Thursday, January 18, 2007

Limited Liability Partnership

If you want to start a company you have two choices: start a Limited Company or a partnership/proprietorship.

A partnership or proprietorship has been a loosely held entity where the ownership and responsibility of the company is defined in a registered agreement. If one partner decides to take a loan and run away, the liability is transferred to all other entities in the partnership. Given such issues, most companies are loath to recognise partnerships as proper suppliers or customers. (Exceptions are professional organisations like Auditors, lawyer firms or architects, which by definition cannot be private limited companies) Again, no one will passively invest in a partnership because of the unlimited liability it exposes.

A Limited company provides for limited liability - i.e. you, as an owner, are only liable to the extent of your shareholding in the company. Currently, limited liability companies have a whole lot of statutory requirements to follow - having strict board meeting regulations, annual general meetings, rigid documentation etc. Not a very easy thing for a startup, and the costs, as you can imagine, are much higher. Plus, given that closing a company can take years in India, the cost of regulation can be high for a failed company.

Enter the Limited Liability Partnership (LLP). A new bill proposed in the Rajya Sabha in December, creates the potential for a new entity - the LLP - which will have the benefit of limited liability and the statutory relief of a partnership. (Read the bill in toto)

If this bill is approved, it may be an interesting vehicle for entrepreneurs to use. Plus, you can convert from it to a limited company anytime. An option has also been provided to convert a limited company into an LLP, which will give a lot of relief to owners of now-bust-companies.

Tuesday, January 16, 2007

Thoughts that will make you think

Thanks to my friend Mohit, I saw a list of entrepreneur thoughts at the gaping void.

What I liked best was:

Bill Gates may have a million times more money than me, but he isn’t going to live a million times longer than me, watch a million times more sunsets than me, make love to a million times more women than me, drink a million times more fine wines than me, listen to a million times more Beethoven String Quartets than me, nor sire a million times more children than me. Human beings don't scale.

The one thing I can think of is: He can help a million more people than me. That's perhaps why I should want the money.

Wednesday, January 10, 2007

Profit is a four letter word

In India, there seems to be a cultural disrespect for the word "profit". I remember walking in an exhibition and hearing this conversation:

"Kitna hua" (How much)
"200 rupees"
"Bahut zyada hai" (way too much)
"Isme bahut kam margin milta hai" (i don't get much of a margin/profit here)
"To margin nikal ke bolo na" (remove your profit margin and tell me the price)

I was flabbergasted. Sure, this is negotiation. But the implication was Sell me this item at no profit. This, by itself assumes that the exhibitor will give you the item at just about break even pricing! (Of course, shops are smarter than that)

But we have a history of con-jobs. Most times people indulge in uneven pricing - meaning they price items at different rates for different customers. Foreigners get the worst treatment here; and even the unsuspecting middle-class gets stiffed ever so often. In that light, a strong negotiator is very highly recommended.

The problem, though, is in the abhorrence of profit. It's not like "Give me your best price" - that is perfectly acceptable. But asking one to ditch his profits so he can make a sale seems unfair, and is fascinatingly acceptable in this part of the world.

With a new middle class, and cash rich people, will all of this change? We just have to bet on it.

Monday, January 08, 2007

Startup hiccups in India

Dharmesh Shah analyses why there aren't more software startups in India. By "Startup", he means a company that produces a product - not the BPOs, or the software service companies. He means software product companies, of the likes of Tally Solutions, Picsquare and the new startup that I will be starting in a few days but haven't had the time to build the darn home page yet.

Now yours truly is going to counter-analyse and put in points from a) someone who started a company at age 23 and b) someone who is going to start once more at 32, but this time on a completely different front.

Service companies have lower risk
Startup or service company? When you look at it from an entrepreneur point of view, it's about food on the today (service company) or a gourmet meal far far away in the distance. Dharmesh says the risk of a software service company is lower; and I agree.

I will digress right now into a brief history of my first startup; we went down the "service company" route, though initially only as a funding source.

When I started Agni, I was 23, it was 1998, I had unending reserves of energy and was totally clueless. Which are the prime requirements for starting a company with nearly nothing in your pocket. We put in Rs. 30,000 each - four of us - which was all the money I owned at the time. All of us also brought in our home computers, and set it up in a first floor room of a company owned by a company that was ok with renting it to us without a deposit.

Chirag and I - two of the four founders - had no rent to pay or other big liabilities so we decided that we would go full time into the business, and Arun and Bhaskar, the other two, decided they will get themselves a day job. The deal was: Within three months we generate cash flow to pay us Rs. 15,000 every month, and we all go full time. Otherwise, we shut shop and go away.

We started as "corporate trainers" - meaning we would go to big companies and do five day training courses on C++, Delphi, Java and the like. Even the day jobbers took part - and in three months we generated the required cash flow, everyone went in full time etc. All a happy story till now.

Enter the product. Fin-Acc, an accounting software that would beat the pants off the competition. Two founders would develop it full time - but how to pay their salaries?

(Note: We hadn't even started to think of marketing costs - we were conveniently using Chinese math like 100,000 companies register every month, and where will they get their accounting packages, we can easily get 1% of this market and so on. Our eyes were the shape of dollar signs - because the rupee sign simply does not make for good eyeball graphics - and we honestly believed that if we built it, they would come, hand over their money in small bills in paper bags, and beg us to give them our product. I love those times.)

So, to finance this, there would be a "services division", which was the remaining two founders looking for service contracts worldwide. Luckily we got a break in Europe and then in the US and the "services division" became stronger.

Eventually, as the product started to take away more money than we could throw at it, we began to pull the rug. Take out the newspaper ads. Pull down the hoardings. No more stalls at IT.COM. And later, ditch the product idea - let's sell the service of getting companies accounts online.

What am I getting at? We were forced to go down the service route initially because we had no money. Later, we did it because the product was just not getting COMPARABLE revenues to the services division. Services is easy. Products are tough. Period.

Lack of precedence: Dharmesh says that the Indian story lacks the inspiration provided by prior startups, like in the US you have the Intels and the Microsofts. In India, whaddya got? Infosys, which landed a big contract in 1990 and became a services giant. TCS and Wipro, which was funded by an established house. And while these guys have some product lines, they are primarily service businesses.

But I think India has good stories, albeit not always in the tech space. Suzlon Energy, Bharti Airtel and Rediff have grown from fairly humble beginnings. The recent IPO of has brought a new angle to tech IPOs - that a web company can get an huge valuation in the Indian stock markets.

But yes, the garage companies have still not set a precedent. There aren't that many IPOs - I don't know why, in the face of growing investor awareness, large fund investments and lower regulatory problems - but I'm sure that equation will change. After all, I'm not the only soul that realises even a sub 100 crore turnover is enough to take a company public.

Early stage capital is hard to find: I've talked about it in the context of "not enough capital" and "no more VCs?" earlier. Deal flow is not acceptable and angel investors are either not there or are more chip-on-shoulder than VCs. Okay, gross generalisation.

Bureaucracy: Dharmesh says:

Here in the U.S., I can have a brilliant idea for a software startup and within about 72 hours have launched a “real” company. By “real”, I mean it will be registered (LLC or S-Corp), have a Federal Tax ID, have a merchant account to accept payments, a bank account and a small business credit card. I’m not sure how long the equivalent process takes in India, but I’m guessing at least weeks.

This may not be such a huge hurdle anymore, as even Dharmesh admits in the comments. But let me see:

- Starting a company: If you start a private limited company, this requires a Director Identification Number (costs Rs. 2000 or so and can take a while to get), a copy of a PAN card and such. You also need some "Memorandum and Articles of Association" and application documents which your accountant will snag from another similar company. You will then need to apply for the name of the company, which requires government approval. Okay, it's a pain in the ass. But if you choose to start a partnership firm, which makes sense because you're not going into debt, it's a 10 minute job.

- Getting a Tax ID for a company is an over the counter thing nowadays, and a bank account takes from 1 day to 7 days.

- Merchant Account: You can get one easily at CCAvenue. If you want to be an offline merchant, i.e. get a swiping machine and stuff, it will cost you more time and money. And you have to convince the bank you're not going to cheat customers. Such is life.

- Getting a small business credit card: You can probably forget about this one. Businesses don't get credit that easy, and all you can do is get a personal credit card.

- Dharmesh mentions that it requires a more gregarious attitude to get things done in India. Well, I don't know; I'm not an introverted shy sort of person, I'm more of the sort Dharmesh describes that will "get things done". You probably have to find such a person, but I've found that accountants and social circles help.

All in all, bureaucracy is a pain only if you want it to be. To me, it's the cost of doing business. I would love it to go away - and it's slowly easing up - but it doesn't stop me from doing what I want.

A small digression: One of the reasons I've never wanted to take up a job in the U.S. is because they grudge work permit holders the freedom to start a business. With an H1-B, you never get that freedom until you land a green card; and that process can take around 6 years. I'm ok with waiting a month for my company's tax id, but six years, man that's tough.

Recruiting employees is a challenge: This is the big one, mate. There are two aspects to this:
1) Finding people with the "drive": A tech startup needs people who are extremely passionate about what they do. So if you're going to write mobile games, you have to find people who will breathe games and understand mobile technology as if the acronyms were built into their chromosomes. There are about 10 such people, and the big companies have hired goons to protect them from you.

Okay, I'm exaggerating. But it will sure seem that way to you after a 100 interviews, 200 phone conversations, one-on-one meetings in coffee shops etc. You know what ticks me off? The kind of person that proudly puts "COM and OLE" on his resume, and when asked about how IDispatch interfaces work with late binding, will say "I don't know, we didn't touch that part in our project".

The very excuse that their "project" did not involve a certain area of a technology seems to absolve them from the need to ever learn it. This kind of person can never work in a startup. And yet, such persons are 95% of your candidates.

2) Ability to hire them: Now let's say you hit a gold mine and found a few potential hires. Convincing them to join is ultra-tough, like Dharmesh says, in the face of big corporate salaries, perks, and importantly the cultural peace you get by working with a "known brand". I'm one of those guys who doesn't give a rats ass about my "career growth", but the Indian recruit-o-sphere is littered with those that want a shiny, polished, smooth-upward-curve resume, in which your startup obviously causes undesirable bumps. So you can't hire the career types, the money types or the known brand types. Now you are left with a sum total of two people you can hire, one of whom is you.

It's also interesting that Dharmesh mentions the marriage angle; that startups are not considered kosher for the marriage market. One of my friends, who was a consultant making obscene amounts of money working only six months a year, had to join a big name company when his in-laws postulated that the lack of a fixed job was not explainable to their relatives. Think about it. His wife and his in-laws were ok with his job, and the money was great, but he got a job so that their relatives wouldn't raise eyebrows.

He quit the job a month after his marriage.

Product companies are tough and creative: What Dharmesh says here is a little subtle; that Indians, in general, don't want to spend time on the creative nature of product development, and are more focussed on practical, heavy things. Uhmm...I think he's right here. There are some essential small parts of development - usability, clarity, no. of clicks to get something done etc. which are largely ignored by developers and companies alike.

I think it's not that we don't think of it. It's that we don't try to refine ourselves once our product is out.

A commenter also mentioned that a huge problem is lack of local market. India by itself is not so much a consumer of software products. Not only is piracy rampant, but people simply do not pay in volumes that make any sense. The lack of local market means that most startups look to get customers from abroad; it is now painfully obvious that you should be where your customers are, therefore the startup moves to other shores for selling, customer acquisition etc. and leaves India as a development/testing location. It is now no longer an Indian startup.

The lack of a local market is relative. Maybe this is not the place for a youtube or a facebook. For mobile content providers, it's *the* market. For online travel ticketing, jobs and real estate portals and the like, it's showing tremendous potential. And I believe there is a big market for discount bookstores, tax return software, fast food restaurants etc.

Overall, I think startups in India will be tough to come by. It's largely the lack of good people that will kill the enthu of the few that do start. Yet, all it will take, and I shamelessly borrow from someone whose name I don't remember, is a few good men and women.

Thursday, January 04, 2007

Targeted New Year wishes

A Google search for "Deepak Shenoy" has yielded this snapshot:

Look at the right - Sponsored links with my name on it! What a way to target a New Year wish :) What's even more impressive is what happens when you "click" that link:

More power to Mahesh Murthy and the people at Pinstorm.

To Mahesh, Pinstorm and all of you reading: Wish y'all a fantastic 2007!