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.)

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