Managing in the Tropical Zone

VC and Founder Compensation are so totally different

2007-10-01T06:16:00.000-07:00

Sramana Mitra has an excellent post about how skewed compensation is at startups. (Emphasis mine)

As for the compensations, General Partners at Venture Firms make anywhere between $1 Million to $3 Million a year without counting performance incentives. The carry is all upside.
...

In contrast, the poor entrepreneur bootstraps a startup, takes enormous risks, and if (s)he raises venture money, the first thing a VC does is to restrict his/her salary to a minimum.
...

Only one out of 50 startups succeed (or may be one out of 100, I don’t know the exact ratio), so the equity component of the compensation package rarely pays off after the liquidation preferences, etc. are settled.

Meaning:
1) For the entrepreneur, the compensation as salary is kept absurdly low by the VCs. And their equity returns are kept even lower with liquidation preferences, drag-alongs and such. The argument usually starts with saying that the founder needs to have the hunger and then moves quickly to "the golden rule is that the man with the gold makes the rule".
2) VC managers on the other hand have "carry" as an unrequired bonus, and get fat paychecks thus ensuring that their success is not linked to the success of their investments.

Patently unfair you think? There are simply two different kinds of skills: Fund raising for further investment, and fund raising for a startup.

The attitude of the former is: "Listen, I have this deal for you. You give me [x] million bucks. I then take a fat paycheck out of that as a 'management fee'. I invest the rest into some 10 companies. One of ten investments might succeed. I say might, it's like saying the sun might rise from the west. If anyone does make it, I get a piece of the profit. If they all go down the drain, you lose all your money, and I still get my paycheck. No I don't know which companies or even the broad area I'm targeting, but I'll choose them, that's why you're giving me money. If we go down the drain, then it's your money, not mine.".

When it comes to the entrepreneur raising funds, it's like: "Listen, I have this great idea. It's not just an idea. I've got a prototype. And this fantastic team. We have to work on bare minimum salaries? No problem. All our equity goes back and vests over four years? Uhm, ok. And if we fail you get your money first and then us? Ah, ok. Then you can fire us and we lose unvested stock? Oh, fine. And you want a drag-along so if you feel like the roses didn't smell good that morning you will sell my company and I *have* to sell my shares too? ok. Do you want me to bend over and grease up as well?"

Isn't it ridiculous then that venture capitalists find entrepreneurs "arrogant"? No wonder successful founders always tend to go and set up funds of a very different variety or start really helping other founders (like VentureHacks).

But closer home, there are very few instances of founders crossing the chasm, one of them being Alok Mittal of Canaan Partners, who also runs VentureWoods. (Disclosure: I have posted there earlier). Another founder - Prashant Prakash of Netkraft - co-manages a seed level fund named Erasmic.

Unfortunately some "angel" funds in India seem to ask way too much of the founders. Questions like these, requested by a member of the Indian Angel Network, seem to demand a lot an angel level presentation: while questions about the team, competitors, market etc. seem to be on the line, needing analysis of stuff like SWOT, IP (which is a ludicrous thing in India, I feel), marketing innovations (which I could game easily), "are you getting good sales/adoption?" etc. are simply premature (and do not belong in a pitch, they should be in an exec summary or q&a on the pitc). This isn't angel investing, it's a more like an early stage VC.

Note: I've just started Moneyoga which is a stock market website (still being constructed) and we have been thinking a lot about whether to get institutional funding. The decisions we're making is going to sound astounding when we write about them and look positively arrogant, but I think that there's a position where a lot of things come together, and give us a good life and excellent returns. Will talk about it when our stuff pans out.

Starting a company in India: The regulatory issues

2007-06-15T05:09:00.000-07:00

I'd like to talk about some of the things you need to do if you're starting a company, aiming to get funded and the like. Note that you can get professional help for most of the below; accountants will help you through the process for a fee.

1. The "Private Limited" entity

You could create a proprietorship or a partnership, but if you're looking at investors and venture capital you will want to have a private limited entity. This is a "firm" - a company registered with the Registrar of Companies (ROC), and while it provides limited liability there are much more regulatory issues to deal with. Let me assume you're going ahead with a private limited company.

The way this works:

The company is founded with a certain amount of startup capital (we'll talk about that later)
Each founder (and angel investors) get "shares" allocated to them for a price they pay
These shareholders (called "members") elect a board of directors to represent them at the company. For a startup, you will typically have all working founders and representatives of any outside investors on the board.

2. Getting a "DIN" - a Director Identification Number

Registering a private limited company requires that all directors get themselves registered at the ROC. You should apply for a Director Identification Number (DIN) - you can do so online - by filling out a PDF form and submitting it. A provisional DIN is allocated, after which you need to print the page, sign, get a notarisation from a practicing CA and send it to the MCA office. This costs nothing, except a small amount you may pay for the notarisation.

3. Digital Signatures

All applications for creating private limited companies now require online forms and digital signatures. Details are on the MCA web site - and a number of certifying authorities provide these signatures as USB tokens. The cost ranges from 500 to 2000 per year.

You need just one DIN and one digital signature, even if you are a director in 10 companies. Also note that for the purpose of starting a company, only one director's digital signature is needed.

4. Naming ceremonies

You need to get the name registered first - this is to ensure that your company does what your name indicates.

Download and fill Form 1A (all forms are downloadable ). You can upload this to the MCA site and pay Rs. 500 for the service online. The name then must be approved by the ROC, which is a discretionary and sometimes, unfathomably arbitrary process. Amit Ranjan has a post on his experience.

A good CA can get your name approved with a personal sit-down and explanation.

About these forms: each PDF form has a "Check Form", "Prescrutiny" and "Submit" button. At this point, none of the "submit" buttons work - you have to submit the form manually.

5. Incorporation - Memorandum and Articles of Assocation

You can then get your CA to create your Memorandum of Association (MoA) and Articles of Association. In simple terms - the MoA specifies WHAT your company wants to do. The AoA specifies the framework of organisation (who are the directors, what kind of voting, how will expenses be approved, how many people form a quorum for an AGM etc.) The articles are important in that they should not be one-sided towards specific shareholders (will tick off investors, who'll change them anyway). Most likely your CA will draft one from a standard set of terms that they have earlier passed through the ROC.

These need to be attached with Form 1 (again, downloadable), digitally signed by you and your CA. When you submit, you'll pay fees based on your "authorised capital". This is the amount of money you plan to convert into shares. So for an authorised capital of Rs. 100,000 you can issue 10,000 shares of Rs. 10 each (or 100,000 shares of Rs. 1 each and so on). The "paid up" capital is the money actually converted to shares - so for an authorised capital of one lakh, you can pay up just Rs. 10,000 and divide that 10,000 into shares to founders.

You will pay a certain stamp duty and registration fee for the "authorised capital" - it goes from 4,000 for a 100,000 authorised capital to 26,000 for about 10 lakhs and so on. People may advise you to go for a lower authorised capital to save on this registration cost, and keep any excess capital as a "loan" instead. But this structure may reduce your later compensation when you get investors in, as the loan may be returned and your shareholding moved to a vesting structure, giving you very little value for the money you've put in. Don't lose out on future value for a few thousands today.

Remember, you are both an investor and a "manager" - meaning you have both management and control interests in the company. A new investor can come in and choose to vest the ownership you get as a "manager" but that should not compromise on your holding as an investor. Split the two - in fact, at important points, think independently of decisions as a manager and an investor.

ALong with Form 1, there are two other forms - Form 18 and Form 32, that need to be signed and submitted to the ROC.

6. Opening a bank account

Once your company is "approved" you will get a piece of paper called the "incorporation certificate". When you have this, along with a "common seal" (your CA will get this done) and a printed copy of your MoA and AoA, is you can pop the champagne or the poison of your choice.

But to pay for the champagne, you may want to open a bank account. Banks will ask for the documents and your PAN/TAN number (mentioned below). Account opening can be upto four days and you will be required to fund the "current" account with about Rs. 10,000 or so.

7. Registration with other authorities

PAN/TAN number: This is for paying and deducting tax. Can be applied for online. Needs an address proof, for which a copy of the aforementioned Form 18 is ok. You need this to do any tax stuff, or to open a bank account.
Bank Account: For a bank account, you need to provide, at the very least, your MoA/AoA, incorporation certificate and PAN/TAN acknowledgement of application. Some banks will ask for more details. Also you can ensure that two signatures are needed for cheques, and get a netbanking ID so all investors can be made aware of the expenditure.

8. Do you need an office?

If you're planning to work from home, don't bother with a few registrations because they will want you to put a signboard with your company name on the outside. Most residential societies will not allow this. Yes you can perhaps get away with bribing the labour inspectors etc. but frankly that's not the "clean" way to do things; if you're in the business to get other investors or to sell the company, you need it as clean as possible.

But if you do need an office or want to hire employees etc. you should get the following registrations:

Shops and Establishment : Karnataka has this act where you need to register an office, but other states will have their version as well.
Professional tax: A state levied tax on salaries paid out. You need to pay Rs. 2500 in karnataka to register, and depending on salaries paid, pay a certain amount (max. 200 per person/month) to the Professional Tax office.
Service Tax and VAT: The Central Excise department wants you to pay tax on pretty much any revenue - VAT is if you sell a product and Service tax, if you render services. Registration is important. Service Tax registration can be delayed till revenues are above Rs. 7 lakh a year.
Provident Fund (PF) : For 20 employees or more, this is mandatory. Lots of documentation, but you can get someone to help for about Rs. 5,000 or so.
Employee State Insurance (ESI): Applies to Karnataka, but other states do their own number. This is for employees whose income is less than Rs. 7,500 per month, and again, only applies if you cross 20 employees. Get someone to help, it's cheaper.

9. Compliance and Accounting

Post registration, a private limited company needs to maintain records and be compliant with the laws. That would sort of be obvious, but honestly it requires some work on a regular basis.

ROC compliance: Involves Maintaining a big fat "statutory register" - no big deal really - ROC filing at key points and maintaining board minutes (using signed minutes is fine, once a quarter is legally required). You can do this yourself or use the services of a Company Secretary (typical charges: Rs. 3000 - 5000 per visit). You might need to revisit this process once a quarter if you are a small startup.
Professional Tax, PF/ESI, VAT/Service Tax : For these there are monthly, quarterly and/or annual returns.

Get a person to help you out in this process - typical costs are about 3-10K per month.
Tax Deducted at source (TDS) and Fringe Benefit Tax (FBT): again, monthly and/or quarterly returns, could be done by the same person as above.
Accounting: You need someone to maintain books of accounts. If you choose to use an accounting software, you can bring someone in to enter vouchers etc. Typical costs are Rs. 1000 to Rs. 5000 per month. You might not need them every day - once a week might be ok.
Tax and Statutory Audits: At the end of the financial year, you will end up needing to file accounts in two places - the ROC and the Income Tax department. The actual numbers will vary because of the great Indian fight between these two departments on what constitutes "depreciation". You'll need a Chartered accountant to "audit" your accounts for the ROC, and someone to help you file the Income Tax returns. Typically the same CA will help with both, and charges vary from 10,000 to 10 lakhs depending on many things including your accent.
Inspections: Officers from various departments may visit your office for "inspections". Do not instantly hand them bribes or even meet them as a "CEO" or such hi-fi designations. Let the process run through and you can even negotiate bribes if demanded. Whatever happens, ensure there is paperwork to back it up (like an inspectors report or such).

The entire incorporation process can be done is as less as 15 days, unless you want to start a company named "Infosys Wipro TCS Congress BJP CPI Indian Government Private Limited" in which case the time required is: forever.

While all this may sound daunting, a good CA can help you do this fast. Remember that although a CA will help you through the process, you need to ensure that no corners are being cut, since it is something you will have to explain later when legal and other due diligence is performed. Keep yourself informed about what needs to be done, but outsource it to accountants. While you can delegate this task, you can't absolve yourself of the responsible.

What you want to do is get this done with the least amount of one-time and continuous pain, and get on with the real work.

Notes:

Post incorporation funding: When you incorporate and create a bank account you need to then fund the account with money. Assuming the founders and early investors will put in money, take care to note down the money received, and if required, provide equity shares for the money. For example, if you have asked for an authorised capital of Rs. 500,000 and four founders want to initially put in Rs. 25,000 each, you might issue 2,500 shares of Rs. 10 ("face value") each to the investor, for a total "paid-up" capital of Rs. 100,000. A few months later, some investors might put up a further 100,000 and then you issue fresh shares of the same Rs. 10 face value (but these shares can be sold for higher, like Rs. 50, if you please)

Some other Links:
Startup costs in Bangalore

Hacking the venture process

2007-05-10T00:25:00.000-07:00

I just stumbled upon (not StumbledUpon) a site that discusses venture funding: Venture Hacks. Started by Babak Nivi and Naval Ravikant, both of whom have been on the entrepreneur and VC side of things, the site brings oodles of information for you, the entrepreneur. They present a series of articles on term-sheet-hacks.

The VCs know more than you do.

You, the entrepreneur, negotiate a term sheet once every few years. You negotiate your most important term sheet (the Series A) when you have the least experience. You negotiate against a VC firm that issues two to three term sheets per month. You negotiate against a “standard” term sheet that encapsulates decades of combined knowledge from hundreds of venture firms.

If you're a newbie to what a "term sheet" means, join the gang. You might want to read Brad Feld's term sheet series first.

Let me give you the low down: Term sheets are what VCs use to tighten hold on your private parts. If you don't negotiate, you will be left with a very painful experience. Don't let them get to you.

You probably know this, but both Venture Hacks and Feld's series are representative of VC points of view. Yes, they're both much more leaning to the entrepreneur, but you'll note a subtle VC bias in the approach, which simply means making more money for the VC at the cost of the entrepreneur. They never tell the entrepreneur to break a deal on a clause, but mention how VCs will take certain things like no-founder-vesting as a dealbreaker. Just so you know.

One thing though: these hacks assume that VCs are willing to "discuss" elements of term sheets, and that you have some reason for the VC to listen to you ("leverage"). If you find that is not the case with you, you can shut down your browser and either take what you can get or carry on without the VC world.

You might think that all of these things are applicable to India. They are, but you have to see them in the right context.

1. Convertible preference shares are "debentures" in the Indian context.

2. Very few Indian lawyers that know anything about negotation will come cheap, so if you hire a lawyer, be ready to shell out lots of Mahatma Gandhi adorned pieces of paper.

3. The legal process takes a lot of time in India, so please expect a lot more anti-entrepreneur clauses in Indian term-sheets.

4. Option pools have a serious Fringe Benefit Tax impact. If you set up an option pool based on VC term sheet, be ready to understand how this impacts your revenue guidance, since FBT is payable by the company. (Yes, you can bill it to the employee, but which employee will pay for illiquid stock?)

A better approach is to create a trust that will issue the ESOP, but the company must not own the trust. VCs will balk at this. Why?

Think about it. Let's say you get a pre-money valuation of 8 crores (for say 10 lakh shares), and VC puts in 4 crores. You think, heck this is great! 33% to VCs, rest to founders! Founders are worth 8 crores!

But they say they want a 20% option pool, created pre-money. Means, post their investment, they will have 4 cr. worth shares, option pool is another 2.4 cr. and you have the remaining - 5.6 cr. worth shares. Suddenly you're worth a lot lesser. And since the option pool is not vested yet, the real shares issued are worth 5.6 cr. (to founders) and 4 cr. (to VCs). This means they hold 42% of the company at investment.

If you went and created an option holding trust, the VCs only get 33% (since the option shares are issued to the trust). That's not in their favour - if they get a buyer they will benefit from unvested shares in the first case, but with a trust the trustees will benefit (and the founders will be the trustees). VCs will not be happy.

I hope you enjoy the sites. I did. I will write more about the Indian context to these options.

Geni-us?

2007-03-16T06:02:00.000-07:00

Geni is this brand new family tree engine that allows you, in one screen, to see all the people you have to buy gifts for. Basically it allows you to create your family tree and has just received $10 million in funding, for a total valuation of $100 million. From The Founders Fund. Which I had referred to in an earlier post, about how they are ok with partially paying founders when investing.

In this case, the founders of Geni are perhaps not quite in the need of money - they're all ex-Pay Pal, Tribe and such companies that, if venture funding was a religion, would be senior Gods worshipped in every household.

TFF, to its credit, is not the one giving the $100 million valuation. They only gave it a piddly 10 million dollar value and stuffed them with $1.5 million. The $100 million value was provided by Charles River Ventures, which, albeit the valuation, involves more venturing by the Charles River.

But you may be thinking: Is this company worth a $100 million? I must be honest: Even with my exposure to large sums of money flashing on all TV channels in the forms of scams, frauds, bribes, ransoms etc. this sum seems ludicrously large. $100 million is about Rs. 440 crores. This is the kind of money that will buy you a two bedroom house in Bangalore nowadays, and should not be considered a trifle. This house has a real garden.

Some of you may think I exaggerate needlessly. But I think if we were not intended to needlessly exaggerate Darwin's law would have eliminated all writing anyhow. I originally intended to put god in the last sentence but after my baby boy's colic attacks I have finally understood there is no god. But I digress.

Now the question is: Is Geni worth Rs. 440 crores? Is this 18 person company a proposition that, if exchanged for currency, would yield a 100 million greenbacks? The last time such a question was posed, they all laughed at you. This was February 2000.

But we will assume this is not February 2000, because we haven't yet invented the time machine. So is Geni worth so much because it is unique and can't be copied?

Geni is perhaps easily copiable, and is definitely not the first family tree representation on the planet. Unfortunately it has also not taken into consideration the probability that someone could have 13 siblings, like in my father's family and therefore it will not work unless I have a dual monitor machine. (Which I do, incidentally) What actually worked, when I had to explain the 126 "close" family members to my wife, was pen and paper and lots of arrows. Actually it's better represented left to right rather than up to down - all family trees are, IMHO.

But they have a business model for sure. Have you seen the most popular serials on television? What are they about? Some of the biggest blockbusters in the hindi film industry were: Maine Pyar Kiya, Dilwale Dulhaniya Le Jayenge, Hum Saath Saath hain, etc. Think of the basis of all of them. Everyone's related. And now, look at Geni's logo.

Soon, you may see Geni sprouting the capability of saying "I don't like this person" and you will see strange music in the background when you drag and drop people near each other. Perhaps even red colors as you move across the evil people who try to murder their mothers-in-law using faulty fans (don't ask me, I saw this on TV, I swear).

Then there will be mock fights and in comes the revenue from online betting on who will win. And you can SMS to a four digit number who you like the least so that person's icon will be relegated to a corner of the screen. The SMS revenue itself, shared 50:50 with Airtel, will yield millions.

And there will be people who will pay to see who is having whose baby in the Bold and the Beautiful and to unravel how, through a series of bad marriages, a person has become his own step-aunt.

Finally of course, look at the ease of understanding large family battles. If Geni were to host the discussion of the Bajaj family and their various holdings in various group companies that hold stakes in various other companies, it would be so much simpler to understand. After all you hear that Shishir Bajaj said Niraj Bajaj was siding with Rahuj Bajaj and his sons against Kushagra Bajaj. THe reader's band is baja(j).

Take all the business battles: Bajaj, Ambani (whose battles don't even have the same last name), Birla, Tata, Rin, Surf Excel etc. All these battles look so much better explained in a flash videos marked by respective family trees, and I'm sure stockholders will pay to see the darn thing unravelled. Eventually, though, they may be pissed off that the real owner is a pair of underwear or something. Still, that's information that someone is willing to pay for, either to know or to ensure others don't know.

I have now come to the understanding how this can soon become a billion dollar company. Maybe even a trillion dollars. Yes, success is an absolute, but you will see how it can be a relative.

P.S. Maybe there can be a Geni for India that gets there before they do - www.khandaan.in?

The ESOP workaround

2007-03-12T04:01:00.000-07:00

For entrepreneurs this budget - Budget 2007 - has one dissapointing element. Employee Stock Option Plans (ESOPs) are now classified as a Fringe Benefit, and one needs to pay Fringe Benefit Tax (FBT) on them. In essense, this means 33.99% of the difference between the price at exercise and price of grant is borne by the company.

A startup usually offers part compensation in stock, and the grant price will be abysmally low, like Rs. 10 or so. The employee can't buy stock at grant, because the options will vest over a few years. Even at vesting, the employee needn't buy stock - indeed, buying it will be of no use when the company is not public. And if the company goes public or gets sold, the company has to pay a ton of money as FBT for the options exercised.

Even if an option is exercised before the company goes public, the Income tax department will value the shares at the time of exercise (based on a valuation method that involves net worth per share) and tax the company on the difference.

Now a company may choose to recover this tax from the employee. I don't know how, though - what will the accounting entry say? "Received money to pay FBT"? Will that not classify as "other income" and get taxed in the company's hands? But that's a petty problem which I'm sure smart accountants will solve using fantastic words and phrases that will light up the room with their very presence. I'm not too worried about that.

What I'm worried about is that the government takes away a chunk of your employees' profits when it comes to a liquidity event (IPO or sale). I think I have a workaround to this, though I'm not yet sure it's totally fool proof.

If you're starting a company, start a "trust" which will hold shares that you have allocated for ESOPs. This trust is a separate entity (you could even have a different "not for profit" company) unrelated to the company, and will own the pool of shares you have set aside for employees. Ensure that the company does not own the trust - though promoters may do so.

Run your ESOPs the usual way, X shares every month for N months etc. But if the employee wishes to exercise, have the trust sell her the shares instead of issuing fresh stock (which is what happens with stock options).

The difference here is that the company is not involved - there is a third party transaction that transfers stock from the trust to the employee. If the "market value" of the share is much higher than the value it has been sold at, the trust takes the loss. The trust is a not-for-profit entity anyhow, and does not have a tax liability, so the loss is neutral for the income tax department.

The Income tax department may of course take a different view and disallow the loss. It could term the transaction a "deemed profit" for the employee and add it to the income of the employee. The idea here being that the trust intentionally sold the shares at a loss so that the employee must profit. But this can be fought in court, if you have an agreement between the employee and the trust on an earlier date that fixes the price of the share for later purchase. Such "call" options are common and legal, and in fact the very basis for convertible debentures.

Problem: If you get Venture capital and they want you to augment the number of shares given as ESOPs, you will need to issue more shares to the trust. Obviously this is going to be at a lower price than the VC price, which means the tax department will say it's a "deemed profit". That phrase again. But if the trust is created as a non-profit, you can avoid tax liability on such deemed profits too.

But such an arrangement will have to be stopped after the company goes public. Obviously, ESOP grants can't be transferred to a trust at a lower price after a company is subject to pricing laws when it is public. But as a public company, it may simply be better to use RSUs (Restricted Stock Units) instead.

What do you think?

Where angels fear to tread

2007-02-27T01:33:00.000-08:00

If you're reading my blog post by post, I will sound like a broken record about this, but bear with me please.

I'd complained about the general lack of deal flow and VC issues here, here and here. A recent post on Venturewoods had comments leading into the angel investment space. Angel investors, for the uninitiated, are those that give money to entrepreneurs when have diddly squat to demo. When people want money to build something that they can make very big, they will need to turn to angel investors.

Why? Because the typical amounts such ideas need are between 10 and 50 lakhs. Why that much? Two founders, salaries for a year @25K per month, let's say they need equipment, outsourced graphics design and programming perhaps, colocated or dedicated web space, collateral, etc. And perhaps a small team of people towards the end of the year to be able to generate the traction needed for a VC funding round. Okay maybe this is too big an amount, but everyone is not debt free and rent free.

You might think: Ok, why not go to a VC directly? VCs have $20-100 million dollar funds. They don't want to invest pocket change in you right now - after all, what you have is a dream and everyone has a dream, including Martin Luther King. For unlike him, everyone's dream cannot become reality. So they tell you to do something, hustle around, get some "traction" and come back.

Plus, if they gave you your 50 lakhs ($100K) they will need to fund some 200 companies like you in order to cover their fund of 20 million. Now if these 200 companies gave progress reports just ONCE a quarter, the VC will have to meet 3 companies a day just to cover them all in a quarter, and heaven forbid someone wants time in between. Typically VCs do 10-20 investments.

You might say: Uhm, why not find a VC that has only 5 million? I will now ask you to sit back and think about how VCs get paid. They get a "management fee" which is a percentage of the fund value, and they get a profit fee. Profits are five years away at least, so how does the VC pay their bills? Yes, management fees. Say that's 5% (I am picking a figure from the air). For a $20 million fund, fees are $1 million which pays for the lexus, the chalet and the trips to investor meetings in Honolulu. (To any VCs that are reading: I'm kidding! The Lexus is already paid for)

Now think about a piddly $5 million fund. The fees there are $250K which covers less than Bipasha Basu's clothing, speaking in the VC world. (Not that Bipasha Basu is in the VC world, though if that happened we would have a lot less bickering) That kind of VC would have to travel economy class, which means 'regular' VCs will have the room cleaned with water from the Ganga after they visit.

So VCs won't want to hear about your 10-50 lakh thingie. Now what do you do? Let's say your project manager, a smart guy with lots of contacts and good industry knowledge, professes interest in providing you the money - but he won't join you. Just be on the board, help with some initial setting up and refining, and provide the money you need to get traction, so you can go to the VC.

In return, you give him equity - say 25% of your company. He is now your angel investor.

If, after a year, you go to a VC who values your company at 18 crores ($5 million) and now is happy to invest another 9 crores. What happens to your angel investor?

In the US, many investors will pay the angel the valued amount of his stake (full or partial) and take over his stock. Your angel investor is happy to get this kind of a return and doesn't have to wait 5 more years - that was his risk taking capacity.

This kind of partial or complete cash-out happens at many levels in the US - from first round to second, and even founder partial-cash-outs . This is what I call deal-flow.

Deal-flow is non-existent in India and the reasoning for this, judging from the comments in the venturewoods post, is because VCs are not happy to see other investors exit. Why aren't they staying, they say, and is there something they don't like about this company that we are overlooking?

Plus, of course, financially it means someone is exiting when you are entering. The greater fool theory means that I will buy at a high price and find a bigger fool who I will sell to at an even higher price. VCs do not want to be the greater fool. The fact that they are buying from someone else makes them feel they could be one.

But that theory holds very little water. In mature markets like stock exchanges and such, there are people who buy high and sell higher all the time. Even traders buy high priced goods and add their margin when selling to others - and you have been a greater fool at some point in your life. Ever drunk Barista coffee? You're a greater fool. Ever eaten at a five star? You're a greater fool. Ever bought a cinema ticket in "black"? There you go. Ok these are consumption themes, but I don't know what business you are in - even so, do you take a salary from your company? You are a greater fool - it is far more worthwhile to take the same money in a consulting role. Being a greater fool suddenly is not as bad as you think.

Of course the other big issue is of valuation. Startups are founded by people who may not have too much of an idea about finance. When I started Agni, we brought in two other people who frankly provided very little to the company (though one did give us some office space to start, and later charged us the rent) - but we gave them stake at the same proportion as our money bought. Yes, really. This was 1998, and I was an uninitiated fool.

VC's will generally identify that the founders have been screwed in an angel round, and therefore readjust the capital to distribute the real value. The being-screwed part is obviously subjective, for angels will argue that they paid money where nothing was visible, so their investment would cover the risk. But then the VCs have the money, and the golden rule of finance is: Who has the gold makes the rules.

Thus VC investment generally means that angel stake gets substantially corroded, and therefore it may be in her best interest to sell the stake during the VC round - there is no management input by definition, and there is no control, and this in a private illiquid company; all reasons to sell out. Of course, all of this may be overshadowed by the phenomenal growth potential, and most angels would stay invested. Yet, some may decide they would like to exit, and providing them that exit path is best for all in question - the VC, the founder and of course, the angel herself.

The one way to avoid this is to find angel investors willing to stay very long term. Not that tough, even project managers will have that tenacity. And the second way is to use bridge loans.

At seed time, valuations are murky, so there's no end to valuation arguments. Therefore seed investors can provide capital as a loan, convertible to equity at two points - a) if the company is acquired and b) if there is VC investment. In either case, the conversion will happen at a discount to the valuation offered; say 30% or such. Such loans will be given at about 5% above the market rates, and the accrued interest is not paid out, instead it adds on to the loan amount for a later conversion. This is called a bridge loan (or at least, that's what I call it)

This is great stuff - in fact if you are starting a company, and investing your own money, go down this route. Reason it's great is - if you buy shares early, then you end up valuing the company way too low, which obviously affects other investors later. Secondly, you keep the cash as a loan so if the company goes down you will have first claim on any assets. Convertible debt as a bridge loan is what even big companies do now, through convertible debentures, FCCBs and such. In fact, if VCs were not afraid of losing control, they would also use convertible debt as an option.

Angels can therefore provide money as a bridge loan instead. This kind of thing is just starting to happen, and it may now be the evolution of the angel process. Yet, angels will want to see the possibility of earlier exits if the angel space is to really evolve.

And why should the angel space evolve? Because when you start, you don't need $2-3 million. With tech becoming cheaper and cheaper, why would you take that much money when you can do with far lesser? But VCs won't give you lesser, and angels aren't even in there because the model doesn't permit exits easily. Perhaps we should change the model.

As for founders - I would say put your money as a bridge loan, and take stock options for your hard work. So part of your stake will come as conversion of your upfront money and another part as options vested over time. That arrangement comforts a later VC also about valuation.

Thoughts?

Parenthood is here

2007-02-18T01:54:00.000-08:00

Yes, I'm a dad now! We're all excited and wanted to post here to let all the people who read this blog know, if both of you are still around. Cheers!

Limited Liability Partnership

2007-01-18T03:37:00.000-08:00

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.

Thoughts that will make you think

2007-01-16T04:32:00.000-08:00

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.

Profit is a four letter word

2007-01-10T04:49:00.000-08:00

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.

Startup hiccups in India

2007-01-08T21:57:00.000-08:00

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 Naukri.com 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.

Targeted New Year wishes

2007-01-04T09:49:00.000-08:00

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!

Founder payouts are now in business

2006-12-27T07:57:00.000-08:00

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

2006-12-13T22:03:00.000-08:00

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

2006-12-07T23:10:00.000-08:00

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

2006-12-05T00:19:00.000-08:00

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

2006-12-04T05:00:00.000-08:00

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

2006-12-04T03:56:00.000-08:00

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

2006-12-03T11:15:00.000-08:00

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

2006-11-22T23:13:00.000-08:00

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

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

Micro-money - μMoney

2006-11-21T21:44:00.000-08:00

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

2006-11-20T03:15:00.000-08:00

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

2006-11-19T23:15:00.000-08:00

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

2006-11-18T01:56:00.000-08:00

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

2006-11-18T00:05:00.000-08:00

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.

2006-11-13T01:47:00.000-08:00

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?

2006-11-09T01:57:00.000-08:00

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

No long distance teaching for New York City

2006-10-31T07:16:00.000-08:00

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?

2006-10-31T03:44:00.000-08:00

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)

2006-10-29T20:43:00.000-08:00

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

2006-10-25T22:24:00.000-07:00

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

2006-10-24T08:44:00.000-07:00

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

2006-10-20T04:26:00.000-07:00

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.

2006-10-19T08:15:00.000-07:00

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

2006-10-18T00:30:00.000-07:00

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?

2006-10-17T03:43:00.000-07:00

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

2006-10-12T23:52:00.000-07:00

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?

2006-10-11T11:17:00.000-07:00

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.

2006-10-10T04:03:00.000-07:00

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?

2006-08-31T23:05:00.000-07:00

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

2006-08-24T23:34:00.000-07:00

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

2006-08-10T00:34:00.000-07:00

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.

The Indian Software Football team

2006-07-26T05:46:00.000-07:00

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!

The long tail of India

2006-07-24T02:22:00.000-07:00

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?

Are we there yet?

2006-07-14T02:13:00.000-07:00

"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).

Outsourcing: Raise the bar. Share revenue.

2006-07-07T04:45:00.000-07:00

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?

2006-07-07T01:31:00.000-07:00

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.

10 myths about Entrepreneurship

2006-07-05T23:42:00.000-07:00

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?

Wrong.

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.)

Bangalore - An Outsourced Plateau, not a Silicon Valley

2006-06-09T00:05:00.000-07:00

Guy Kawasaki recently posted about "How to Kick Silicon Valley's Butt". It's about how cities can strive to become a silicon valley.

I live in Bangalore, India - known as the Indian version of Silicon valley, though neither "silicon" nor "valley" make any sense here. My thoughts on whether Bangalore qualifies to become a silicon valley.

1. Bangalore is beautiful, fun, and overpopulated. The city has too much traffic and is polluted, but just an hour away south or west is a great countryside. Oh and the weather is just brilliant.

2. Bangalore has high housing prices, one of the highest in India.

3. There are very few finance companies (other than the call centers) that operate from Bangalore. India's financial hub is Mumbai. But there are tons of MNCs. And the biggest threat to entrepreneurship is that these MNC's - Accenture, IBM and the like - and LARGE Indian Software firms are offering ridiculously high salaries. Startups can't hire good people with stock (pooh poohed) and cash is scarce.

4. We have no known enemies other than our politicians. But they are more than a handful; who needs enemies when you have our politicians!

5. Bangalore has great education - the state with the highest number of engineering colleges and high quality training institutes. The bad side of this is: We have a dearth of good teachers, because they're swallowed by the higher paying industry. And most colleges don't even have industry cells for sponsored programmes.

6. Bangalore's a great immigrant place: There's more migrated population here than "locals". Not just from India, but from the US and Europe as well!

7. Bangalore's had a huge "return from the silicon valley" reverse exodus, and entrepreneurial ambitions run high. And are infectious. (We have a club called eClub-Blr - at www.eclub-blr.com - got a few of the silicon valley "graduates")

8. Forgiving failures and celebrating heroes: Happening more now than earlier. Saying "I moved on" is no longer a bad thing, and would even land you an opportunity because "she wouldve learned what NOT to do".

9. Bad thing: The local government celebrates when a Microsoft or Google opens it's branch office. And sulk when a Dell or a $1 billion fab goes to Hyderabad. Really stupid, this whole sulking/celebrating thing. What's the big deal if you offer those people carrots you don't give to local industry?

10. The local govt. focusses on the wrong things; Job Creation, Tax Exemptions, VC Funds (the govt has like fifty of them) and cheap infrastructure. Tax exemptions are the worst - zero tax for software exporters.

Guess what, I calculated that infosys, one of bangalore's largest software companies, pays zero tax on its net income of nearly $600 million. It's 50,000 employees pay a total of $50 million in tax. What a ridiculously dumb trade-off.

Recently another city has built a "tech park" and offered lowered rents of Rs. 10 per sq. ft per month. And yet another offers cheap land, incubation space etc.

But the biggest problem in Bangalore is the absense of "deal flow". No one likes to trade capital - if you get in, the only way to get out is the IPO or an acquisition. No wonder VCs shy away from smaller aggressive companies, and that brand of entrepreneurs almost exclusively service US investors.

In all, I think Bangalore is not any Silicon Valley. At best it's an Outsourced Plateau, with mediocre entrepreneurship support. Startups survive not because, but inspite of government initiatives.

Can't hire the best, anymore.

2006-03-24T12:16:00.000-08:00

Welcome. You're now reading what I've intended to write for a reeely long time. A blog about the Indian I.T. picture, about where life seems to be heading professionally, and where I think we'll be.

I live in Bangalore and manage a software company here. Guess what my biggest problem is: Getting quality people. Two reasons for this:
a) The demand for good people is high.
b) The supply of good people is low.

So obviously salaries offered are currently drifting over the rooftops. That's not as much a problem as you might think: if people would help generate higher revenue, I'd bite. The real underlying issue is now demands that seem to be emerging, and the unscruplous habits that are more common than all else. if you want good, experienced people you must not only offer phenomenally high salaries but also concentrate on the other evils:

How many people will I manage?
It isn't about just doing a job well anymore. The pseudo attraction of a job is the number of people ruled over - the concept of a "team lead" is no longer about actually leading the team, which few are capable of; it is more about the prestige. The higher the number of reportees, the higher the prestige.

Designation, Designation, Designation.
Funny thing this. I keep hearing "I'm a team leader (of a team of one) currently, so you must give me a better designation, if not the same". In my company, designation is tightly linked to roles and responsibilities so we shun from setting false expectations of team leadership and so on. This also has a tremendous prestige value, so people invent ridiculous designations to keep people at bay.

Like "Assistant Deputy Vice President". Promotions from there will be "Senior Assistant Deputy Vice President", "Assistant to Deputy of Vice President", "Another Not so wise President" and so on.

Phone interviews only. I won't write a test.
This is by far the most irritating: that candidates don't want to come down and spend a half day or so with the company they're going to be working with. We have a detailed process where we try to gauge analytical, logical and problem solving skills of candidates. Our interviews are deeply technical and we never have YES/NO answers; we always give hints and try to lead candidates towards an answer (which could be different from ours).

People nowadays seem to resent that. The rare few really appreciate the underlying reason behind the process - we want someone we can work with, not just someone who'll come in, stay aloof, and walk out after six months. The vast majority hate being told they're wrong, however subtle we do that. Many even cross their hands and say "I give up", even before I've given them a hint! And some will just block their thoughts out so much that I could give them the answer and they'll still say "I give up".

I would never hire someone who gave up without asking me for a hint, or taking one when I offer it.

I'll sign an offer letter but there's no guarantee I'll join.
You can give a candidate an offer, negotiate the terms, and she'll even sign up. But she may just not join. Because:
a) Another offer materialized and that sounded better.
b) Her current company matched the offer.

These are not problems, of course - they would occur anywhere where the demand/supply equation is skewed.

The real issue is that you, as a company, have no clue to whether this will happen. The candidate could even join, hang out for a week, and suddenly fail to turn up. Unprofessionalism is so rampant that if you called up to find out, you could find they will ignore your calls!

Some of the biggest causes for this are recruitment agents. Yep, the very folks that will get you candidates will take them away - after they get their commissions, and your employee's been there for three months, some agents will call and tell the candidate "ho gaye na teen mahine?" - i.e. you've done three months, so why don't you look elsewhere.

Resume rigging, Invalid references.
It's getting to lies too. You may come across those who say they have a degree they don't, who say they get a higher salary than they do, who rig experience details, who will fake references. It's rampant, and you have to hire an agency to ref check your guys - and as a small company, that may be above the budget.

These are our hiring challenges. Dealing with this involves giving so much bandwidth and time from management and HR that a small company that hopes to hire fast and grow ends up getting quagmired getting around these hurdles.

Of course, there are the real gems of people hidden in the middle of this mess: and your biggest challenge is finding them. It's getting to be more and more chaff and less and less wheat. What we need is a big fan to blow the chaff away - and unfortunately, in the process, some of the best wheat will also get blown away.

What we might want to do is to have an independent fact finding agency to maintain candidate data. Researching references, school and college records, past employment history etc. Some of you will think this is an invasion of privacy. So be it. But with rampant unscruplous behaviour, employers have little choice. I would pay for such a service, gladly.

Maybe there's a business opportunity here.