, catching up on each others’ lives, imbibing bootlegged liquor surreptitiously and also finding time for some serious discussion.
One of the recurring themes in many of the discussions was how so many people in the class had ended up pursuing entrepreneurship as a career – out of 175 in the class more than 35 have founded companies. At least seven of these companies have achieved scale, three have listed and several others are expected to grow big in the years to come.

This is a very high strike rate by any standard. So what is it that made the Class of 89 different.

Unquestionably timing and circumstance had something to do with it. When the economy began to open up in 1991 many in the class were in the right place at the right time. We had gained some work experience, yet were still green enough to not have mentally committed to a long term career as an employee manager. We were earning relatively low salaries (the average starting salary in our graduating class was Rs. 3800/- per month) and so the opportunity cost of entrepreneurship wasn’t very high – we could take the risk and not lose a very fancy salary. When we went out to get business for the companies we started the growing economy gave us the breaks. To a large extent we were products of economic liberalization.

But it wasn’t just timing and circumstance that made the difference. There were other factors at play.

In the eighties the admission policy at IIM A ensured that there was diversity in the class - you had students from different academic backgrounds and different kinds of work experience. There could be a maximum of 50% of the students in the class from any one academic background. This made for a 360 degree experience with several points of view on the table during class discussions. There were a fair number of mavericks and independent thinkers – many of us simply did not want to work as employee managers and we had said so in the admission interview. Today India’s best business schools including IIMA seem to be ignoring the value of diversity in the class. Today, the admission policy at IIM A has changed - 93% of the students in the current first year batch are engineers – a retrograde move. If you reduce diversity you produce clones. And a class of clones is likely to produce fewer entrepreneurs.

The second factor is what we were exposed to at IIM A. There was a whole suite of courses that were relevant to entrepreneurship. In most other B Schools there is one course on entrepreneurship – I ended up doing five such courses. In fact till the early eighties there was even an Entrepreneurship Concentration Package which you could do. There were case studies of start ups and small enterprises – an entire body of knowledge had been created. Today this has expanded into a centre for innovation, incubation and entrepreneurship.

The third factor at play was the demonstration effect. One by one as more and more people in the class started companies, others mustered up the courage to do the same. And we are not done yet. Some more are likely to become entrepreneurs in the future.

So what should a business school do if it wants more of its students to become entrepreneurs?

First admit a more diverse class without compromising on academic rigour. In order to do this do not rely simply on hard criteria such as the CAT score – do a 360 degree assessment of the candidate. The best business schools in the world look at the GMAT score as only one out of half a dozen criteria for admission.

Second create a separate academic department for entrepreneurship and introduce a number of relevant courses in that area. Create and source material relevant to entrepreneurship – case studies, handouts, books etc. Allow students to major in entrepreneurship.

B Schools need to stop bragging about their success using average salaries, people placed overseas and placement rate. These indicate a mindset of managerialism. Instead celebrate successful alumni entrepreneurs. Lionise entrepreneurs who can be role models. The decision to quit a well paying job and start a company is frequently an emotional and irrational one – people need to be inspired to do it.

Encourage frequent interaction with entrepreneurs – let the students know their stories.
Finally the goal of every good business school should be to produce a fair number of misfits – because that is what entrepreneurs are. They do not see themselves fitting into existing corporate structures.

Team Up Scale Up

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!

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.

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 Whats your Big Idea

My October Column in Mint

A few months ago I spoke at a conference on entrepreneurship at IIM Ahmedabad. In the audience were several students who were aspiring to be entrepreneurs. The most persistent question thrown at the speakers during informal interactions in the evening was “I want to be an entrepreneur – what business should I start?”.

Most of the speakers who were there found the question a bit absurd. Any business that you start has to be your idea – you cannot go haring after an idea that someone else has given you in a casual conversation.

So the question becomes - where do the best business ideas come from and is that where you’ve been looking? While good ideas can come from anywhere or anyone, the best ones come from observing and interacting with customers.

If you know your prospective customers well enough, if you have spoken to them, if you have been a customer yourself, if you have felt the pain – then perhaps you have gained customer insights which contain in them the germ of great business idea.

Great business ideas are those that solve a customer’s problem. Sometimes customers will tell you what problem they need solved. At other times they will not articulate it and you will have to dig deep. Many times customers will not even know they have a problem – you will have to get into their skin, join the dots and figure it out for yourself.

However you look at it – successful new businesses usually solve a problem. So the first test of a great business idea is whether you are solving an unsolved problem.

But apart from the unsolved problem test, a good business idea also has to pass three other tests before you can call it a great business idea - the right one for you to pursue.

The first test is the test of passion. Does the idea resonate with you? Have you lived with it long enough? Have you explored it from various angles? Have you discussed it with prospective customers? Does it capture your imagination? Does it motivate you enough to spend the rest of your life doing it? Is it your calling? How passionate are you about it?

The second test is the test of unique qualification. Will you be the best person to execute it - do you have the capabilities required to bring that idea to life? As an individual you cannot personally possess each and every quality required to build a large business – but then do you have a team of founders that can provide leadership to the company in most of the critical areas? Are you and your team uniquely qualified to pursue that business – the chosen ones so to speak?

The third test is the test of scalability. Is there a reasonable probability that the pursuit of that idea will result in the creation of a large profitable business that grows fast – assuming of course that you do wish to create this kind of business. I must acknowledge here that you can be perfectly happy building a small profitable business or doing a not for profit. Having said that – the fact is that most people do want to build large profitable businesses.

To the extent that the test of passion and, to some extent, the test of unique qualification depend upon qualities internal to you the answers will be different for different people.

However let us look at the test of scalability and explore some of the generic traits of businesses that become large and profitable.

In general, businesses that scale up quickly address potentially large markets. They solve an important problem that is felt by a large number of people. They are first movers in their space or at least early movers – entering markets before competition does. They are usually market leaders.

They have a clear, credible, compelling and differentiated value proposition that is simple and easy to communicate to their prospective customers. They are able to hit a hot button with their intended customers.

They execute well and use a service or product creation and delivery method where capacity is capable of being scaled up quickly.

They create defensible intellectual property. They innovate continuously and focus on those areas where they have a core competence.

They frequently benefit from a positive network effect, have high operating leverage and are in businesses where revenues scale up disproportionate to head count.

They build other barriers to entry in their spaces as well.

They survive recessionary cycles - more than once.

They are magnets for talent and the best people in their industry are usually to be found there.

And they share the wealth with the employees who helped create it.

The most successful companies built in the last three decades around the world by first generation entrepreneurs possess many of the attributes listed above - Microsoft, Yahoo, Google, Infosys, Oracle and many others.

So what’s your big idea – does it measure up?

Review of - The Game Changer

This is a review of The Game Changer – How every leader can drive everyday innovation. By AG Lafley and Ram Charan, that I wrote for the Business Standard recently

The Game Changer is a significant book for two reasons.

First because of the credentials of the authors.

Lafley is the Chairman and CEO of Procter and Gamble. In his tenure over the last seven years P&G has tripled profits and has massively improved revenue growth and margins.

Charan is one of the most influential management thinkers in the world today. Born in a small town in UP, he worked in the family shoe shop, studied engineering and later went to Harvard for an MBA and then a Doctorate. He taught at Harvard and Kellog and is now a full time management consultant with several books and articles to his credit.

The second reason why it is significant is because of the importance of the subject the book addresses – innovation, or rather the management of innovation.

Innovation, to my mind, is or should be, central to the agenda of every high growth high performance company anywhere in the world.

The premise of this book is that an innovation led strategy is the best way for companies to attain sustainable and profitable growth. Lafley opens the book by saying that his job as CEO of P&G is to integrate innovation into everything that P&G does. It is the central principle around which people at P&G make decisions and seek opportunities for growth.

Innovation the authors say must be customer centric, customer driven and organisations must first structure themselves around the customer for this. The organisation and the people working there must possess a motivating purpose and values. The next stage in the process is to identify opportunities, and decide on goals and strategies and then leverage on core competencies to make it happen. At the execution stage organising for innovation involves putting in places appropriate structures and systems, building the right culture and ensuring the innovation process gets leadership.

Sounds like management jargon – well it is and the book has more than enough of it. It sounds great as a textbookish process when articulated like this – but it is the execution that counts. And Lafley did successfully follow this route at P&G.

Orchestrating an innovation centred transformation implies not being afraid of failure. Lafley says he gets worried when sixty percent of his innovations are successful. It means he is playing too safe and not pushing the envelope enough. In the book he candidly lists out the big failures of P&G over the last seven years.

The book is an interesting jugalbandi between Lafley and Charan – with both speaking in different voices. Lafley talks the reader through the transformation, which was centred around innovation, that P&G went through under his leadership. Charan puts the P&G experience in perspective and looks at other companies and industries where innovation has made an impact.

The Game Changer is useful for understanding how one large company pursued innovation to transform its fortunes and there is also prespective of how other large companies did similar things. It should be read by managers and leaders in large companies, by business school students and professors, and by trainers.

However if you are looking for a story with the romance of entrepreneurial brilliance at innovation, eureka moments, one mans passion and dream – the small start up in a garage that set out to change the world and successfully did – forget it. This is not that book.

In fact it is not a gripping unputdownable read. It needs to be read slowly and carefully and after reading a chapter you need to think through the import of what you have just read, perhaps skim through it again – make bullet points and discuss them with a colleague or friend while going through in your head the implications of what you have just read for your organisation.

The book is less about innovating and more about the organisation and management of innovation and the strategic importance of innovation.

It tells you that innovation is not the preserve of Silicon Valley start ups alone. It can successfully pursued by large stodgy companies, with low product or service differentiation, operating in mature markets and displaying moderate growth with steady or declining profit margins.

Bootstrap before looking for funding

My September column in Mint.

Over the last several years many aspiring entrepreneurs have met me for advice – be it at business schools, through TIE, at conferences, at business plan contests or by simply sending me a mail and asking for time. Almost all of them have had an idea, a half written business plan – for which they were exploring the possibility of raising capital. Most believe that without committed funding by a venture capitalist they cannot start or will not succeed. Most struggling entrepreneurs would believe that it’s great to raise venture capital at the start – but is it really?

While many successful companies did raise venture capital early in their life cycle, yet there are many more that did not – Microsoft, HP, Dell are three such examples. Closer home Infosys, HCL and Reliance and many other first generation successes were bootstrapped and built the hard way. The fact is that most successful companies and most successful entrepreneurs reached where they have without raising venture capital.

In the company where I work – we managed to get external funding only after we had bootstrapped for ten years.We were delighted to raise capital when we did. However in hindsight, it was the bootstrapping experience that taught us valuable lessons that saw us through the later years.

There are many learnings you get by bootstrapping.

First bootstrapping is a test of commitment – if you are really committed to your idea you will muster up the courage to quit your salaried job, put in whatever little capital you have or can raise from friends and relatives, tighten your belt and somehow begin to execute your idea. If you aren’t willing to bootstrap then question your entrepreneurial motivation. VC’s understand this and they prefer to invest behind good teams that are bootstrapping rather than behind professional managers who are still in secure jobs but have a nifty powerpoint presentation.

Bootstrapping helps you to validate your concept for yourself, your team and prospective investors. Validation of the concept would mean that the startup team is in place, the product is ready and there are a few paying customers who are happy with the product and are willing to buy again and recommend it to their friends.

Once your concept is validated investors come in with much greater confidence and give you a much higher valuation then they would have at an earlier stage. You get to keep a larger share of your company for the same money. Most entrepreneurs don’t realise the importance of this until much later – should the company go on to become valuable.

Bootstrapping makes you stretch 24x7. It makes you think about survival, about how to break even, about where the next rupee is going to come from and about where it should be going or not going. You innovate more, you prioritise and focus on the essentials. You manage your cash flows better, you go out into the field and sell to customers yourself and you put in twenty hour workdays if required. It instils a culture of frugality in the company. This is a priceless asset.

At Naukri when we were bootstrapping, we had to break even to survive. We found ways of doing that - somehow. So by the time we raised money what we had to do was to scale up and enhance a validated business model. The fiscal discipline that bootstrapping enforced on us is now a part of our DNA. It ensured that we went through the meltdown and became profitable with 40% of the capital that ICICI gave us still in fixed deposits in the bank.

Bootstrapping ensures that you recruit missionaries and not mercenaries – after all you won’t have the money to pay high salaries. You will pay then in stock rather than cash – non believers will simply not join you. This core group of believers will be the people who will see you through the tough times that every early stage must go through.

It takes a lot of time and effort to raise money – preparing the pitch and the plan, doing the rounds of the investors and meeting the interested ones several times, negotiating and signing the term sheet, dealing with lawyers, going through the due diligence and negotiating and signing the final agreement. It is a six month process if you are lucky. This is precious time you can spend instead on building the product, putting together the team and finding paying customers.

And then after you raise the money you have to manage the investor – and that too takes time. The fact is that when you raise money you don’t just get the capital – you also get the capitalist. He will be on your Board and he will have ideas and suggestions to give – it’s called value addition. And he will have disproportionate powers. But you might want to do things your way. In such a situation it might be a good idea to take the business forward till you have something concrete to show and then raise capital.

So, commit yourself, validate an idea, build a team, be an entrepreneur, bootstrap now, raise money a little later.