Vijay Anand | The Startup Guy.

Not all Shares are Created Equal.

// June 9th, 2010 // No Comments » // Entrepreneurship

If You are an Investor one thing you want to learn about really well is the principles of Accounting. If you are an entrepreneur, one thing you want to learn about as much as possible are the rules that you have to play with – the statutory compliance bit. The reason – it takes innovation right at that level to be able to build up and thrive as an enterprise in a transient landscape like India. So the textbook for reference for all who are serious about setting up a business – The Companies Act of 1956. If you are lazy and creative, one shortcut to that is to befriend someone who has graduated out of the Company Secretary Institute – Please note that Company Secretary is not the same thing as the Receptionist or what is widely known as the position of a Secretary – We certainly don’t want to hear news of Startup Entrepreneurs courting Secretaries now – not for this reason!

Here’s some information that might be helpful. Not all Shares are created Equal. Yep, thats a fact.

Most of you might be aware that there are two distinct classes of equity – the Common Stock and then there is the preferred Stock – which is what the investors usually go for – which means that in the case of a liquidity, the Investors get to take their money out (with some agreed multiple) before anyone else – including the founder get to touch the money. This is more or less common knowledge.

What is less known is that you can infact create multiple classes of shares within the company. There is this other kind of stock commonly referred to as Class B shares (at times also used to refer to Preferential Stock if they have higher voting rights) – in which case you can significantly drop the rights and priviledges that one can have in the company – such as board rights, or the right to interfere in management. Why is this important?

Imagine a situation where you are building a company and you have plenty of friends and family around you who are willing to give you money. One of the first things you do not want to do is give them equity shares (or Common Stock) – which basically gives them direct rights into the company and gives them a say in the management and board of the company. Apart from reasons that it might become a nightmare to manage their interests, its also important cause if everyone of your friends is sitting on the board – so to speak – and carries one vote each, no investor in their right mind is going to come onboard that company and represent himself in a board that closely resembles a circus than anything else.

So the option in such scenarios would be to create a different class of shares, with the least amount of managerial rights and priviledges and allocate as much of that as possible. You will also note that in such a scenario even if the founder holds 10,000 shares (for example) and the collective Class B share holding is more than thrice that, and even if one single holding is more than the holding of the founder, it still doesnt affect the control that the Founder has to run the company. So that’s quite helpful to preserve some sanity.

As in all things you also want to be fair to those who invest into your company. Class B shares usually have what is called Redemption periods – a set time period as to when the shareholders will make an exit, and also there is a pre-defined rate at which they will exit. In some cases the Class B share holders are also given dividends – at times accrued and given at the time of exit – a percentage from the profit margin (a rough number is usually less than 10%).

Overall, Its an interesting way to structure a company – when you are raising money from friends and family, there is a lot of uncertainty as to whether its charity, and when they would get their money back – these terms would define that in black and white and quite nicely. It becomes the collateral for the loan – in a shade of equity, without complicating it too much. Also you avoid the situation where one of them might come back and ask for the money back before its time – like they’d do with a fixed deposit. Such little things can create a lot of problems with the operations of the company and you would want to avoid that.

I would strongly recommend that you spend time on this before you leap off to setup a company. Assuming that the Venture Capital Industry is not yet ready, and less than 1% of the populace will actually get institutional funding, it helps to know alternatives and plan accordingly.

Note: For the Curious, as per the Corporate Act of India, You can have upto 50 investors/shareholders in a company.

The Best of What You are.

// August 18th, 2009 // 3 Comments » // Entrepreneurship

Malcolm Gladwell in his book “Outliers” talks about a rather interesting theory to becoming an expert. 10,000 hours. The theory is that if you spend 10,000 hours in developing a skill, by the end of it, you’d be an expert in it.

There is common perception that startups are entities who are low on resources, are always constrained by talent and time, and have none of the perks that bigger companies enjoy. That statement couldn’t be more wrong. Startups are infact by definition, entities that are extremely good at what they do, can deliver the next generation of quality and experience at half the cost. If your startup doesnt live up to that promise, its a sure sign that something is seriously wrong.

Lets think about the Logic of this whole matter for a minute. There are bigger companies with loads of cash and resources, and the network to go after the same market that you are aiming for. The only standing chance that a startup has is if you are amazingly good at what you do.

Thats exactly where Malcolm’s theory comes in. Every business has certain crucial aspects. If its a technology company, you are going to need someone who has great R&D background, one who has solid understanding of business and the markets and someone who can manage finances and play complementary roles. You Have to be the absolute best in what you are. When starting up, its worth asking yourself that question, as the destiny of the company you start very much depends on it. If you dont have a skill, its time to sharpen it. 10,000 hours to go!

The Case for Startups – The Prelude.

// August 13th, 2009 // 5 Comments » // Business, Entrepreneurship, India, Politics

Over the past three years, it has been quite a journey interacting with startups, some of the key stakeholders and in a lot of ways understanding some of the constraints that we are facing in building up this landscape. There is undoubtedly a lot of enthusiasm, an unparalleled momentum within the community and daring spirits aspiring to build world-class companies. No doubt about it.

But we are not nearly where we’d like to be.

Lets also have a bit of background here. We must humbly acknowledge that certain things existed even before we all arrived at the scene. There is nothing new under the sun says Solomon who was apparently one of the wisest man to roam the earth and he possibly could have been true. A report by the committee on National Enterprises clocks the number of Small and Medium enterprises in India at 32 Million. Yep, you read that right, its 32 million! 40% of the gross manufacturing GDP is a contribution of this sector of the industry. One of every ten Indian is employed by an SME. If you thought startups became fashionable in the past three years, we would be very misguided. That said, there is a sudden trend and confidence emerging that India too can build world-class companies. That sentiment is a recent one.

Though it was the camp at Proto.in, that initiated some of the key initiatives to drive this change, its no doubt that today there are several entities – all very key elements who have started to play a role in shaping this landscape. The purpose of this series is hopefully to point out some of the obvious things that we are going to have to work towards – so that we dont contend ourselves thinking that we’ve arrived.

I’ve thought about it, mulled it, discussed, debated and fought over it, but simplistically it comes down to this. Startups need two very crucial elements that we need to build in order to nurture them.

a) Media Focus
b) Capital

I’d also add a third component of Mentorship/Networks, but I am going to presume for a second that that onus can be laid upon the entrepreneur as there are several means and ways to compensate for that (linkedin, included) for now.

Media Focus:
Let me be very very honest here. There are several attempts by everyone involved in this space trying to get some coverage in the media, but there is a serious issue with the focus here. ET’s Ideas competition included, the focus somehow seems very much on the initiative than on the entrepreneurs. This goes for the Proto.in camp as well – while sometimes its nice to rest on our laurels, we have to constantly remind ourselves that we are just a mere platform and our success is when the companies we help succeed. We have got to do better in this. I know we can.

There are shows on television which as of now seem to be doing a better job at this than what most of the “showcase” events have managed to do, and its quite sad that thats the level of comparison we are at. Rest assured that there are also going to be equally enough efforts from the media to want to sensationalize it, and even make an emotional outcry out of entrepreneurs, dreams, hopes and dreams smashed, and its sooner or later meant to happen, but one of the things seriously lacking is the media network and lack of focus for startups.

Things we ought to do in this space:

a) There is a serious need for a authoritative blog that covers startups, and the emerging verticals.

b) There is also a need for a firm to start analysing the emerging market, as the value chains shift, and to help companies position themselves based on that. Such a company could almost become “the” means to start categorizing and analysing, comparing startups systematically.

c) We need more journalists who could write about entrepreneurship and startups with a solid understanding. There are very few right now (like Snigdha Sengupta) who can do such analysis as of now.

d) Everyone has this question. Every platform, Bplan Competition, Entrepreneurship summit seems to showcase 10-15 companies. What really happens to these companies after that? Do they get funded, attract clients, sign on anyone significant, strike any key alliances? There is space for a “Startup Tracker” to be in place. This will be crucial for the Media to start reporting indepth stories, and also for raising funds in the future (More on that in the upcoming series)

e) Events such as TiECon, Proto.in, Headstart have to put their heads together and figure out how to a) Get the startups coverage on national media b) Get coverage on overseas media – For Example. When PlasticLogic launched at DEMO, The Hindu Chennai edition had a coverage of what they presented the next day. Needless to say that company received enough backorders for their product, including bagging the order from Amazon and Sony within the next three months. If these native platforms are not able to offer that level of coverage, make no mistake, DEMO/TC50 will make its way to India to deliver that value.

There are projected plans to bring the employment rate in India to below 2%. In a global economy where countries are struggling to stabilize their unemployment rates, we are actually talking about almost making it disappear. SMEs will piay a significant part in it, and since Employment is a key value proposition of any government and referring to my previous article on who really owns a company, You can rest assured that the government will get involved and play its part to help. But the initial organizing of this sector has to be driven by all those who are claiming credits already. And clearly there is lots of work to do. Its time to get to work – and not stop at empty promises.

Small is Beautiful?

// August 3rd, 2009 // 6 Comments » // Entrepreneurship

I am an entrepreneur. And the first thing you develop as part of being an entrepreneur is to start picking up patterns of directions people are moving in, and either do a mental math or just walk on the opposite direction of the flow and see whats it that people are totally missing. Usually there are interesting business propositions at the end of that rainbow.

There are two things that trouble me lately, and it connects to the subject of this post. Size.

We are in a rat race, and unfortunately so are most entrepreneurs. Working with entrepreneurs, the common chorus sung these days is to build a company, get it funded, scale, scale globally, make tons of money, go IPO or get acquired, and settle down. And this usually a 15-20 year plan (Anyone who does it in time less than that is either a genius or in sheer luck). The problem with this picture is that everyone thinks this is the de-facto route to go. But not everyone seems to be built for that.

Instead of getting into all the gory details, here’s the question: What’s really wrong about running a Sole Proprietorship firm, making perhaps about 3-5 crores in revenues, and being stable at that?

I met an audience of around 300 such entrepreneurs a month back, and the pace they live their lives by, not hazzled by competition, globalization, board pressure, missing out on family time etc seems almost non-existent – One even mentioned that its a better tax plan as well.

The reason I write this to this audience is cause, one of the biggest things that we worry about, especially with rural enterprises is scale. And at times you notice, sometimes with RTBI, and often outside that not every entrepreneur and entity is built for this. Small can be beautiful, if you know thats what your capability is, and can with content deliver on that consistently.

The second aspect of whats bothering me is something directly related to the first.

I am possibly fairly young, but even I miss the days when you call a company for customer service and you got someone that you spoke to the last time – makes for such a pleasant experience. I have an issue with my Airtel connection and I have called them 17 times so far over the past 18 months trying to get it fixed – so far no solution yet and I have given up on their system and started hoping for Number Portability to arrive.

One of the other side effects that I am lately noticing is the sheer amount of bills and receipts that I am hogging. You make a broadband payment, settle something here, there and you want to keep a copy of it all, because you really dont know when one of these companies will send you a note saying you owe them something and you have to make a case for yourself – and there is no one in the entity who can show you a friendly face.

Its almost unfortunate that with scale, customer experience has gone out of the window. Its said that when we were still bound by the day and age when we werent globally connected, most local businesses and entrepreneurs eventually “ran out” of a market to target, and their way of keeping themselves busy was to constantly improve upon what they offered to keep their customers engaged, happy, and conversing with them. Those days are really gone, arent they?

I think small is, was, and will always be beautiful. The sphere of success and what we really want – whether it be the size of the enterprise we are building, the mode of operation, or the values we want to be known for (even if its darn good customer support) are decisions we make. If anyone can make a decision agains the tide, its entrepreneurs. And with this day and age when trust is nowhere to be seen, and transaction costs inevitably will rise, small can be really beautiful – with a pleasant experience and happy customer.

The People-Cause Dilemma.

// July 19th, 2009 // No Comments » // Business, Entrepreneurship

It is an unfortunate reality that any member of the creative class, be it an entrepreneur, an artist, or a creative director has to deal with. You almost have to continously reinvent yourself, and prove yourself over and over again, if you want to remembered. The world has a nasty way of having a short term memory and there are many great achievers who have fallen down the wayside in the trench of being forgotten, and was never again recalled, till they passed away.

Thats the nightmare of everyone in the creative class.

So the bottomline is that we have to strive to be better than the best, and in most times, we are our own enemies – as we try to overdo what we have accomplished in the past. The bigger nightmare is to build one great success followed up with a disaster and have people talking about the second one, more than the first.

With this as a background, one of the biggest dilemmas that entrepreneurs have to deal with, over and over again, is as to how to deal with people. Every one of us, if we have a tint of visionary streak in what we are trying to do, will come across a point when some of those who work alongside with us, dont see us eye-to-eye on what we are trying to accomplish. When that point in time arrives, is it going to be the people, or the cause that you are going to align yourself with? Thats the question.

I have wrecked my head over this dilemma. Most achievements are a matter of the team coming together right? In which case, shouldnt the vision be easy to compromise to accomodate those who have stood by us? Yet, it is also deceiving that if the vision can accomodate the team, then there also is scope for loads of mediocrity to creep in – and thats not one that a visionary can afford to have.

One could argue both ways on this, but I’ve come to the conclusion as such: For most of us, its not the glory in the act, nor the money, but the satisfaction of getting something done that was once deemed impossible – atleast for me it is. So the question to ask, when you are placed in the bridge of having to make a choice between taking that investment money or going bootstrap mode, or letting go of the partner or team lead, or even having to ask a close friend to step down are all a factor of what you really want to accomplish and where your passion lies. If your passion is in making a difference, then dont settle for us – whatever the cost. Because without it, and the vision that is birthed by it, we are just ghosts with no life nor grip on existence.

Who Owns Your Company?

// June 16th, 2009 // 14 Comments » // Business, Entrepreneurship, India

Once in a blue moon, this situation repeats itself. The board of a company along with the stake holders and investors are pushing the entrepreneur towards a direction and he/she is really not liking it, and tries the ownership card. “This is my company, and I do have the best in mind for it”. Nobody usually reacts to those words, but technically one could throw you out for making statements like that. I’ll start with who doesnt own a company – Its the entrepreneur.

Whoever sold you the romanticism that being an entrepreneur meant being your own boss, was clearly lying. You really never escape the chain of command and reporting structure so easily – not in a civilized society. So Its no wonder that things don’t span out as they say. As an employee you might be accountable to your boss, but as an entrepreneur you are accountable to all of your clients, stakeholders and employees. And every one of them holds you responsible to have the answers and do your best – that’s no different from being an employee times ten. Think about it.

So here’s two things you must know. It is crucial to understand this because this sets the context to understand a whole lot of things that happen through the course of the company.

1. The day you incorporate your company, you no longer own it. You want to own something, keep it a proprietory firm or under a partnership (wouldn’t recommend it, as the stats are as high as 99% of partnerships ending in breakups). It might not be a bad idea to keep it as a family business, but there as well its joint ownership.

2. The Day you agreed on a termsheet and took money from your investors, you made up your mind that you were going to sell your company for a good price someday. Investors invest looking for returns and that returns are never going to happen without an exit; And an exit means a sale. Read that line a few times, it helps to get it into your head. You have in all means sold your company when you take investment. Period.

So the obvious question arises. Why on earth would anyone want to be an entrepreneur despite all these gory truths. Well, a couple of reasons. a) You still do have the capacity and capability to build something from scratch, scale it and make money in the process – You are still one of the major stakeholders in the firm. and b) What you want to do to create this value (be it money or impact or fame) is all left to you – atleast in the beginning.

The intent for writing this article is for one thing. I see and come across enough entrepreneurs who want to own more than 50% of the company. Thats almost the sure way to kill the company and strangle some relationships, because it shows that you haven’t gotten the first thing about a corporation right – you cant own it. And the only way to scale it is to give up control, bring in the right people, and yet have enough of a leeway to make a decent exit – note how the stake you hold is towards a better return, rather than control.

And in all this does the obvious question remain. Who does own a corporate? They say it becomes an entity of its own, can own assets, can incur liabilities, can attract investments and is a being of its own shielding its board and management from most liabilities. Who then owns it? The answer to that is probably the most shocking. The Government. The Government is what owns a corporate – actually every corporate. The rules of the land, enable and provide the space for passionate, enthusiastic and enterprising individuals to spot an opportunity, exploit it, create jobs, add value, attract investment, grow the company, expand, create a board to make their own decisions and directions for the entity, make an exit, or even take it public. But at the end of the day, when and if it does shut down and incurs a loss, the losses go away with the fading memory of the company. And thats the shield that a government provides towards the entrepreneur – probably the best of freedom for an individual to create wealth and value the fast track way.

As far as the govt is concerned, creating jobs is one of its prime mandates. And corporations are instruments towards that cause.

In the light of that, look at the bailouts. You might see a slightly different picture.

Open Wide the Indian Boundaries

// April 12th, 2009 // 5 Comments » // Chennai, Entrepreneurship, India, Politics, Venture Capital, Venture Funding

If you are one who has traded in the Stock Market and had anyone sensible enough to teach you the ropes, the first rule is that when everything starts to drop, its a good time to buy. The rule is simple. When everyone is heading one direction, there is probably – and with very high probability – a chance to make money if you head the other direction.

Given the economic climate, the first thing every country out there seems to be intend on doing is to plug their capital leakages, and in most cases seems to be shutting down outsourcing, closing borders to immigrants and workers, and the usual shabang. Close the doors, lock it tight and throw away the keys till we figure this thing out seems to be the attitude.

This is all just so wrong.

The US is such a fabulous country for one reason. Because the land gave opportunity for entrepreneurs to succeed. It was a fresh soil, they got rid of all the natives and with no prior baggage in terms of history, it was all open to those who arrived to build the nation. And building almost always came with perks – of becoming rich.

We need to do the same here in India.

Its election time in India, and not sure if anyone is reading blogs and listening to the voices that go on here, but if there is someone listening, they should seriously consider opening the boundaries of this country for any national from anywhere in the world to come here, and setup shop. We should even go as far as providing these startups with space and some financial support to get them on their feet.

We have very little to lose, and so much to gain if we do this. We would;

a) Have more entrepreneurs coming here, looking at everyday problems of ours and trying to fix them effectively, essentially building this country. And Making money.

b) Bringing a fresh and radical outside perspective which doesnt carry the cynical attitude that we carry towards change.

c) Will leapfrog India into an International zone, creating various modes of expression and lifestyle services, that will make us unique and original, rather than imitations of the west.

d) Entrepreneurship is the fastest way to create most jobs.

As I said, if anyone out there is listening, You make this part of your mandate, and You have my vote and support.

Getting to the Heart of it.

// April 8th, 2009 // No Comments » // Ask Vijay, Business, Entrepreneurship

I am reading the transcript of the conversations held by the Union Square Ventures, and reading a quote by Sir Ken Robinson (who is now fairly well known in the education circles for his TED Talk). In the talk, he quotes a note from the book “The Empty Space” by Peter Brooke. In a way of not breaking what he said, Let me quote him.

   There was a fantastic booklet a few years ago by a
   guy called Peter Brooke.  He’s a theater director,
   if you ever come across it.  He wrote a book called
   “The Empty Space.”  And he asked himself this
   question.  He was concerned most theater and is –
   loose entertainment — it’s not invigorating.  It’s
   like a passing time.

   His thing is theater as a vibrant,
   social and cultural force.  So, he also analyzed
   what goes wrong with the theater.  So, he asked
   himself this question.  He said, What is the heart
   of the theater?  What is it?  What is this thing we
   are talking about?  And to get to it, he started
   the process of subtraction.  He said, “What can you
   take away from it and still have it?”
  
   And he said, well, you can take away
   the stage.  Take away the script.  You can take
   away the lighting.  See what’s going on, you take
   away the curtains, and you can take away the
   building.  You can take away all the crew, and you
   can certainly take away the director.  All of that
   is very easy.  Take it all out.
  
   The only thing you cannot remove from
   theater is an actor in a space and somebody
   watching.  That’s the heart of it.  And if either
   of those parts is missing, there is no theater.
   You need a performer and an audience.  Theater is
   that relationship.
  
   And he said you should never add
   anything to that relationship unless it improves
   it.  If it gets in the way, if it encumbers it, if
   it makes it more difficult, you shouldn’t have it.
   And that’s his problem with theater.  Everything is
   a distraction from the main business.

More than once, and whenever you do find yourself trying to redefine an industry, change the way a system works, or maybe even build an ecosystem, these words are good to turn to. Define the basics of what makes that system work, and see how it can be re-tuned, rebuilt and made to work better. You have to go back to the basics, if you want to redefine.

Fearing the State of Not Climbing

// April 1st, 2009 // 2 Comments » // Business, Entrepreneurship

There are quite a bit of people that I come across, good and very good people who sometimes have this fear of not being in the ladder. They are great with startups, but are afraid of being left behind in the startup world and constantly keep looking over the shoulder to move up to becoming a corporate and then join the old boys club of retired entrepreneurs.

i have almost come to believe that that is one of the primary reasons why once someone is fairly successful in this country as an entrepreneur, they run off to become a VC, and then become directors in a few companies and are never heard from again in the startup circles. Apparently they “graduate”. And this is somehow seen as the norm.

There is a certain thrill, passion, grit and energy in working with Startups. And if you do fall addicted to it, there is also more than enough means and ways to create wealth in this phase of creativity and corporate development.

But you are going to have to make a decision about staying put, sinking your heels deeper and committing to this space. As someone rightly said “My life never makes sense in the windshield. It only makes sense in the rear view”. Working with Entrepreneurs, working with Startups, and being an entrepreneur is also a lifestyle choice.

Making That Halo Glow – Part I

// March 28th, 2009 // 5 Comments » // Ask Vijay, Business, Entrepreneurship, India

Even as the current economic situation hasnt seem to have harmed the Early Stage Investment scene by much, there is some major misunderstanding by First Time Entrepreneurs, starting off in India, who are looking to raise funds. This series hopes to shine some light on some of them

LESSON: MAKE THAT SACRIFICE. GROW WITH THE ORGANIZATION

Scenario: In the last three business plans that I have had the priviledge to look at and to give feedbacks on, it seems that the average entrepreneur wants a salary of around 2 Lakhs a month, seems to be hiring an office attendant or a secretary in the first year, is travelling extensively, starts a marketing budget even before the product is ready, claims a steady income stream, is absolutely immune to market changes, and can solidly break even in 3 years. And oh, they give a 4x return in the fourth year.

You cannot demand a salary that runs in the lakhs. You cant because If I were investing, I wouldn’t know if there is even an incentive for the entrepreneur to slog to make this company succeed anymore. Given the current employment situation, I would even have a slight doubt as to whether the guy lost his job and is getting self-employed with a raise. But I do understand if you would want to live comfortably. This is what I would suggest.

Take a pay cut in the first two years – till your product development is ready. Just so you get a number, You get paid at the same level as your Indian Lead Software Engineer (I have to specific about the indian part, since some folks also have high paid outsourced engineers). That should put you at around 40K a month. Once that is set, and once your product development is done, and your marketing and sales efforts start, align your salary so that a base of 40K and a incentive component from the sales defines what your take home package is. That will assure me as an investor that you are willing to take a paycut to keep costs low and burn things slowly to get through the initial phases and even as the company makes money you arent raising costs, but defining your salary from what is coming in. If you are a company that sells products that sells in the millions, or have several product packages, it would be wise to even define slabs, that define the percentage.

You do that, and all of a sudden I see a real entrepreneur, who could really use with some financial support, and the halo over the head glows and a lot more people just might be willing to seriously consider your financial proposition.