One Fix Needed in the Indian Startup Space : Need Respect From Corporates

[Editorial Notes: Entrepreneurship is tough, but very few share* the real side of the story. Read on, a guest piece by Aditya Gupta. Aditya, cofounder of SocialSamosa (and earlier started iGenero) shares a few lessons building a ‘small company’.]

Bootstrapping is fun but not always and is a challenge but not always! In 5 years, what we at iGenero realized is not something new, not something that other startup founders didn’t. The journey, from getting a new client to setting up your first office to getting the “big” client, is intense and filled with unmatchable highs. The lows, well, while not forgotten, are not usually dwelled upon. However, let’s talk about the lows for a change.aditya gupta

When we started the journey at iGenero, we always believed in being transparent, playing fair & being true to our clients and ourselves. We were very clear that we were here to do some good work and the money would follow. Today, we have worked with over 100 clients across the globe and produced quality stuff. Not a lot to complain about, right? However, I can’t help but comment about how unprofessional most companies in India are.

Yes, I’m talking about both the companies with as many employees as the capacity of Eden Gardens as well as companies which have less than ten employees and all those who fall somewhere in the middle.

Couple of years down our own startup journey, a few opportunities to get funded or acquired came our way. We didn’t jump at these, because we felt we had to first figure out the space and the opportunities that lay before us. An advertising company offered to acquire us during our very first meeting.

Their reasoning for the offer was “You guys are too small a brand for my company, but we like your work & hence the only way we can work together is when you work for our company directly.” Back then, we did not take such offers seriously. We missed that boat and even today, we don’t know if we did the right thing or not. Later, a couple of clients who also happen to angel investors brought up the funding topic which seemed insincere and a way for them to convince us to bring down our pricing.

The client side is always been painful. We were approached by one of the biggest ecomm companies in India and they made us chase them for over six months. After six months of mails, calls and meetings, the dude higher up decided that they would only work with a company based in same city they were in. The parochial attitude of an e comm company -the irony was priceless!

Another memorably ironic experience was when we were told by one of the top b-schools in India that we were too young to work on a top b-school project! The reality was the other company competing for the project told the client that they needed a 40 member team to work on the project and iGenero wouldn’t be able to do that since our team size was 12 back then.

The irony? That a top business school didn’t support entrepreneurship and lean business practices.

The industry folks have, every now and then, dismissed us as just another company. Maybe we are just another company when it comes to the scope of services that we offer but we definitely aren’t like the others when it come to quality of our work, our ethics, morality & purpose in life. There have been many occasions where people told us that we needed to do whatever it took to get the ball rolling – “wink, wink”.

Obviously, it majorly meant lying & cheating in all aspects of business. From the team size to revenue to the duration of project to cut-copy-paste to probably your gender too, they covered it all and how! Not just that, we were also told if we want to survive in the startup scenario in India, the earlier mentioned tactics were the only way to go!

I’m reading about India becoming a product nation. There’s a lot happening already. I hope it happens. More than anything else, I hope professionalism seeps into companies & individuals quickly. The startup community is booming in India right now and while we are all hopeful it will only get better, I’m also skeptical about how it’ll all pan out in the coming years. At the end of the day, only we will be responsible for making it or breaking it.

Professionalism, ethical practices, good faith, recognition of quality – these are the cornerstones of a good, robust business economy. Sadly, at the moment, our experience has shown us that these cornerstones are missing. A nurturing environment, where start ups and young entrepreneurs are nourished and cultivated, where ethical practices are not optional, but mandatory, where cheating someone is not considered an accomplishment but an offence – this is what India needs. Only then, we will see long term sustainable growth and progress.

And now, I need to go chase a Social Samosa client for payment that’s been over due for a over a year!

[*Note: If you want to share your experience/insights as a guest author, simply drop us an email : editors@nextbigwhat.com]

The True Promise of Technology In (Indian) Higher Education [We Need To Think Beyond MOOC]

MOOC Statistics

India's Education System : Where Are We?
India’s Education System : Where Are We?

Unless you have been living on a Himalayan mountain top you must have heard of this new phenomenon called the MOOC. MOOCs are massive open online courses offered by the world’s best universities and supported by the world’s best companies. Ever since Sebastian Thrun (then at Stanford and Google and now at Udacity) and Peter Norvig (then, as now, at Google) decided to put their Stanford AI class online and found themselves teaching 160,000 students instead of the usual 160, there’s been this intense frenzy over online higher education.

Thrun and Norvig were soon joined by two of their Stanford colleagues, Andrew Ng and Daphne Koller, who started Coursera. Their East Coast colleagues, or should I say, competitors, at MIT were not far behind; EdX opened it’s online doors soon after Coursera and Udacity. For a while, everyone thought that massive online courses would be the savior of the unwashed.

Here’s a quote from Daphne Koller:

“High-quality education provided by MOOCs can be a significant factor in opening doors to opportunity—even among the college-educated.”

Here’s another from her East Coast competitor, Anant Agarwal:

“So we are applying these blended learning pilots in a number of universities and high schools around the world, from Tsinghua in China to the National University of Mongolia in Mongolia to Berkeley in California — all over the world. And these kinds of technologies really help, the blended model can really help revolutionize education.”

That was the promise. Now we know better.

Students who do well in MOOCs are richer, better educated and more likely to be men than students as a whole. In other words, a technology that was supposed to help the poor and the oppressed is a great boon for the exact opposite. There’s nothing wrong with technology that brings benefits to the Indian middle class; it’s great if smart people everywhere have access to high quality knowledge. However, we should be careful about creating new inequalities in the name of reducing inequality. In education as in everything else, information economies are of the winner-take-all kind. Where there were hundreds or thousands of providers, we might be left with one or two or ten. A diverse online education ecosystem is better for all of us.

Beyond the MOOC

An Indian geek like myself is left between two hard choices:

1. A future that’s much like the past, with a few good colleges floating in a sea of mediocrity or

2. A future controlled by a few global higher-ed providers catering to the relatively well off.

The first is choice is intolerable. India is a young country and it’s youth deserves good education. The second will lead a tri-level hierarchy, where the certifiably smart or rich get to an IIT or an MIT, the next level has access to blended learning platforms run by the Coursera’s in partnership with Indian colleges and then you are left with people who don’t have access to any kind of quality. Surely there’s an alternative.

India poses a major challenge and a major opportunity for innovation in higher education. Indians are the second largest users of MOOCs after the US, but like students everywhere else, we are not completing the courses for which we sign up by the million. We need to think beyond the MOOC. Technology mediated learning can go a long way in meeting the gap between supply and demand in higher education. I can think of two models that could work in India.

Two Alternatives

The first is the Wipro-Infosys model. I once had lunch with a founder of one of those companies – I am not going to tell you which one – and he said that the goal of his company was competence, not excellence. In other words, he hired and trained people to do a good job at a competitive price. Don’t knock that model! Infy and Wipro know how to acquire and train people at industrial scale. Their relative competence is much better than the abysmal quality we see in most Indian colleges.

Someone needs to figure out a similar scalable higher-ed model in India. I don’t mean NIIT; that’s skills training. I am thinking of real higher-education that translates into livelihood and dignity. Here, scale has clear advantages. Centralized content creation and all-India distribution could lead to a good compromise between quality and personalization. Such experiments are being tried in Latin America, where courses are taught from a central campus but the teachers travel routinely to campuses elsewhere.

The central campus is attractive to high quality faculty who can combine teaching with research. The peripheral campuses are much more attractive to students who come from smaller towns and cities. This is a capital intensive model and can only be achieved with deep pockets.

The second is a more jugaad model, combining aggregation and localization. I am thinking of an online-cum-physical platform which combines courses from different MOOC providers, provides hands on assistance via local teaching assistants and also combines skills and subjects that are India specific.
For example, a machine learning course from Coursera combined with India specific data sets that leads to business analytics in the Indian context. I think such a platform could be created in Bengaluru and replicated in Delhi, Chennai, Mumbai, Pune and a few other cities. By it’s very nature it will be decentralized and may have problems achieving scale, but it will create really strong centres of learning where it takes root.

If one of these two is made to work, we can hope for a third, more ambitious system: one which combines research and training in a distributed network and that can solve Indian problems at a scale no one had seen before. We are still a ways from there, but the demographic time bomb is ticking and we can’t afford to sit still.

The Ethics of Higher Education

Let me end this piece with a reminder about the ethics of higher education. All of us know that higher-ed in India is full of third-rate colleges started by fly by the night operators, people with political connections and local goons. Since demand for good education far outstrips supply, education is a thriving business. A low trust business at that. The cynicism about education bothers me more than anything else.

Schools and colleges are the places that form us; if they fulfill our needs, we enter the world with a readiness to contribute our share. If they are exploitative, we enter society with an ingrained belief that institutions aren’t worthy of trust. That lack of trust permeates our interactions with other citizens throughout adulthood. I hope a new generation of entrepreneurs can solve the problem of providing solid, trustworthy and creative education at scale. It’s a monumental task, but I believe we are up for the challenge.

Rajesh-NIAS-small

[About the author: Rajesh Kasturirangan is an Associate Professor at the National Institute of Advanced Studies in Bangalore and the Anchor of theCognition Programme there. While his research work focuses on problems in the mind sciences, he is interested in applying the principles of cognition to larger questions of society in general and to understanding education in particular. He is also interested in understanding whether technology can revolutionise education in India and what role entrepreneurship can play in making that happen.]

Image credit : shutterstock

Are Startup Gods Right in Suggesting Indian Government To Invest in Startups?

[Editorial Notes : Recently, a few folks have suggested the government to launch a fund to invest in startups. At NextBigWhat, we certainly don’t believe that this will help solve a problem (read : What’s the role of government in startup ecosystem? Stay Away!). Here is a neutral piece written by Sumanth Raghavendra (Founder, Deck) with inputs from Ashish Sinha (NextBigWhat).

In the wake of the upcoming union budget, some of India’s “Startup Gods” are urging the government to follow the footsteps of the Singapore government and launch a fund that will invest money directly into our startups.

This is the actual statement – “the group recommended to the government the establishment of a fund of Rs 5,000 crore that it should use to invest along with other VCs. So, if a VC does a due diligence and decides to fund a startup, the government could come with matching resources from its own fund.”

In our opinion, this is a hair-brained suggestion and one that we hope the government will not focus on especially in lieu of other initiatives that are much more deserving of their attention.

The Startup God, Literally!
The Startup God, Literally!

Here is why: 

“Show me the money”: Is there a capital availability problem?

The short answer is NO.

There is a meaningful number of active VC firms operating in the country and each of these firms has substantial funds at play for investing in Indian firms. Also, capital is increasingly becoming global and there are many Indian startups raising money from investors outside India especially so as they increasingly straddle and target global markets.

What about early-stage funding? Isn’t there a shortage here?

Most folks would agree that the availability of early stage funding is better than it has ever been in the past. According to data from audit and advisory firm E&Y, investments in early-stage startups rose nearly 40% to 121 deals with the transaction value jumping 66% to $605 million (Rs 3,630 crore), compared with the same period in 2013. There are a number of micro-funds such as Blume Ventures and Kae Capital that have emerged in the recent past that only invest in early stage companies. Besides this, almost every top-tier VC firm has dedicated seed programs to fund early stage companies.

Does this mean that every startup that is looking for early stage funding is able to get it?

Not at all, it is still a competitive market and that is the way it should be – the fact that there is a set of criteria that one needs to fulfill to be able to raise early stage funding essentially means that there is a system in place and it is working. If a startup is not able to raise funding today, it is not because there is a problem with capital availability but rather because it hasn’t measured up the benchmarks expected by investors.

One point that might be worth putting in focus here is the sense of entitlement that many startups seem to be having of late. There is a deluded view that I have a startup that is in my opinion “innovative” and/or “disruptive” and therefore I am entitled to get funding just as say a startup operating in Silicon Valley would. This is a sad commentary on how our entrepreneurs are picking up the wrong lessons from their peers in SV – funding is always a privilege that needs to be earned and not an entitlement that one is born with.

Beyond capital availability, what are the issues with the government funding startups directly?

“Who is your daddy?” – Why should the government invest alongside VCs?

One rather bizarre aspect of this recommendation by our Startup Gods was that the government should “invest alongside VCs who have done the due diligence and have decided to invest in a startup.

If the idea behind this suggestion was that the government should bother itself with doing due diligence and “outsource” that to VCs, it is a badly thought-out one.

So, if a startup has already secured an investment mandate, why would it need to take money from the government?

The only party that this arrangement would benefit is the VC as this would ostensibly spread the investment risk as it would require the investor to put in a smaller amount of capital than she would have normally done as the rest is filled in by the government.

The truth of the matter is that this would not really benefit the VC either.

An investment call is a binary one – the VC puts in money in the expectation that the company is one worth backing and will eventually give her a multi-bagger return or she decides to pass on the investment if she doesn’t have this confidence on the team and their market. The only event in which a VC would want to take in “dumb capital” from the government or any other agency is she feels that there is a capital risk that she doesn’t want to take herself irrespective of all the other things about the company.

No good VC would ever make a “go” call when such a doubt exists – the result of this would be a race to the bottom where the government money is seen as “cheap money” that can subsidize the investor’s own risk and the only VCs who would take advantage of this type of scheme would be ones who probably shouldn’t be in the high-risk technology investment space in the first place. So there is an adverse selection problem that comes into play when the government invests alongside VCs. 

“The road to hell is paved with good intentions”– The moral hazard problems with the government owning a piece of a company

Another reason why the government should not take a direct equity position in a company is that it opens up several moral hazards both for the company and for the system, in general.

The most prominent one that comes to mind is the “agency problem” – when the government underwrites the cost of running a company, it leads to skewed incentives and risk-taking behavior both on the part of the entrepreneur and on that of the “professional VC” who has invested alongside. The problem with such a situation is that when one party in a transaction is insulated from risk, he or she may behave differently (and more carelessly) than expected.

The other side of the coin is what the government and its nominated representatives will expect out of a company which has a fiduciary obligation towards it – look no further than the vast array of struggling PSUs to ascertain why this mutant socialist form of capitalism has been largely debunked.

“Startups need help not hand-outs” – Money is not the answer

As an entrepreneur running a business in India, the influence of the government on my company’s operations is significant. But the one thing that I am clear about is that my expectations from the government don’t extend to expecting them to put money into my company for funding my ambitions.

I was appalled when I saw this statement from an Indian entrepreneur – “If the government can provide us with funding, it will go a long way in establishing the country’s startup ecosystem,” – what was most appalling about this statement was that it was made by a person who has already raised more than Rs. 25 crores from a top-tier VC! If you need the government to bail you out after having this kind of resources behind you, you should seriously reconsider your career options.

My expectations from the government are more along the lines of hygiene factors – clear-cut policies that cut out rent-seeking behavior, simple procedures for determining and filing taxes and fees and straightforward processes for filings. It would be nice to have reliable infrastructure in terms of roads and utilities but in a land beset with a million grave issues, it would be churlish to demand such things especially so as a pre-condition to creating world-class products, which I would like to believe is something that we will have to do despite of rather than because of living in a third-world country. 

Epilogue

So if the government shouldn’t invest directly into startups, what kind of role should it play vis à vis startup funding and encouraging entrepreneurial behavior?

As far as capital availability goes, the government should focus on non-equity financial instruments to foster innovation. This could be on two fronts:

Venture debt: Investing money into a startup as debt instead of equity takes the incidental moral hazards out of the equation as the entrepreneur is accountable for paying the money back. Actually, India scores pretty high on credit availability already – the government operates a scheme called CGTMSE – www.cgtsi.org.in/ – for venture debt up to one crore for startups without requiring any collateral.

Grants: Rather than invest alongside VCs, the government should come in to fill the gap in areas where VCs are loath to invest. These should be restricted to domains that don’t fit a traditional VC’s investment thesis – for instance, research-heavy initiatives, defense and security areas and ventures that can potentially have a ameliorating impact on macro issues faced by the country such as health hygiene and education. Ideally, these investments should also be in the form of debt but if that is not feasible, then the government should consider grants.

Finally, as far as the “Startup Gods” go, you are in a position where you have the ear of the government in some meaningful form or manner, please use this opportunity to present cogent suggestions that have the force of informed opinion behind them. Offering silver-bullet prescriptions that are blindly lifted from the playbook of countries like Singapore is a wasted opportunity and a pointless exercise akin to jerking off in the dark and convincing yourself that you have scored!

NB: Stylistic punctiliousness should not get precedence over what needs to be articulated with uncompromised honesty.

[Image credit : shutterstock]

Successful Startups Lessons From The Programming World [Focus on Performance, Not Only Functionality]

As a founder-CEO, most of my time today is spent dealing with management tasks: hiring, fundraising, setting priorities etc. However, before I “moved to the dark side” and got an MBA, I was neck deep into technology and engineering (and loving it). This article uses the programming metaphor to glean out some startup best practices.

Entrepreneurs will know that most startups are not successful most of the time. Our hiring isn’t quite right, our funds are often running out, we don’t know if we have achieved a good product-market fit, or if the pricing we decided is optimal! On an average day, an entrepreneur has his/her hands full with more than one such challenge. In a sense a startup’s job is to deal with failure… and systematically eliminate it so we can scale up a roughly error-free business model.

Making a complex program is in many ways like building a successful startup, and “debugging” is the equivalent to changes and corrections that startups make to achieve success. The metaphor can be used to highlight 3 principles that I think entrepreneurs can learn from and apply to their business model evolution process:

# 1: “Comment your startup”: Good coders write programs that are commented well. Commenting is the documentation of a program- it describes what every block of code does, and how it achieves its outcomes. Similarly, one should document a startup in as much detail as possible. Documentation is important because it allows you to scale effectively.

Every good piece of documentation is an artifact that removes a dependency on you- the most scarce resource in your business. Like code commenting, documentation allows others to look at your business and understand its moving pieces easily, thereby making them effective contributors quickly. In our startup, we use tools like dropbox and Google Docs extensively for shared access, and document all business processes as much as possible.

# 2: Focus on performance, not only functionality: Making a program work is generally the easy part. What’s challenging is to do so with minimum resources (e.g. memory, CPU cycles). Similarly, good startups not only achieve business results, but achieve them efficiently, with minimum resources (capital, people, office space). Don’t just ship that product; ship it efficiently!

Even if you have VC funding, it’s important to remember that resources determine the bottomline of your business- if you build a large, bloated organization with low levels of productivity, sooner or later your system is going to crash due to a resource crunch!

# 3 Hunt for errors systematically: When you deal with failure, you have to tweak different factors and levers- the way you hire, the amount of money you spend, what business priorities you set, how you manage work… and any of these, if not done right, can lead to failure.

In contrast with these multitude of critical success factors, “failure” is often visible in only one dimension: all you notice at the high level is that sales are not happening, or that suddenly all your key people start to leave.

To handle such challenges, it’s critical to measure, and to do systematic root cause analysis on your successes and failures. Like in programming, it’s a good idea to execute smaller and manageable pieces first, and then build complexity incrementally on top of that.

What other lessons do you think startups can learn from software engineering /programming space?

Also Read : The Lottery of Scale And Avoiding The Revenue Trap

[About the author: Amit Sharma is the Founder/CEO of Genesis Online Commerce, which runs specialized lifestyle eCommerce destinations driven by proprietary private labels. He has 10+ years of experience in technology and general management, and an MBA from the University of California, Los Angeles.]

So How Fast Can a VC Run?

[Editorial Notes: Guest article contributed by Mayank Khanduja of SAIF Partners. In this article, Mayank covers a very important part of fund raising : “Why VCs/Investors take time to evaluate the deal? Why is it slow or fast?”].

Don’t worry, this is not about a fitness wearable device. Instead I want to share my perspective on the deal evaluation process at a VC. This post has been inspired by a conversation I recently had with founders of a company we really liked. Our discussions with them were progressing at a rapid pace when they asked, “Why are you moving so fast on this deal?” I think it is one of the smartest queries relating to a VC’s evaluation process– entrepreneurs should ask questions not only when a VC is moving too slow but also when they are moving too fast!

Run Like Hell
Run Like Hell

We all know of instances where funds move quickly to extend a term sheet, only to see it fall through at later stage, as some part of the due-diligence on areas like market, competition etc. was completed only later. While one cannot entirely fault the VC from backing out, it is definitely unfair on their part to extend a term sheet before completing these elements of the business due diligence, as the entrepreneur would have stopped all other fund raise conversations.

Therefore, the entrepreneur in the case sighted above was well within his right to raise the question he did. We were able to give him comfort by sharing the database of 100+ companies we had met in their space and other such detailed groundwork we had been doing.

An oft-asked question by entrepreneurs is “How long does the deal evaluation process take?” Answering this with a definitive number is almost impossible given the multitude of factors that go into the decision-making, and thus most VCs acquire notoriety for not having a set time frame.

I have seen many deals at our fund go from first meeting to term sheet in a matter of days, while others can take a few months of knowing the entrepreneur and company before extending the term sheet. Few important factors that determine this time frame are:

Hypothesis on the market

I am a believer in the hypothesis-driven approach as it allows me to narrow down my focus areas and build in-depth knowledge in them. The hypothesis can be extended to not just sectors but specific business models that could succeed. So, if a company fits well into the hypothesis and has been executing well, the process can move fast.

But every once in a while, an interesting company comes along bringing together a combination of a great team and a potentially large market, which piques my interest in a new sector. In such cases, the groundwork begins only post meeting the company and thus the process may take longer.

Scan of the current players

In either of the two cases mentioned above, an exhaustive scan of the players in the market is done. This not only covers direct competitors but also players whose business model could converge with that of the company we are evaluating. In early stages of a startup, it is often difficult to be 100% sure of the path the business is likely to take and therefore we need to build a view on who all could be the potential competitors over the next 4-5 year horizon.

Strong reference on the founding team

A large part of evaluating an investment at seed stage is focused on the team. Its always more comforting if a team is recommended from one of our portfolio founders or people in the startup eco-system that we respect. It just does a great first level filtering for us and helps move the process along faster.

All in all, a deal evaluation process is like a courtship – sometimes the magic just happens, or on other occasions love can take time to grow on you… but both could lead to long and happy relationships.

[Image credit : shutterstock]

Transitioning From An Employee to Employer? Bring Tissue Boxes and Family Packs of Ice Cream

Startup Hiring
Startup Hiring

[Editorial Notes : Guest article by Tapan Rayaguru, who earlier was Sr. VP at MuSigma. In this piece, Tapan shares a much needed perspective on managing team/taking tough decisions as a startup grows.]

If you were not a born entrepreneur and had the fortune (!) of working for someone else first, the transition to an employer could be non-trivial.

A successful startup does not necessarily scale well. A successful high scale organization does not necessarily stay successful forever. The choice of employees you have made at each stage probably has a very high degree of contribution on the continued success.

STARTUP PHASE

In the startup phase (you and 3 other dudes in the proverbial garage)

  • So you do everything… legal mumbo jumbo in incorporating the company, getting across regulatory issues, what color to paint your office walls, logo design, the whole 9 yards…
  • The three other dudes don’t really see you as the boss and will relish a fight if they don’t like something you say… you welcome the fight equally vigorously…
  • There is no employer and there is no employee.

Bliss. Happy Days!

SCALING PHASE

In the scale up phase (when your next employee comes from a pool of folks that applied for a job to your firm or through some reference)… Life starts to get more complicated

  • In an interview, you try to explain your ‘vision’ and the eyes are rolling on the other side waiting to be told about ‘the role’ and ‘the pay’ and ‘the growth possibilities’ and ‘the share in the booty’
  • Every day, people will do what they are told to do. Some will do slightly more but not as proactively as you would have liked them to.

    Now we have employees and you are the employer!

  • End of the month : Salary time. Forget getting paid, you got to pay and on-time. So what your finances are shaky,  the ‘employees’ need and deserve to get paid.
  • Retention : A combination of ‘showing the vision’ and ‘what’s in it for you’ should work but the balance will keep shifting depending on who it is and what stage of your scaling up you are
  • Letting go : When you are trying to scale a business you can’t really afford deadweight around and when you want to let go a non-performer, it is quite an emotional story with multiple revisits to the decision, alternate role tries and drama.

Get ready with tissue boxes and family packs of ice cream!

SUCCESS PHASE

In the success phase

  • You get resumes with prominent IIs in them and Ivy League B Schools. You get more advice during the interview than you ever got from your spouse or parent – claims of having run businesses many times the size of your business will be plenty. When it comes to discussion on salary they will want your entire payroll budget and then some more.
  • Once you have them onboard you will spend more time designing and aligning KPIs to overall vision than really focusing on the vision as the incentives direct so goes the herd.

The panacea really is to hire a bunch that can live through each phase of the organization and morph to fit in with the needs at each stage. Like all panacea, they don’t exist, so get ready to have some very emotional farewells.

[About the Author(s): This article, part of “The Science of Entrepreneurship” series has been written by Tapan Rayaguru, Executive Director, Career coaching at Sunstone Business school. Sunstone Business School is part of NextBigWhatSelect, a curated set of regular contributors to NextBigWhat. Sunstone business School

Sunstone provides a one year part-time online PGPM program for mid-career Technology professionals, helping them transition to entrepreneurial & business roles. Click here to know more about Sunstone’s PGPM program. Contact id: tapan@sunstone.in]

If Not Equity, Then What Else? A Look at Different Sources of Capital for Startups

In an all-embracing sense, capital makes the world go round. It is perhaps the most permeating invention of the human race – an efficient and ubiquitous medium to exchange goods and services. However, for you managing a start-up, capital takes a much more tactical stand.moneyandecommercedesign_thumb.jpg

Crudely, without cash in the bank, you will not be able invest in equipment, not be able to pay your employees, not be able to travel, not be able to pay your suppliers, etc. Simply put, you’ll perish. Needless to say, capital is the lifeblood of a startup, in fact, of any company for that matter.

Often, capital has to be raised. Surely, you can raise capital by selling equity – that’s what venture funding is all about. But there are a couple of other options that you, as an entrepreneur should evaluate.

The first option is that of raising capital through loans. Contrary to what perhaps Finance textbooks administer in that loans as a source of capital is not accessible to startups because of their deficient track record, I have seen many start-ups access this source. However, they do not source debt capital from financial intermediaries; instead they source debt capital from friends and family.

A subset of loans that is quite popular with entrepreneurs in the valley and is fast gaining popularity locally is convertible debt. Convertibles are loans that, on a pre-decided event get converted into equity at a floating valuation. If you’ve ever raised capital through the equity route, you can surely acknowledge the cumbersome nature of coming to agreement on a pre-money valuation.

At an early stage of your business, this valuation estimate is fleeting at best. This process is entirely avoided when working with convertibles and the only agreement that remains to be reached is a discount to a would-be, if-so, Series A valuation. That’s a much easier task. Other than that, paperwork needed to execute capital infusion through debt, including convertibles, is lesser and consequently the infusion can be completed much faster. Money in the bank sooner than later can be a crucial advantage.

The second option, again often passed off as inferior, is that of raising capital from your customers and suppliers. This may sound absurd but if you have customers who are willing to pay you an advance, and/or suppliers who are willing to wait for their payment, you enjoy what in finance circles is called a float, or more technically a negative working capital. Float is money that a company temporarily holds and is free to use in whichever way it sees fit.

However, few startups, especially in the software products space have any revenue come its way, at least not initially. Yet, for those who do have revenue, it definitely does not harm to see if you can get to a negative working capital cycle. Even if you don’t have revenue, creative ways of structuring deals with anchor clients can be very fruitful. Often, if they like you, they would not mind taking a piece of your equity in return of giving you business as well as bragging rights of working with a Tier 1. Both are priceless.

If you can get access to either of these options, you would have hit upon a cheaper source of funds than selling equity. Selling equity outright is, averaged out, an expensive proposition.

[About the Author(s): This article, second in the series on “The Science of Entrepreneurship”, has been written by Aniket Khera, Director (Programs) at Sunstone Business School, who are part of NextBigWhatSelect, a curated set of regular contributors to NextBigWhat. 

Sunstone business SchoolSunstone provides a one year part-time online PGPM program for mid-career Technology professionals, helping them transition to entrepreneurial & business roles. Click here to know more about Sunstone’s PGPM program. Contact id: tapan@sunstone.in]