being startup ready

January 25, 2016 0 comments

most startups succeed overnight

565-1Entrepreneurship is like a roller-coaster ride. You need to hold on and stay the course but that is what makes the whole experience exhilarating. I have had my fair share of all of these. We held on, our guiding motto being that success comes from hard work, passion, and a great idea. If one works smart and hard over a period of time, then it will surely pay off, and it did pay off. We had to wait a fair bit though. It took us about seventeen years to become an overnight success. But again I can state with all sincerity that we had a great journey proving the adage that “there is much to be said for failure. It is much more interesting than success”. Half-baked attempts at entrepreneurship or those who turn to entrepreneurship as a fallback are less likely to succeed. A renowned motivational speaker, author, and politician, Les Brown had said, “For wannabe entrepreneurs, wanting something is not enough. You must hunger for it. Your motivation must be absolutely compelling in order to overcome the obstacles that will invariably come your way.” In fact, it is useful to keep in mind that over eight of ten new startups fail.

the best partnerships are with friends

Many times, you want to team up with friends just because you get along with them—this is a big mistake and my experience bears this out. In business, the complementarity of skills, a shared vision of the future, and most importantly a match in the core values are what brings about enduring productive partnerships. From the very beginning, some basic ground rules to guide behavior should be put on paper. Expounding the value systems and ensuring that there is a match between partners is of utmost importance. The partners need to understand each other’s value systems, complementarity of skills, business desires, and experience. One error made by many startups is failing to have essential business documents and agreements in place from the beginning. Partners often hold off on putting key terms in writing because in the early stages, when everyone is enthusiastic and in sync, they can be loath to interfere with the thrill of getting a new business off the ground. However, having basic agreements that outline each party’s roles and obligations is key to preventing problems down the road. Furthermore, in the initial stages all the informal modes of communication work but as the organization grows, the lack of formal systems will start showing up.

entrepreneurs always take huge risks

Many businesses fail because they do not take risks proportionate to their ambitions and capability. There are generally two benefits of failure. First, you learn what does and does not work; and second, it gives you the opportunity to try an entirely new approach. Not having enough failures often means you are not being innovative enough and therefore, not taking enough risks. But what works cannot be decided based on analysis because if you are creating a new product or process, or addressing a new market, there is no historical data. This puts off many because of the ‘fear’ factor—there is an issue of spending on something whose outcome is uncertain. However, often these are the initiatives that help a company to scale up faster. I am reminded of the time when my co-promoters, I, and the team debated for long before we decided to plunge into patent analytics. We had a large team that abstracted patent documents for a client and hence had a pool of engineers who understood patents. With some amount of investment in their training, and a larger investment in sales and marketing we could potentially target an entirely new service. We took that risk and had a million-dollar business in the first year of our operations. Two major takeaways are:

  • Do not be afraid to take risks and stare at failure. Failures could teach you how to get it right the next time. So, as long as there is a possibility of a good upside, go ahead and take the risk.
  • Evaluate the risks. As an entrepreneur, there are a number of decisions I have taken based on intuition. But it is important to validate such decisions as one goes along and faces market-based realities.

entrepreneurs do not quit

Based on my experience, I believe persistence is an important attribute that prospective entrepreneurs should develop. I have had more failures than successes but I trudged on to eventual success. Never giving up or not knowing when to give up in the face of repeated failures can be a virtue, but then it can as easily be foolishness. I had focus and stayed the course and while it took us a fair bit of time, I succeeded in scaling up and building a team that helped me unlock value and monetize the business.

There is a Chinese proverb, “Vision without action is daydreaming and action without vision is a nightmare. Strategy without tactics is a slow route to victory and tactics without strategy is the noise before the defeat”. In many ways if you really want the true ‘secret’ to success in life, it lies in taking action. Entrepreneurship is not for the faint-hearted; it is for those who dare to take those calculated risks. However, if you look at entrepreneurs, most have always quit when they needed to either look for newer ventures, or to cut losses and move on.

VCs are the first source for startup money

The most common source of startup capital is the business owner himself/herself in the form of credit card advances, home equity loans, and loans from family members. There are also some options that governments extend to certain types of businesses. When these sources are exhausted or unavailable, entrepreneurs usually seek capital from commercial and investment banks, angel investors, wealthy individuals, and VC funds. Their investment is usually styled in the form of debt, equity, or a combination.

The common form of capital used by startups is debt. Most form of debt is secured by the assets of the company including the possible personal guarantee of the owners. The company repays the principal with interest from cash flow and is especially recommended for financing if the revenues are assured. In 2002 when our company received orders from clients in UK and the US, this is what we sought to do. However, the problem here is that often the business has very little fixed assets as in our case and /or the promoters do not have the assets to give as a collateral.

Remember VC funding is far more expensive for a well-run business with assured revenues. However, debt is also a riskier option since when the business fails, lenders foreclose and liquidate the assets for repayment, possibly seeking any deficiency from the owners. Asset lenders are concerned with the market value of the assets, not the business enterprise, lending only a proportion of the asset’s value in order to ensure repayment. While the interest rate on borrowed money may be high, using debt allows you to maintain 100% ownership.

The other less risky option is equity. Angel investors, PE firms, and venture funds provide capital in return for equity. When utilizing equity, investors become owners of the business with the entrepreneur, the amount of ownership held by each is dependent upon a negotiation, which in turn is based upon the funds invested and the agreed-upon value of the business. Business valuation is an art, not a science; the conclusion is always subjective depending upon the perspective of the valuator.

A new funding mechanism known as crowdfunding is also now available. This is still unregulated in India but can be a good means to raise the initial capital.

I feel it is better to have some traction on revenues and clients with a clear business plan in place before approaching VCs. Better still is to be so good at what you are doing that VCs make a beeline for you.

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