Founder payouts are now in business

Turns out The Founders Fund has started talking openly a partial buyout of founder stock by Venture Capitalists. What this means in simple terms is: When a VC firm invests in a company, they give part of the money to the founder in exchange for her stock.

Now TFF (my acronym) is a group of founders, so you would think they are biased. They've been founders that have become VCs; and perhaps they understand the nature of entrepreneurs better. They are doing something a lot of people (including me) have been talking about lately. Paul Graham mentions this in two essays. For angels he ascribes this as a plus:

Angels have a corresponding advantage, however: they're also not bound by all the rules that VC firms are. And so they can, for example, allow founders to cash out partially in a funding round, by selling some of their stock directly to the investors.

And he says it to VCs too:

..letting the founders sell a little stock early would generally be better for the company, because it would cause the founders' attitudes toward risk to be aligned with the VCs.

What he means is that founders have all eggs in one basket. VCs on the other hand revel in diversification, and a little money to the founders balances the risk a little bit.

Imagine this: You have struggled like crazy through the early years of a startup, drunk the early morning coffee by staying awake all night, had a lump in your throat when you told an employee his salary would be a week late, and in general took your health, family and personal life for granted; you have then built your idea on the grave of everything that will matter in the long run, and shown some traction, and then pitched it to a VC who's decided that yes, it *is* ok to fund.

Now this VC demands a big piece of the pie, asks more of your time to give him a weekly report, releases the money in parts based on performance so the lump in your throat is now a physical feature rather than a temporary blip, and in general, expects a lot more than you expected when he signed up.

In return, you ask for a bit of money to make it all seem worthwhile. And give up a bit of stock for it. It's not the end of the road, but believe me, you like a road a lot more if every once in a while, you were able to see something interesting.

Investors find that disgusting and they would say 'Yeah, after all, it's our money, why should we pay them and not the company? Why do they get paid when we don't?'

But the same guys wouldn't mind the startup paying a sign-on bonus to get new blood. And they wouldn't mind having the company pay a CFO mega bucks, a big-name auditor to say "yeah, this kinda looks sorta ok",and pay lawyers to rewrite the website terms and conditions at $500 an hour. Yet, a founder payoff is miserable, somehow? (Caveat: If this happens a few days before a liquidity event, it's kinda stupid, because the event may value the company far higher than you sell stock for)

Founders don't get less hungry when they get paid. If money has taught me anything, it is that a little bit of it makes you want a lot more. Heck, why only money, it's the lure of anything. Revealing dress = more attractive than the lack of dress. It seems the VCs want you to wear burqas instead.

Disaffiliate marketing

Venturewoods has another interesting post: Where is the catch?

Will viral affiliate marketing work in India, Sanjay asks. Background: MakeMyTrip's High Five program and SeventyMM's free for life program are examples of viral programs in India, but they expect a referral to BUY the service rather than just sign up. That means they don't just expect you to get someone to sign up, but they have to pay up for you to earn anything.

Sanjay rightfully points out that this is a higher bar for such programs - that registration itself is not enough, a transaction must be made. On the other hand, merchants are quite willing to shell out money for paper and TV advertisements, or Google Adwords, which are simply impression or click based programs, and demand money for impressions rather than registrations.

So, he asks, will this viral marketing concept ever work in India? Here's my take.

Viral, Affilliate or Word of Mouth?
Don't care. What I'm talking about is the concept of having users refer others. Versus using a distribution channel where you have to cough up considerably higher money for branding and advertising.

Whether this is by definition viral or affiliate or otherwise, I am talking about having other people do your marketing, but not through the traditional distribution channels. Yes, this can mean MLM too, or a combination of all of the above like this one.

Where's the money?
What do the two sites offer you? MakeMyTrip offers Rs. 500 off on tickets you purchase from them in future. SeventyMM waives 1/6th of your fee for each member you register.

None of these mean hard cash for you. Cash off on tickets or fees bought means you only benefit by using the service in the future. It does not reward you for the task of referring a customer, for which the merchants are paying big bucks for in advertising anyhow. Imagine that MakeMyTrip went to StarTV and said, listen, we'll give you Rs. 500 off for every flight you take for the next three months, just show our ads 10 times a day.

"No, thank you", is what they will get. The "thank you" will likely be replaced with unprintable material even in the "Wingdings" font.

If web sites continue to offer benefits of the form of "you'll use us again, surely, and then we'll save you some money" - they will see very little interest.

Let affiliates make real money instead
Any affiliate program that's really successful in India needs to show people real money. (Not just in India, but anywhere, according to me. See Amazon) It need not even be cash or cheque (though that is vastly preferable), it could be transferrable coupons. If MakeMyTrip makes my coupons transferrable (I'm assuming they are not) then I could sell them on eBay for Rs. 450.

Seventymm needn't give me the cash off - Give me real money instead. Because in the current system if I get six people I have then got complete fees off - why should I then bother referring any more? I won't even place their link on my blog because heck, I'm not getting paid after six, right? (Or so I think, though the terms of use says that they will send me a cheque, but that's not substantiated anywhere on their affiliate page)

Cash can a pain in the neck for tax purposes, but it's a pain that can be solved, believe me. I have been in the business enough to know that I can hire accountants to work this out for less than Rs. 5,000 a month, so if anyone gives me "tax reasons", I say phooey. Service tax is an issue, so cut 12.24% out and offer the rest. TDS is an issue only if payments exceed Rs. 20,000 a year - you can obviously gather tax details at the time. And if this is still such a huge issue, simply allow people to buy gift or food coupons with their accumulated income; country-wide shops like Lifestyle, Westside etc. simply work.

For seventymm, whose customers are specific to two cities, even food coupons from SodexHo might work.

Offer the "referred person" a discount
India loves discounts. Instead of paying me Rs. 500, if MakeMyTrip.com paid me Rs. 250, and took Rs. 250 off the reffered person's tickets, that would be a heck of a deal. Same with seventymm.

So the deal is: If you come through me, you get a discount. You don't get that discount if you go directly to the site. So there's a tangible benefit, is there not?

I wouldn't mind a lower affiliate revenue if I can offer real value to my referral. And think of the conversation:
"Don't register directly, register through me",
"Why?"
"I get a referral commission".
"Hmm. Gimme half of it".

But that's the way it works in India.

Better to have:
"Don't register directly, register through me",
"Why?"
"You get Rs. 100 discount".
"Oh, cool, will do".

Guess what. That person will now WANT to get referred by you. Cut the affiliate's revenue by half, but it means she can get 10 times more people because they will see value.

Restrictions on earnings
MakeMyTrip limits your coupon earnings further: You can't use more than one coupon on a flight and the coupons expire after three months. So if I have 10 referrals, I get 10 coupons, and suddenly I must fly 10 times a quarter for this thing to make financial sense to me.

Seventymm restricts me from transferring my earnings. And I'm not sure about this, but I think they might cut my earnings off if my referral unsubscribes - though that's not written anywhere.

Make it easy
Referring customers right now is all word of mouth or referral emails. Why can't I paste a little piece of code on my blog to refer people over? Something like a Google Adsense referral or Amazon's referral code?

Or how about deepakshenoy.seventymm.com? Nothing different except I get the referral income.

Make it a viable business opportunity
Referring people is not seen as a channel in India - but companies have got a hang of it and figured that instead of paying agencies they can pay half that to their own employees for referrals. Win-win.

And web sites can do the same, if they let users (and non-users alike) refer people. I don't mind the idea of pay-as-you-earn, meaning affiliates get paid only on purchase by referrals rather than on registration. Money begets money.

To make it a real business opportunity, sites should:
a) Offer real money or tradable currency
b) Let earnings grow when referrals grow
c) Offer discounts on affiliate based signups
d) Make it easy for affiliates to advertise to referrals

What do you think?

Deal flow in India and not enough VC in general

Typical deal flow involves a new investor buying out an existing one as part of his investment. If I'm an Angel investor in a company that gets funded by a big VC, the VC will plough a part of the money to buy some of my stock, at the same valuation.

This happens hajaar in the US, but is practically unknown in India. While in the US they are even starting to talk about investors compensating (hold your breath) founders by buying some founder stock when they invest, in India most VCs will balk at even partial exits by prior investors.

Angel funding is only possible if there is a reasonable expectation of exits. In today's market a five year hold is probably the least you can expect to some exit event: M&A or IPO. Angels may have to hold even longer, since they fund the company from seed levels. VCs usually start buying in during year 2 - so they're ok with a three-four year hold. But angels shouldn't be expected to stay in forever - or at least, not with their entire money. VCs must understand the concept of deal flow and how it compensates earlier investors; actually, it's not that they don't understand, but it's a typical financial mentality to say "oh my god, this money won't go to the company, but to make someone else a profit, I won't pay.". That, in my opinion, is being very niggardly.

It can also be a fear psychosis, thinking "Why's this guy exiting?", but the answers to that are obvious. If a VC has done the right amount of due diligence, these questions have already been answered.

And if an angel eventually has like 5% of a company, it's practically too small for any level of control, and with more VCs in, there won't be board presence or even advisory roles for her (the angel). Letting them exit is just a better way to handle things.

But we have smart VCs here now, and I'm sure the negotiation table will start getting more and more open towards deal flows and partial exits.

Without partial exits, Angels will fear to tread into this space, and without Angel funding companies won't even be able to move to the VC level or even come to the VC with an expectation large enough for the deal to make sense. I mean you can go and ask a VC for $2 million today, because that's how much you have bootstrapped a company without funding. But 2 million is too small for most VCs to think about, with the huge liquidity of today. The right angels may have made the company ask for a lot more, and an angel exit alongside means that the VC can put in their minimum quantum (part for the angels, part to the company).

Now for the "entrepreneur" end. Why don't entrepreneurs run to VCs more often?
1) Stupidity: That "small pie big share" is less exciting than "big pie small share" is just not prevalent enough, mainly because everyone wants "big pie big share". If you can pull it off, BigPieBigShare is a great place to be. But to pull it off, you need NonDebtMoney and BigTimeContacts which VCs can get for you, and that means BigPie in less time than TheSpanishInquisition. But yes, SmallerShare. Even I have been guilty of this. Yes, I have been stupid.

2) They're Timid: So many people I know just don't have the balls to stand up and say they're good enough and they deserve it and they've done this. And when you combine "timid" with "to big an ego" it's complicated - first you have someone who's too scared to say "I am good", and when he does, and someone tells him "that's crap", he gets all flustered and unhappy. What you have to be is thick-skinned and frikking confident. And for heaven's sake, don't say "we" when you mean "I".

3) Urban legends and true stories: I've only heard bad things about VCs. Why? Because only the bad stories come out. If founders say they love their VCs and how "strategic" and "compatible" and other such words the VCs are to the business, you only think: "Saala, suck up kar raha hai because he wants more money". The bad stories somehow seem more spicy; there's a book called "BooHoo" which is a cry-baby book about Boo.com's phenomenal failure after $100 million of funding. Guess who gets blamed.

4) Lack of respect: If VCs don't know your business you are bound to think about why you even bother to talk to them. It's easier to ditch them upfront, because then they will start the fishmarket haggling over silly things and piss you off. But what do you do when 90% of your VC universe is filled with prople who don't know XML from a bar of SOAP. Okay, that's changing. But it's still pretty lousy out there.

Having said that, I believe today does not have to mean tomorrow. Change is essential, and change is happening. In a few years, you will laugh reading this blog post and call it "those days".

Prawn de-shelling outsourced

Young's, a seafood firm in Scotland, has decided to send the prawns it catches all the way to Thailand, where the prawns will be de-shelled by hand. Then the entire thing comes back all the way to the UK to be sold.

Prawn shellers in Thailand cost as low as 25p per hour, versus the Scotland rate of £5 per hour or so. Machine shelling doesn't provide the high quality of scampi they need, and hand shelling is too expensive in Scotland. So they've decided to send the stuff 19,000 km. away to Thailand and bring it back.

The carbon dioxide emitted by the travel is supposed to be huge, say environmentals, who evidently know their carbon dioxide from other natural gases. The company could offset this by purchasing carbon credits with a £350,000 cost, it seems.

Think of it. Someone is sending prawns over 19,000 km of sea, to hand shell them at such a low cost that the travel is worth it. Outsourcing gone wild.

Of course it causes a loss of a few jobs in Scotland, but that can't be worse than this or this.

A μMoney update: Online photos and DVD rentals

From my last post about μMoney I've had some further ideas in two areas: Online photo printing and DVD rentals.

For the online photo printing, someone suggested that people who don't have access to photo printers may send their photos using MMS to a printer who can print/deliver/get paid.

But I believe most people do not have the ability to MMS their photos over. I think what might be a good idea is to have kiosks in malls which can accept cash or cards, and where you can connect your phone (all sorts of connectors, all sorts of phones). A touchscreen shows you the photos on your phone, you select what you want, and the photo comes out a little chute. Rs. 10 per photo. This can also be customised to a "send photo" option. Addresses can be read from a credit card or you can use different "ship to" addresses. And why stop at mobile phones: Allow cameras as well.

I like that idea, actually. An experiment in Forum mall in Bangalore may be a good idea; a one month manned kiosk (so no credit cards are needed initially) to gauge response. Can be done as a beta for Nokia mobiles exclusively. Hmm. Anyone game?

DVD Rentals: One thing of concern is that people buy pirated DVDs at 30 Rs. a movie (so I hear), which can kill the rental industry. Of course quality can be the head turner.

My thoughts: Quality is not so much an issue anymore. You can get pirated DVDs that have the same quality for something like Rs. 100, inclusive of a printed sheet and a DVD case. The issue here is the local dvd rental shop (of which at least one exists per area in India I would think) which buys such DVDs and rents them out. That simply kills the online DVD rental by undercutting.

But still, there is an interesting market for sitcoms and perishable content, which is too high strung and technical for the local shop. Essentially, get the producers to send you content over the wire, and you stream it to your local offices (of course you have local offices). Streaming is done on demand (when a customer wants a certain episode set) The local office then receives the stream and burns a DVD - a process that can take 10 minutes for a rewritable DVD (apart from the download time, which you can shunt out through quality lines and torrent style non-public peering). Royalties and revenue shares are the way to go, and investment isn't too high.

What do you think?

Fishy market analysis

I sometimes find such statements on blog comments:

India: Total subscription base of 9.5 crores…[GSM+CDMA]
If an application is targetted around this, and generates a bare minimum revenue of Rs 1 per month per user/subscriber….it has the potential to generate 9.5 crores INR per month....

This is a classic fallacy but used so often that most VCs will, on listening to this, splutter and choke and burst various unrelated blood vessels.

These figures talk about a "universe". Not a target market. (Peter Rip explains this very well.) The total number of mobile phone subscribers in this country is 9.5 crores. You can probably reach much much much lesser of them. For instance, you will not be able to reach or tap the fishermen who use the phones in the high seas to figure out which fishmarket to sell their catch.

You will not be able to tap the innumerable phones given to car drivers because the car owners understand that parking is tough, and visibility is less useful than radio frequency in such situations.

You won't get a hoot from people like me who are suspicious of anything which involves my paying money over SMSes or mobile phones. You won't get much interest from people who are sick of mobile spam.

I believe you will not be able to tap most of the 9.5 crore people anyway, even if you paid people 2 rupees each to send you an SMS.

Even if you tried stunts like having people pay automatically when they switch mobile zones, you will find people changing service providers or removing the service. You can't make people pay even 1 paisa when they don't specifically say they want to. Not in India.

Your real target market depends on what market you want - students, housewifes, drivers, people with bluetooth phones etc. And then it depends on what you do to get to that target market. Er...not clear? Here's the underlying concept.

--- Mobile business plan---

I will sell fish through mobile phones. There are 9.5 crore mobile phones. Of which 2 crore eat fish. Now fish is a perishable and requires freshness, so all people have to do is send me an SMS or give me a missed call and I will send it to them. Each family eats fish around once a week, and probably 500g of it at a time. That's 2 Kg of fish per month. I have a margin of Rs. 5 per kg of fish, so I can get a net revenue of:

2 crore people = 1 crore households, eat 2 kg of fish per month and I profit at rs. 5 a kg, so I make Rs. 10 crore per month.

I will spend five crores on marketing and people and all that and I net a cool 5 crore a month.
--- End of plan ---

Sounds fairly stupid to me.

Firstly, all the above assumptions are wrong in some way or the other. Secondly, I can't get one crore people sending me SMSs or whatever. I can probably reach 100,000 people in one city for a certain price point. Of that, less than 1% will buy my service. I can perhaps sell a thousand KG of fish a month, if I really try.

Reality is harder than you think. It's all very nice to start thinking of universes. What really matters is what you can reach.

India has 4 million home PCs. That means nothing to you. What you really should care about is: How many can I reach, with the 100,000 rupees I have for marketing?

A seedfund.in India

Okay, that pun was largely wasted. But check out <seedfund>, a company that does extremely early stage investments in India. Their "seedfunda" is:

Big backing + tiny fund = giant impact

The folks behind it are Pravin Gandhi, Bharati Jacob and Mahesh Murthy.

They invest under $500,000 in their seed rounds. That's enough rokda to start small - what does one need to start an Internet company these days? Let's see.

A typical startup would have some development time to get the idea into the next stage.
- Salaries for the founders - money for the late night egg burjis, the petrol kharcha and the like - should be around 50,000 per month (averaged). For around 5 people, over a 6 month period, that adds up to 15 lakhs. (Initial cost: nil, running cost: 15 L)
- A 1500 sq ft. office would cost Rs. 75 K per month to rent, and plonk down 5 L for the deposit. Need to spend about 5 L on the UPS, carpeting, A/C, tables and that kind of stuff. (Initial cost 10 L, running cost: 4.5L)
- 5 laptops, 5 Desktops, 2 servers and network equipment would set you off by around 10 lakhs. (initial cost: Rs. 10L, running cost: nil)
- Internet connection, electricity, maintenance, paper, cards etc: Rs. 30K per month. (Running cost: 2 L)
- All the propaganda and internet space and all that would cost another 50K per month. (Running cost: 3 L)
-ATOB (All the other bull***) : Approx. 20 K a month (running cost: 1.2 L)

So getting a company up and running for six months will involve an initial cost of Rs. 20 Lakhs, and a running cost (total) of Rs. 25.7 lakhs.

That's about 45 Lakhs in total, a $100,000 fund in total. Scale that up to 10 people, 12 months and you're talking about approximately 200,000 to 250,000 dollars. Probably very much on seedfund's radar.

They have some major names on their investor list, like KB Chandrashekhar, B V Jagadeesh, Kanwal Rekhi and the hotshot companies like Reliance ADA, SVB's financial group and Edelweiss capital.

Check them out. They don't need me to advertise, of course. But they probably need smart ideas, so if you have one...

Micro-payments - μMoney

To avoid confusion with "Micropayments" this page has moved to:

http://tropicalmanager.blogspot.com/2006/11/micro-money-money.html

Micro-money - μMoney

Alok Mittal wonders if businesses around the theme of providing a service to a million users at $100 a year (1m x $100) works in India. Or at least I assume he means in India. Of course, we don't speak the dollar language so I assume he means (1m x Rs. 5000) a year.

Specifically, Alok mentions:
1. Online DVD rentals
2. Online photo printing
3. Online tutoring (export oriented - ok more like 100k x $1000 here)

The theme behind such sites is - pay smaller amounts of money for a service rather than a product. You can rent, say, 2 DVDs for Rs. 200 a month, or pay Rs. 4.5 per photo to get it printed. Or get lessons off the net, with a real person delivering a course, at about Rs. 1000 per month.

I think such sites are the future for the software business in India, which is littered with software pirates. Piracy is so rampant that creating any "client side" software is a dead proposition from the start, unless you are able to build and sustain market share and then, hopefully, charge for it. I call this the Microsoft strategy, which has worked in India in the past, in the form of the Tally Solutions strategy.

But small entrepreneurs can usually not wait that long - after all, cashola is the king. Plus, if your solution can be pirated, it will be. The answer is to take the solution online: after all, no one can pirate your site and use it for free, and if they do you can fix it fairly easily.

I call this concept "MyuMoney" - a name for "Micro Money". Micro, in greek, is the letter "myu", so MyuMoney is written like this:

μMoney

μMoney is the concept of charging small amounts of money for a valuable service. An amount so small for a value large enough that it flies under your customer's radars and therefore, she pays for it.

It's not something I invented. It's been there for decades, perhaps centuries. But it's new to the Indian software world. Why? Because we have been exposed to the US style of micro-money till now. In the US, μ meant $10 - $50 a month. To individuals and businesses this is so small it is under the radar. In fact for businesses, even $200 a month is an "below-the-radar" price to pay for a service.

Converted to rupees, this translates to Rs. 450 to Rs. 2250 a month. Not cheap by Indian standards. Cheap for businesses, perhaps, but not cheap enough. I can get an accountant to visit the office weekly, enter all my vouchers and invoices into an accounting software, reconcile bank statements and even prepare individual returns for Rs. 2,000 a month. I can get photos printed offline for Rs. 4.5 per photo. I can buy books at 15% discount offline (minimum).

So any service that's online must give me a deal that is just below my radar for a monthly service, or below the price paid for a similar offline service.

I should be able to pay monthly or per unit - anything that asks me to pay upfront for a year, or tells me they will send me 12 magazines and charge me annually, is off the radar. The yearly or multi-unit options are supplementary; I should be able to pay per unit if I choose to.

Further, online payment options are nice, but they must include Indian netbanking links (like ICICI or HDFC netbanking) and also have a "drop box" facility to drop cheques or make payments in cash (for sufficiently large sites). This is not easy but it's mandatory if you want a site to grow in India over the next three years.

So let me prepare the rules for μMoney:

1) It must cost between Rs. 200 to Rs. 500 a month for an online service. Ticket size should be less than Rs. 500.
2) I must be able to pay monthly.
3) I don't want to pay more online than I do offline.
4) I must provide online and offline payment methods for people who want to pay.

The unwritten deal is that I need to provide value for the money I charge; and the value should visibly be large enough for customers to know they're getting an absolute deal.

Who's available? Let's see:
- Shaadi.com, the online matrimonial service charges between Rs. 282 to Rs. 425 per month.
- Real estate sites like 99acres, (charges Rs. 500 for 2 month).
- Share Trading advisories like PowerYourTrade (Rs.500 per month)
- Personal finance sites like personalfn (Rs. 300 per year)
- Photo printing services like PicSquare (Rs.3 per photo)
- Mobile games and songs and ringtones (usually Rs. 50 a pop)

Who isn't?
- Most online job sites. They cost upwards of Rs.5000 per month for jobs.
- Many stock trading advisories or magazines that charge annual fees upwards of
- Most other sites that don't even bother to offer this option.

μMoney is all about flying under the radar. In the Indian context, it means approaching masses. Selling software at Rs. 500 a pop. Retailing at 99 cents a song - yes, that model will work in India, but not for songs. Think about TV serials. Cricket match highlights. On CDs, not just downloadable. Heck, I love that idea but it needs more money that I have and higher time to returns than I can get capital for.

But the concept remains exciting: Make small payments for a service that can give you much greater value. μMoney is the way forward for Indian startups; and a way for the Indian Software Industry to finally mean 'software' rather than the types of Infosys and TCS. It's time we finally came around. It's time for μMoney.

I have just registered myuMoney.com - I will build that site and list all the μMoney sites for India. And maybe,

Personally, I'm working on a site for India on the same front. It's based on the concept of "fool.com" - an online stock advisory that helps you become more knowledgeable about your investments. My idea is more than stock recommendations though - there are too many of those sites - and more of a complete investor tool. I've been writing about investing per se at http://theinvestorblog.blogspot.com, a basics and intermediate level site for the Indian investor.

Some of my thoughts includes tax accounting for investors, providing a look-see into "real" growth, comparing investment options, cash-flow analysis and a slew of other things that work for intermediaries.

I will expand on this in the future, and give you an insight into this "startup" which initially focusses on information, but in the end, aims to be the first stop for the Indian investor.

If anyone's interested - drop me a line at deepakshenoy at gmail.

Another idea I have, which I will not take up because I'm involved with the above, is an online "testing" tool focussed on companies testing candidates. I will write more about this, later, if I have some time.

Let them leave

Nirav Mehta loses two programmers without notice to L10NBridge (yes, that's a name), whose Human Resources (HR) person, when told about it, felt no remorse and threatened to hire the rest of Nirav's QA team with him (Nirav) helpless to do anything about it. Further, a request for action to be taken against the errant ex-employees was refused.

Nirav's rant is that:
a) Employees shouldn't sell their soul. Values matter more than money.
b) Lionbridge shouldn't have bought their soul. If you force employees to break contracts, what example are you setting?

Well, comments have flown back and forth and Vulturo has posted in detail that:
a) The blame is squarely on Nirav for not retaining his employees.
b) Employees aren't slaves, and they should be allowed to buy their way out of a notice period.
c) Money's a big factor. If you can't afford to match or beat the industry standards, it's your problem.
d) Nirav shouldn't be demanding explanations from LionBridge. They're just doing their job.

I think there are two definite aspects to this. The first one is an ethical dilemma: Should people just quit for the heck of it, without proper notice? And the second one is: If they do, shouldn't the hiring company be adamant that they complete their notice period, and get relieved properly?

This would not be a complex answer but for the "asshole employers" that dot the marketplace. The disappointment at losing key personell grows to resentment and vengeance is extracted, too often, by delaying relieving letters, not paying dues properly, and creating arbitrary hurdles to a smooth exit.

Would you buy a computer today if Microsoft told you that before you load Linux on that machine you would have to get a court approval to do so? Would you enter a shop that refused to let you leave unless you bought something?

Creating barriers to exit is a downright stupid thing to do, and employees are nothing less than your customers. You have to make it easy for people to leave, and perhaps even help them when they resign; it's not extremely difficult. Discuss it openly at company meetings: If anyone is looking for a job, let them talk about it. Organise farewell parties in the office for all those that decide to leave; not on the last day, but just after they resign. Stretch the notice rules; transition can always be worked out separately. Always tell them, "Look, if for any reason you don't like it there, come right back. We'll just forget this happened". Keep it simple, your paths may (and most likely, will) cross later.

If that is in place, your employees will want to be nice about it. Of course you have the bummers who won't, but you don't want them in your company anyway. (Give them that farewell party though)

Note here that I'm not saying Nirav made it difficult for his employees to leave. He does say that his company tries to treat employees like family - unfortunately a family position is much more difficult to sustain. The ability to separate gracefully is rare in Indian families; why would the soapy tear-jerkers (movies and TV) make so much money otherwise? So your employees are bound to dither and feel ashamed when they wanted to leave; and for as small a thing as money. It's not small, is it?

Now, should the new company be wary of have-not-properly-exited hires? They should, but even they are aware of the "asshole employers" concept. Also, HR targets are to get the best people as soon as possible, and that links directly to rewards. And finally, if they don't have the integrity, what can you do about it?

You definitely can't - or shouldn't - call and berate them. An email perhaps, if you can make it sound non-vindictive and helpful, but definitely not a phone call. They should be the ones calling you for a reference, but if they don't, you will not make matters any better by calling them. The exception here is if you know someone high enough at a personal level.

And most importantly, if you expect relieving letters and notice periods served etc., expect the same when you hire. I've noticed that often, in small and big companies, HR expects you to join "today, or potentially, yesterday", but will try to enforce a notice period when you leave. Chances are that will not be taken kindly.

While employers can't force a notice period down a person's throat, there are necessary approvals that they can withhold: Like a PF transfer form signature, or encashment of leave etc. It's illegal to withhold them, but relief is only possible through a civil suit, an option most people are loathe to use.

The question of references comes in often: Should you check references? Well, if you don't, then expect that people will leave you high and dry at the worst time possible; after all, you may hire someone who hasn't been as kind to her last employer. Should you give references? Only to those who were nice in leaving, and that you want to recommend. The lack of a positive reference is equivalent to a negative one, so you don't need to write a negative word in a reference. (In India, you can legally give a negative reference)

Oh and I forget about Bonds: companies routinely make employees sign bonds that they won't leave before X years, or else they pay Y money back. The justification is that this is training money spent; If so, I say take the money upfront. Return it once they complete X years. Suddenly the option doesn't sound all that great right? If you take money upfront you must train properly, and give a real certificate that means something to the employee. In most of the "bond" cases, none of that is happening. Bonds add no value, they only take away the trust in the relationship. Once you've lost the trust, no amount of legal threats etc. will bring it back to normal.

Lots of people think that such abrupt departures with no notice and SMS "break-ups" are bad for the industry in the long term. They are not. In fact, they build better businesses. The ability for your lousy employees to leave by just sending you an SMS is the best thing that can happen to you.

If you do not understand, let me tell you this. Marriages are better when the option to divorce is available. Cars are better if the only color you can choose is not black. Business are better if they can fire as well as they can hire. Online buying is better because there is no customs department involved.

The ability for employees to get up and leave in whatever manner they choose affords you the knowledge of who chooses to leave nicely and who does not. And in the same vein, to do whatever you can to keep those that goes the extra mile to keep it courteous.

Cybercafes: Alive and Kicking

Someone asked in the Venturewoods blog if Cybercafes are dead. " If you consider urban penetration of PCs, it will be close to 75%, If you look around who doesn’t have PC at home.", was the comment, specifically.

Cybercafes and dead? Urban penetration of PCs is still less than 15% from my experience. Heck, in Bangalore, with an urban population of 7 million, there are less than 300,000 home PCs. [1]

Cyber cafes are the choice for a huge number of people, which is why the Satyam Infoways and the Reliance Webworlds are doing so much business. In fact there are “remote” courses (basically those that involve long distance learning) that enforce testing Reliance Webworlds (including the IIMs!)

Also, the next big thing in cities (and even small towns) nowadays is to use cyber cafes for stock trading. And this is so popular that broker have set up their own terminals for the day traders, becoming vertical versions of cyber cafes. The money is in the brokerage, not in the lending of a computer for a few hours.

But the masses have still not adopted home computing. The masses do not include people who sip coffees at barista or pay Rs. 250 for a movie ticket or eat at restaurants where each dish costs more than Rs. 200. And the masses are more than 90% of our population.

1. My estimate. I haven't googled enough to back this up.

Bangalore Barcamp: The Geek Freedom Jam

The next Bangalore Barcamp will be on December 2 and 3, 2006, at:

ThoughtWorks
2nd Floor, Tower C,
Corporate Block, Diamond District,
Airport Road, Bangalore.

Registrations are on.

This is going to be my first barcamp. I really like the concept: an open geek event with the ability to network, interact, find like minded folks, and quite interestingly, open up avenues for startups.

The last barcamp looked like fun. Lotsa familiar faces.

A good time to be had. And perhaps an insight into whether there's enough geekhood in this otherwise nutty city.

(You'll notice I used "Freedom Jam" instead of the ubiquitous "Woodstock". Many bangaloreans will know Freedom Jam - the free-to-all concert held on Independence Day)

PC and Internet penetration in India

Alok Mittal had posted a note on how India Today's cover story mentioned how "most of India's 200 million middle class homes now have computers". The comments there ranged from speculation of whether it meant "microprocessor based devices" (i.e. cellphones) or whether the magic figure was 10 million? or 50?

What do I think?

There's a difference between the number of domestic households owning a computer, number that access the Internet, and the number of computer owning households.

Firstly, the number of PCs sold in India was around 4.3 million in 2006 (IDC). I would estimate the total base at around 30 million (we were 5 million in 2001) and corporates + cyber cafes to have about 85% of that. About 4 to 4.5 million PCs are in houses, and I think even that is an overstatement. I have three PCs at home. Chances are that the real number of PC owning households is around 3 million.

PCs that have a net connection: I think that figure, on a per household basis,is less than 2 million.

Number that access the net - if you consider the huge number of cyber cafe visitors in comparison to PC owners, I'd say 35-50million people was a fair figure. Note that time based visitors to cyber cafes means there's very little internet commerce capability, limited to airline tickets or such. Netbanking and Online credit card sales penetration is still fairly low.

There's a feel good factor, yes. Growth is heady for the top bracket. Penetration is not low because of lack of money; it's the void in reach and infrastructure. By 2015 India will, at the rate it's growing, reach around 150 million PCs with about 10 million in households. Still not anywhere close, I think, to the figures touted.

Other links:
A post on BusinessWorld's May 2006 report on Indian consumers
Forbes.com report

Demos to VCs in India: When, where, etc.

If you're an entrepreneur and want to demo your product to venture capitalists, note the following events.

Venture Intelligence Demo, Bangalore
Date: December 12, 2006
Deadline to submit: November 15, 2006

Arun Natarajan of Venture Intelligence has organised this as part of a Mobile VAS connect meet, and involves product demos only (no powerpoints) for product companies planning to release within 12 months. (Submit Demo Here)

TiE-Canaan Entrepreneurial Challenge, New Delhi
Date: Sometime in December.
Deadline to Submit: November 24, 2006. (Check here)

A business plan competition for existing entrepreneurs only. Plans to be honed through INSEAD, Singapore, and the Indian Band of Angels might invest.

Submit proposals via e-mail to challenge@tienewdelhi.org using their template.

Proto.in, Chennai
Date: Jan 20 and 21, 2007
Deadline to submit: 30 Nov 2006

A two day event, 30 companies, 10 minutes each. Prefers "itchy fingers", i.e. companies that want VC investments. Okay, why else would one...uhm, yeah, backspace and all that. I think I'll go attend.

Also read the corresponding venturewoods post.

What a great time to be an entrepreneur. And it's just beginning.

Money, the root of all evil?

You cannot help but smile at the logic of Tim Harford's reply to that question.

No long distance teaching for New York City

You can't outsource education, says New York City. Socratic Learning, a company providing online tutoring services with teachers from India had bagged a $2 million a year contract to train 2000 children under a federal "No Child Left Behind" program.

New York City insisted on teachers being fingerprinted (which they did, in an Indian police station), and prints verified by the FBI, which was done.

But New York City wanted the teachers to be physically present, and for the company to provide them U.S. Social Security numbers, which aren't given to non-residents. Is this the end of tutor-outsourcing as we know it?

Maybe they can turn around and offer that to Indian students.

Time for the consultants?

When the Indian IT hiring scene is as bad as it is today, it's time to sit back and think. Why is it so difficult to find people?

Demand and supply, you say. There's few people who really understand coding and these people are hugely in demand. That demand has encouraged those that didn't really care enough about programming to enter the fray; and it might sound extremely arrogant of me to say, but we Indians seem to revel in doing things we don't really care deeply about.

From Arranged marriages [1]to Higher Education, Indians seem to prefer to "study whatever is fashionable for the job market", rather than following their heart. This hasn't just happened; our history has shown that the socialist days of the past meant limited jobs, and even more limited opportunities. A bad education could make one absolutely miserable in terms of money; trades like journalism, the fine arts or even sports were littered with lowly-paid degree holders who had learnt the hard way that there just wasn't enough in there. The next generation was obviously huddled into lower risk career options; an engineering degree, computer skills and programming lessons. They didn't dare to question their huddling, perhaps, and in reality, they bought the study-for-a-job argument.

Engineering degrees started to get a huge demand for Computer Science and Electronics degrees, and those in the rest of the streams like Mechanical and Chemical Engineering took extra classes to learn C++ and Java. Not from a burning desire to learn, but to make the grade for the Computer jobs.

With the advent of the tech outsourcing boom, companies started to look for people and initially, the Electronics and comp sc. students weren't enough. So they would hire engineers from other branches, who went through a rigorous training program and learnt the ropes. Everyone who knew anything about computers qualified.

Soon, even the engineers weren't enough so companies were hiring among any graduates of any school that had seen a computer at a distance less than 5KM, though this requirement could be further relaxed if a project was slipping past.

Switch over to now. There are a few good men and women. And there are a huge number of qualified but unenthusiastic engineers in jobs that don't suit their temperament, but who's looking at temperament? This is a science, not an art, they all say, and slap you with the 10,000 page ISO900x manual and the CMM process document. Anyone can do this, if we break it down.

But can we? Is software development so simple and definable that we can write a manual and expect that a team, ANY team, will deliver to expectations? Not one single manager worth his or her salt believes that. It's eventually about people, and about having the right people. The code gurus are the real people we need, those that can take a requirement to its logically intended software end. Not necessarily the superheroes, though they are preferable to the "junta" crowd, but "developers".

So where are these code gurus? Some are managers now, since companies don't allow you to evolve much or earn more as developers. Some get disgusted with the sheer lack of quality work and either turn into entrepreneurs or join marketing or sales to beat the boredom and learn something. The rest are treated very highly by their companies and manage their projects fairly well.

There's a problem there, though. These guys, though useful, aren't well paid. Because the Great Indian Software Dream has only one career path - managerial. If you want more money, you become a manager. You're defined by the number of people you lead, which is such an irrelevant measure I splutter everytime I'm questioned why I hate it so much. Good coders often don't give a damn; they want to build something, not someone. But if money calls, one has to go up the manager route, does one not?

Maybe it's time for them to turn consultants. Then they can demand higher pay (per hour) than they usually get, work for short periods (3--6months) and spread over multiple companies. They'll not have to turn managers to get paid more, and so can continue to do what they love most : code. Lesser office politics, and perhaps less red tape to deal with. Delivery is all they're hired for, and that's all they get.

Yes, startups will want these guys. But startups should understand the demand-supply equation - don't let a person go because they're not willing to work full time. Heck, even pay them partly in stock (yes, you can still do that in India) if it makes them want to stay.

It might just be the age of the consultant quicksilver software developer. I think I'd like that as a career sometime :)

I'm just afraid of what happens if the consultant market gets muddy. If hiring a consultant is as tough as hiring full-time, you'd always prefer the latter. Enter blogging and networking: only the fittest among the networkers/bloggers will survive. And Googleable-names will be the top consultants.

1. Arranged marriages aren't always decisions taken by parents for their children; in fact most counter arguments claim that every individual has a choice to say "yes" or "no", in all but the most remissive clans in India. Yet, the concept remains that parents provide the choice(s), individuals only approve whoever they like. There's a huge difference between attempting to find someone (and most likely, finding yourself in the process) and having someone else do that for you. Oh, it is changing, by the day. But it speaks tomes when you find those that didn't even care enough to try and find the person they will live with for the rest of their lives.

Changing names (and the World)

Guy Kawasaki has changed the name on his blog to "How to Change the World". That, I like. Also I like the tagline:

"A practical blog for impractical people."

Only impractical people can change the world. Practical means, or so I think, "connected to the world", and by definition, changing the world involves reversing practicality, if such a word exists.

Have I ever thought of changing the world? When I was fifteen there was no other option, for there was nothing that deserved to stay. I wanted to change the way education was slapped upon us, I wanted to make cars cheaper, Buying things for indulgence would be the norm, I'd make a world class hospital, and change politics for what I know.

Now when I'm 32, I don't see it as black and white anymore. A hospital's fine but I want to be able to pay for private rooms. I want to change politics but not right now. I can change education, but the effort needs me to go full time, and I have a family to feed. I want to make cars costlier, except the one I like. I want to keep that shade of grey, and can we remove the 50% gray, please?. Oh yes and that entire series of grays has to go, but that one out there, peeping out from the corner, yeah that can stay. I kinda like that.

I kinda like that.

Famous last words.

"Getting Real" is now free

The folks at 37Signals.com have made their Getting Real book free to read - read it on the web now for no charge. You can also choose to buy this book in PDF or paperback form.

This book is an awesome read. You may not agree with everything you read (I didn't) but you have to admit that it makes a fascinating argument for a new world - the New Web Startup. (I hate the term Web 2.0)

What it brings to the table is a collection of startup concepts you might have heard of in passing that contradict popular notion, and somehow the authors come across as the Robin Hoods of startups. You've heard "Get a VC", they say "Screw the VC, get started anyhow". You've heard "You gotta go full time", they say "Part time's ok, even weekend time". "More features than the competition" is now "Less but better tested features".

There are small, tiny little things in there that stick on for a long, long time after you've read them. I find myself sitting back and thinking again about some of the assumptions I'd made, and asking myself, "What was I smoking?" For instance, you'll find the argument against functional specs compelling:

Build, don't write. If you need to explain something, try mocking it up and prototyping it rather than writing a longwinded document. An actual interface or prototype is on its way to becoming a real product. A piece of paper, on the other hand, is only on its way to the garbage can.

What you might want to is get yourself a good 2 hour undisturbed stretch to read this book. Maybe four hours, if you, like me, need to wander off and search for what struck you when you read something.

An imaginative workplace

The Volkwagen "glass factory" at Dresden is an incredible workplace, and the photos will simply blow you away. Here's a (linked) image:



I will (hopefully) be visiting the Toyota Factory in Bidadi (Karnataka) soon, and perhaps I can bring my photos here. I'm sure a clean and efficient workplace is possible anywhere in the world, and the VW factory simply blows you away.

Killing startups

Paul Graham talks about 18 mistakes that kill startups. When I read that first, I said: Why 18? Why not 20? Or top 10, or even top 3, in todays times of instant gratification? I think this was more on the lines of "Ok, here's the top 10. Oh shoot, I forgot that one. Let's make it the top 11. Er, remember that guy who shot his co-founder. Top 12. And 13. And 14...Okay 18 and that's it. The remaining 982 they learn for themselves."

Apart from what Paul said, I think one of the other BIG reasons that kills startups is:

19. Inertia
You know the standard way startups try to fund themselves: I'll do some consulting on the side, they think, and pay the rent. Soon, they get a few projects, hire a few employees on both product and consulting sides, and now they have some healthy revenue that they pump into their product's marketing like visiting trade fairs, buying advertisements and so on.

But the product still does not sell. The employees are working hard; as hard as they can. But some employees are on the consulting side and others, on the non-performing product. As every company does, founders try to reward performance through bonuses - consultants get the meat and the product employees are handed only a "company wide bonus"; they either begin to leave, or ask to be moved to the "other side". The products flounder further.

Yet, the startup owners are doing well - the consulting revenue is enough for profitability, and they still feel the product "has something in it". So they continue to fund it, and after a few more down or "just break even" quarters, have the big doo-dah meeting: What should we do with this thing? Founders are (usually) human beings with a huge attachment built up for the product; after all, it's the only thing the company owns as a technology asset, while the rest of the work is for-hire-for-customers.

Warning sign: Inertia.

They *could* fund the product forever. As long as consulting revenues come in, the product can underperform, or just about break even, and no one will feel compelled enough to break the impasse. This is where I believe startups fail; the inertia from running a business profitably eats into the potential growth one could have with a more "remove the deadwood" approach.

That's why founders need a plan. Not a plan you show investors where your numbers make you sound like a significant contributor to GDP. A plan that says: This is how much I want to grow. This is how long I'll wait to see that growth. And if we fall short, I will quit or find a venture capitalist.

I failed in that I did not have a plan. I did have dreams. I was scheduled for my second ferrari last year, according to one of them. I have one car by ferrari's parent company, Fiat, and I just cleared the loan last September. Oh so much not the same thing.

What I'd recommend is: 50% growth for the first five years of sales, and a Rs. 5 crore revenue target (Rs. 1.5 crore net profit) within 36 months of your first sale. Or quits.

If you already have venture capital, throw all of this away; the VCs will tell you what sound to make next.

Note: I understand inertia does not "kill" a startup - if you're still profitable, are you dead? Well, I could run a company profitably with $1000 in annual revenue. See what I mean?

There won't be no more VCs in India.

A Unified Theory of VC Suckage is a phenomenal article by Paul Graham about how the structure of Venture Capital funds explains why people who (wo)man them are usually jerks. It's the structure of the fund, he says, that pays them a percentage of assets managed, that results in their "suckage". Meaning they need more money to invest, to make more money as commission, and more money is not always good:

VCs don't invest $x million because that's the amount you need, but because that's the amount the structure of their business requires them to invest. Like steroids, these sudden huge investments can do more harm than good.

That's just lousy for the founders who need lesser money in todays world. Imagine you, as a startup, need some money. Not a heck of a lot, around a million bucks. Because you're either outsourcing, or have a lower-cost marketing idea, or you don't need as many servers as google, or simply that hardware and bandwidth costs are low enough to serve out of your basement. You're not going to get these piddly little sums from VCs, who want a minimum of $5 million per deal because they got a $2 billion base to work with and each guy has to deploy like $100 million and she can manage 20 deals at the absolute maximum.

So, the startup thinks: What the heck, let me get the money, at least more money is better than nothing. Well, it turns out it's worse. Getting more money means giving up more control, and now the VC owns you; they will then do the standard thing of putting their own CEO, CFO, C-everything-O until you're left with C-toilet-cleaning-O. That's still ok, I would guess, if you got paid for it - but Venture Capitalists shudder at paying founders for their stock.

So why am I ranting about this? Because this spells the death knell for traditional VC investments in India, which are already under some amount of duress.

1) Indian startups require a lot lesser capital than, say, a similar startup in the US. I don't mean a start up that sells in the US, I mean one that sells to Indian customers. A software startup with a great idea, 20 employees and a few customers and a reasonable growth plan will perhaps need about ten crores, which is about two million dollars. If VCs are coming with truckloads of cash, they need to back up those trucks a little bit and get them one truck at a time. Unfortunately their own structure denies them that opportunity.

2) Deal flow is practically non-existent. That means there are very few VCs whose ego is not inflamed by the idea of taking another VCs handouts. In fact, the little deal flow that exists is always an ACCRUAL; meaning a downline VC will pump in money into the company but refuse to buy out an earlier VC or angel; meaning there's a lot lesser enthusiasm for the early stagers.

Exits have to be through IPOs or acquisitions. Either option is perhaps too far away, and if founders aren't going to get some payout at the time of investment (part of their stock for instance) their ability and interest in keeping the business going is going to flag, especially if they are just C-toilet-cleaning-O. You will take away their control and management powers, and won't even pay something for what they do own (stock), and you expect them to work as enthusiastically as before. I may be quoting Bill Gates here, but that's the stupidest thing I've ever heard.

No wonder VCs are not getting the best deals; if founders know that VCs will take control AND screw it up (I'll talk about that later) they won't give up a good idea.

3) Okay, let's say we can fix deal flow by saying it'll happen tomorrow. Founders are still going to lose (and perhaps lose more control). If VCs don't help founders by giving them a little bit (equity or cash) on each deal, the residual founder ownership is going to be very low and they will walk away. VCs will be left with the business people that they CxO'd and those guys, to show they can deliver, will go about doing what they do best, making big-ticket deals. They'll just acquire each other left, right and center, with no real profit to talk about. Sounds familiar?

4) Valuations in the past have been unnervingly low. Take JobsAhead.com, a recruiting site which was sold in 2004 to Monster.com for about $9.5 million. They got (unknown amount of) angel funding from the Dalmia group and two rounds from ChrysCapital totalling $5 million. I'm guessing ChrysCapital wouldn't have got more than 70% of stock - that's a total return of around 60% over 3 to 4 years, about 12-15% annualised. Not exactly print-worthy.

Another example: Baazee.com was acquired by eBay for $50 million. VCs Funded: $22 million. Net return would be around the same - 12-15% or so.

More: NetKraft gets bought by Adea for $8 million. Actis & Jumpstartup: 67 percent paid $8 million. Net return: (MINUS 33%).

I don't know what happened in the above cases, but it seems to me like acts of desperation. Take the deal and run seems to be the mantra, and VCs have LOST money or face. In all the above cases, VCs controlled more than 50% of these companies, and I believe that they decided to exit while they were still profitable. Now you know why VCs become Vulture Capitalists!

Initially I thought founders would not have been too happy. But when you're C-toilet-cleaning-O, money for your stock is always good, so these founders would've been honestly happy. Some of them have gone on to start VC funds in India or incubators or become members of India's band of angels.

But I think these valuations kinda prove a point. This is what happens when you give VCs control - they sell out for stupid valuations, and they ruin it for the next set of entrepreneurs.

4) I think many VCs have figured out they can't run companies. VC funds are now coming as PE funds, meaning they invest in public companies and get stock in return; for in such companies there's a need for big money, and the funds don't get as much control, so they can't do things like change CEOs and CFOs etc. No matter what anyone says I don't believe VCs do this management changing rigmarole because they like it; they feel existing people don't have the pedigree or the experience they can bandy to THEIR (the VCs) investors.

The rules of the VC game are that you put in money and then you protect it by surrounding it by your people. The rules of the PE game are that you give the money and you get a cocktail + dinner presentation every quarter, and if you get all cranky you can go sell your shares in the market, thank you very much.

So is this the end for Venture funds in India? Note carefully that I said "traditional" VC funds. It's the end of the road for you guys. Pack up your bags and go home.

To the smart lot that's left; come hither and have a cup of chai. Let me be an arrogant asshole and tell you what I think. I think you guys belong here. This is where it will happen, where the biggest amount of money is. But it needs money, and you're the only ones that have it. You know this, but you're afraid of the past. The Indian past of low valuations, lousy VC performance etc. Forget the past. So some people screwed up. So what? You're smart. You're smarter than those guys boarding the plane back. You can find, and fund, and foster the next big thing here. Look at India, not just the IT sector - look at India.

Look at dishing out smaller chunks of money, and managing more excel sheets. Look at giving founders more breathing space in this non-credit-rated, low-debt-availability market. Look at larger valuations. Look at making money in 10 years instead of five; you're smart enough to convince your investors, I'm sure. And you know this already, but wait and take the IPO route rather than jump into a pool of choreographed acquisitions.

Your chai is getting cold.

P.S. Sramana Mitra has a neato-article on the same wavelength, calling for sub $25 million funds.

Eyesore 9000

If you're ever bogged down by standards like ISO 9001:2000, you must read the Eyesore 9000 standard. It comes with intuitive, easy-to-understand phrases like:

How you document it [your process] is your business.Feel free to use scratch and sniff in your Quality Manuals. Do the whole thing in Morse Code. This Clause specifically prohibits your registrar from mandating the format of your documentation, or the methods by which your execute ISO 9001. It's the Clause they don't want you to know about.

Such valuable advise, and for free! The e-book comes with a lot of handy suggestions like "Make sure the ink dried.", which has surely reduced the number of wet-ink accidents for the ISO 9001 implementers, formerly a major cause of implemenation related injuries. But you must have a little something the book expects you to have: a sense of humour.

Creating a software company: Processes?

Let's say you want to create a software "services" company. By that I mean a company that offers software development services to customers, perhaps on a turn-key basis. (As opposed to a product company or ISV) Now if you want to grow to a bigger employee base than, say 10 people, you will need some way to co-ordinate activities and keep things organised.

What you need, they'll all say, is a well defined process.

There are some big standards in this sort of setup: ISO 9000, CMM and the like. I'm not a fan of multi-letter acronym standards; for small companies, these are more a pain in the backside than of any serious help. And for the entrepreneur, these are an absolute nightmare!

What you want is effective project management, and the ability to learn from your mistakes. That's all. Here's my take on what you need, and how you can ensure that you can grow your staff strength and still keep your sanity. Note that some of this can also apply to product companies (ISVs), so if you're an ISV with some time on your hands (oxymoron?) I hope this will help you.

Ensure you have the following tools:
1) A stable version control system
2) A bug/defect tracking system, with post-mortem cause analysis (a custom combobox might do)
3) A time tracking system
4) A project management tool.

Then, start writing. You need to write down, CLEARLY:
1) How you specify work. If you work with fixed specs, ensure there's a place to store (and search for, usign google desktop or such) specs. If you work on T&A, ensure you put in feature requests into a common area (perhaps in the bug/feature tracking tool)

2) How you develop: This involves your entire software development process; write down the different ways you can. I.E. where the customer's involved, where dev, qa and systems come in, whether you use milestones and deliverables, when QA does regression, how you use automated tests + smoke tests on builds, how you use automated builds (please do) and so on.

3) Version control: What happens when a new project is started, what is the format of user checkin comments, do you use edit-and-merge or exclusive locks, do you expect personal workspace checkins or only buildable checkins (or both) etc. Work carefully with defects as well: bug fixes should perhaps be marked in some way with the defect code.

4) Defect reporting: Write about how defects will be reported (area, steps to reproduce, workarounds, "owner" of a bug, bug states, approval procedure etc.) And write about how you will analyse WHY a bug occured, as a post-mortem process after the bug. (bad Spec, bug reported wrong, dev error, feature-not-bug, etc.)

5) Time tracking: Write about how your people report time they spend. Is it per spec, per product, or freehand? Are you using billing codes? Can you create estimates and link them with actuals alongside?

Now try and link them all together. Run through a cycle of projects and come back and refine these processes.

You may find that you need:
a) Better Specification and feature control. There are requirements management tools that can help.
b) Estimation recording and analysis
c) Organised learning and a central knowledge base

Or more such things. Now schedule a review of your original documents after every project cycle, and you now have a process of "improvement" also.

As a uISV, you probably hate this kind of stuff. But if you plan to be more than a handful of employees, having this planned out is essential.

Over the next few posts I'll try to write a bit about each of these topics, and a sample process document for each of the above.

Free Tools for Micro-ISVs

A discussion on Joel's business forum showcases free tools for Micro-ISVs (a term for ultra-small Software Vendors, usually those that have another day job that pays the bills).

Don't miss it.

How much should you charge as a consultant?

A post on the JoelOnSoftware Business forum wonders what one should charge as a consultant, and whether dividing required income by 1000 is a good way to set an hourly charge.

Typically, as an employee, you would make some money as salary and some as benefits. Benefits include employer payments into your retirment or pension plans, medical insurance, gratuity etc. Usually this is around 25-30% of your base salary. So if you made Rs. 10,00,000 (10 lakhs) a year, what do you need to charge if you become a consultant? (In India, most consultants would charge by the day or the month so I'll stick with that charge)

What's different between an employee and a consulant? Lower benefits, yes. So you've gotta make that up somehow - 25-30% of base must be added to the amount you should make.

But we haven't considered taxes. If you are an employee you get a few deductions for housing and that's it. For a consultant, you can expense out a lot more - the depreciation on your car, the cost of fuel to get to work, what it costs to run your website etc. The savings in India can be 20%! My auditor has told me that the tax department expects that at least 40% of your consulting revenues will be profit - meaning you can expense more than half of your income - of course, only using legal means. If you can expense out 50% of your income, you would pay tax on only the remaining 50%, which at today's rates would be 15% of your total revenues.

Let's say that as an employee you make Rs. 700,000 post tax (on Rs. 10 Lakhs) and another Rs. 200,000 in benefits. So what you need to make post tax now, is Rs. 900,000. Depending on how much you are allowed to expense that you otherwise spend anyhow (such as your web site, commute cost, internet charge etc.) you can figure out what you really need to make pre-tax: For the above figures, Rs. 10.6 lakhs if you were able to expense 50% of your revenues.

With regards to an hourly calculation : 1000 hours is perhaps ok. If you worked half of the available 50 weeks a year, you'd make 25x40=1000 hours a year.

A daily charge can be arrived at using the same kind of formula: 50 workable weeks of five days each gives you 250 days. Divide this by two for a reasonable buffer. In my example, you would charge Rs. 8,480 per day.

Multiplied the daily cost by 20 for the month's charge.

For a two-four week gig, this pricing should be fine since it's going to take you as much time to find another contract. But if you need to pitch for a contract that lasts 9 months, you might think of reducing your price for it's now more than a half years work (which is what you have considered in your pricing)

Of course, in the end, it's all about how much your customer will pay :)

The "dhanda" of Software: The Indian Perspective of the Software Business.

Thanks to Mohit, I have received my personal copy of Eric Sink's "The Business of Software". Eric is a darn good writer, a programmer, an entrepreneur and a someone who created a "Micro-ISV" for the heck of writing about it.

All of that makes him someone I want to be, except he's 38 and I want to be all of that right now when I'm 32. Go on, smirk away.

The book's an excellent collection of his writing, mostly from his blog. He talks about starting up, staying there, hiring people, paying them, negotiating with customers and in general, the transition from geek-programmer to geek-entrepreneur. You should read it if you're looking to start a business, unless you are
a) an employee of SourceGear, Eric's company or
b) someone looking to compete with SourceGear, because he paints a not-too-rosy picture of his industry.

I think I'm inspired enough by Eric to want to do something more than I'm doing; and yet, I think some of what he says needs a little bit of time to work where I am - in India. The U.S. went through a massive boom and bust in the I.T. industry; in India there's still a boom and no bust in sight. (they're never in sight, are they?)

Attrition rates are high and the job market seems to be so good that it makes little sense for the "Micro-ISV" to even think about ISVing. Or is it?

What's stopping people from going out and starting up? This is a question I asked of a group that's part of a startup network. Here's what I got:

Not yet ready.
This means someone's not emotionally invested enough to launch. Most people think this business of starting up just "happens". Something will suddenly inspire me, they think, to go out and start my own company. It's not a lack of ideas; there are still those that think selling pet-food online is a killer idea that will just have be acquired by Google. Yet, they would like to remain corporate slaves because the idea is still "in an ideation stage", which is another way to say "I'm still chicken".

Not yet ready, to me, is just an excuse. An excuse I've used too, no doubt, but that's me being a wuss. At least I admit it.

How will I survive?
A very legitimate concern for startups is: how am I going to pay the rent? Most people are willing to cut down their lifestyles - what lifestyle are you going to have anyhow, if you work 20 hours a day - but some expenses are just not avoidable. Rent, food, kids expenses and electricity payments is perhaps the bare minimum one needs.

I would plan for a six to eighteen month cash flow, depending on the type of startup. That then determines how much salary you need; if you have that as savings (and a reasonable buffer) you should be on. Otherwise, you have to add that to your funding requirements - I'll get to that later.

Don't want to quit the day job.
Let's face it: Some products need you full-time. You can't set up a retail shop by continuing to have a day job, and you can't sell software or services (in India) while working in another job. And if you're familiar with Bangalore today, you will understand that traffic is going to sap all your energy so you'll have very little time and mental energy to cope.

Most entrepreneur books and sites tell you to start up before you've quit your day job. Apart from making you live in a cucoon and postpone your launch indefinitely, what can happen is that your employer may claim it as theirs; most companies require you to sign off rights to any of your work while in their employment, regardless of whether you did it at home or otherwise.

If you got a free invite to a concert, would you bother going to it in the rain? What about if you paid Rs. 1,000? Creating a product while working full-time for someone else is usually treated like the former - I didn't sweat while making it so its loss is no big deal. Your project might just languish like the hundreds of thousands of those with the same idea; and you should actively protect against such a fate.

Meaning, if you're ever going to NOT quit your day job, set up a time frame when you will. And if you're "not ready" at that time, shut down your computer and lock it up in a garage.

Having said that, it's important to have a small cash nest to depend on in times of adversity. So working to build that nest is a good way to go; except you need to know how much you need or you'll save till you retire and then your pet-food-online-store idea is defunct because no one has any pets anymore.

Don't have the money
How can you start if you don't even have enough money to take the product forward? There are enough funding sites and blogs that talk about how to get equity funding, angel capital, seed money and the sort. I won't go into that, but will say that you can find money through Consulting and contracting: Do a few gigs here and there to get the moolah in, and phase it out as the product gets better financially.

You're going to get beat up sometime - either it'll be money, or your product features, or your customers or employees. You might as well get ready and go for it.

China, India and Bangalore - the new order, in that order?

My comment on the Infosys blog:

More interestingly, Richa Govil quotes Silicon Valley and Bangalore as examples of friendly ecosystems to Tech Entrepreneurship and IT professional hiring. (respectively) I'm not sure this has anything to do with an IT outsourcing ecosystem - the only plus for bangalore, and in fact, India, is it's cheaper and skilled engineer force which has been numbed by years of retrograde teaching techniques .(learning by rote, low practical exposure etc.)

You need all three. You need skill, that's what makes you deliver. You need mind-numbness because such work involves long boring processes which aren't fun for the technically passionate individual. And you need cheap, or there will be too many questions.

China has all three, in perhaps as much abundance as India. They only need to get their act together; English skills is their only drawback. In fourteen years, they can bridge that gap, and they already have years of mind-numbness from communism. How can India match their infrastructure?

As for Bangalore within India - ask around in the city about the new commercial "software parks" and whether they're able to get tenants? The answer, my friend, is blowing in the wind.

Creating a work culture

I'm trying to figure out what the best way is to create a positive work culture for three People Goals:
1) Hiring: People should want to join.
2) Retention: People should want to stay.
3) Growth: I should be able to scale up manpower and still maintain 1 and 2 above.

The business goals we have involve Productivity and Quality. Essentially this means profits - higher revenues, lower cost.

So how does one build a work culture that addresses the "people" goals, and at the same time maintains business goals?

A few things I've considered, but will not do:
1) Get tons of money and throw it at people. Won't work. Firstly, it's very difficult to scale, and secondly, you don't get the business goals => paying more salaries does not mean more productivity or quality.

2) Do "cutting edge" work and get phenomenal talent. The gaming industry works this way; some of the best programmers work in this field because it's dynamic, exciting and cutting edge. You can pay less; programmers will work to be part of such a team and product. Does not work for me; for our work is quite banal - bug fixing, spec writing, database development and the like. Personally it's worse - my job involves a lot of Microsoft Word and Excel. So my edge is as "cutting" as a hammer.

3) Huge Infrastructure, CMM/ISO etc, Lots of HR, Mass Recruitment. The Indian Software biggies do this - you basically get cogs in the big wheel. One cog goes away, replace it with another cog. The overall infrastructure promotes retention: Having a Pizza Hut in the campus, getting little cycles to roam around, Gyms and swimming pools etc. - the poor cog won't get this in most other companies, so he'll stay. CMM/ISO processes add lots of resume glitter. A huge HR force and mass recruitment makes sure you have enough low cost bench resource ready to replace the exiting cogs. If you have constant inflow and constant outflow, the net result is stability.

I can't do this - Don't have the money, and won't get it.

What I choose to do instead is to approach things in a piecemeal but integrated manner. (Whatever that means). Here's the story.

Make them want to join

Create a solid pitch to every candidate, with our business focus in mind. Each person should be aware of where the company is, where it's going and most importantly what they will be doing to take it there. Talk about growth, rewards, performance assessments and everything else mentioned below.

Create good infrastructure that's attractive but not expensive. A clean and quiet office, enough whiteboards and pinboards to write or pin stuff, high end machines with awesome monitors (no they're not that much more expensive) Etc. Impress them when they're in for the interview.

Make them stay

Provide a well defined career path and skill credits for both technical and leadership levels. Every individual can obtain skill credits by going through courses or passing certain tests.

Set up internal training programs (online) with certain skillsets and Assessments with internal certification and skill credits. This ensures they have an objective way to assess where they are and where they can go.

Give employees exposure to conferences, presentations and user group meetings: Not very expensive; definitely cheaper than getting a corporate trainer - and builds technical strength.

Organise a company wide meeting every quarter in a resort or such: The cameraderie will build over time. Ensure that employees can be frank with you here, and tell them where you are and where you expect to be by the next quarter.

Infrastructure: Small things matter. In India an employee is happy to wear a company T-Shirt - don't skip that, ever. Get more company branded merchandise: Pens, Pads, Diaries and the like. Get a coffee machine; people like to have coffee when they stay late.

Measure their performance

Set up internal skill assessment metrics to see what level of skills each person has, in order to see what technical or leadership level they can be on.

Set up business goals: Ensure that people get their estimates right with respect to actual work done. Measure this. Divide work into templated tasks that have internally set estimates - and have employees enter their timesheets regularly so that you can check how well they've done.

Measure project performance with objective input on time and quality: Set up measures for number of bugs thrown back by customers with causal analysis of individual defects (whether it was a bad spec, lack of understanding, bad code etc.). Measure the time taken to fix issues during development, and post deployment.

Note non-project contributions: If people help with setting a process or tool that addresses your business goals (productivity/quality) - note this and reward them.

Set up objective measures, not subjective ones - so that you can scale appropriately. Subjective measures are prone to interpretation, involve too many inteperson dynamics and often are rubbished for not being fair or honest. Objective measures need to use and collate data - rate stuff from one to 10 or as a percentage. Rank employees within your company so everyone can see who's the top and more importantly, who's the bottom on the leaderboard.

Reward their performance

You have metrics in place; now assess your savings when people perform better than the internal metric, and give people hard cash for such savings. If it costs you Rs. 500 per hour to develop something and it's done faster than your metric estimate, you've saved some money. Share it with the employees in question, in proportion to their contribution to the saving.

“Pool” rewards: For things like bug fixes, you can't reward people for bugs or for fixing them. Keep a pool of money as a reward for a project; this pool reduces in size with the number of customer reported bugs that were avoidable. Bad coding or insufficient QA, for instance, reduces the pool size and in the end, the remaining money is shared with all involved.

Let people go
When you find that people are underperforming consistently, let them go. Define the process - for example, an employee is given three warnings, one of each time that he comes in below the acceptable metric of estimation, task performance and quality. After three consecutive warnings, the employee is let go.

People will complain about a productivity based performance system - and will tell you how unfair it is. It will be partly unfair because of a certain bit of subjectivity that is required; but it will only be unfair to those that underperform, or are scared of doing so. Give everyone the option of leaving if they don't like it. (Don't backtrack on this; if you do it no one will respect you anymore)

That's all I have so far. Thoughts?

Going down the freelance road

Gautam Ghosh is turning freelance. My best wishes and a ton of good luck to him; I'm a recent reader but his articles have some...er.."dum".

Gautam is now an "organizational consultant" which I guess is either organization of consulting or consulting with organizations, or maybe something else. And can be rearranged to form "Tantalizing or uncool Satan".

But I digress. The issue is that of moving to a freelance situation, and having given up a not-so-high paying job for entrepreneurship myself, I know a few of the pangs that one goes through in this situation. Let me elaborate.

People will call you stupid.
You're giving up a monthly salary for a completely random, no paycheck job. You're relying on the fact that someone out there might actually want to use your services, and basing your life out of it. You're also potentially sabotaging your corporate ladder growth for a fleeting passion; growth that would perhaps ensure that one day you will be given an award, a plaque and perhaps even a cozier chair.

Ignore them. The idea of giving up a salaried job is anathema to most people; and the idea that your income is transient will seem like a serious disadvantage. There's more to life than that, of course; passion and the need to do something is as important. But there's something the salaried folks are not likely to know: you can earn more money by hiking it on your own, and transient income is fantastic for personal life (holidays, free time and quality of life).

Building blocks are important
Most of us in salaried jobs are completely ignorant of what it takes to run a business, even a freelance one. You need an accountant for the finances. You need to get yourself an office (more about that later). Brochures for marketing; a responsive web site; Service tax registration; Company accounts; etc.

I will provide a more detailed post on how to go about this, on another day.

And you need the base stuff for your business itself. A freelance trainer will need to create course outlines, training materials and powerpoint slides. A consultant needs convincing marketing material.

The time you spend on this stuff is not billable - so you don't get paid for what can be really hard work. You've been salaried all your life and haven't known a situation when you don't get paid for hard work. Not easy to face. But you've already figured out by now that it pays off in the long run.

Not as much fun
The usual crib of the new freelancer is that they have to do some much "boring" stuff.

"I started out thinking I'll have so much fun, that I'll only work on what I want, and here I am filing taxes, making phone calls for payment, figuring out what colours look best on the marketing brochure."

This is part of a freelance life. My suggestion: Outsource what you don't need to do. Pay an accountant to make your service tax returns; get an ad-agency to do the creatives; hire a web designer. And for other painful tasks such as asking for money due - create models that reduce the pain; like advance or staggered payments, proforma invoicing, accepting credit card payments and so on.

I work from home
This is tough. Home is where you relax, or do difficult homely tasks such as hammering nails or cleaning the fridge. Home is where you hang out and see TV and curse the gazillion advertisements.

Home is not where you work. When you get to a freelancing situation your first feeling is: reduce rent, work from home. The money you save isn't worth two hoots if you can't get work done! So you have two choices:
a) Rent an office: This could even be a small place in a business center. This affords you the privacy of an office, and could have additional benefits like phone answering, faster internet connectivity, conference rooms, ability to call people over to discuss etc. Obviously, this is more expensive.
b) Designate an area for a home office: If you have a 3 bedroom house, consider allocating a bedroom as office space. Restrict your family from using the well accepted method of shouting your name and asking you where the cupboard keys are. Don't watch TV (unless you're a day trader in stocks) Consider this as your office - if this isn't getting anywhere, wear a formal shirt, tie and shoes to this room.

Working with family
If you ever start a freelancing business with your spouse, you're doomed. Well, not really, but it takes a serious toll on your personal life, a little bit later. Initially it's all hunky dory, like your pre-marriage days; and then it starts to dawn on you that you hate it when the excel sheet is not filled EXACTLY like that, and she hates you for creating that ridiculous looking destop icon.

You're going to have trouble working together, like any two people working together in this planet. The problem compounds because you see each other every bloody minute of the day - as a corporate slave, you didn't need to see your boss' face after office hours. And who do you crib to, mate? Not your mate.

One funda: Don different hats, and keep overlap to the minimum. One person does marketing, the other does delivery;One is responsible for accounts and the other for office supplies. Wherever there is overlap, ensure you know who's boss. If she's a better speaker, let her do the talking. If he's good at powerpoint, let him create the presentations. And never, ever, work from home.

Taxes: a pain?
To most freelancers the thing that hits most is the additional tax levels one gets involved with. There's Service Tax - a return must be filed every quarter. Then there's tax deducted at source (TDS), albeit only at 10% or so. And then there could be others such as advance income taxes.

Since freelancing begets "business income", freelancers are expected to provide bills for their expenses, provide numbered invoices, maintain cash flow etc. for tax purposes. This is a pain. Or is it?

Consider this: Business income is revenue MINUS expenses. That means your expenditure is "deductible" from your income. This is SOOOOO different from your salaried job where you would only see your money after taxes have been deducted.

Remember your good old car? You can now claim depreciation on it. Same for your computer, and your cell phone. You can expense your petrol bills, part of your phone bills, your electricity charges etc. So the comparison looks like this:

	Freelancer	Salaried
Annual Income	500,000	500,000
Depreciation on car	120,000	(not claimable)
50% of petrol bills	25,000	(not claimable)
Depreciation on computer, cell phone	30,000	(not claimable)
Other expenses (consumables, electricity etc. @ 5,000 p.m.)	60,000	(not claimable)
Taxable income	275,000	500,000
Tax @20% (approx)	55,000	100,000

The saving of bills and preparing of invoices is a small thing to do to save so much in taxes!

(You will spend a little more as a freelancer, but your income is also correspondingly higher)

Do you remember how wholesale and retail markets work? When you buy from a wholesaler (let's say you're a shop) you can get a deduction for VAT, and pay, in general, lower prices. When you buy from a retail shop, you pay high and then you pay VAT on that price too.

In terms of income, Salaried people pay taxes and then spend money. Freelancers spend money and pay taxes on the remaining amount.

Salaried people are retail. Freelancers are wholesale.

Conclusion
As all writers must, I will stop. All of you who are still here, you either have a lot of patience or you cheated and read ahead. So go on, start your freelance venture and don't hesitate to make mistakes.