A Cockroach In A Unicorn World

I read somewhere that we tend to memorialize and capture huge entrepreneurial successes – the blockbuster six sigma variety and there isn’t enough written about more achievable, realistic successes. The kinds of businesses that don’t normally grab headlines, don’t have splashy investors and fund-raises and thus don’t capture the public imagination as much. Taking that to heart, let me try and pen down some of my relatively contemporaneous thoughts capturing learnings from one such entrepreneurial journey while still relatively fresh in my mind.

To start with some background, my business partner, Anmol Bhandari and I founded Cians Analytics in 2009, some 12+ years ago. We recently sold the business to a private-equity backed competitor firm. I would describe the outcome as a successful one – we sold a growing and profitable business to our largest competitor in a deal of our choosing. Ours was not a capital-intensive business but the value creation in terms of investment returns were well over 50x, i.e. for every 1 Rupee that went into the business, more than 50 Rupees came out as return, in the aggregate. That still may not make this a business that a venture capital firm would like to fund (more on that later), but it certainly provided a high return to shareholders (including employees) who stayed with the business. Our employees and clients are now part of the #1 firm in the industry, so overall a satisfactory outcome. Other than Cians, I have also been part of a few other early-stage businesses and have been an angel investor (though not a very active one, given time constraints for the last several years) which gives me a different perspective from the other side of the table, as well.

As some of the learnings from my entrepreneurial journey and experience working with other early and growth-stage firms, here are some words of advice for entrepreneurs and potential entrepreneurs:

Have a focus on getting to profitability. Quickly

“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery” ― Charles Dickens

In my experience, what worked best for us was a focus on achieving profitability as soon as practical. This mindset allowed us to be self-sustaining early on. After an initial 1-2 years (will depend on the capital intensity of the business you are in) where it would be difficult to achieve profitability, you should be able to get over the hump and strive for profitability. This allows you to grow in a way that, as founders, you want to grow rather than being driven by external investor views and needs. I am reminded of Russ Hanneman’s character in the terrific HBO series Silicon Valley (especially season 2) which I think while very tongue-in-cheek, is not far from the truth in the characterization of certain types of early-stage investors and the risks of being dependent on investor whims and fancies.

A lot of what one has seen globally, especially in startups covered by the press over the last few years has been a focus on investor-driven growth. VC firms or other early-stage institutional investors have invested in businesses and owing to their return expectations, have resulted in companies often focusing on growth at all costs. When the focus of a business becomes to show a step-up in growth and short-term performance with the primary purpose of using that performance as a way to justify raising the next funding round, that results in a business that has skewed priorities. Growth is a much higher priority than profitability, in this case. As a result, firms often achieve a reasonably high level of growth and scale but have often still not achieved profitability nor do they have line of sight on profitability (some frankly haven’t figured out what their business model is despite a fair amount of scale), and thus remain at the mercy of external capital. Given that external capital availability is cyclical, this can be very dangerous for a business if the capital cycle turns and liquidity becomes tight (as has happened since the second half of 2022).

In my view, the better approach is to focus on building a great, self-sufficient company. Investors and investment will follow.

Build for the customer. Not for the investor or anyone else

“Organizations are successful because of good implementation, not good business plans” – Guy Kawasaki

This is related to the above point but is an independent one. One part of this advice is exactly what it says – you need to tailor your product or service offerings towards meeting a customer’s need. That is paramount. Unless your customer is willing to take money from their pocket and put it into yours, you do not have a business. It doesn’t matter what investors say is hot, exciting, and a great opportunity. The north star for an entrepreneur has to be delivering something of value to a customer at a price that the customer is willing to pay. Customers have to choose your product or service over other competing alternatives.

The second point is that when you have external investors, especially investors with meaningful stakes in the company, you have to take their views and advice into account. This can often be useful as they provide a good sounding board for the founders to share their ideas, but depending on the structural arrangement (number of board seats held by investors, mindset of the investors, etc) sometimes this can result in a conflict wherein what the founders think makes sense and what the investor/s think makes sense, could be different. This can be for various reasons, including the fact that the VC investor business model is more of a home-run business rather than a singles and doubles business (to use a baseball analogy). VCs manage a portfolio of investments. They recognize that of the 100 investments they make, more than 50 will return close to nothing, and most of the value of their portfolio will be driven by a handful of successful investments (unicorns, decacorns, etc). This results in VC firms mostly focusing on business models that have high-fixed cost and more importantly low-variable costs – the typical businesses that are hit or miss. If you hit, you are stupendously successful since the business is highly scalable at low cost since there is low incremental cost once you get to a certain level of scale. If you miss, you are out of business. This also often makes investors keen to have their portfolio companies swing for the fences, and adopt a more risky strategy to try to achieve a superstar outcome. The risk of that is that if the strategy fails the company may end up bankrupt. The VC has 99 other investments to limit this risk even if one company goes under. The founder has only one.

Entrepreneurship to me: Stargazing, with your feet firmly on the ground

To me, running a startup requires very contradictory skillsets. That’s what makes it hard. You need to have a long-term vision with a reasonable idea of where you want to get. A goal, a destination, even if it’s a broad idea rather than a specific one. You need to have a sense for the macro picture, where you want to get and a broad vision for how to get there. What some call strategy. At the same time, you have to live in the present. You cannot take the eye off the ball from today’s problems, today’s issues — the micro. For small companies especially, you have to spend most of your time and energy handling the day-to-day minutiae and building on each small achievement so that you can have a shot at a very different tomorrow. You have to manage time and costs wisely, while also investing for the future. Often these two different perspectives pull you in different directions – for example, do you reduce prices to woo a client who is on the fence, or do you hold the line and keep prices consistent so that you can build your brand and not be known as a company that undercuts competitors. The answer is different depending on the time scale you choose – the short-term answer is often different than the long-term answer and in the end you have to balance the two.

The Capital Question. How much capital do you need. How much should you raise?

“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations” – Tim O’Reilly

This is a very tricky question. As is often quoted (though it seems almost farcical), the number 1 reason startups shut down is because they run out of money. While this statement is obvious, it does speak to the fact that you really don’t want to get to a situation where you don’t have enough cash in the bank to keep the business running. The consequences of running out of money are terrible, so you don’t want to end up in that situation.

At the same time, my personal view is that I think the fact that having a very limited amount of capital actually helped us more than it hurt us, when I think about my experience. It made us think very hard about what we spent money on, it prevented us from doing some foolhardy things that seemed interesting at the time and would probably have been detrimental to the business. I look around and see many businesses that over the last 5-10 years have had too much access to capital because of the easy flow of money into startups, and a lot of them used that funding window and squandered a lot of money in the process. Having too much money in the bank can be a problem if not handled judiciously, as it could result in you running down every rabbit-hole that seems like a good idea at the time. When money is “free” almost every new project or investment opportunity seems justified and has the potential of covering your cost of capital (near zero).

My view on this in general is that capital is a means to an end. You want to raise capital so as to get you to a point where you have a self-sustaining business. To my mind, getting to that self-sustaining stage early on was of paramount importance. Once you get to the self-sustaining stage, and achieve escape velocity, you stop being dependent on external investors to keep you going. This is critical. Paul Graham of Y Combinator summed this up beautifully in his essay called Default Alive or Default Dead (http://www.paulgraham.com/aord.html) where he describes how a startup should strive to go from “default dead” to “default alive”, which marks a critical point in its startup journey.

From what one sees in the popular press, fund-raising is often viewed as an end in and of itself. While I do think that one should celebrate a fund-raise because it gives the startup the runway to try to deliver results, it is dangerous to start looking at fund-raising as a goal. To my mind, rather than it being a goal to achieve, it creates an obligation for the startup to use the money efficiently so as to generate a return on the capital. As a rough rule of thumb (exact math will depend on the cap structure, capital intensity, valuations to outside investors, etc), founders need to get the company valuation to be at least 10x the total amount of capital raised during the life of the company, for the investors to make a reasonable return. So, if you raise $1mm during the life of the company, you need to be worth at least $10mm at exit. Similarly, if you raise $100mm in capital, you need to be worth $1 billion at exit. If you don’t get there, the math will likely not work for the investors.

Sidenote: I sometimes meet founders who think one of two things. 1. It’s the investor’s job to make the business a success and to open doors and help get business. 2. They think investors are risk-jockeys who blindly put money into things (think free money) without requiring safeguards, restrictions, covenants to protect their investment, and line of sight on potential return. My view on both those items is No and No. Investors may help with #1 but you really shouldn’t expect it. A good investor stands by you and provides advice and counsel where needed, and lets a founder drive the train with the goal of generating returns. And an investor usually has a fiduciary responsibility to take steps to put conditions and a framework in place to protect their investor’s capital. In addition, investors always need line of sight on potential return. The most simplistic way to think about how investors calibrate opportunity: if the investor puts $100 in, she wants to know how many years later she will likely get an exit, what % of the company will she own at exit date (depends on how much future capital the company raises), and what will be the value of the Company at that exit date. The risk of her investment is captured by looking at the probability of achieving each of these – the likelihood of an exit, the likelihood of achieving that exit valuation, and the likelihood of retaining a certain % ownership.

Pay your taxes. Take compliance seriously. Honor your agreements

“The first thing is character, before money or anything else” – JP Morgan

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett

This is true from both a legal and a practical standpoint. Rules and regulations can sometimes be tedious to monitor and implement in your business. But you must take it seriously. Apart from the obvious reasons to do this (it’s the right thing), this will also be critically important if you end up raising money from institutional investors, or if you are lucky enough to get to IPO or a strategic sale.

Wearing my investor hat, this is something I have seen as erratic with many companies and it can be a serious hurdle to external funding.

Growing up in a family where my mother and father both worked and paid their taxes, no questions asked. And were steadfast about following rules, I have always come at this from somewhat of a puritanical perspective but its really in a founder’s best interest to give this serious consideration. Spend the money to get good chartered account advice and a part-time company secretary. Hire a lawyer (I know its expensive and have not done this as often as I should have) as a one-time exercise to get clean contracts in place, and then for ongoing major events.

Having contracts in place is important (client contracts, employment contracts, etc) and you must spend time on them. At the same time, to be honest, I have had experiences where people have honored their word without a contract in place, and others who have reneged on contracts despite full legal contracts in place. I guess that’s part of life but one learns over time how to size up counterparties and assess the risk from different contracts/with different stakeholders. I believe there is an element of karma here though. If you are known as someone who honors your word, that helps both your conscience and your bank account, because people trust you and trust is very hard to build.

How do you track your business? How to keep the business on track

“What gets measured, gets done” – Tom Peters

The good part of having external investors and independent board members is that they often have the ability to keep you focused on metrics and achieving milestones. That comes naturally to a lot of professional investors and is something that a lot of founders don’t have as good a feel for. Whether you have external investors/board members or not, I think this is a discipline you must have. Set targets for the year and for longer periods, monitor progress against the targets. Maintain dashboards that provide feedback on how you are doing. As I am also an investor in some other early-stage businesses, I have often seen founders who are reluctant to put out targets for fear of not being able to achieve them. This is short-sighted since I believe you can never get to where you want to go, unless you have an idea where the destination is. Business is always dynamic and you may need to revisit the targets you set periodically, but that doesn’t mean you don’t go through the exercise.

I believe the same thing about things like financial projections. You have to go through the exercise of forecasting where you think the business is going to be at different times in the future. Going through this exercise allows you to identify and test the assumptions that are underlying the forecast. This is useful in and of itself and helps you understand the business better. It doesn’t matter whether the forecast ends up right or wrong (it will most likely be wrong), but it is useful to conduct the exercise. As George Box said, “All models are wrong. Some models are useful”.

Sidenote: if you plan to talk to any investor to raise funding, most will want this anyways.

Align incentives with as broad a group of key employees as possible. If using stock options, give a disproportionate number to folks who are likely to recognize what they are worth and thus could serve as both a hook and a meaningful liquidity event for the employee at some stage

“Show me the incentive and I will show you the outcome” – Charlie Munger

I think it’s a great idea to make as large a group of employees participate in the company as investors, as possible. This aligns incentives between the employees and the shareholders. It also keeps employees motivated and has a positive impact on employee retention. If the company does well, everyone wins. There are clearly constraints to doing this, though. If you have a private company that has unlisted shares, the people receiving shares/stock options need to have the information to be able to think of them as having value. For most organizations, as you get to more junior folks, they are not privy to the information that will allow them to evaluate whether the stock options have any value and if so, how much. Thus, they are often wasted if you spread the stock options too thin. They are not meaningful enough for people to really think they will impact their lives, and thus don’t have the desired result.

Especially in a service business, you are only as good as the quality of your employees. But does that make employees family?

“Train people well enough so that they can leave, treat them well enough so that they don’t want to” – Richard Branson

This is a controversial question, and one that is very topical since several large firms and well-funded startups are now laying off large numbers of employees. This is at many firms that were considered very employee-friendly which were famous for pampering employees in the past. I think that each firm and the founders need to introspect on how they think about this issue, and then once they decide, they should be consistent in how they behave. There seems little point of firms offering free massages in the office and a host of other perks to employees in the good times and position themselves as employers of choice, only to lay employees off when times are not as good. Every firm has to weather the storms that they encounter and belt-tightening is a part of managing business cycles but I think its important to maintain some consistency in how you deal with employees, and to walk the talk when times get tough. From my perspective, I personally think its better to more cautious while staffing up as well so that you can carry employee costs when things are not as good. Additionally, I find it horrific how firms have chosen to conduct layoffs – some letting people go through group zoom/MS Teams calls, without even a one-on-one meeting. Other firms, just shutting off access to company systems and laptops without warning. Even if you have to conduct layoffs, I can’t imagine too many reasons why a company would need to do things this way. Thankfully, I have not been in a situation in my various roles as an entrepreneur or a senior manager, where I have had to let too many people go. Even when we did, there was no question that if someone was being let go or managed out, it would be through a one-on-one meeting with their manager. Managers must at least look an employee in the eyes, and have this unfortunate conversation if they find themselves in this situation.

On the broader point, while I like the idea of thinking of employees as family, I think the more appropriate way to think about it is what is described by Reed Hastings at Netflix. In his book, No Rules Rules, where Reed Hastings described his approach, he states that he believes the way to think about the employer-employee relationship is that of a professional sports player has with a professional sports team. There is camaraderie within a sports team. Players have loyalty to the team and to their team-mates. And the team, has loyalty to the players, and works to ensure the camaraderie stays. But the team manager’s job is to put the best team on the field on any given day, and each player needs to strive to do their best and deliver value. In the end, the team manager can swap out players or trade a player to another team. And the player can also choose to go and play for another team. Its only through creating an environment that fosters a mutually beneficial relationship that both sides stay satisfied and both parties grow and develop.

Strap In. Its going to be a long ride

“The only place success comes before work is in the dictionary” – Vince Lombardi

There are no overnight successes (or at least very few). It usually takes 10+ years to get a business to a stage where you can monetize the business (IPO, M&A) since that’s often how long it takes to build a sustainable business. The first few years of a startup are incredibly hard.

An entrepreneurial journey is almost never a straight upward line, even in the most successful businesses. Most startups struggle for money at some point. Most founders end up in a situations where they have had to put in more money of their own to meet payroll, not take salaries for periods of time, and have had to ask some of their employees to take delayed salaries (I have had to do all three, at different points).

Building a company is a long journey and a lonely one. It helps to have a co-founder for many reasons but for that one too. You can bolster each other on your low days, when one is despondent the other could be upbeat and vice versa. It also helps to have a supportive spouse and family. My wife, Shravani, has certainly been one.

Final thoughts

The perception of entrepreneurship has evolved over the years. 20 years ago, a retail entrepreneur would derisively be referred to as a “dukaandar”. Today, we deify startups and entrepreneurship, especially those that are addressing large target markets. The press is filled with articles on decacorns, unicorns and soonicorns. We have gone from vilifying entrepreneurs to idolizing them. I believe we need to tone down both extreme views. As in most cases, the truth lies somewhere in the middle.

What enterpreneurship doesn’t provide is a get rich quick scheme. What it does provide is an opportunity for the founders to drive their own destiny.

What it doesn’t provide is a certainty of success or consistency of a paycheck. What it does provide is a way for you to test fate (so much of your outcomes are still determined by luck), your skills and strategy to compete against firms regardless of their size.

What it doesn’t allow you to do is to be a specialist (you are the person who has to solve the issues and problems that are not assigned to anyone else). What it does provide is a opportunity to be an all-purpose generalist.

What it doesn’t provide you is anywhere for you to hide when anything goes wrong since you are ultimately responsible for success and for failure. What it does provide is an opportunity to try your hand at fixing all the problems you see in a marketplace or in a work environment (coming from every job environment you didn’t like or every boss you disliked).

What it doesn’t provide is the compulsion for you to have a boss give you a performance evaluation or an appraisal. What it does provide though is an opportunity to be appraised by customers, employees and investors to deliver value to them. It is only by doing that, that you can try to attain business success.

In the end, entrepreneurship is a journey and not a destination. If you fight hard, and the chips fall in your favor, you can achieve a high (sometimes astounding) degree of success and wealth. If things don’t work out, you live to fight another day. In either event, you have to learn to enjoy the journey. As Christopher Morley aptly said, “There is only one success – to be able to spend life in your own way”.

Aman Chowdhury, February 2023

Indian startup regulations: beyond the rhetoric

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Friction=Waste=Startup Failure

In India currently, the government provides more incentives for investors to invest in shares in Reliance Industries than in a fledgling startup. While successive Governments have made big pronouncements about the value of entrepreneurship and boosting startups with grand schemes like the Fund announced by Narendra Modi in 2014 and the Start up, Stand up program in 2015, relatively little has been done to enable the startup ecosystem on a basic, practical level. Rather than government-backed solutions that focus on investing in startups and the like, what the ecosystem really needs the government to do is to ease the administrative and bureaucratic hurdles that currently plague entrepreneurs. To a large extent, as with a lot of things in India, the entrepreneurial ecosystem that has developed has done so in spite of the State, rather than because of the State. The State would be well to take further steps to reduce hindrances to growth for startups rather than proactively try to mandate things. Startups would be best served if the government reduced its involvement and did away with elements that obstruct startup growth.

Here is my short-list of some laws that currently plague entrepreneurship in India that could be addressed by (relatively simple and thus implementable) policy adjustments:

Equity Investment into Startups – The requirement to justify fair value to the taxman: Based on a law passed in 2014, if a private company raises money from an individual investor at a price higher than par value, the Company has to prove to the Tax Assessing Officer that the transaction is at a fair price. This is a ridiculous rule that basically that requires and puts the onus on the entrepreneur to justify the seed/angel/VC round capital raise price to the tax authority. I believe the government’s thought process in enacting this rule was to stem the flow of black money into dummy private companies but clearly this seems like a case of throwing the baby out with the bath water. Based on this rule, every Company needs to satisfactorily defend its share price to the assessing officer, and if it doesn’t the amount of capital raised would be automatically considered taxable income in the hands of the Company. So, if you raise 1 crore from angel investors and the AO doesn’t agree with your valuation, the 1 crore would be considered taxable income for the startup and taxed as income with a 30% tax rate.

Equity Investment into Startups – Long Term Capital Gain rate applies after 3 years rather than 1 year if an investor invests in public equities: For several years now, investments into private company shares had less favorable capital gain treatment compared to public company shares. Investors investing in publicly listed companies enjoyed a 0% tax rate on long-term capital gains, whereas investors in private companies were taxed at 20% on long-term capital gains. But now, based on the changes effected by the Finance Act 2014, private company shares are at an even greater disadvantage relative to public shares. The definition of long-term capital gain has been changed from the earlier level of 12 months to new level of 36 months. An investor has to hold the private company shares for 36 months for it to be classified as long-term whereas his holding in public company shares qualify as long-term after a 12 month holding period. If the intent is to provide impetus to investment in startups and small private companies, this is a counter-intuitive policy. We should be looking at ways of providing incentives for people to invest in small private companies rather than disincentivize them from buying startup shares and nudging them to buy shares in Reliance Industries and Tata Steel instead.

Loans to startups – basically not allowed: Based on changes made to the Finance Act 2014, no individuals other than directors can extend a loan to a Company. Earlier, directors and their families were permitted to extend loans. Still earlier, even members (shareholders) were allowed to extend loans to a company. This is a significant constraint for a new company. Loans from friends and families may often be the only way for you as an entrepreneur to get a business off the ground. If that avenue is no longer open, your options are much more limited. You are allowed to take a loan from a bank, but the chances of a bank extending a loan to a startup are miniscule.

Payments to foreigners – painful right now: as a country with capital controls, we have a series of laws that put restrictions on foreign exchange transactions. This also includes laws that define processes around payments to foreigners, whether in Rupees or in foreign currency. While a lot of people are not aware of these laws, they define a process whereby you must make disclosures and get documentation from a chartered accountant prior to making the payment. As an example, if a Company has to make a payment to Facebook for Business which is a foreign company, the Company must first fill a Form on the Tax Department (Form 15CA) website, and then get a Chartered Accountant certificate (Form 15CB) confirming the tax rate applicable. This must be done prior to buying the service. These kinds of rules are an annoyance for big firms but are much more harmful for startups. Unlike big companies, small companies do not have the bandwidth or the knowhow to deal with this kind of issue. They probably don’t have a team of chartered accountants and company secretaries to guide them through FEMA regulations. The reality is they will either ignore the rules and thus risk prosecution, or they will try to educate themselves and abide by the rules which will cost time and money. Speed is the essence of a startup, and impediments to speed such as this, are very detrimental to startup success.

While I am sure most countries have laws that could hinder the speed with which startups can access capital and operate, I think that the problem in India is that these structural constraints incentivize capital to flow to areas other than startups, limit the financing options available to startups and generally reduce the speed and bandwidth within a startup. Getting a startup off the ground is incredibly hard as it is. More hurdles that serve to reduce the probability of startup success, only make things harder. While currently the easy money environment across the globe coupled with the hype surrounding Indian startups has provided a window of opportunity for many startups to set up and get funded, my fear is that the difficult operating environment will result in sub-standard performance and investment returns and could sour the picture when people start expecting a return on their capital. In an environment where there is an abundance of private investment capital looking for returns, the government would be better served focusing on creating an atmosphere conducive to startup/business success rather than trying to directly invest or bolster early-stage venture funds.

Hopefully, the Indian government will look to remove some of these structural impediments to startup growth, along with announcing the splashy big-ticket entrepreneurial initiatives that they have been. A combination of these efforts could truly create a robust startup ecosystem and allow entrepreneurs to achieve their full potential.

Aman Chowdhury

September 2015

Product features: sometimes less is more

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Less is More

India has recently had an explosion in online grocery companies trying to fill the ample gap in the market for home delivery of groceries.

Over the last few months, we have experimented with using a few of them. Mostly, ending in an unhappy experience.

It’s strange, because when we lived in New York 15 years ago, we were constant users of FreshDirect, one of the most successful online grocery providers at the time.

I was thinking about the causes of our unhappiness in using the Indian counterparts, and when I thought about it I realized that my unhappiness boiled down to features that are really irrelevant to my shopping experience, but they were offered, I took the offer at face value and then was really pissed off when they didn’t deliver (pun intended) on what they promised.

The case in point: We used Grofers. Nice app. Nice selection. But the weakest link, as you would expect, was on the fulfilment side. In the 2-3 orders that we placed, they had problems in delivering all the items that had been ordered. Certain items were out of stock, and so when the order was about to be delivered they announced that the items were not in stock. While annoying to be informed about this at the last minute, this was not our biggest gripe. The biggest issue for us was the fact that they committed to delivering quickly (often with an actual X minute estimate of delivery time) when you order from the app. But then, we noticed that by the time the order was placed, the time estimate of X minutes had increased by 20 minutes. And, by the time the order was delivered, it was X + 60-90 minutes. So, basically, they promised something in 2 hours and delivered in 4 hours.

The interesting thing is that in most cases, I didn’t really care about 120 minute delivery times. I actually couldn’t care less. I did care a little about certainty around the time that it would take for the groceries to get there. But mostly, the problem was, that Grofers offered a time of 120 minutes, and because it was a commitment they made, I held them to it. And I was really unhappy when it took double the time they had committed.

Which brings me to the broader point, which applies to my business Cians Analytics, as well. We offer our clients a base offering of research hours, and since a lot of our clients are in a different time zone, we commit to acknowledge their emails within 30 minutes regardless of time of day. I wonder if the same dynamics apply to us? It’s a feature that we provide clients. Maybe they care, maybe they don’t. It’s expensive and onerous for us to meet the commitment (with a high degree of reliability, which is key) but I think it’s worth evaluating whether it’s worth it (for the client) or not. It may be similar to the case I have described above – another feature that has downside risk for our business (risk of upsetting a client if we don’t live up to it) but not so much real value to the customer from the feature.

The broader point is: Often, as a business we have a habit of offering something to our customers thinking that it is a feature that they value. And it can be very expensive for us to deliver against that commitment. Yet, its worth stepping back and really evaluating if that feature is something the customer actually cares about. In the case above, If Grofers had only offered and focused on providing me some fixed time delivery options that were 4, 6 and 8 hours away, I would have been fine. Instead they offered a crunched time feature, then botched on the fulfilment and lost me as a customer forever.

P.S We quite like Pepper Tap now, and I use their fixed hour delivery option.

5 Things I Wish I Knew Before Starting My Startup In India: Finance & Financing

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Think cashflow, not accounting expenses

For a startup, it usually hurts to think like an MBA or an accountant. While an MBA analysis (or typical big company analysis) would make you look at costs and revenues on an accrual basis and suggest ways to grow and maximize profitability, for a startup you need to always think cashflow. Money in, money out. So, a rental deposit is not an asset that can be excluded from your expenses (based on accounting values), it is an immediate cash outflow that must be recognized as such. To take this to an extreme, purchasing assets with periodic payments rather than a lumpsum upfront payment, may make sense even if the interest rate on the periodic payment is high. The (first) goal of a startup is to stay in business. As long as possible. Managing on a purely cash basis allows you to stay in business longer, which allows you more of a chance to validate your business plan.

Hire a Chartered Accountant, preferably with a part-time Company Secretary who is experienced in working with small businesses

The laws pertaining to company formation, company compliance and basic capital issuance for all companies (including startups) are quite complicated and are unfortunately wrapped in clouds of secrecy. I was not, and am still not, aware of any comprehensive sources or websites one can go to in order to figure out how to comply with laws related to company law and capital issuances. To highlight some simple points that most people don’t know – are you aware that shares issued by a startup to an investor at a price higher than par value (which is almost always the case) can be treated as taxable income in the hands of the Company, unless the Tax Assessing Officer is satisfied that the price is “fair”? It’s a strange rule, meant to curtail the use of private companies to funnel black money. But unfortunately, it serves as a painful rule for honest startups that would necessarily need early-stage capital to get off the ground. Most people don’t know these kinds of rules. Need a tax/accounting/company law professional to quickly advise you on these matters

“Be Indian, Buy Indian”

This is not a xenophobic comment, nor do I think that you need to be patriotic and shun foreign products. However, given that the biggest constraint for a startup is usually time and the fact that our foreign exchange laws in the country are extremely limiting, you are better off dealing only with locally-registered companies. Payments to foreign entities have a whole different set of rules which usually require professional advice and slow you down. For example, did you know that for a startup cannot just swipe a credit card and pay for Facebook For Business? Or LinkedIn? Both of those companies have foreign entities that are the contracting entity for Indian customers. As a corporate customer, you need to get a Chartered Accountant to issue you a tax document in advance (called a 15CB), you have to deposit TDS and then remit payment. Apart from the cost of getting a Chartered Accountant’s certificate (usually costs upwards of Rs.1500 per event), it’s the hassle of doing all this just to make what sometimes is a payment of a few thousand rupees.

If raising external capital, try to raise it domestically and not raise Foreign Direct Investment (FDI)

While the rules relating to FDI have been eased substantially over the years, there is still a lot of paperwork and bureaucracy in dealing with foreign investment. The RBI has delegated a large part of their exchange control roles to banks who serve as authorized dealers. This ought to be good, as it reduces the number of times you have to approach the RBI for approval. However, most banks (I have dealt with three till date) have internal rules and controls that are more stringent than what RBI specifies. That means you often end up with a situation where the bank’s compliance department will not process your payment even though you are compliant with RBI rules. I have once had to wait 2+ weeks (and go through a real run-around) after a wire was made to us for the funds to credit into our account. Tread carefully.

If raising external capital at an early stage, don’t worry too much about valuation

If your business needs external capital to survive and grow, it likely needs it in a relatively defined timeline. In that instance, you are better off trying to raise capital quickly on reasonable terms rather than slowly on great terms. Best to get fund-raising over and done with as quickly as possible. In the grand scheme of things, valuation levels at a startup are within some rough ranges anyways and time is your most valuable commodity so focus on getting your business off the ground and not squeezing the last bit of valuation out.

Asset Returns in India

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If you talk to folks and pick up anecdotal evidence, you would learn that a lot of money seems to have been made by investing in real estate in India. Those of us who live in India constantly bump into real estate brokers driving fancy cars and are regaled by stories of farmers selling their land for millions, and friends whose investment properties have quadrupled in 2 years! I had my team at Cians Analytics take a deeper look at the real data, and to compare and contrast what returns different asset classes have given in India over the last 23 years (since the economic liberalization of the country starting in 1991).

Asset Returns in India (1991-2013)

The results are presented in the attached paper (above), but I am summarizing the key points below:

Unlike in the US, where a Robert Shiller (arguably the most knowledgeable commentator on the real estate markets) has posited that real estate is at best an asset that barely covers inflation, in India the data looks quite different. In fact, in India, it appears that real estate returns have comfortably exceeded all other asset classes. That being said, our view is that one should be very careful about how one invests in the real estate sector. While real estate returns seem to have been high on average, as an asset class it is highly illiquid and in India comes with a substantial amount of credit risk (if buying real estate from a developer) and is plagued by substantial black/grey market dealing. Honest investors are at a disadvantage and usually can’t exact full value and returns.
The stock market has given a healthy return on an absolute basis (~15.5 % per annum), however if you factor in inflation, the real return is only ~7.1% p.a.
That also begs the question of whether investors are getting adequately compensated for their risk by investing in India. If the real return in Indian equities is only 7.1% per annum, does it make sense for a foreign investor (for example a US investor) to take on the additional risk of investing in India rather than investing in their local markets. During the period of possibly the highest growth in the Indian economy, the Indian equity market returned only 7.1% on a real basis, while the US equity market returned 7.3% — basically implying that investors who chose to invest in India got no benefit for the extra risk they took on by investing in India (note that this holds true without even factoring in currency devaluation which would have made Indian returns seem even more unattractive)
Obviously, investment decisions are not made by looking in the rear-view mirror, but history can provide pointers for how asset classes react to different external conditions and stimuli

Aman Chowdhury. May 2014.

Startup stress: margin of error

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I was having a drink with a family friend the other day, and he asked me how becoming an entrepreneur compares to the job I had before (my prior roles have broadly been P&L-running roles in large/mid-size companies). My initial response was that a) at one level, there were a lot of similarities as my prior experiences had also required a high degree of accountability and ownership but b) while running anything and managing people always comes with a high degree of pressure, the stress levels in a startup environment are even higher.

I have been thinking about this more subsequently and here’s what I really think — Startups are infinitely more stressful to run then larger companies.

I’ve been trying to identify exactly why that is, given my experience in going through the process of building a startup not too long ago.

I think it has to do with the fact that there are a very large number of items that can be business-ending. Things just matter more for a startup. Its that simple.

Its often one slipup and you are done. And I don’t just mean a slipup related to cash and cashflow, which I think is an obvious one. Its more broadbased. Margins of error are very thin, and so EVERYTHING matters more.

To wit:

If you are Microsoft and you lose your largest client unexpectedly. That’s bad. But you’ll get over it. Quickly. If you are startup, its probably curtains for you. You probably won’t get through it (though you might depending on things like whether you are really well capitalized)
If you are Reliance and a few of your largest clients pay you 3 months late, your AR looks bad and Dalal Street will not be happy with you. If you are a startup, you probably won’t get through it
If the tax department sticks you with a big tax bill (valid or not) and you are Vodafone, you will get through it. If you are a startup, you probably won’t be able to pay the bill. Even if you can pay the bill (and herein lies the rub) you probably don’t have the time/bandwidth to even go through the process of contesting a tax bill (your 1 person Finance team will spend his entire time dealing with audit queries and thus won’t have the time to do regular work like invoicing/financial reporting/etc) . When you are small, time is probably an even bigger constraint than money. That’s the part one doesn’t normally realize going into it. One assumes that the playing field is reasonably level if the rules are the same for all competitors. But the reality is that the impact of shocks on the system is significantly greater when you are small.

For those who are visually minded, here is my simplistic depiction of the difference between startup stress vs large company stress:

Quick Math: Rule of 72

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Most people who have an interest in investing understand the power of compounding — putting something away today at a certain rate of interest, will reap a significant benefit tomorrow simply due to the power of compound interest.

One can use a shortcut method to figure out exactly how much return you would make due to compounding by utilizing the rule of 72:

Simply put, if you earn 6% per year and let it compound, your investment would double in 12 years (72/6=12).
If you earn 8% per year, it would double in 9 years and so on.

By using the rule of 72, you can solve for 1 of the 2 variables — if you know return per year, you can figure out the duration taken to double the investment. If you know the duration to double, you can figure out the % rate.

Try it. It works. Its an approximation but an effective tool. As they say, better to be approximately right than precisely wrong!

Management tips – startup to scale-up

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Here is an email I sent internally to the senior managers at my firm to capture my (current) thoughts on how to manage people. Captures my view on what is required from a Company’s managers when a Company gets past the start-up stage and needs to start focusing on how to build systems, processes and really starting to focus on building lasting value.

Caveat: the points captured I am sure are not original (even though I can’t recall where precisely each came from, either real experiences or imbibed knowledge) but they do reflect what I consider useful management traits, attributes and techniques:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Hi,

As we have discussed this topic at various points and have discussed ways to supplement and enhance the managerial skillsets at the firm, I thought I would pen down some of my thoughts based on what I have learnt over the years and also based on things I have read in various books and consider useful and practical. So, here are a few key management tips that are worth considering as you choose to define your own unique managerial style:

Management is not a popularity contest

In order to do your job, you need to inspire the respect of your team members. People need to look up to you, otherwise it will be hard to get anything done. You have to get along with your team. But have to tread a thin line. You should be personable and friendly but if you get too friendly it becomes hard to have the tough conversations and drive the team when needed. A lot of people I have seen in my career, have struggled with this and tend to have 2 types of manager-employee relationships – some are too firm and standoff-ish and often don’t manage to connect with their team members and earn their respect. Others, are too relaxed. They want to be every employee’s best buddy. Makes it very hard to execute, and usually ends badly as they struggle to make things work when people get busy.

People work for people, not companies

A lot of research into company behavior indicates that a person’s longevity and happiness at a place of work is most heavily influenced by his relationship with his/her boss. This ranks higher than a host of other factors that include compensation, company stature, policies, etc. The evidence is clear – if you have a good relationship and respect your boss, you want to stay in the Company. If not, you don’t.

Communicate bad news early and good news late

If there is a problem, communicate quickly. Get support to resolve quickly. Risks need to be addressed as quickly as possible. They can have dire consequences. Good news deserves praise, but there is normally no urgency to address this kind of news. It deserves its place but doesn’t require speed. Our natural inclination is to showcase and highlight good news and bury bad news. What separates great companies from moderate companies is how they handle both types of news. What is the speed with which they communicate and address the news?

Praise in public. Admonish in private

This is a standard piece of advice for all managers as taught in business school. Publicly humiliating someone doesn’t solve anything. It just results in people feeling slighted and ashamed. On the other hand, praise is often best handed out in public so that everyone can appreciate the positive behavior. All of us are guilty of losing our cool and saying things we probably shouldn’t have in a public setting, but we should strive to control this to the extent possible.

Make your boss’ job easier

Everybody in an organization has a role dictated by their position and responsibilities. A defined hierarchy and reporting lines, allow everyone to leverage their skills and time, and defines clear accountability. Making your boss’ job easier means potentially doing some of his work. This demonstrates that you CAN do more of his work, and also frees up more of the boss’ time. If everyone in a Company does this well, the Company is highly productive and can execute well. Execution is the key to success of every organization.

Hire for attributes, not for skills

In most professions, you can train a person to pick up skills. You can teach them how to do a comp, a PPT deck, a model. But attributes are very hard to change. If a person is lazy or stubborn, for example, it is very hard to change that. When interviewing, one should always try and gauge that.

Play the hand you are dealt

While you should always strive to hire the best, you will usually have to deal with a mixed bag of employees — some A Players, some B Players, some C Players. This could be because you inherit some employees who you haven’t hired yourself, or could be because your hiring isn’t foolproof. The job of a manager is to bring out the best in the team that they have. That means making every employee perform at the best of his/her abilities. Your job as a manager is to turn C Players into B Players, and B Players into A Players, while creating an environment that retains and motivates A Players. You often don’t choose your cards. But you have to learn to play the hand you are dealt

The client is not always right. But he (or she) is always the client

In a service business, you are constantly engaging with multiple clients. Clients can be relaxed and friendly, or tough-as-nails. You won’t always agree with the client’s point of view. The client may sometimes not be polite when providing feedback or demanding work. On top of that, sometimes you will know the client is wrong. You have to suck it up and deal with it. The client is the client.

Every employee thinks he (or she) is under-paid

In my 18 years of working in companies, I have come across only 3 people who thought they were over-paid. Generally, everyone wants more. Its human nature. As a manager, you have to learn to live with it. Compensation must be commensurate with the value each person delivers. That should be the goal post you use in calibrating compensation. Otherwise, you will end up just paying people based on how vocal they are about their compensation.

Execution is key

A manager has to have the ability to “get it done”. Execution is a mind-set and like a muscle if you stretch and exercise the muscle, it gets stronger. So too with the ability to execute. Your teams efforts, ideas and feedback should always be solution-oriented.

Actions have consequences. Think through both short-term and long-term implications of your actions

As Type-A individuals, we all have a habit of focusing on solving the problem, at hand. We want to fix bad quality work, we want to spend extra time to do something right, etc. While these are an integral part of our functioning and is absolutely required, we should always also be aware of longer-term implications of what we do. So, for example – we can have people work 120 hours to get something out the door quickly and well this week. But, that stretch will have longer-term effects if not addressed or curtailed. Stretching the team to get something solved in the near-term obviously needs to be also balanced against the longer-term good. This potential dichotomy between short-term and long-term good has to continually be balanced, in order for us to stay stable and be a successful employer.

Judge others on their intentions, and yourself on your outcomes

It’s a human tendency to judge others more harshly than ourselves. We need to fight that urge. We should give our employees the benefit of doubt – if they have the right intentions. Sometimes, people cannot live up to their expectations because of items outside their control. We should try to judge them on their intentions, in those cases (as long it is not a recurring phenomenon)

Take inputs. Then decide. Live with your decisions

As a manager, you cannot run away from making decisions. You, more than anyone else, has to live with those decisions. As a part of your decision-making process, you can and should take inputs from your team. The best ideas often come bottom-up so this is very important. Once you have received feedback, the final decision is always yours. The buck stops there

Respect is not conferred by titles. You have to earn it

People assume that fancy titles automatically command respect. That’s true in the very short term. People will respect their boss in the short-term because they have no choice. But, I think the correct representation of that is that they obey (not respect) their boss, in the short-term. Eventually, if your team doesn’t believe you are capable and worthy of respect, they will show it. And, most likely, leave

You always pay for pain

There is no free lunch in management as in life. The more pain your employees bear, the more you will have to pay (in compensation, attrition rates, morale and quality). There are firms (and industries) that work people 100+ hours a week, or keep their employees on the road 4-5 days a week. Not surprisingly, they pay people more. Balance has to be restored. The best you can usually do as a manager is not to contribute to the pain that arises from poor management, lack of direction, lack of respect for each person as an individual, and lack of alignment of personal and company goals.

Am sure you have read about, heard of, or experienced some of these pointers during your careers. Hopefully, it can serve as a refresher and can help you with refining your own management style.

Thanks,

Aman

Beggar Thy Neighbour

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It’s all relative.

Unfortunately, that’s what our perception of most things boil down to. We have a very weak compass for evaluating absolutes. That applies to money, wealth, prices, jobs, nearly everything else around us.

Let’s imagine a situation:

You open the mail one Monday morning, and discover (to your immense pleasure!) that you have won a $1 million prize. Complete windfall. You are ecstatic. Pause and imagine what that feels like.
The next day, with a spring in your step, you walk out of your house on Tuesday morning imagining all the things you would do with your new-found wealth. You meet your neighbour in the elevator and start talking about your windfall. The neighbour listens to you patiently but soon cuts you off and says, “Wow, what a coincidence. I also got a windfall prize in the mail yesterday. Oh, and it was for a $5 million prize”

The question is: How do you think you would be feeling after you received the $1 million windfall in Point 1 above? And how do you think you would be feeling after you heard about your neighbour’s windfall? The reality is that you are $1 million up in both cases. You ought to be ecstatic. But most people would be significantly affected by the second piece of information that you received on Tuesday.

That’s the reality of how we perceive windfalls, or evaluate new information. It’s wins and losses, relative to where we were before. And it’s relative position compared to others (other people who we think are relevant).

There are many other instances that point to the same factors. One obvious one is the interesting correlation that seems to exist between countries that are consistently ranked as the Happiest nations and those that have high suicide rates. (see International Business Times article http://www.ibtimes.com/happiest-countries-have-highest-suicide-rates-280921). It seems that unhappy people in generally happier countries may be more driven to take their own lives because they think of themselves as relatively worse off.

On a less morbid note, there is also quite a bit of research on the fact that an individual’s happiness could increase by staying in the company of people that are less attractive, rich and/or intelligent than them. It makes them feel relatively more attractive, rich and intelligent and could thus improve their sense of happiness. Better to be the richest guy in a poor neighbourhood than the poorest guy in a rich neighbourhood. Beggar Thy Neighbour.

Seriously? Foreign Direct Investment (FDI) rules

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Having had some experience with dealing with raising FDI capital over the course of the last several years, I was somewhat perplexed with some of the strange rules.

Explain this:

India’s FDI rules have an interesting provision related to valuation of a private company. The rule basically states that an Indian resident (including a Company) cannot sell shares to a foreign resident at a price below its fair value.

Ok, fair enough. The government wants to protect Indian residents from potentially unfair foreign investors (don’t agree with the premise, but I guess I can understand that some could).

Now, here is where it gets interesting. In order to determine the fair value of the shares, a Discounted Cash Flow (DCF) analysis must be conducted, and the price arrived at based on the DCF is said to be “fair”.

Then, the foreign investor MUST invest at a price equal to or higher than the fair value, as determined by the DCF.

Obviously, from the Investor’s point-of-view, the DCF value is the fair value. In order for any investor to invest in an asset, they must believe that they are buying the asset at less than the fair value. However, the FDI rules pretty much guarantees that one cannot buy at less than the fair value. That basically means that either the Investor has a completely different valuation approach that somehow justifies paying more than the DCF valuation, or that the Investor is looking at a completely different set of projections than what is submitted to the Reserve Bank of India by the Investee Company.

Quite a bizarre rule. Pretty much forcing firms to fudge numbers. Hope better sense prevails when the new government revisits some of the existing laws.

Aman Chowdhury

March 2014

www.amanchowdhury.com