Wednesday, July 26, 2006

The Indian Software Football team

Got this in my mail today:

How would India-Based IT Services Company (IBITSCO) tackle the game of football?

1. It would start with only 3 players (including goalie) at the start of the match and ramp up to 11 by the end of 90 minutes. It will attempt to have at-least 7 players on the field at halftime

2. 9 of the 11 players will be India-based

3. Out of the 11 players announced as the first 11 for the game, 8 would be hockey players, 1 would have kicked a ball sometime and advertisements for vacancies for the other 2 positions would be out in the newspapers.

4. All 11 players would be handed over a soccer manual 3 days before the 1st game and asked to learn everything in it by the next 72 hours, including the flight journey to the venue for the soccer match.

5. The team would be paid half the allowance of the other teams.

6. One (and only one) very high paid consultant would be hired (just for the duration of the tournament) to "advise" the team on how to play soccer.

7. Feasibility to playing the game offshore would be considered owing to cost reasons.

8. The suggestion of using 22 lower skilled footballers instead of the usual 11, in an infinite-substitution mode would be mooted.

9. Internally, there would be deliberations on whether there is any process standard for football by which you can say anyone who is at least 28 years old and has played at least 3 football games would be eligible for the squad

10. Immediately after the match, the playing 11 would be asked to board the next flight to Istanbul where they would be needed to play a handball match the next day!

Monday, July 24, 2006

The long tail of India

Chris Anderson's Long Tail post about "scaling down is better" is quite apt, in my opinion, for the country I live in. In essence, what Anderson says is that the real difference Google (and long tail companies) makes is that they give their smallest customers the same flexibility as their biggest.

Anyone today can set up a Google Adsense account and get access to advertising on their own web site, making it possible for millions of otherwise ignored customers to get paid advertising on their site. Anderson mentions that this is the long tail - a hitherto uneconomic market tapped by simply providing a service that would otherwise be reserved for the "high end" customer.

India is a growing economy and suddenly, we've seen hordes of "high end" consumer products come into the mainstream. I'm not just talking Gucci or Armani - I'm talking about a gazillion products that are built to sell only to the super rich. Cars priced above Rs. 10 lakhs; Restaurants that cost you a fortune to eat; Software companies that only sell "ERP" solutions; Wealth management only for those with incomes over Rs. 25 lakh p.a.

My complaint isn't that these products are available. It's that these are the ONLY (or seemingly so) products out there in some fields. For instance, most wealth management products from banks are conjured as "portfolio management systems" - a service that advises one to invest in certain financial products or markets based on one's goals - and these are limited to "High Net Worth Individuals" (HNIs), or essentially those with incomes greater than Rs. 25 lakh. Now the great majority of wealth management is required at the lower end i.e. with those that have much lower incomes, say Rs. 5 lakh p.a. These people need financial planning because their saving of even Rs. 5,000 per month today can result in a significant income stream for them tomorrow.

Further, High end products in cars make little sense in India, where the annual passenger vehicle market itself is a total of 1.1 million. No, sit down and understand that. Of the purported "middle class" of India of 300 million people, less than 0.4% buy a new car every year. (Compare this with the U.S. total population of around 300 million and 16.9 million cars sold a year) Further, the number of people that buy cars greater than Rs. 10 lakhs is probably less than 10% of all new car buyers - that's a total market of 114,000. This is shared by Honda (Civic, Accord), Toyota (Corolla, Camry), Mercedes (all variants), Skoda Octavia, Ford (Mondeo, Endeavour) (etc.) and only higher priced players like Audi , Bentley and BMW. And new cars are releasing every month in this segment!

Software companies too are not going for the layman - most products built for the Indian market involve ERP (Enterprise resource planning) priced at Rs. 100,000 or more. There is only one India wide accounting software for small companies, which is frankly a piece of cr**. But when no one is investing, the one eyed man is King! And there are very few software for filling in personal income tax, share and mutual fund portfolio management, traffic analysis, internal security and such. And there is huge potential for services in these domains too - but it's "too small" a ticket size. Long tail!

Services too are the domain of the rich. Housekeeping and messenger services are overpriced to make up for addons like buttoned up suits, printouts and such. Coffee shops provide a "hang out" for the urban elite, and ignore the deluge of masses that want one "to go, and fast". The U.S. retail model comes here, but with U.S. prices - that puts the mass market chains like McDonalds and Subway on a higher pedestal and out of reach of the very base they were created to serve.

I could go on forever. Books, Videos, Libraries and so on. Yet, the mentality of investing hasn't really sunk in. Everyone wants to go online; books online, videos online and so on. India doesn't need online investments, like I had mentioned earlier.

India has 50 million internet users (*), though the number that are ready to use a credit card number on a web page is, frankly, peanuts. Business can't be ONLY online - having an online arm is good, but we must go beyond the online world and engage in really leveraging long tail principles - using offline resellers or franchisees.

(* I find that number difficult to believe. From Computer Industry Almanac, the total number of PCs in use in India are 16.98 million. So, if we don't count people who visit cyber-cafes we'll end up with a far lower "addressable" population - people who would actually make business happen on the internet)

You might think: But that's not true! Look at the number of investors using online trading, or the number of cell phones + connections being sold, etc. But that's because of the long tail, because there are offline links to these products! Online brokerages allows for "sub brokers" - people with computer terminals who can link to the main broker and resell brokerage services.

Cell phone services too engage an offline intermediary for sales and bill collection - and Reliance Infocomm was probably the first to realise the extent of the Indian market (frankly, if they hadn't come in we simply wouldn't have seen the growth of that industry like it has now).

What we need is more services to get on the road. Products for the 300 million middle class, not for the 2 million overpampered upper class. And ideas that will allow for a much broader reach through a reseller or franchise concept.

What kind of businesses?

  • Fast food: In big cities there's still a demand for fast, healthy takeaway food. Not "burgers". Think of packaged curd rice in the south (picked, sour, etc.) freshly packaged and sold for lunch. Think of a roti cut into small round pieces and packaged in with dal/chana in Delhi. The idea is that it should take less than 5 minutes to serve, and could easily be taken away. In smaller towns, work on the "clean" model - most restaurants there simply don't have clean or visible kitchens.
  • Motels: With good highways coming up, people want affordable, clean and safe places to stay. Not five star hotels, but motels - the Kamat group is doing a great job in the south, but the field can accomodate FAR more.
  • Wealth management: Banks and FIs can easily provide this, with a strategy similar to broking. Provide online terminals to resellers in small towns, let resellers enter information and get advice - and then allow product sales to flow indirectly.
  • Books and CDs/DVDs: In smaller towns, this can be provided through an online link. The problem here is that stocking books or CDs is usually a big expense - allow a shop to order such CDs online, and send the shop only the cover of the book/CD. The idea is that the customer won't see a product immediately - they'll get it a day or two after they order, and they pay when they get a product. As sales increase, stock important products or make more trips!
  • Microfinance: Give a guy a hundred rupees in the morning. He'll give you back Rs. 110 in the evening. Yes, that's how the retail agriculture traders operate in the villages, with money borrowed from loan sharks. And most borrowers, remarkably, are honest. If you have the right infrastructure, you can get in there and offer loans at a far lower interest - yes, there is a fear of loss, but is that any greater than that in the city?
  • Magazines: There are simply not enough magazines for the middle class; and not enough variety in the ones available. "Home improvement" may not be a big thing in India right now, but there is a definite potential for "how to", "great deals" and coupon booklets in India. I am exploring such markets myself so I won't elaborate, but the market here is huge, for what is a very low burn rate at Indian publishing costs.
What do you all think? Is this true? Or will India grow so fast that the really HIGH income people will be the market we should all care about?

Friday, July 14, 2006

Are we there yet?

"The Myth of the New India", Pankaj Mishra's piece in the New York Times is an eye-opener of sorts. He talks about how the whole hoopla around India is misguided, and perhaps quite elitist as well. That "India has arrived" is blatantly false; we have, after all, the per capita income of sub saharan Africa - around $728. (I dare say, though, that this figure would be up 30% if we considered the "black money" hanging around)

The whole Mittal saga and the subsequent announcement that India is now the big guy on the block is ridiculously overstated:

This sounds persuasive as long as you don't know that Mr. Mittal, who lives in Britain, announced his first investment in India only last year. He is as much an Indian success story as Sergey Brin, the Russian-born co-founder of Google, is proof of Russia's imminent economic superstardom.

True, isn't it? Mittal has a pronounced accent that's very much Indian, but his achievements are that of an Indian NRI, in Britain and Holland and Luxembourg and such fancy places. He's a true blooded Indian, and has answered questions on his inclination to move to a British passport with "Why should I?". Coming from the son of a land that counts its children in green cards and citizens, I find that very pleasantly patriotic.

Yet, his achievements have nothing to do with the Indian economy. Which is why India shouldn't have been all ruffled when Guy Dolle of Arcelor made a Zinedine Zidane out of himself, referring to Mittal's origins during the battle and eventually having to shake hands with the very man he set out to defame. That was Mittal's battle, not India. Having said that, though, it's heartening to know our country will stand up for one of its citizens. I just hope one day it will do something for those languishing in prisons abroad, or in bonded labour in the gulf.

So, back to the equation at hand: Is India Hot, or Not? Without alluding to shampoos I will agree with Mishra that it is not.

Yesterday was a real revelation for me in this regard - and in quite a surprising way. I am a member in a bootstrap entrepreneurs club and in yesterday's meeting, was privy to a discussion about an online business focussed on Bangalore. The business involved building a website to access certain valuable information placed online by certain retailers. I was a little perplexed about the business model, and began to think about the size of the market.

There are around 500,000 software professionals in Bangalore, and perhaps another 500,000 of rich/semi-rich citizens with computers and Internet access. Gives us a million people total, but I would hazard a guess that 10% of them would use a computer to serious effect - searching for items, buying online etc. That's about 100,000 people - this is the total size of the Bangalore market for anything online.

There are perhaps six other such cities in India - Delhi, Mumbai, Hyderabad, Chennai, Pune and Kolkata. That gives you a total market of around 700,000 people. Out of a billion population, your total online market is short of a million.

What use is a "mass market" online solution? No wonder there are no big retailers online, and none of the big mass market vendors spend money on a mass market web site. The better thing to do is to work with more traditional elements to get to these people - meaning newspaper ads, hoardings, brochures etc. Even tele-sales!

I think this might change eventually, but right now India needs a lot more of the "old economy" stuff. Like toll free number registries. Like Refrigerated transportation for milk and vegetables. Like innovation for rural areas - including farming, water harvesting, power storage and so on.

Writing online stuff right now is simply trying too hard to get the same customers all your friends are trying to get. What you should do now is try and target those people nobody's talking about, and who're a mere statistic. The thing one must know is, they're a statistic with a lot of money (collectively).

Friday, July 07, 2006

Outsourcing: Raise the bar. Share revenue.

Michael Fields of KANA writes about "Back Shoring" - moving software development back to America. Fields, CEO at KANA, moved the software development operation from India to the U.S. and that, he says, "was the best move for KANA".

He makes some important points we need to understand. First, he says,

As a small company, IP is a critical part of KANA's asset base - one that deserves full control and protection. Globalization is a powerful force. But I believe it is important to outsource only those things that enhance the success of your product delivery without outsourcing the core product engineering.
Every company wants to protect its IP. But what American companies like KANA do not realise, though, is that you could give the source code of highest revenue product in the world - Microsoft Windows or Office - to a company like Infosys or TCS, and they just will not know what to do with it.

Most likely, they'll go up to a Fortune 500 company and say "We can build you an email client that looks just like Outlook".

The IP protection argument is sound, but in another angle: Indian IT companies routinely "switch" developers between clients, because they need to continuously balance resources. Obviously the developers will then "borrow" code from their immediate past, simply by accessing shared source, or ask their colleagues to mail it over. Code simply flows, and concepts are easily shared. If you have a new or brilliant idea you don't want anyone else to see, don't outsource it.

Fields then goes on to say:
Indian developers have a very high level of skills. It's no wonder that executives become fixated on the fact that you can hire 2-3 Indian programmers for the cost of one U.S. programmer.

However I would be willing to bet that few software vendors have an idea of the TCO of their offshoring operation. For KANA, the competitive labor market in India meant that we had little control over who was working on our projects. There was no way to curb high turnover rates, control labor cost increases or to hold onto key talent.
This is crucial to understand. That Indian IT companies switch developers midway through a project is a not-too-well kept secret, and the effects of this, and the higher turnover, labour cost, managerial cost (KANA kept a program manager for every five engineers) and travel ensured a much lower ROI than expected.

Why do Indian IT companies switch resources between clients? Think of it this way: you get paid per engineer per month. To impress a new customer (Say A) , you use your best engineers on a project, and pour in a few riff-raff (i.e. less talented folks or fresh recruits) for supplementary work. Soon, A is happy and increases staffing.

At this point, you get another new customer (B) you need to impress. The number of high quality staff you have is limited - typically only 1 in 10 people you have is of the high standard a new customer expects. (My experience) You then pull out the smart guy from A's project, hoping that the others, including the "riff-raff", would be capable of taking on A's work. This rarely, if ever, happens, and combined with turnover, causes A's product to be delayed, shoddy or both. Guess what though, you get paid both by A and by B.

A's happy experiences the first time around make then stay - "this might be an exception". But it's not. It was always going to happen, and will continue to happen because the Indian IT business model works that way.

You might think this is equivalent to the good guy leaving the company. It's actually worse: if a person resigns, someone else ALWAYS takes on the work, and the company may even hire a new smart person or move someone from the bench. But if he's still there, but just on a different project, the rest of the team depends on him for inputs, and the company thinks he's always there for backup. This is the beginning of a disaster; not usually a catastrophe, but a disaster nevertheless.

Fields says attrition and hiring issues are rampant in the US as well, but with the downturn, reality has sunk in and "U.S. developers are simply not pricing themselves out of the market anymore.". Indian developers have just no idea how bad a downturn can be, so pricing pressures will exist until the s*** hits the fan.

Interestingly, Fields comments:
Software development is really a collaborative process. Typically an architect sets forth specifications for development. Then as the programmer works, he or she thinks of new techniques to improve scalability and performance. The programmer and the architect come together, make changes and continue to work in such a cycle.

This process is very difficult to re-create when teams are interacting around the world. We found that our offshore developers often told us, "Here's what we built, exactly as you wanted - but it won't work, and here's why."
Deja vu, all over again? (thank you, Yogi Berra) I agree soooo much. There is NO business reason that the Indian IT company should bother to correct the problem. If they get paid on time spent, they would rather spend the time and then ask questions.

You might think - Well, pay them a fixed price then! Ha. I thought this was the answer too - but that solves no problem at all. Fixed bid contracts need fixed specifications. If you want a collaborative process then you will spend all the time just "freezing" your specifications, and then you'll realise you have to change something drastic, and the whole model falls apart. Also, you're then hiring code monkeys, not software developers - after all, if no inputs are allowed after a specification is frozen, the developers wouldn't even want to think about whether it will make a positive impact! (The IT company will ask you

Communication is also inefficient - There's no "coffee room chat" and the ideas you get by simply bonding with other developers. The time difference destroys innovation by removing the developer interaction with the business people - or even, as Fields notices, between developers. A product company does not benefit by stifling innovation, and time zones are not really in our control.

Fields concludes, quite appropriately, with the results: "For every 3 to 4 programmers in India, we are now able to hire 1 American programmer to deliver an equal level of productivity."

Okay, we have a problem. What's the solution?

S. Sadagopan at Satyam writes about managing offshore costs. He suggests that solution is to look closely at costs, that the best cost is not the lowest, but more closely aligned with value provided. (That's good, but how do you measure value until you've spent the money?)

Sadagopan also provides 10 steps to manage outsourcing costs - including resource backups, better vendor tools/reports, ignoring short-term spikes/troughs etc.

This, I think is simply the wrong approach. Better reports and resource backups are great for a manufacturing process, which software development is not. What a software product company wants from their Indian outsourcer is greater buy-in. What Sadagopan mentions as "a shared risk model" is the only way forward, but as a "shared revenue model".

The shared revenue model is self explanatory; the Indian company makes a percentage of gains made - and shares a percentage of losses. What's different from a shared risk model? Typically shared risk involve a minimum payment per month, and a "bonus" based on gains made. The upside/downside is not significant - and causes very little bottomline difference to the Indian outsourcing company.

So what really is different in shared revenue? That each party actually buys in. Let's say an company - call it AmCo - wants to outsource to an Indian IT company ("Indo"). Indo will buy a certain part of AmCo, part of the IT resources and even IP. This can be structured even as debt between Amco and Indo, including monthly payments to keep Indo running.

Indo will then work closely with Amco and refine the product so that gains are real. These real gains are then shared between the companies, and the debt (if any) gets written off slowly - eventually the debt goes away and both companies make money.

The downside is that if the project fails, Indo has the debt on its books to repay. Indo will do everything it can to avoid that. Put it's best developers on the project, do the coffee room video conferencing if it has to, build quality resources instead of "riff raff". Oh and with visible upsides, Indo can even provide product performance related bonuses to staff - attrition and movement is controlled.

But Amco loses it's IP, and part of future revenues! Well, there can be a buyback agreement in place, but frankly, Amco benefits from having Indo own equity in the project. After all, Indo's reasons for succeeding including making Amco's products successful!

Do I recommend this for every project? Well, if there are real gains to be made from the project. But do not use a shared revenue model:
  • If Amco didn't have the budget to use local staff, and outsourced purely to get things done at a lower cost, don't use this model.
  • If Indo doesn't give a hoot about debt on its books, and takes the project purely as an "I'll do whatever gives me money".
  • If Indo asks no questions about the revenue model, marketing efforts, cost gains and so on. "Buy in" means informed decision making - and if one party asks for no information, something is wrong.
  • If Amco has no process to measure the revenue/cost gains accurately and have you know. How would Indo know how much it earns?
  • If Amco doesn't want to give out IP. But then it faces the same issues as our friend, Mr. Fields, did.
Shared revenue models are about raising the bar. It's not just about the software development process, but the entire business itself! That's a big leap forward. Let me give you an example.

An insurance software, developed using the shared revenue model, has increased premium revenues and decreased claims processing costs shared between the insurance company and the outsourcer. The software development is spread across 5 phases, and each phase has additional revenue. From an initial web based software specified the outsourcer enhances product revenue using mobile technologies, across countries/languages, and cross sell with other companies - purely because it's equity in the project makes it interested enough to explore these options.

I think it's possible, and the balance sheets of some of the Indian IT companies are now big enough to take this on. But the question is, will they do it?

Pot calling the kettle black?

There will be an "All India Bank Strike" on August 1, protesting against outsourcing of normal banking services to private agencies.

Indian banks have struck it rich recently on high credit offtakes through housing and personal loans. These loans are provided by a significant extent to those that work in the high tech and Business Process Outsourcing (BPO) sectors, which take on outsourced work from foreign companies, including banks abroad.

So the very concept that brings Indian bankers money and growth is scaring them now - that work will be outsourced to cheaper locations, even abroad. Not fair, one would think, for defending our outsourcing practices is what Indian companies have done for the last decade!

Every job is potentially a candidate for outsourcing. Bangalore continues to be the most expensive city in terms of average salaries of high tech and BPO employees - costs today are dwarfed by their equivalents in the west, but given the high rate of attrition, the cost of bad infrastructure and issues with quality, the values will soon start to converge with the west. Then, it will be more common for Indian companies to choose to send work out - to smaller cities and to cheaper countries.

If you have a credit card, you can outsource today - sites like rentacoder allow you to provide specifications and get your work done online. And prices there are, quite surprisingly, a fraction of what it would cost in India. Either they're underbidding, or they're just cheaper. I'd bet on the latter.

Wednesday, July 05, 2006

10 myths about Entrepreneurship

I've been an entrepreneur, and for reasons that'll make very little sense to you. In the process, I've learnt that there are things about being a founder that aren't at all expected. Here's to warn you wannabe entrepreneurs.

1. I'll be my own boss; no more working for someone else.
Let me get straight with you: You're never your own boss. If you make a product, a service, a thingamajig or whatever, you exist solely to serve your customers and/or shareholders. You might think: I don't need to report to anyone or ask someone for a raise. Dude(tte), you think asking someone else for a raise is tough? Try askin' yourself. I'll guarantee you, you'll never pay yourself what you think others need to pay you.

When I started Agni, on the first day of the job - March 25, 1998 - all four of us founders went and watched a movie at 3:30 pm. This was my "smelling the roses" - I was my own boss, finally. I din't have to take no more orders. Because I was the boss, right?


After we hired employees, my prime aim was to get business, see it moving and see the revenue. It was always business - weekends, holidays and all. By the time I realised I was burning out, I was three years down. Three years of being my own boss, underpaying myself and ruining my health. I was a slave to the company, and I didn't have anyone to blame it on but me.

After that day, I have never seen a movie on a working day at 3:30 pm.

You're never your own boss. The minute you have a customer to get money from, or an employee to provide for, it's over.

2. I'll create jobs by starting a company.
This might not be comprehensible to most people who're not in India. But a very big set of people here think starting companies helps in a macro-economic sort of way because of job creation, and that is a firm positive. It's also enshrined in the way people talk - "How many people do you have?" is usually the first Q thrown at you when they find you're a startup.

Now, creating jobs is a good goal to have, if you have money to throw away. You give this crap the government when you want cheap land. But don't ever, even for a minute, believe it. Your company exists solely to make money. If you were able to earn the same money with lesser people, you should go ahead and do it. "Creating Jobs" is a goal best left to a certain founder of Apple Computer, when he wants to have children.

3. All I need is the money.
This is by far the most common thing you hear from the wannabe entrepreneur. The idea is there, in someone's mind, and if the money comes in, everything else will falls in place.

Wrong again. Most entrepreneurs that have an idea need to understand a lot more about entrepreneurship and starting up. A startup is vastly different from the big companies, which is where the biggest ideas germinate and die a natural death because "all I needed was the money". In big companies, everyone has a job description and a nice and cosy "Key Responsibility Areas" and goals and targets and all that. Startups involve being totally multi-functional and clinically insane, usually at the same time. Founders need to think of EVERYTHING; including who the hell is responsible for keeping a supply of toilet paper.

"Yeah, right", you're thinking, "I'll hire people to do this stuff once I have the money". Bad strategy. Too many people start with the 50,000 feet view and then don't like the feel of the ground when they hit it. Egos play a part too - people don't want to do the "dirty" stuff, but it has to get done, and there's no one else responsible for it but you.

Note: When I say "you", I mean the lot that founded the company.

Capital always follows those that have understood the nuances of a business. That's why you see more existing companies funded compared to blue-suit-and-tie-making-pitch.

4. It's my baby!
Having children is perhaps the most responsible thing you will ever do. And underperform, because in the end they'll turn out to be just like you.

But a company isn't your baby.

When I started Agni, I fell in love with it. It was mine, something I owned, something that needed nurturing until it could stand on its feet. This meant working like crazy, doing whatever was needed to make it grow - building cash reserves, analysing spends, ensuring the web site had the right image and so on.

In the process, I became a control freak. I refused to delegate; no one could talk directly to a customer, and if she did no one could make a mistake. No one could update the web site without going through me. It was my baby and I'd see it grow the way I wanted it to.

Those of you with teenage children are probably snickering right now. I don't have teenage children but I figured this out on my own:

My company is bigger than me. It could run on its own, if I gave it the change.

It's not my baby. It will never love me back.

5. The company gets paid, I get paid, same thing!
Non-funded entrepreneurs tend to get very confused about this. A company tends to have a completely different revenue/expense structure from an individual. For instance, two persons drawing a salary of, say, Rs. 100,000 per month each decide to up it and start a company. After a couple months, a cheque for Rs. 250,000 arrives - everyone's feeling great! This is 2.5 times their earlier income!

But they took two months to get the cheque. And the expenses are different - they had to pay for the phone calls, the travel, the fuel, the printing, and tons of other stuff they didn't have to worry about at a job. In the end, when they prorate income, it's far lower than what they made per month!

There's another side to this:
6. The company isn't my bank account.
Another way to put this is that The company pays, I pay, same thing. Don't confuse the company for your personal finance. For instance, don't pay your laundry bills through your company, or buy a TV for your home using the company cheque book. This is very bad practise, and if you ever hope to see an external investor or get VC funding, avoid this like the plague.

Remember, the company's money isn't yours. What you need to do, is diligently draw a salary every month. The money you put in initially bought you a part in the company's capital - meaning you own x% of the company. Any money you take out should be structured as a salary, otherwise you cause more confusion when you hire someone or get other investors/partners.

7. I'll pay myself lower than industry standards.
So you got through the salary bits and figured out you gotta pay yourself. And you invest about Rs. 50 lakhs (5 million) rupees in the company. You figure - my friends get 20 Lakhs (2 million) a year, but I'll pay myself only 10 - this way I'll last longer.

This is great if you want to save taxes. Any other reason to deny yourself this money is stupid.

Why? Because you're not here to make the company's capital runs as long as it can. You're here to build a business, and if you run out of money at least you'll realise it sooner.

Second reason: Let's say someone big comes and decides to buy your company because of your profit record and what not. What are you going to say - double my salary after you buy me out? When you run the numbers, your profit is inflated by at least Rs. 10 lakhs - the amount you denied yourself! They'll figure it out, and revalue your company with lowered profits. Suddenly you're looking at a much lower valuation than you thought you commanded.

A note here: You might have a cash crunch sometime - so it's entirely ok to stop paying yourself for a month here and there. But make it up when the going is good, and make sure you account for the difference.

When we started Agni, we decided on a 3 month "salary free" period. I.E. we needed to make enough money in three months to pay ourselves our last company pay packet, or we'd shut shop. (We started with four computers) We made it in two. The company's over 8 years old today.

8. Board meeting, regulations, taxes, phooey. We're a small startup.
Entrepreneurs usually disregard basic company law because they're so busy running the business. But this stuff comes back to haunt you when it hurts the most, so here's my check list on what to do:

  • Get a stationary set for your company- this means company seals, letterheads, cards, Memorandum and Articles of association (multiple copies), share certificates, a fixed asset register, voucher slips etc.
  • Buy an accounting package to maintain your accounts. You can get accountants to fill in details (or do it yourself) once a month for a sum of around Rs. 2,000.
  • Get registered. This means get a VAT number, a tax number, a company registration certificate etc. You'll never figure this out, so hire an accountant to help with this process.
  • Setup board meetings at least once in three months. In India, if you're a private limited company this is mandatory, but ill enforced. It matters a lot when you show this to investors, so just do it.
  • Pay advance taxes, VAT, TDS etc. on time. Your accountant should tell you what you need.
Of course, this isn't an exhaustive list.

9. You can save tons of tax! Expense EVERYTHING!
As an employee, you barely get to save much tax. You have just a few options, but the important thing is: You pay taxes and then spend the rest of the money. This means see your money only after tax is paid.

A company is different: A company spends money and then pays taxes. If a company buys a pencil, it can deduct that as a valid expense.

When a new entrepreneur realises this, the first thought is: expense everything!

Bad idea.

Firstly the tax department isn't so kind that they'll take your expenses at face value. Chances are they will reject what they deem frivolous, like "massage for dog".

Secondly, investors hate this kind of stuff. So if you want to get organised capital or go public, cease and desist from over-expensing stuff.

Lastly, this creates a bad impression to your employees. Keep it professional so they won't try to abuse or misuse the company's resources either.

10. If it doesn't work, I'll shut it down.
Shutting your first company down is very painful, because you cringe from the failure associated with a shutdown. But be reasonable: if it didn't work, it's better to let it go and start elsewhere. You will be tempted to cut salaries; but how long will that work?

This applies to the products you build too - if one of them succeeds and another doesn't, shut the bad one down. It's tempting to fund one line of business through a "cash cow" - but you have to turn the tap off if you want any peace of mind. Give every line of business or product a certain target date by which it must deliver profits - and if it doesn't, say goodbye.

Also, define what "doesn't work" is. It's not about running out of money - that's the worst case, and when it happens you have to shut down anyway. It's not about profitability; you may make the same profit every year, with no growth. That is still reason to shut it down - take your net worth and put it in a bank, you'll make more the next year. You can have targets like top line, bottom line, annualized growth rates and profit per employee.

Don't have fuzzy targets like "I'll change the world". You already did that by inhaling when you read this post.

Don't have absurd targets like "number of employees". Having more employees is not a sign of good health - you need to work towards either greater revenue per employee, or greater profitability per employee.

Don't have targets that are unachievable either. Think carefully, because it'll shape your tomorrow.

And don't bet on Brazil to win the world cup either. Because you, like me, will be dissapointed when they play a lousy game.

(The 10 point thing is taking a cue from Guy Kawasaki's blog, which I really really like.)