Dont let the BIG Companies kill you

You run a startup that is solving a tough problem and the market potential is large. You never had enough money, so the only way to survive was to practice super bootstrapping and to actually make something which customers will pay for. You also had to make sure that your customers are happy with your product / service so that they keep coming back and refer more customers. After some near death experiences you finally managed to become cash flow positive. You had to create stuff in near zero cost, innovate, try a lot of different things and approach the market from a completely fresh perspective. You understand the market now, you have handle on things, sales are growing at a healthy pace, product seems to have reached a certain maturity, hiring is no longer that difficult and your startup is getting good visibility. There may be interest from investors to give you the first Rs.1-2 crore (200K USD) of investment. Overall things are looking up, team is looking forward to next phase of growth and next set of problems that will come with it. 

Sometime now you come in contact with a large company. Reason could be any: they have just entered this market or are planning to enter, they have some offering in this space and you can fit in. Because of what you have accomplished so far they are very keen to speak to you and figure out what can be done together. Isn’t that exciting? It seems too good to be true. But you tell yourself – maybe we are really that good.

That is how we felt before the first meeting with a senior guy at one of India’s largest companies, they were planning on entering the same market as madhouse. “Wow – this is our first startup and one of India’s largest company is interesting in talking to us. If we can crack a deal, we will be golden”. There was nothing on the table – no deal / no partnership nothing – it was just a meeting. But we were quite excited, guess it was natural. We had gone thru 2-2.5 yrs of extreme hard work to bring madhouse to that stage, we could bring a lot of value to the large company. If we get acquired for a good price or figure out a good way to partner with them, we can really scale the business. With their size they will bring the money / the network / the leverage and loads of other advantages.

With this mindset we did the first meeting and many meetings after that. They only asked questions / never answered any of our questions. They wanted to know everything about our business and in detail. How do we get customers? How do we manage operations / specially the hard parts? Can we walk them thru our financial model? Who is our SW vendor? Can they get a photocopy of our packaging?

Looking back it is pretty obvious to me that they probably never wanted to do anything with us. But back then they made us believe that they are interested in acquiring / investing and hence want more info. We made a consious decision to open our kimono. Which was a bad decision because the whole thing it was a farce – till the time they wanted to learn from us the relation was warm and after that it just started dragging. They stopped answering calls / wouldn’t reply to emails for days. And the offer to acquire did not come. At a very crucial time for our business we wasted a lot of effort in talking to them – same effort which could have been used constructively to take our business further.  They learnt all they could, took all the contacts. They even got our SW vendor to build their website and backend, I learnt this a few years later. So the moral of the story is that the big company just used us and moved on.

What is really happening?

With time I learnt that this is a pretty standard way most of the big (even medium) Indian companies to deal with young / promising startups or smaller organizations

  • These guys know that founders have run hard for quite some time without much resources and a possibility of good returns / large sales channel or a large client would be attractive to startups 
  • They use their big company charm to lure the startups towards them, take whatever advantage they can
  • These guys just do not care if the startup lives or dies as long as they can get their stuff dont 
  • If the discussion is about acquisition – they will just go cold after few calls / meetings
  • If the discussion is about partnering – they will make some really unreasonable demands of you just to partner with you (e.g.: we will help you sell if you give us 60% margin on product sales and you own the inventory)
  • If the discussion is about them being your client – they will take forever and if they decide to buy from you they will want to negotiate really low prices and make the payments 90 days after acceptance of goods / services (in many such cases they will not sign any contracts and then terminate contracts whenever they feel like)
  • If it is about investing – they will want 60% of your company for 20 Lacs

Why I hate such practices?

  • I hate these practices not only because they are unfair / unethical
  • But mainly because this is one of the major reasons Indian startups have not taken off
  • Startups have to co-exist with big/medium companies in the  economic eco-system
  • They have to deal with big companies at various times in different circumstances
  • If big companies continue to follow these practices / they are essentially hampering growth of startups and the overall economy
  • The motivations behind such practices are very short term and in most cases such things happen because of the incompetent middle managers / senior managers in these companies who only care about making their bosses happy and their monthly paychecks
  • Because in long term partnering with or acquiring a startup with talented resources can bring big benefits to big / medium companies
  • Smart companies in US have created lot of value for their shareholders by partnering with or acquiring good startups – but such practice is not common in India
  • In India the standard thought process is – we can do a better job than the upstarts, we have lot of money and leverage. Startups do have some head start  – but we just have to make one call and these guys will come running and do whatever we ask them for 

Make your own rules. Dont follow what BIG companies tell you

  • Startups should not stop dealing with big / medium companies (that would be suicidal) but they need to change their ways so that these interactions create long term value for the startup, the big company and the consumers
  • Founders need to realize that the big guys need you more than you need them – you are doing something unique that not too many companies can do (including the big company)
  • Donts
    • Don’t jump on the offers to talk. Show some attitude – take your time in responding
    • Don’t get blinded by the excitement
    • Don’t bend over backwards to make them happy
    • Don’t accept unreasonable payment terms
    • Don’t take loans to full fill big company orders
    • Don’t take the next day full price flight to go and meet them
    • Don’t be desperate
    • Even if you are desperate – don’t show the desperation. They just need one signal to take you out
    • Don’t believe the rosy pictures they paint or the big promises they make
    • Don’t bend or be extra humble and use terms like “Sir / Kindly / Please / Mr / Honored ” – while communicating with them
    • [Updated] Never agree to pay comission / bribe. You will run into folks who will say they can get you the order, if you can give them a kickback – this may work once wont help you in the long run
  • Dos
    • Be confident / believe in yourself / your product / your team
    • Stand your ground / stick to your guns
    • Ask for fair terms. Say that you will deliver the best quality product on time and on cost
    • Deliver on promises of time lines & quality standard ( always try to under promise and over deliver)
    • If you are making something worthwhile they will deal with you on fair terms if not its better you move on to something else
    • Be open to reasonable negotiations / concessions / free trials / prototypes to get in – but do not let it become a norm 
    • Treat the CEO / Directors / VPs of large companies as your peers and be on first name basis
    • Across all the communication with them (meeting / calls / emails etc) – be confident,  be cool, be yourself   
    • Do not start any major work without formal agreements / purchase orders
  • Basically big companies have slow / long processes, lots of gatekeepers and very few people who can give the final GO
  • The way to get around is first of all stop expecting/ pushing them to make a big decision in your favor within few meetings
  • Instead propose a trial engagement which leads to something valuable for them.
  • Trial should come at low / no cost to them and it should not have a lot effort on their side
  • Do all the work yourself, invest a bit of cash if required and deliver exceptional results
  • These results will get them interested in taking the next step, which could be a limited pilot.
  • Deliver exceptional results again
  • That would lead to bigger engagement and slowly you can have them as a regular client or even get them interested in acquiring you

Finally, I would like to clarify that not all large companies are bad or filled with bad guys, there are loads of good ones. I have had lots of good experiences as well. Sometime since they are big they may look bad but if you follow the process things will work out. But as a startup you need to watch out, do not let over dependence on a big company become reason for the death of your startup.

Thanks to Ankur, Nandini, Ankit, Pankaj, Shashank, Sid and others for reviewing the article

Investor / Entrepreneur – Who is the horse and who is the cart?

The Indian startup eco-system is around 10 years old and the two main constituents of this eco-system are – professional entrepreneurs (*1) and investors (angels / VCs). The growth in numbers in both these groups has been quite phenomenal; specially in the last 2 years. But despite the rise in numbers, we have not seen enough number of successful startups, that either have achieved high revenue numbers or have achieved attractive exits.

This issue of creating successful startups is very closely related to the business model of my current venture – The Morpheus, so I think about it a lot. While there are a number of important issues that need to be addressed, one key issue is the dynamics between Investors & Entrepreneurs. And there is a big fallacy in the way the two parties view each other.

  • Fallacy: Investors are the horses and Entrepreneurs are the carts 
  • Truth: Entrepreneurs are the horses and Investors are the carts

For real progress to happen the horse should come in front of the the cart and pull it forward. If by mistake the cart comes before the horse – there wont be any significant movement, as the horse will be pushing from behind. This fallacy is today plaguing most entrepreneurial ventures – funded and non-funded and hence little success has been achieved in last 10 years.

Majority of the folks believe that the Investor is the horse and the entrepreneur is the cart. Why? Because the investor is the source of  money – which is believed to be the starting point. And actually it looks pretty logical – you do need money to get started. But if you look carefully you can see that this thought process is entirely wrong. In reality its the entrepreneur who is the prime mover in a startup – he is the horse. Everyone else – angels / VCs / accelerators/ incubators are the various forms of carts and the carts need the horses to pull them and not the other way around.

This fallacy is leading to a bunch of  problems in the Indian eco-system and hence we have not made much progress in creating real start-ups that execute the classical path of – bootstrap / build great stuff / raise money / keep growing / raise more money and reach the finish line with an exit or start making serious revenues. If you look closely at the 10 odd year history of start-up investments in India – there are no profitable exits to show – except Makemytrip. (I am of course not counting the PE stage investments done by some venture capital firms). I believe the main reason “lack of startup performence” is the same fallacy.

“Cart” type Entrepreneurs  

  • 90-95% of folks who plan to do start-ups believe that they are the cart and so they need horses (Investors) to get them started and unless they get an Investor pretty early (or even before starting) they really cannot make much progress
  • These people spend a lot effort looking for funding during the initial days of the start-up
  • Which essentially means they are not putting all the effort into building the product or doing sales
  • As a result most of these start-ups make poor progress on two most important aspects – product and sales and eventually die 
  • Some of them actually do manage to raise money because of their Miss India type backgrounds 
    • Ex-CEO of so & so company
    • Worked at top tier consulting firm
    • Alumni of certain institute
    • And other such reasons 
  • Since these guys haven’t build anything great before they raised money, and now they believe have found the horse which will pull them – they become complacent. Such investments don’t really pay off the investor or the entrepreneur.

Me and my co-founder, Nandini, were in the same category of “cart” entrepreneurs when we were starting madhouse. We spent the initial months creating B-plans / spreadsheets / projections / market study and all that jazz, spent couple of months meeting the investors. We would have died in that Chakraviuh. But were extremely lucky to have a great mentor who helped us see truth – which is “If you build something great, money will find you“. That is when we realized that we come first – we are horses. The investors come later.

“Horse” type Investors

  • These are investors who believe they are the horses and whomever they fund is only a cart
  • So who they invest in does not matter that much since they believe can pull the cart to the finish line
  • In this mindset they end up funding all kind of wrong folks who also believed they are carts
  • So you have a cart (investor) who thinks its a horse and tries to do a lot of pulling – of course with no visible results and a potential horse (entreprenuer) who thinks its a cart and hence doesn’t pull – and the result is disastrous anyways
  • We see many such deals happen around us and often wonder “How come these guys raised money?”
  • Just after the deal happens there are celebrations and the founders feel they have arrived and get on with the job of burning the cash. For a while no one notices and some time later the companies die because of lack of progres
  • Many investors get fascinated by trends and start believing this is where the next big company will come from. And following the horse mentality they look for start-ups in that domain and even tell entrepreneurs whom they meet to change their business & go after this trend
  • Now when these guys meet the real entrepreneur – who knows he is a horse – they fail to recognize the opportunity and pass on the deal

All through my madhouse days we were being told by would be investors with a lot of authority about how we should build our business. Just before I started Morpheus I was asked by a couple of guys to “start something like mGinger” which was a heavily contested deal at that time – but has been long forgotten

Who can fix things? 

“Horse” type entrepreneurs

  • We need more entrepreneurs who know that they are the horses and hence take the ownership of pulling the cart – which includes the business and the investors
  • They start their journey as a young horse, gain strength and speed along the way – they become strong horses
  • Irrespective of whether they have  cartsc(investors) or not they win their races

“Cart” type investors

  • We also need more investors who clearly understand that entrepreneur is the horse / the prime mover / the creator
  • They respect the entrepreneurs and look for horses that have the potential to run a long race and win
  • They look for horses that have shown promise in the race so far
  • They do not try to manage the show but provide the right kind of support

We already have a few folks in both of the above categories. They are doing their respective jobs silently & do not really make much noise. The real trend is on their side. Eventually their successes will correct the fallacy and I am sure India will produce a great percentage of good quality, successful start-ups and good quality investors who invest in those start-ups!

Notes:

1. Professional entrepreneur is someone who has gained knowledge & experience through education / work and he combines that with his intelligence, passion, hard work to create a venture.

My Article from anniv edition of entrepreneur mag

I wrote this article for the Sepetember 2010 Anniversary Edition of the Entreprenuer Magazine (India Edition). Orginal article can be found here

Money will find you

What is the best way to get funded? This was an important question that Nandini Hirianniah (my co-founder at Madhouse) and I were trying to answer around the beginning of 2005. Madhouse Media (our first startup) was an organized movie rental venture—envisioned to be the Netflix of India. Netflix then was a super hot startup in the U.S.

The following were our thoughts on funding at that time:

  • Both of us had returned to India from the Silicon Valley
  • I had worked for five years with a couple of Valley startups, both of which had raised $50 million plus in funding
  • Nandini had seven-eight years of media experience with many media giants and a few funded media startups
  • We had the relevant experience to spearhead Madhouse—Nandini in media and communications, and I in technology
  • We had quit our well-paying jobs, withdrawn our PFs and burnt our bridges
  • We took the “right” path and prepared an exhaustive B-plan

According to the B-plan, we needed Rs.1 crore to launch the business which would break-even in over two years, and become a Rs.50 crore-Rs.100 crore business in about seven years with subsequent rounds of funding!

It all looked good and we hit the road to raise our Rs.1 crore. The initial step was to find contacts who could connect us to potential investors to pitch for funding. It wasn’t an easy task, but we were confident. We started getting initial meetings in Mumbai/Delhi through our network and more contacts through people who we pitched to.

An initial meeting was never a problem. People spent two hours with us, they seemed to like the idea, asked a lot of questions which we almost always managed to answer; all seemed to go well. But often they would go silent post the first meeting and, in some cases, after a couple of interactions. Follow-ups resulted in them saying, “We’d like to pass on this opportunity.”

We were at it for two months, busy pitching, getting feedback, tweaking the B-plan, following up, but no one wanted to fund us. Now the question was, what next? Should we continue looking for money? Should we get back to our jobs?

That’s when we had our moment of reckoning! While discussing what to do next in our mentor’s office in Mumbai (head of a larger retail chain), Nandini and I had an informative conversation with our mentor, who had been really supportive and had given us access to some of his contacts to pitch to. (The following is an account of the conversation, not the actual one.)

Mentor: Looks like you guys are not going to be able raise money. But are you still passionate about the business?
Us: Yes, of course.
Mentor: How much money can you invest?
Us: If we have to, we can manage around Rs.8 lakh, Rs.4 lakh of our savings and Rs.2 lakh each from our respective parents.
Mentor: In that case, my advice is, go back to Chandigarh and launch a pilot of your service using this money. If you do a good job, money will find you.

After that, we stopped all efforts to raising money, went back to Chandigarh, trashed the Rs.1 crore B-Plan and created a new, simpler Pilot Execution Plan. This new plan had just one goal: Our monthly revenues should be more than our monthly expenses, before the Rs.8 lakh got over!

If we achieved this, Madhouse would be a “customer-funded company.” We were back in Chandigarh at the end of February 2005 and launched our service that May. We had some good initial customer traction. By August, we had a couple of angel investors interested in investing around Rs.25 lakh in Madhouse.

We did not go looking this time, but they found us! How? Execution is better than a business plan. One of the angel investors had heard about Madhouse and the founding team’s passion through a Madhouse employee.

The angel called me and what started off as a casual call turned into long discussions over many calls. But the initial calls were never about funding.
After some days, he just asked, “So how are you guys funding your business?” I said, “We have invested our personal money and have borrowed some from our parents. We are confident that we can make our business profitable.” He said, “I’ll  be interested in investing. I can check with my IIT friends if they want to invest. I can help out part-time and connect you to folks in my IIT network.” About a couple of months after that conversation, we raised Rs.25 lakh from two angels.

Finally, we had found the answer to our question. The best way to get funded is: Figure out how much capital can you raise on your own to get started. Get all your savings, your Provident Fund, all the money that you can get by selling your liquid assets, you credit cards, etc. Also check how much money you can raise from your close friends and family without giving them too much trouble.


Tips for aspiring entrepreneurs:
1. Start by using your own money and if things go in the right direction, then invest money taken from friends and family.
2. Treat the friends and family money as convertible debt. If the venture takes off, give them equity. If not, treat it as debt and return it.
3. Raise around Rs.5 lakh-Rs.10 lakh from the above two sources. It’s not easy but possible.
4. Launch with the goal of becoming profitable before you run out of money.
5. Execute the plan with a lot of passion.

Dont look for a co-founder. Find a Right Hand Man

In my first startup, madhouse, I had two co-founders. Before madhouse I worked at a couple of startups, which also had more than one founder. So when I started Morpheus, I did not have any first hand prespective on single founder scenario. At morpheus, I have worked with a number of such startups and developed a good understanding of this scenario. Interestingly some our most succesful portfolio companies have a single founder.

Very often I meet single founders who have business background & are looking for a tech co-founder or tech founders looking for a business guy to come onboard as a co-founder. In a good scenario co-founders know each other for some time as good friends / colleagues / classmates / cousins etc, they all want to do a startup. They get together before the idea is finalized and get started. In scenarios where this does not happen – looking for a co-founder is a bad idea. Good idea is to look a Right Hand Man (RHM).

  • RHM is someone who is quite capable (& willing) of contributing to a start up in its early stages not only in his field of expertise but across the board
  • Basically a rock star
  • He is not a guy who will go all the way and start his own company in the near future
  • But he is also not someone who can be happy in a run of the mill corporate job
  • He has many traits of a startup founder
  • He is restless / wants some adventure / can handle the startup uncertainly/ wants to really contribute/ wants to learn / try new things/ brings ideas
  • He will be fine with a survival salary 20-30K INR a month (would love for someone to sugest a USD equivalent this amount) & 5-10 % equity (which is vested over 3-4 years)
  • He should be more than just a developer or sales guy or ops guy. Basically good for his primary role but also capable of contrubuting to other parts of the startup
  • If you are single founder with business background you need to of course look for someone who has the skills of making & delivering the product (or service) that your startup plans to sell
  • If you are a tech founder who has skills of making & delivering the product (or service) dont look for a business guy. Instead you should also get someone who will first take up “making”.
  • So if you make a tech product get a lead developer who can also do other things  
  • Since you have the skills of making, you should make the initial few versions of the product yourself
  • Once you get the RHM you can do a handover but still run the product from the top as an architect or even contiue contributing to making
  • But sales is something you are still figuring out as a company & the founder needs to be incharge of sales (don’t ever get a guy to run sales unless you have figured it out yourself)
  • Now that u know who you are looking for, write a nice / exciting job description & post on your company blog 
  • Post the link on various relevant forums : alumni network mailing lists / other mailing lists / forums/ twitter / free job sites / social networks etc
  • Best place to look is into your own network for references – class mates / juniors / cousins / friends
  • Also you should consider getting interns from good colleges where they have 6 months internship. The probaility of them coming on board full-time after graduating is pretty good / since they would have learnt about you and your startup during the internship period
  • Hangout at meet-ups / tech events and similar places where you can run into such people. Online you can hangout at Hacker News
  • Maintain a honest blog about your experiences so far – that is very likely to attract a good RHM.
  • Send me the link to the post I will be happy to spread the word!

Wanna be an enterprenuer – Figure it the fuck out

Just read this amazing article by Chad – Figure it the fuck out. His observations are right on the money and totally apply to the startup scenario.

I meet loads of wanna be entreprenuers who are not yet ready to leave their jobs and somehow want to convince me (and themselves) that they are going to be just fine while they are “working a full time job & doing a startup” or while one person on the team is full time & rest of them continue other full time activities.

And when I tell them it wont work out like this and there is nothing called part time entreprenuership. You are not full time because maybe you don’t want it bad enough, many times that annoys them (and that’s my intent anyways – may be it will change them).

Common arguments :

  • I know a lots of folks who built big businesses while they also had a job
  • We are moving in that direction and for next year one person on the team of 3 will be full time – so we are committed
  • And the brahmastra How can I quit my job I have so many financial commitments?

Go and “figure it the fuck out” / Dont waste yours & mine time.

Wanaa solve a problem u deeply care deeply about?

Best startups happen when someone who deeply cares about a problem decides to go all the way to solve it. Most of the time these are problems you have faced yourself but not always. Best founders are ones who are totally annoyed by a problem and cant take it any longer. 

  • Google founders cared deeply about the accuracy of search results & were annoyed by results shown by existing search engines like – yahoo / altavista
  • Steve jobs cared so deeply about design of products that he taught all of us “What a good design is and how to appreciate it?”. He has been doing it for over 33 years and still has the fire to take on all mobile companies

Many founders would ask – if the venture can make money – why do I have to care deeply?

  • All (or most) money made by a business, by fair means, comes from real users
  • Users only pay for something that solves a problem, they have, in a really good way
  • It’s not enough to get users to pay once – for a business to really grow users have to pay again & again and they should spread the gospel about you
  • Only way to accomplish this is to create a high quality solution for a problem thats important for users
  • To create a high quality solution – you really need to care deeply about a problem
  • You should care so deeply that you want to solve it not only for yourself but for everyone in the world
  • You should care so much that “you get joy in your customers joy” and “you feel pain if your customer is in pain”
  • Without that connection it won’t work

If you want to solve a problem you deeply care about (or are already working on it) – The Morpheus will be happy to partner with you, infact we are badly looking for you everywhere. Talk to us

Early employees – Salary & Equity

In the beginning of a startup there are just the founders. They do all the work – making / selling / admin / HR / cleaning / finance – everything. With their enormous passion and never ending energy they start moving the wheel. They make the product / launch it / get some traction / start getting some orders and so on. Once the work load increases to a point there is need for more hands & heads. Since they have launched / been covered / have made progress – less people look down upon them and some even show interest in working with them. Through their efforts they manage to find some passionate guys ready to come on board. (Read here about What to look for in startup interviews?). So far so good. Now comes the tricky part. What should be the salary and equity for the new team members? 

 

Salary

  • You need to find folks who are ready to work for much lower than market salary. Folks who value the other things they will get much more than money, things like – learn lot of cool stuff / work on hard problems / have loads of fun / work with uber smart folks / etc 
  •  To begin with it’s great if they agree to work for “survival salary” for a year or until the company either raises money or starts earning enough to pay him / her more than survival salary
  • Look for people who lead a fairly simple / bootstrapped lifestyle and don’t have too many commitments. Specially stay away from folks with housing loans
  • I think INR 15-25K a month is a good range to think about  
  •  When you make the salary commitments you should ensure that you have enough cash to take care of overall expenses for next 10-12 months or more
  • Budget for other expenses like – Computer / Phone / Work area / misc expenses for each employee
  • If you can hire people who bring their own laptop – that is a bonus


Equity

  • Equity should be decided depending on
    • Stage of the company
    • Potential impact on the employee on the future of the company
    • How much cut is the guy taking on the cash side (this should be compensated)
    • A good thumb rule is to think 5 years in future
      • Assume that your company is acquired for a reasonable amount
      • Calculate the return which that guy will get via sale of equity
      • Now estimate the market salary of the guy 5 years from today
      • If in the 5th year he can make 5-6 times his annual salary via the equity sale – its a decent deal / anything higher is off course better for him
  • Read PG’s excellent article on how much equity is the right equity
  • Overall you should designate a certain number of unallocated shares as the ESOP pool. These shares are not yet issued but have been allocated as employee stock – to be issued overtime
  • Typically startups keep 20% as employee stock option pool
  • Vesting Schedule
    •  Equity offered to startup employees is not just for joining but for long term contribution to the company
    • Hence you pro-rate the equity over this period of time called “Vesting Period”
    • Normally this period is 4 years. But in special cases it can be brought down to 3 years
    • You also need to think about the minimum period the person should work for the company for making a decent contribution
    • This is called “Cliff” and is normally 1 year. You can be flexible on the duration but its strongly recommended that you have the cliff in the arrangement
    • If the employee leaves (or is asked to leave) before completion of the cliff period he / she will not get any equity in the company
    • So lets say you plan to hire a guy X for following terms
      • Equity – 4%
      • Vesting Period – 4 years
      • Cliff – 1 year
    • This means that you will give X  4% equity for working in the company for 4 years. But you expect him to stay for minimum 1 year
    • Let’s say 4% translates to 4800 shares
    • Total vesting duration in months is 48 months
    • Every month that X stays with the company he becomes owner of 1/ 48th of 4800 shares – which is 100 shares
    • Now the cliff kicks in, X needs to complete the cliff period of 12 months to receive any shares
    • So if he stays for 13 months, number of shares = (4800/48) *13 = 1300
    • But if he stays for 11 months, he gets ZERO shares – since he did not complete the cliff period
  • Additional equity
    • In some case companies give additional equity to employees later on as a performance bonus or as part of promotion
    • Each equity grant should have separate vesting schedule
  • Share price
    • In most cases startup employees are only expected to pay the face value of the shares and even that is reimbursed in some form
    • But at later stages companies calculate the share price with the help of their CA and offer the shares the employee for a heavy discount or subsidy
  • Paperwork / Agreements
    • Setting up a formal ESOP plan with help of a good lawyer would be too expensive for a bootstrapped startup – hence it’s a good idea to do that after you raise series A or start making decent amount of revenues
    • For a bootstrapped startup, you should mention the amount of equity and details of vesting schedule in the employment agreement
    • At the time of issuing shares you enter into share subscription agreement with the employee – where he / she only needs to pay the face value of the shares
  • Deciding later
    • In many cases people like each other and start working together without finalizing the equity %
    • Leaving it totally open could be a bad idea – since expectations could be totally mismatched and that could become a big headache
    • If you do want to defer the decision on the number, make sure that you discuss
      • Exact time after which equity will be decided
      • Range in which the equity will fall
      • Your expectations from the employee
    • Best way is to start with a firm number slightly on the lower side and if things turn out good you can always grant more equity

Ankur raised a point while reviewing the draft of this post that some times the employee will ask you back the question – Why are you guys keeping 95% and giving me only 5%? Obviously guy is not able appreciate to or realize the difference in the contribution of a Founder and an early employee. Here are some of those reasons, which quite often remain invisible to the employees:

  • Founders take the maximum risk while starting a company
  • They quit their job not to join an existing setup but they quit with nothing in hand
  • The startups are literally created in heads of the founders – its their DNA that the startup carries – they have the maximum impact on its outcome and the equity should reflect that
  • The initial days are the hardest for every startup and there is very little to show – so at that point almost no one wants to join them – during that period its the founders alone who toil and create – employees mostly come later
  • An employee has the flexibility to leave  the job whenever they want and move on to a new job. Founders don’t have that option – they need to stay with the company thru thick and thin. (In theory they can also shutdown or leave – but in practice its very difficult)
  • Founders also make the initial capital investment in the company and add more capital in most cases / they max out the credit cards / bring personal laptops / run office from there home / bring stuff from home to run the office and many such contributions
  • Founders work for zero salary for quite a long time
  • Founders normally setup ESOP of 20% out of which other employees are also given equity grants – so they are really are not keeping 95%
  • Most employees want to do specialized jobs around their core area and stick to it – so that they continue to build their job career. Founders do not have any such choice – irrespective of their backgrounds – founders need to work in every department and do what ever it takes to keep things moving and it also involves junior most jobs like – bank work / cleaning / delivering orders / making tea / pretty much every thing
  • A founder’s career and reputation is attached to the outcome of the venture / he is the one who worries the most / looses the most sleep – the buck stops at him
  • As a founder -If you find a guy who can match you to a certain extent in above listed aspects – you should surely give him more equity or even bring him on board as a founder. One of portolio founders did this very recently – brought a guy as first employee with 9% equity / found that the guy can bring a lot more value and invited him to join as a co-founder with same amount equity as the first founder
  • As a founder – its also important that you draw the line at the right place. If you find someone really good for a particular role, but they bring no additional value and this person expects a much higher equity than what seems fair – Dont worry about it – just let them go. If they can not respect your contribution – they are anyway a wrong hire
  • As a potential employee – if you don’t see founders with the kind of commitment and qualities mentioned above – don’t join the startup

What are your experiences as a founder or a startup employee? Please share in comments and help make the post better.

 

Importance of Cash over Profits

I have been invited by folks at Power of Ideas (POI) to give a talk on the above topic as part of POI start up workshop 2010 – that will take place @ IIMA Campus from 8-17 October. I looked at the agenda of the workshop & believe its is a very good initiative and should end up adding a lot of value to the shortlisted teams (big improvement over last year’s mentoring sessions).

They requested me to jot down my thoughts about the session and share with POI folks for feedback. I thought why not jot down the thoughts on my blog and get feedback of a larger community. I plan to use a lot of real life case studies (both good and bad) from the my experience @ madhouse and with all The Morpheus portfolio companies. Here is a related post I wrote previously: Should a startup be Ramen Profitable

Please  share your thoughts in comments – especially ideas on how can I make the talk better.

Basics
  • A startup should focus on only two things – Making & Selling
  • When you are making something you need to spend cash & when you sell anything you earn cash
  • Naturally making comes before selling and hence cash-wise spending comes before earning
  • If you can earn more than you spend – you are cash flow positive
  • So managing your efforts in making and selling is the key to managing cash

Making
  • Identify the minimum set of features that you need to build as V 1.0 to solve the smallest part of the “big problem” you are going after otherwise called Minimum Viable Product (MVP)
  • What you build should offer “definitive value” to the customers – so that the product is good to use
  • It should be something you can evolve (or scale) into a complete product
  • Do not invest more than 40-50% of your initial capital in making V 1.0
  • It should take between 2 – 6 months to make V 1.0
    • Closer to 2 months for a simpler product – lets say a web service
    • Closer to 6 months for a more complex product – lets say a hardware based device 
  • Since you have 50% of your capital still with you, there will be enough room to evolve your product into something that people will pay for and something that makes money
  • Important pointers:
    • In the beginning, don’t spend more than 2 weeks on discussions / analysis / customer surveys / market search and other such activities
    • For the initial version almost all of the making should be done by founders. There is no room for hiring employees for making or outsourcing it. Outsource usually makes you spend more time & money, and you will end up with a shabby product.
    • Never hold a release waiting for a perfect product
      • There is nothing called a product that cannot be improved and startups who get into the mindset of coming out with a perfect V 1.0 end up spending most of their cash building V 1.0
      • Irrespective of how much you spent making V 1.0 – it usually doesnt sell – you need to be able to take the learnings from this phase and build 2.0 / 3.0 and sometimes 4.0 before it starts selling
      • The early you release the better it is
  • Most of these points also apply to versions that come after 1.0

Selling
  • When you have a MVP ready, its time to get initial customers to use it, give constructive feedback for you to fix things and then go out and get somemore customers.
  • The most obvious tendency is for us to do Mass Media Marketing & Advertising – that’s something that we’ve been exposed to all through our growing up days and so a default choice!
  • As a start-up or even a company that’s on its growth path – its important to act by ONE Mantra – “Marketing / Sales activities that can be measured are worth investing in”.
  • There are lots of capital efficient ways of spreading awareness about your product / generating leads / closing sales and getting repeat orders
  • In good startups all money is spent on “making” and there is no budget for “Marketing or advertising” and even if a startup was to spend some amount, given the small budget – no one would notice
  • In the first year or two almost all marketing and sales should be done by founders. There is no room for hiring employees or outsourcing the work. You will end up spending more time / more money and bad results
  • Remember: Goal of Marketing is to generate Qualified Leads & of Sales is to convert that lead into a paying customer
  • Startups need to practice “Zero budget marketing” which in a nutshell is:
    • Create kick ass products which will be sold by the initial users to other users
    • Leverage upon Social Media channels to create a community – take their permission to talk to them about your product
    • Have a simple and effective website & a blog
    • Create good content that can be used to communicate with your community
    • For offline businesses – engage with your customers via cost-effective events & meetups
    • Measure imapct of each channel – learn from the data you have – quickly discontinue channels that are not effective
  • Sales
    • Take the conversation towards giving more information about the product to the qualified lead
    • Increase the chances of him converting into a customer / freebies – for initial customers to make them feel special
    • Keep in mind to increase Trust about your brand in the customer – that can be a potential concern
    • Conversion tactics include – free trial / discounts

 Back to basics
  • Make a good product while controlling the spend on making
  • Practice zero budget marketing techniques
  • Founders should take care of both making and selling
  • Improve the product fast to help sales take off
  • Then you are at
    • Low monthly expenses
    • Early Sales
    • You are now cash flow positive and that feels good

Cashflows
  • Running out of cash is the biggest reasons for startups to shutdown
  • Hence its very important that at every point you have a good understanding of
    • Cash in Bank
    • Monthly cash flow
    • Runaway available
  • monthly_cashflow =  (monthly_cash_in) – (monthly_cash_out)
  • For example if you spend 1000 Rs in month of September and got paid 600 Rs for the sale made
  • monthly_cashflow = (600 – 1000) =  – 400
  • If you keep going like that one day you will have “ZERO” cash available and that would end up killing your startup
  • On the other hand if you become cash flow positive even by a small amount  – it means at end of every month you have slight more cash than what you had the beginning of the month
  • This means few important things
    • Your startup had infinite runway (feels good)
    • You have made something people want to use and pay for
    • You have managed to keep your cost of making and selling below the cost at which customers are buying
    • And this is pretty much formula of a successful business
  • While fighting the battle of survival – cash flow and runway are the most important things a startup should pay attention to

Profits
  • They also matter but more in longer term after you have won the battle of survival 
  • There are two kind of costs
    • Monthly costs (for example – office rent / salaries etc)
    • One time costs  (for example the office printer you paid for this month but will use for next 2 years)
  • While calculating monthly profits you take the one time costs, convert them to monthly cost, add it to regular monthly costs and compare the total to your monthly earnings
  • One time Cost
    • You purchased a printer this month for 2400 Rs
    • Printer will be useful for next 24 months
    • You convert the cost into monthly cost – which is 100 Rs per month
    • You add the printer cost into monthly cost
  • Lets you monthly costs are 1000 rs without considering the one time cost
  • Now to become cash flow positive you need to earn above 1000 Rs
  • But to be profitable you need to take into account the one time cost as well and earn above 1100 Rs

Notes:

 1. I have kept the talk to Monthly Cash flows and Profits
2. I have also kept the concept a little simplified so that its easy to understand. Not gone into payables / receivables / PAT / EBITA etc
3. Once people understand basics they can build upon them

Hiring method that works

I recently learnt of a hiring technique that is working very well for one of The Morpheus’ portfolio company (and while interviewing for them I wrote the previous article). They have been able to build a very impressive pipeline of potential candidates for various roles and all this without paying expensive fees to consultants.
 

Preparation

  • Create a hiring team that would exclusively focus on hiring & do nothing else for minimum 1 month 
    • Have an HR person who would undertake search / make the initial contacts / handle scheduling & other logistics 
    • Have founders dedicate their time to share the company’s vision & check the skills of candidates 
    • Have domain experts to check for required skills 
    • Have some experienced advisers / entrepreneurs / investors / mentors to check if the guy would fit in a startup (people who understand culture of ur startup) 
  • Be prepared to put dedicated / high quality / honest effort 
  • Ensure the pre-sales material is in place : 
    • Impressive corporate website
    • Well written job profiles
    • Well thought of pitches to get candidates interested
    • Crisp powerpoints abt the company 
  • Understand that the best talent is most likely not looking for new positions & hence ur initial pitch / pre-sales needs to be really good 

Execution

  • Buy a limited time access to naukari.com database 
  • Buy premium LinkedIn package for your HR person 
  • Make a list of companies / places you would like to hire from 
  • Find relavent people in those companies via linkedin & other sources 
  • Research them online / on social media 
  • Connect with them on social networks or use naukari.com database to find a old / new copy of resume of this guy 
  • Basically get hold of their cell number / personal email 
  • Have a person with good people skills (preferabally a girl) cold call this person 
  • This first contact should only focus on few things
    • We are a exciting company
    • We have hand picked ur profile from 100s of profiles
    • Our founder would like to meet you for coffee 
  • Line up lots of focused interviews 
  • Ensure a high quality interview process that would look impressive to potential candidates 
  • Take real good care of candidates during the interview process
    • meet them on agreed time
    • keep them informed
    • keep ur promises
    • [Important] do get back to people who are rejected & inform them accordingly 
  • For candidates who look good, line up the followup interviews fast & complete the whole process swiftly 

Hope fully this would allow you to build a good hiring pipeline & close some positions. Do share ur experiences & tips in comments.

 

Note: Thanks to Ankita & Annkur for sparking the idea for the post.

What to look for in startup interviews?

In the last 10 years I have taken loads of interviews for positions at startups and made a mix of good & bad hiring decisions. Basedon my experiences over these years I have evolved a certain mental technique of Startup Interviews, but I never had a chance to put it on paper and share with others. 

In last 3 days I did two telephonic interviews for one of Morpheus’ portfolio companies. I rejected the guy who has previously played the role that we are hiring for & has worked for two startups. I strongly recommended the guy who never played the role which we are hiring for & has only worked for large service companies. The results were surprising to me also & that got me going on this post.

 What to look for?

  • Honestly / Integrity / Character
    • This is one the most essential quality to look for – people who are dishonest can be very costly for a lean startup which runs on thin budgets and deadlines.
    • The first guy had somewhat lied in his resume about his current role. During the interview I discovered he has actually not been playing that role for last year but just to look more suitable for the position he choose to misrepresent things.
    • The second guy was totally upfront about never having played this role in past and said one of the reason he is interested in this role is that he has never played it before which means he gets to learn new stuff.
  • Startup hunger
    • A good startup employee is really hungry for doing something meaningful and for creating something he can be proud of. He will ask a lot of questions and if things are not right he will keep coming with up with new ideas about how things can be done in a better fashion. His doesn’t have ideas only for his department, but for pretty much every department that matters in the company
    • First guy did not have any hunger to create / do and do stuff in life which he be proud off. He did not want to get anywhere special with his career – he just wanted to get by. He did one job in city A, left in 6 months for some random reason, moved to city B, has been in the same job for 2 yrs – not really doing anything great, not happy – but made no great efforts to get out. I guess he was getting his salary every month and that was pretty much enough.
    • Second guy has spent two years with this large service company, has managed to achieve interesting things even within that setting and has been on interesting assignments. He recently moved to the “new businesses group” – he has shown a lot of initiative and urge to move things. If he comes to a startup, where qualities like initiative and ownership are valued a lot, he can a big difference.
  • Artist at heart
    • An artist is someone who creates. His creations come straight from the heart. He sees beauty in his creations and you can that purity his work. Thats the kind of people you want at a startup – people who are pure, who really care about what they do and what they create.
    • The first guy did not really have much deep feelings about his work and after the usual interview drill – we didnt have much to talk – the call ended in less than 30 minutes
    • The second guy was passionate about his current work and very interested to know more about work that he may be getting into. He cared about his answers – they seem to come from his heart. His approach reflected the purity of an artist. We talked for more than 60 minutes – still had more to talk but had to hang up because of lack of time.
  • Urge to do
    • I guess this one is pretty obvious. We are talking about people who are naturally interested in doing stuff, they get into fundamentals of things, they like trying new stuff. They are not just about coming to office at 9 and leaving at 5pm sharp.
    • Again I sensed the first guy was more of, I will be in office 9 to 5 – take care of my stuff and move on with my life
    • Second. guy has a strong urge to do / to own things / to have his neck on line – which was something absent from his current large company role and thats a big reason why he wants to move.
  • Urge to learn
    • This is very critical. Startups usually deal with loads of stuff thats not yet been figured and they need people who can learn new stuff quickly, and help implement the new stuff in the startup’s products.
  • Handling uncertainty
    • Its a must that a person working at startup knows to handle uncertainty of all kinds. In early stages uncertainty is a big part of a startup life – there are all kind of answered questions and you need to tackle them and perform 
  • Capability to handle the startup pace
    • Things move really fast in a startup. Critical decisions are made in made in minutes, implemented in hours and there is not much to scope to miss the target. So you need folks who can generate that speed, change directions fast and still be accurate in their results.
    • I could clearly see that the first guy is not cut out to handle the pace – he was more of easy going person – who would want things to move slower and may not be able to catch up with the startup pace
    • The second guy on the other hand seemed likes a fast learned and someone with the potential to generate the speed 
  • Can have fun?
    • For most people idea of a job doesnt include fun. Startups are very different from a regular 9 to 5, wear the formal clothe jobs and a lot more stressful. Unless the guy knows how to have fun – he wont be happy at startup. Unless a person is happy – they can not perform to the best of  their ability.
    • The second guy sounded a lot more fun and first was quite a drab
  • Wants to experiment with his role & is open to get into totally new territories 
    • Many times a startup would need a person to move into a new role than what they were originally hired for – in these situations you need people who are open to experimentations and folks who are just stuck on a career track and hate to do something different
    • The first guy has drifted from him original role at his current job but was cribbing about it
    • Second guy was looking for a role that different than what he has done in past to get out of his comfort zone and learn something new
  • Passion for the vision of the startup
    • You dont need people who are interested in your startup because – you have a branded investor / you will pay more than market / it will look good on their resume. You need people who are interested your vision of the startup , develop some passion for that vision and want to contribute towards achieving that vision
    • The first guy did not have much interest in company’s business model & sounded bored when I started talking about it
    • Where as with the second guy i talked about the business model for more than 15 minutes and he asked a lot of good questions that showed he not only understood the vision but also wanted to contribute   
  • Can he take calls & own upto them
    • You need people who can handle stuff on their own, can make decisions by themselves and not come running to you for approval on every little thing.
  • Problem solving skills /  Strong analytical skills
    • You need people who can think through situations, analyze them and based on the analysis, come up with solutions and try them on.
  • Is weird / abnormal in some ways?
    • Startups are anything but normal,  they are trying to question status quo and create something new. So the only people who will do well at startups are the one who themselves are weird in some way  
  • Money doesn’t come first
    • For a real startup guy things that matter are – do they really believe in what the startup is looking to achieve? will they have fun working at the startup? will they work with other really smart people? do they like the culture? Getting a job that gives then 1.5 x salary as compared to their current job is not the top of their list.
  • Wants to understand the bigger picture
    • When a candidate asks intelligent questions in the interview and attempts to understand the bigger picture, it means he is serious about their decision to work with you and wants to understand things from a larger perspective

 

I am sure you agree with some of my points and disagree with some. What’s been your experience? What do you look for?