Sunday, June 10, 2012

The Road To Entrepreneurship – Part 1: Exploding The Myths

- A Blog by Mr.Jayaram Krishnan, a Mentor On MentorSquare.

Reprinted with permission from http://jk-jayaramk.blogspot.com/

Kuch karna hai, yaar, bahut pak gaya…” – roughly translated from modern Hindi, and meaning, “I’m fed up, I need to do something (meaningful)…” an oft-repeated sentence by organization employees who want to start their own businesses, build their own organizations, and become the masters of their own fate (at least to a slightly greater extent, supposedly)!

Well, talking about entrepreneurship is like an addiction – I’ve been to quite a few panel discussions on topics ranging from B-school education to leadership, which have all finally devolved into an animated debate on what makes some startups succeed and others fail, what kind of education or work experience prepare you best to run a startup, what choices you need to make to succeed, the mindset and personality type you need and so on… many young (and not so young) working people spend hours of constructive day-dreaming and discussion to figure out how and when they must make the jump to entrepreneurship.

There are different startup models of course, ranging from intra-preneurial ventures spawned by large organizations with funding, clear business plans, product offerings and so on, to absolute bootstrap operations. This year, like each year, several startups will be founded by well qualified professionals with rich experience, powerful contacts, well-laid business plans and product ideas, and even sufficient funding. Several other (bootstrap) startups are begun without any of these advantages. Yet, many of the former type of startups will flounder and collapse, while several bootstrap startups will thrive and grow. What is the explanation behind this? To share some first hand observations, as well as actual experience to help deconstruct what it takes to make a startup succeed, I now present a multi-part series of write-ups on the “road to entrepreneurship”, which focus mostly on the latter type of startups mentioned above, i.e. pure bootstraps. These are the kind of startups I am most familiar with, and their success is proof of the ultimate litmus test for entrepreneurship – if you can survive and grow with a sustainable business model without external funding, you are indeed doing things right.

While I do not claim here that bootstrapping is the best way to start a business, I think there is a strong case for putting in perspective some realities about the entrepreneurial journey, and so my series begins with the explosion of a few popular myths:

Myth 1 – you need lots of money to start a business: not true unless you have already decided on a resource-heavy, capital-intensive venture. Many successful startups have been self-funded by entrepreneurs with moderate savings from a few years of work. You do need money, and the more the better, but that is to take care of essential expenses, which could be either business related, or just maintenance expenses for your personal lifestyle. My most recommended and safest way is, for a would-be entrepreneur to assess his savings and any other sources of funds, if he were to completely stop working in a regular job, estimate the amount of time for which he could stretch these savings without affecting his lifestyle (depending on whether he has a family to support, children to educate, house rent etc) and then get into a business which would take minimal investment. Today, there are huge possibilities for businesses you could set up with just a laptop and an internet connection as investment.

Myth 2 – you should not start a business without first having a clear business plan: A large proportion of successful startups have either not had much of a business plan, or have constantly changed it, especially in the earliest stages. Flexibility and opportunism are often far more important for the startup than the illusion of clear vision. As a piece of actual data from first hand experience: I started a business in 1997, and it was only in 2006 that we made a vision and mission statement, although the business was actually performing and growing well!

Myth 3 – you must have something unique to offer, to succeed in a startup: Well, this is a myth depending on what you mean by “something unique” – for instance, if you are a tech worker working in a neighbourhood of tech companies, and you decide to quit your job to start a coffee & snack stall because there isn’t a nice one in the area… now, the business itself may not be unique, but the fact that you have started it in an area with no competition could make it unique… at least for some time! My point is, entrepreneurial ideas do not have to be rocket science or nano-tech all the time… if you see a sustainable revenue stream which can be secured by providing a good product or service with quality achievable by you, then maybe you should just go for it!

Myth 4 – you must (or must NOT) start a business with partners: Even if you are young and relatively inexperienced, you can always find complementary help from your peer group or mentors, who are a growing breed. While it is good to have a like-minded fellow traveler to share the uncertainty, doubt, frustration and triumphs of the entrepreneurial journey, unless you are sure that an equal partnership creates value, which on the whole is, greater than the sum of the parts, go it alone. At least you will not have the added stress of managing a relationship internally, in addition to getting a foothold to survive and grow. Conversely, it is equally wrong to say “you must start a business without partners” – there are enough instances of highly successful startups, some of which have become monsters on the global scale, founded by partners who have an excellent understanding of working together.

Myth 5 – you cannot start a business unless you have some unique and exceptional skills, or experience: the job of an entrepreneur is to create value, and often, that happens by bringing together different inputs such as customer demand, an arbitrage opportunity, skilled manpower supply, a good environment to work and so on. If you are an excellent designer, software programmer, financial analyst or any other type of specialist or multi-specialist professional, that is a great platform to start a business on. But very soon, your role would change to putting together the work done by other specialists (unless you wish to be a freelance consultant, which is subtly different from being an entrepreneur). Therefore, while specialist skills may help you to start, paradoxically, the sooner you are able to grow beyond your own specialist skills, the faster you are likely to scale up as an entrepreneur. It is often the generalist with an open and flexible mindset, and not armed with decades of experience, who becomes the successful startup businessman, living to tell his tale!

Myth 6 – you should be in a big city to start: Not any more! Thanks to the internet and technology, you could provide products or services to customers far away. Thanks to incremental economic growth and evolving customer preferences in the hinterlands, at least in India, you could build very interesting businesses around service offerings not yet available in upcountry locations.

Myth 7 – you should have strong educational qualifications to start: Good qualifications from premier institutions, or good grades for that matter, could be an asset if you have them. But, and I say this with full conviction, not having them cannot hold you back from becoming a successful entrepreneur. Most often, I have seen entrepreneurs who are graduates from reputed institutions, using this asset mostly for networking with batchmates, seniors, juniors and peers from similar institutions. Both globally and in India, there is no shortage of astonishing success stories of school and college dropouts starting the business institutions of the highest quality.

Myth 8 – for your new startup to survive and grow, you need LOTS of customers: I’ve heard this from many startup businessmen. When I was actively running my startup, friends and well-wishers would introduce me to more customers than I could handle. Actually, for a small, new, bootstrap startup with meager resources, one of the biggest costs is business development and marketing. Therefore, it is often beneficial to find one large customer organization and grow with it, until you have built the resources to build new relationships. Of course, you need to de-risk your business, but if your customer is large enough and professionally run, and your products or services are up to the mark, then de-risking by adding more customers is a distant problem, to be attended to much later. At the risk of making a sweeping statement, I would say – it is better for a small business to do business with the largest customers it can, at least until it is beyond the survival stage… avoid small businesses like your own, as customers :)

Myth 9 – to be a successful entrepreneur, you have to bend rules and ethics: Not so. In India itself, we are lucky to have a growing legion of role models in recent years to prove that you do not have to flout government laws, universally accepted business and personal ethics, and find shortcuts to all problems.

Myth 10 – to ensure that your startup grows, you have to create the illusion of size, pedigree, a sweet sounding address and so on: I have come across tiny sole proprietorships in Bangalore with MNC-sounding names containing words like “global solutions”, “Inc” and so on. Some of them also have an “India” for good measure, to suggest that they are part of some very large international network, with office addresses in different cities, countries, and avoiding even street names which may sound down-market. While I understand that in some situations a smart entrepreneur with sufficient panache may benefit from creating the illusion of size or pedigree, I think it is not sustainable. Customers, or any other stakeholders who matter, are too smart to be conned by window-dressing of this type, and anyway, if they want to do business with you, it is because of your value propositions and not your size. When you do achieve size, it will speak for itself. It is better to build a sustainable reputation as an honest entrepreneur with realistic claims, rather than one who tells tall tales.

Myth 11 – to build an organization, you have to be a stern, feared team manager (with whip in hand, perhaps): I’m not sure if that’s a good avatar even for a prison warden. For an entrepreneur, it most certainly is NOT. As a startup businessman, you are always trying to stretch your meager resources to get more for what you spend, and this goes for hiring of people as well. You should try to attract and hire people who are likely to get paid much more than what you would pay them, and that is possible only with inspiration, promises (which you will hopefully deliver on, one day) like stock options, profit sharing and so on. Now, human beings are pretty much the same, whether they are sweepers or vice presidents, and we need to respect their intelligence and sensitivity. Therefore, irrespective of level, it is better to trust, give responsibility, inspire and rely on, rather than enforce discipline. An inspired workforce will automatically be disciplined as well, if the leader serves as a live example. Also, out of necessity, the bootstrap entrepreneur must sometimes hire youngsters with little or no experience and give them high responsibility. If the quality of the entrepreneur’s leadership is good, he would seldom be disappointed by taking such risks.

Myth 12 – to manage cash flows in a startup, you should delay supplier payments as much as possible (and perhaps even more): There are times for startup business when suppliers are more important than customers. While prudent cash flow management is one of the most important aspects of startup management, it is unwise, unfriendly and unethical to squeeze suppliers beyond a point and default in their payments. As a corollary: to be a successful bootstrap entrepreneur, you do not have to be too tight-fisted, or hard-bargaining. A more sustainable mode to hit is to always seek a win-win, both on the sell-, as well as on the buy-side.

Myth 13 – the best way to start a business is to catch a large opportunity but in a temporary time window: While short-lived windows of opportunity sometimes look very compelling, I would strongly recommend against these, unless you really know what you are doing. Some years ago, a friend had suggested that we import a large number of hand-held computers from a US company which was closing down, to sell them in India for a high margin. Fortunately, I was so slow to move on the opportunity (partly because of lack of conviction and partly because of inertia!), that before we had put any money on the table, new products were launched by competition, which made the hand-held computers useless. If we had moved fast, rather than slow, we may have lost a lot of money and been stuck with useless inventory. The point is not it is better to be slow than fast, of course , but that limited time opportunities are all the more risky for startups. Large corporations trying to leverage such opportunities would generally be able to write off any resulting losses without blinking!

Myth 14 – the most important objectives for bootstrap startups are profit, growth and brand-equity: For most bootstrap startups, all these come later. The most important objective is positive cash-flow, which means, are you receiving enough money to cover all your expenses, at the same (or better) rate? Many startups die because they run out of cash at the critical time, and not because their margins are small or their sales are low. Cash for a startup is like oxygen… everything else gets built on positive cash-flow!

So, if we go beyond these myths, then what does it take to actually succeed as an entrepreneur? If the critical factors for success are not capital, strong business plans, special skills, educational qualifications or large numbers of customers, than what are they? Well, you just need to wait a later part of my series – watch this space!

Saturday, June 2, 2012

How and when to Scale your business?

Reprinted with permission from The Hindu Business Line.

Scaling a business from zero to millions is not easy, but it can be done and my company Rentwise is the perfect example of this. Our core business is in helping companies implement a consistent and up-to-date IT infrastructure across the organization, under a rental or operating lease structure. By doing so, we help our customers conserve capital to invest in their core business. Thanks to key scaling strategies used by us we have managed to grow the company from zero customers to more than 300 and from 10 employees to more than 70 today – all in the short span of six years.


Attracting and retaining key employees is an important scaling strategy. As an entrepreneur or a CEO, there is only so much you know and only so much you can do. It is possible that you’ve exhausted all your ideas in the process of starting up and building up a company. This is where your team steps in, bringing with them a fresh perspective and new ideas. In an effort to attract and retain good talent, a conscious effort was made by us to share the company’s successes with employees and contribute to their personal growth. ESOS or a form of Employee Equity Participation played an important role in sharing successes with key people. Clearly defined goals and KPIs were also implemented to motivate them and keep them focused. Incentive based compensation or a bonus system that rewards hard working and loyal employees also goes a long way. It is important to remember that good people will want to be with a growing business that is rewarding them and unless you reward them, they can’t be blamed for following a better opportunity elsewhere. Retaining key people and allowing them to participate in their own personal growth plays a big part in growing a small business.

The next thing we did was identify adjacent products and services or adjacent markets. Since going into new segments would mean starting from a low base and going through a business start-up phase again, we chose to look into services and products which were connected to what we were already working on. By doing this we managed to leverage on our existing expertise and grow without incurring the costs that would go into supporting a new business. A thorough customer analysis plan was then set in motion and we spend a lot of visiting and talking to our customers to better understand them. We discovered that all our customers had one thing in common – a very diverse IT infrastructure that was the result of a traditional IT procurement practice based on restrictive budgets and the best IT deals available at the time of purchase. This legacy of inconsistent technology throughout the organization leads to issues of poor security, non-maximization of software and incompatibility problems. We also discovered that all customers aspired to achieve a standard IT operating environment which will help them overcome the problems of a diverse IT infrastructure. Having determined the problems faced by our customers and their desired solutions, we embarked on identifying the products and services we could offer them to satisfy their needs. Thanks to this exercise we also discovered a whole range of services that we could monetize through our existing customer base. For example, we offered our national and international customers asset tracking, something we were doing for ourselves, as a billable service. We also offered installation and de-installation as a chargeable service and also moved into data mining, among other things.

A golden rule in scaling is ‘Don’t scale unless you can differentiate’, and having identified our adjacencies, we went on to identify our differentiation factors. We discovered what we were good at and what we did better than our competitors and came up with eight additional services that our competitors did not offer in totality. This was then included in the entire Rentwise package, giving us a big edge in the market.

The next step is to ensure that the right systems and processes are in place. Documenting systems allow both internal and external people to know what to do. Most businesses scale by having replicable systems that everyone in the organization understands. Having replicable systems is made easier if a business understands the niche they serve since areas of commonalty or similar situations are more likely to be the same for a majority of your customers. Dominating your micro niche means ease of replicating systems which in turn allow your business to scale.

Organic growth or mergers and acquisitions are the next step in scaling. Both involve healthy risk taking appetite and reinvestment of money. Merging one business with another also involves the risk of transfer of equity, integration of systems and processes as well as co habilitation and cooperation of two cultures. These issues need to be worked out before you determine which the right path is, for your company as well as yourself since, as CEO, you are the key driver.

Wednesday, May 16, 2012

Myths of Fund Raising

While looking at raising funds, the first and most obvious option is to try and generate funds internally. If internal fund raising is not an option, look into the possibility of grants. The third option is to bring in debt instruments. Although debt may seem onerous, they are less expensive than equity which is easily the most expensive way of raising money and should be used only as a last alternative.

Equity Investment
All business enterprises go through several stages in their lifecycle, right from the Inception Stage to the Expansion Stage. At each stage, the needs of the business and the risks faced by it are different, as are its financial requirements. For instance, the technology risks faced by companies in their Inception Stage are usually so great that the scope for raising funds is limited. On the other hand, companies might find it easier to raise funds during the Expansion Stage since they have already proven their worth in the Roll-out and Growth Stages. Therefore, each stage of the company calls for a different type of investor. Angel Investors are those that invest in the company at the Inception or Prototype Stage, while Seed Investors come in between the Prototype and Roll-out Stages. Venture Capitalists and even banks generally enter the scene after the Roll-out Stage, with IPO Acquisition being the final stage for raising money.

Corporations and partners are the other options available in Equity Investment. Companies that do not wish to invest in developing technology internally, choosing instead to focus on customers and quarter revenue targets, may choose to invest in a promising company whose products they could carry themselves in the coming years. This gives companies the chance to test the market without diverting their funds drastically.

Debt
Since debt is a well understood, well supported and well collateralized instrument, it provides entrepreneurs with several options. While family and friends are one, there are numerous agencies willing to work in this field. Project Finance, Banks, Overdraft Facility, State Finance Corporations, Development Banks and Venture Banks are just few of the options.

Grants
When neither equity nor debt is willing to take a chance, the government, through an agency, steps in. The government agency provides grants, subsidies and in-kind investment.

Motive of Investors
A crucial aspect of fund raising is the ability to understand the motives of investors.
Angel Investors come in at a very early stage with a clear understanding of the industry as well as the risks associated with a start-up. Many are willing to help out not just financially but with their time as well, doubling up as mentors to entrepreneurs.

Venture Capitals are often the best measure of the growth of startups. These are institutions that have raised money from someplace else and are charged with investing the same in promising companies to create 10 to 20 times the original investment. Venture Capitals demand a high growth rate from businesses and should not be confused with an ‘end-all’, as they signify the start of ‘high pressure growth’ Private Equity, while similar to Venture Capital, operates on a different mandate.

Milestone-Based Approach
While the Milestone-Based Approach is best suited for equity, it applies to debt as well. This Approach requires that the company be viewed as a series of steps that you are climbing one by one, to get you to your ultimate goal.

Every step is distinctive and represents a different stage of the company with each new step being a transformed version of the previous one. This approach helps map out the risks that the company will face at each stage while also highlighting its financial requirements, giving entrepreneurs an opportunity to raise only as much capital as is required at that point in time and containing the extent of risk for all the parties involved. In addition, a clear set of expectations are set and met, giving the entrepreneur the confidence to move forward decisively.

While funds do play a critical role in the running of a business, it is important to note that if done incorrectly, the bringing in of capital can also kill the company. Investors tend to have unrealistic expectations from the entrepreneur and often, their expectations and requirements are completely different from those of the entrepreneur. In such cases, the company may end up facing more conflicts than alignment. Therefore, keep in mind that while money may solve problems, if the fund raising is not orchestrated in the right way, it could also create problems.

Sunday, April 15, 2012

Fundamentals of Finance every Entrepreneur must know

Finance is the language of business and as an entrepreneur, it is important to acquaint yourself with the fundamentals of finance. Understanding the power of expressing your business in monetary terms will help you not only quantify but also make sound business decisions.

Normally, performance indicators such as Profit and Loss Account, Balance Sheet and Cash Flow are left to accountants and auditors and reach the decision makers of the business 6 months into the next year, by which time the information becomes outdated, rendering it useless for any business processes. A better option is to look at a monthly set of statements. Since this may compromise the accuracy of the information, it is important to strike the right balance between accuracy and timely delivery of information.

Many a financial problems of companies can be avoided by keeping a close eye on the accounts since not only do these financial statements tell you about the performance of your business, they also help you decide future action.

Profit-Loss Account

The Profit-Loss Account is called a period statement since it reflects the performance of the business within a given period.

This statement records the ‘sales’ or ‘revenue’ as well as the ‘cost of sales’ or the direct expenditure incurred by the company to get the product in the market. This gives us the ‘gross margin’.

Fixed expenditure, which is filed under ‘Expenses’, is also included in the Profit-Loss Account. This accounts for expenditure which the company incurs regardless of the position of sales. For instance, salaries, traveling expenses, rent, etc. The net result is the profit made.

Breakeven Point is a small but powerful tool for decision making. It refers to the amount that the company must make as revenue in order to meet expenses incurred. This helps in future planning, especially when venturing into new products and divisions.

Balance Sheet

Unlike the Profit and Loss Account which is a period statement, Balance Sheet is a spot statement. It gives an account of the business at a particular point in time.

The Balance Sheet includes Shareholders Funds and Loan Funds as well as Fixed Assets and Current Assets, and reflects basic financial decisions of the company. The Shareholders Funds and the Loan Funds reflect the financial structure of the business, while the Fixed Assets highlight the investments made in terms of office space, equipment, plant and machinery, etc. Since Current Assets records credit given and received, it reflects the way the business is run.

Depreciation, or the annual charge made on plant and machinery or equipment, is included so that accounts register the use of the asset.

Net Current Ratio determines the solvency of the business. Having more liabilities than assets is indicative of a looming financial problem and the standard current ratio must be 2 or more.

Cash Flow

Cash Flow depicts the actual flow of cash in the company. The accrual of debtors and creditors sets this apart from the Profit-Loss Account.

While not used by many, Cash Flow is a powerful tool since it tells us the current position of the business and also draws attention to the areas of the business that need planning.

Budget and Forecast

While Balance Sheet, Cash Flow and Profit-Loss Account are monitoring tools which give us a clear idea of different aspects of the business, Budget and Forecast are powerful planning tools.

A short term planning tool, Budget helps map out a plan for the coming year, including details such as the methods undertaken to sell the goods and the amount allocated for the same. Monitoring this on a monthly basis helps you judge the progress of the business against the set goal.

Forecast is used to plan for a longer term and uses the power of figures to bring rigor into planning.

Thursday, April 5, 2012

How Mentorable Am I?

All of us intrinsically feel the need to receive and act on advice that we know will help us in our work and business. It is for precisely this reason that our members turn to organisations such as MentorSquare.


It is my experience that while start-ups and SMEs acknowledge the need for input and guidance, at the end of the day they feel that they might not have got quite what they needed from their advisors. The reason for this feeling is the fact that while one feels the need for guidance, in actually practice, every Mentee (or Member, in MentorSquare parlance) has in-built inhibitors when it comes to actually going through the process of mentoring. As a result, some people are more effectively Mentorable than others. An understanding of the inhibitors to effective mentoring will help us to open up and become more effectively mentorable.


Let’s look at 5 major factors that make the difference between a good mentee and a great mentee experience:


1. How open are you to external inputs?

While you may have hit upon an earth-shattering idea, or run a successful business, or are considered a leader in your market space, there may be several alternative ways of achieving your objectives.


First of all, are you open to the very real fact that there is no one ideal way of accomplishing your objectives. Secondly, and having acknowledged that there is more than one possible route to success, you need to ask if you are open to the possibility that inputs can come from the outside, from someone who may not be as deeply involved in your business, and may even not be from the same industry segment. Thirdly, ask yourself if you are open to the idea that discontinuous thinking can sometimes help provide some very interesting solutions.


All of us develop our own ‘blind spots’ – external viewpoints provide a work around these blind spots, provided you are open to receiving and dispassionately evaluating different and discontinuous points of view.


2. How open are you to trusting other people?


Several leaders of small businesses experience difficulty in trusting people outside of their closed circle of advisors, as we all have a healthy distrust and suspicion of ‘outsiders’. As a result we throw in the gauntlet of earning our trust, and make this as difficult as possible for the outside person rather than giving trust a chance from the beginning of the association.


This is only natural and completely understandable from the mentee point of view, as she does not see how a person (albeit a professional) from the outside can be committed to the success of someone else’s business. After all, what is the motivation of the professional besides the fee that she is being paid?


The basis for a useful mentoring experience is to work on a positive trust basis – this will allow the mentor to get effective quicker, and to be more committed to your success.


3. How open are you to being challenged?


A sound idea or business is anchored on ‘pillars’ of sound assumptions and all of us tend to get stuck with our assumptions. However, markets change, the need for the solutions change, customer behaviour changes, and therefore our assumptions are under constant attack.

When a mentor challenges one or more of the assumptions that are the basis on which the business has been built on, the mentee feels threatened. The natural, defensive reaction is to dismiss the challenge on the grounds that the mentor does not understand the business, and therefore is kite-flying. Or the Mentee may dismiss the challenge on an emotional basis.


A good Mentee gains from being open to receiving and evaluating challenges to the fundamentals of her business; dismissal is an opportunity lost for the business to stand on stronger set of assumptions.


4. Are you committed to the process?


Mentoring is a process and not a deliverable. The more open and committed you are to the process, the greater the value for your business. When the process is ongoing there may be a tendency to question the process, as well as its effectiveness and efficacy. Such questioning only reduces the commitment and participation of the mentee in the process.


It is best to ask all your questions, and challenge the (mentoring) premises prior to getting in to the process. Only after having got all the answers and being convinced of the virtues of the process can one commit and embrace the process completely, both emotionally as well as intellectually.


Having committed, do not challenge the mentoring process continually – that way you will truly benefit from the experience.


5. Are you willing to throw away your expectations?


There are usually a set of expectations that the Mentee has when she walks into the Mentoring engagement, and this poses a formidable challenge for the success of the process on both sides. It is best to clarify those expectations ahead of the mentoring process; if some of these expectations are considered unviable and/or unrealistic the mentee should be willing to discard them


I appreciate that this it is a tough call for any mentee to agree to, as it lands them in very uncomfortable territory- it goes against the notion that a Mentor is paid for the service and therefore must accept to deliver on Mentee expectations. However, and as we have discussed earlier, one must trust the judgement of the Mentor and the robustness of the process in order to maximise one’s learning from the Mentoring process.


Although these questions appear to be obvious, Mentees must ask these questions and answer them honestly for themselves. If the potential Mentee finds that he or she will not benefit from the mentoring process, it is best to wait and re-consider. It is best to wait until one feels completely comfortable with the concept and the process before jumping in. Doing so will create a win-win situation for both the Mentee and well as the Mentor, thereby ensuring the creation of a path to transforming the Mentee's business and taking it to a whole new plane.


Incidentally, there could be good mentors as well as not-so-good mentors too – but that’s something I will save for another day!


Write to me on this post or any other ideas that you might have at ravi.narayan@mentorsquare.com