Tips to avoid failure in startups

Investment or mentoring - Which should be first?

In 2016 and H1 2017, over 200 visible startups in India failed. It is not that all of them failed due to non-availability of funds, but infact otherwise.

On analyzing the invested startups, we can draw conclusion that many startups failed either because they got more money they could chew or they were starved off the funds. let me explain.

Many Hyperlocal companies like PepperTap, LocalBanya, GrocShop shut their shop in 2016 and 2017, due to splurge in customer acquisition, to the extent customer acquisition costs were higher than lifetime value of the customer!

PepperTap got $50m including $36 from SnapDeal and they continued their operations on negative transaction cost over a long period, inviting it attracting for local grocer to make a purchase, pocketing a discount of 20% (offered in the name of new user discount) and sold to his customers as otherwise he would have. Operations were not reviewed and trends not seems to have been analysed. This problem occurs when money is available in plenty and our desire is to scale fast, even fulfilling artificial KPIs.

On the other hand, food delivery startups, who started with promise as last mile delivery is still a issue to be resolved efficiently, TinyOwl, ZuperMeal, iTiffin, BiteClub all folded up, as money which was easily available last year, isn't available this year that easily, as investors have tied their purse, witnessing bloodshed at the marketplace. Scale of these startups needed, as per design, higher infusion of capital and that was not available this year.

In both of these situations, somehow, the trust between founder and investor got broken.

I am of the believe, before investing, due diligence should happen over a period of time when founders should understand the investors and like wise the reverse. This can happen when mentoring happens before the investment in the venture.

With this view, we have structured our next accelerator program, different from the market offerings. Accelerators generally give money first and then mentoring take place. The Startup Board is coming up with a accelerator program in which about 15 founders and over 30 top industry CXOs will meet every Saturday for 16 weeks, and virtually thereafter for over a year, to not only expose connections, guide as board of directors guide the management team, but also hand-hold on strategic direction and resolution of strategic issues. This approach will be better to build trust and consequent investment, when maximum weight investors have started giving on the execution capability and value system of the founders.

I would love to get your views.

Cheers! Ashish Jain

Chandigarh - a city of start-up opportunities

Start-up eco-system in Chandigarh

Chandigarh - ‘The City Beautiful’, is an appropriate mix of entrepreneurial spirit (many big business houses are here) and government employees (being the two-state capital).

Chandigarh is first planned Indian city, wide roads, efficient administration and good infrastructure and well educated and well-off residents. It is 2^nd highest per capita income city in India. It boasts of educational hub with fine mix of engineering, architecture, medical, management and arts colleges and universities. It also has higher education institute like reputed Indian School of Business.

Chandigarh boasts of an emerging IT Park and along with its sister cities – Mohali and Panchkula (together known as Tricity) – is home to some major multinational corporations like Quark, Infosys, Dell, IBM, and TechMahindra.

Chandigarh is in close proximity to Haryana, Punjab and Himachal Pradesh and attracts a lot of talent from these states. The availability of a large number of motivated and talented people ready to take up new roles and responsibilities is one of the biggest advantages that the city provides.

Morpheus is the India’s first private sector incubator and is from this city. It has 80 odd startups including CommonFloor, Practo, and Akosha. ‘The Hatch’ (now defunct) founded by Puneet Vatsayan was another incubator that grew out of Chandigarh. In-fact Flipkart founders Bansals belong to this city.

Some of the prominent names in the start-up from Chandigarh are

- uTrade Solutions - a financial trading technology startup

- Jugnoo - auto rental and food delivery startup

- Exito Gourmet – Food Delivery

- Bulbul – Beauty service on demand

- Bistro Offers – Restaurant offers on mobile

- Soulbowl – Groceries delivery (like BigBasket.com)

- DSDInfoSec - Network Security

- MobiProbe - Efficient App Diagnostics

- INOEVE - Internet of Everything 

- Naukri Se Pareshan - Exciting opportunities beyond office life

- Olai - A flexible static pages engine

plus more than 100 more start-ups

Advantage Chandigarh

• ·         High availability of youngsters (due to large number of educational institutes)
• ·         Some of the big corporates in IT
• ·         Better living standard than tier 1 cities
• ·         Low attrition
• ·         Entrepreneurial spirit due to presence of historical business community in Punjab and Haryana
• ·         Efficient administration with great infrastructure

Payment Banks - Opportunities for start-ups

My younger daughter when she was 3 years old, used to ask, what we do in a bank. I did not want to complicate things for her and answered “we put money and we get money”. This could not be more appropriate for the current set of 11 payment banks which RBI has given permission to setup. These banks can not lend and hence “we get money and we give back money” can’t be true.

New striped down payment banks have a big impact not only on the financial and technology fraternity, but also on the Indians in the remotest places, resulting in three things. One, it will help financial inclusion of the unbanked. Secondly, it will spur into greater percentage of cashless economy, and the third, banking transaction costs will reduce across the board. Payment banks are unlikely to open the branch network on a scale as “full” banks do. They are not even obliged to. Lean organization structure, technology enabled banking - mobile or net banking, specialist and limited services on offer, partnering as banking agents, will enable them to reduce the transaction costs. It is big impact for the current set of banks as many transactions and low capital cost accounts are likely to shift to payment banks. When the impact of payment banks on people is such immense, will it have opportunities for new ventures? There are many and we will discuss the same here.

First, let us evaluate the scope of opportunity for SME. Conventional banks have only been able to reach 30,000 out of 5.94 lakhs villages; resulting in almost 50% Indians without a bank account. Unbanked rural folks will find it convenient to pay using mobile. Mobile phone will become paperless cheque and ATM. Urban Indians will shift due to convenience, speed and captivating deals on mobile transactions.

Payment technologies have proved hugely popular in other developing countries. In Kenya, the most cited success story, Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives. One study found that in rural Kenyan households that adopted M-PESA, incomes increased by 5-30%, due to time saved in avoiding regular banking and savings on transactions costs.

This opens up opportunities for many start-ups. Payment banks will have to depend upon “local” entrepreneurs for reaching wide and deep. These entrepreneurs will have more accessibility to last-mile customer and hence the trust, a key ingredient. These entrepreneurs on non-exclusive basis, like in telecom tower business, can create business catering to multiple pay-banks / banks and source products and services including cash dispensing. This is cost effective and win-win model.

Faster adaptation of banking by vast majority of unbanked population will depend on correct and effective consumer education. More than 24 languages, regional biases, dialect, and cultural differences make education of masses a complex task. New ventures can be opened in content creation and local delivery of such content effectively. A friend of mine, who runs a NGO, publishes a “newspaper” with huge amount of local news and pastes them on the milk-van for people to read free wherever this van goes. His income comes from advertisement that consumer non-durable and durable product companies gives to reach this deep. Innovative solutions like this will come more when people at grass-root are involved. This also will help gain trust.

Can the money be sent from Airtel network to non-Airtel network without both collaborating? Here, aggregators come into play that is not among the banks. These new ventures will build plug-ins with each service provider and offer a platform that is ready-to-offer services, like payment gateway aggregators in today’s world, drastically reducing the go-to-market time and cost, while standardizing the platform.

Think of grocery store accepting mobile payment instead of card, as it would entail him to lower service charges (transaction deduction rate – TDR) than 2% he forgo in case of cards. How about electricity and other utilities accepting mobile payments? Purchase a magazine on the traffic light? Purchase goods and pay while talking over phone without the need to disclose the bank account or debit card details? How about lending small amount to a friend /relative in need at a distinct location without the availability of any bank or the ATM? Soon, many apps will be made by ventures on mobile cash management, setting-triggers for regular payments, usage spent limits by spend category, dashboard for predictive spends in future months, suggestions on avenues to spend basis available cash, on-the-fly proximity and spend based restaurant search among many innovations that ventures can think of. Many technology companies will bring innovation; build their application and tie-up with banks to facilitate transactions for each use case, just the same way value added services (VAS) like astrologer, cricket scores, news updates etc. happens on mobile today.

All these services will fail if trust is breached on the safety of money kept in mobile wallet or linked bank account. How to secure if mobile is lost or mobile number changed without opting for mobile number portability? Start-ups with specialization on security of m-cash transaction and reconciliation services will see the day soon.

It is an opportune time for start-ups to prepare and grab the pie, advent of payment banks opportunity throws before them. Size of the market is at least 10 times bigger than the credit card market size.

Ashish Jain

Insane valuation of Start-ups

India is witnessing immense activity in the start-up eco-system. Buzz is no longer confined to Bangalore or amongst the college pass-outs. Many professionals – men and women, fresh graduates, US returned NRIs, and domain experts are joining hands with fellow colleagues and launching their own venture – giving them freedom of expression and sense of fulfillment.

Each of these ventures needs funding, at angel, seed, growth or late stage. Three important questions come to any entrepreneur mind. One, which is the optimum stage any venture should seek funding at?  Two, what is the ideal valuation and third, what percentage of equity can be offloaded to investors?

This subject as much important as it is, has been written as exhaustively and widely. Still right answer eludes everyone. It is akin to a price at which you sold your shares invested in a listed company and still feels you sold it cheaply. There is no right price. However, I will share some established and informal models doing the round.

Key factors for consideration in valuation of unlisted companies are

1.   Idea – demand, scalability, IP protection, entry barriers to competition

2.   Team – education, experience, complimentary skills, values, maturity, vision and passion

3.   Product stage – idea, development, pilot, traction, launch, growth

4.   Finance stage – own money, family & friends, individual angel, established angel, seed fund, growth fund, late stage

5.   Sales figures, if available (for sales multiple)

6.   Debt in the venture

Some of the established methods include discounted cash-flow (DCF) model, cost-to-recreate model, and market-multiple-model. However, market-multiple model works when sales or comparative data is available from another company.

One friend of mine, who quit his plum job and jumped into setting up a new venture in healthcare, has an interesting and simple valuation method to tell. He pegged the valuation at Rs 6 crore, considering 2 Cr for his IIM-A educational background, 1 Cr for having set up his company, 1 Cr for putting in his 15% investment into the venture, 1 Cr for having developed the product (yet to launch) and 1 Cr for initiating contractual agreement with some 20 partner-vendors in South Delhi. Basis this, he has roped in 8-10 investors, giving less than 10% equity to them collectively.

Nathan Beckford, founder of Venture Archtypes and Mahesh Murthy, who funded 50 plus startup, offered stage-of-development as a proxy to the kind of investment a venture can command, and thereby arriving at the valuation and then applying any adjustments. Here is what they have to say, simplistically speaking.

Stage	Investors	Funding Amount	Equity Offered	“Post” Valuation
Concept / Business Plan	Self or Friends and Family	Rs   5 to 25 Lakhs	1% to 10%	Rs 50 to 200 Lakhs
Technology Developed	Angels, Seed VC like Blume, Venture Nursery, Mumbai Angels, IAN, Kae etc	Rs 20 to 300 Lakhs	10% to 20%	Rs 2 to 15 Cr
Launch / Early Consumer Traction	Seed VC, Series A VC like Seedfund etc	Rs 2 to 25 Cr	25% to 33%	Rs 8 to 75 Cr
Scaling and Adoptation (Cash flow negative)	Series A, B, C VC like Nexus, Sequoia etc	Rs 5 to 50 Cr	25% to 40%	Rs 20 to 200 Cr
Rapid Mass Expansion (Cash flow positive)	Late Stage funds like Matrix etc	Rs 50 to 200 Cr	25% to 40%	Rs 200 to 800 Cr

Another interesting model of valuation variation has been exhibited by https://angel.co/valuations in which difference in valuation has nothing to do with many of the venture stages discussed above. It has data basis college (Stanford, Berkeley, Harvard, Mumbai university etc), incubator reputation, past employers of founding members, location (Silicon valley, Bangalore, Mumbai, New York City, Western Europe etc) and markets these startup cater to (Big data, hardware, mobile commerce etc).

These methods do not matter in the later stages of funding. Simple calculation goes, how much money is needed by the venture, for equity that it is willing to offer. For example, if $ 600 million is needed in stage X and equity that venture is willing to offer is 2%, valuation becomes $30 billion. All the earlier investors should be notionally making money at this price. 

Clearly start-up valuation is an art, not a science. Grey area lies in the valuation of the non-tangibles. Individual perception and hype both contributes, to help inflate the valuation, to exit on a “high”.

Some of the Indian e-commerce companies are valued very high. Housing.com currently valued at Rs 1500 Cr, Quickr at $1 billion (Rs 6000 Cr), Paytm at $1.5 billion (Rs 9000 Cr), Snapdeal at $ 2 billion (Rs 12000 Cr), Ola at $ 2.5 billion (Rs 15000 Cr), Flipkart at $15.5 billion (Rs 93000 Cr) are such examples. Would they sustain the kind of valuation even after listing? In a perspective, Indian Oil Corporation (IOC) is valued at Rs 94000 Cr currently and except for top 20 Sensex companies, all other companies would have valuation lesser than Flipkart.  Makemytrip.com, once the bell-whether of Indian e-commerce bandwagon is no longer cynosure of investor eyes. It reached to a valuation of $ 800 million just after listing and is currently valued at $ 450 million.

Will this insane valuation of Indian startups sustain, is a big question mark. Big foreign money is entering India and chasing only the chosen few, considering them “safe”, and increasing their valuation unrealistically. There are many ventures that have huge potential but are still lurking in limbo, in the absence of visibility. It is better to make a correction, diversifying and going beyond celebrated few, to value appropriately, instead of bringing the whole eco-system down with bad examples.

Ashish Jain

Published in Financial Express on 28^th August 2015

http://epaper.financialexpress.com/574095/Indian-Express/28-August-2015#page/11/2

How to be a successful Entrepreneur?

I have had successful entrepreneurial stint. Here are few practical insights based on my first hand experience.


Planning is always considered essential but often ignored in the height of either bread-and-butter or urgency of issues at hand. These are inevitable, but planning is not to be ignored. An entrepreneurial venture needs to focus in that order 1) Product / Solution offering 2) Sales 3) Operations and People 4) Finance and 5) Marketing.  

First and foremost mistake is to get embroiled into daily OPERATIONS. Once in a while is fine. Keeping knowledge of operations and not budgeting for an operations guy are two different things. This is the most important factor to fail. Non-availability of his time or he getting tired in daily operations would leave nobody to drive the bigger agenda - business generation.

A) Clearly Defined Horizon - A startup never has the time and enough resources to dilute the attention. Most smaller companies start with an idea or commence with presence in one product or industry and after the consolidation, moves either for horizontal or vertical scaling. Most Indian IT companies when they started, started with one product - body shopping. I know of a friend who started and established a credible product company in travel industry with marquee customers. He knew the industry and Industry him. By virtue of his domain and industry knowledge, his products used to sell by word of mouth with advertisement budget of less than 2% of net profit (and not even turnover).

B) Connected Organization

    B1. Ecosystem helps - Outsourcing is not just for big clients. It can happen when you are just starting too. Create and have knowledge of an eco-system with specialists that can be tapped at will with in-built extra time and price margins. Upfront investment in hiring and keep worrying to provide work to specialist employee is a big headache saved.

    B2. Networked Organization - Many time, customers judge you indirectly as they may not like to judge directly. An enterprise's Microsoft Gold Partnership, Oracle's premium partner, HP-Mercury's premium level etc. sends a message to customer that the organization is trusted by industry's credible names and they can take it easy in their own evaluations and start trusting. All these partnerships also keeps you in top-of-the-mind recall of partner and may get the inquiries generated at them. A friend of mine in Sacromento, California, USA left a highly paid job at Microsoft to commence a startup. He knew the product BizTalk from Microsoft well and knew what it did not have. He made complementary add-ons and largely concentrated his communication to Microsoft, by direct interactions. In 18 months time, he was able to sell his small company ( $2m revenue) at 34 times premium to Microsoft itself. In generating this $2m revenue, 60% of the inquiries used to come from Microsoft only. Connect with trade association is also very useful.

C) Astute Financial Management

    C1. Keep Cost Low - Startups in garages or room at hostel is still a good idea. Customers that we tend to acquire initially usually do not come (B2B space) to entrepreneur office and grand office may not be needed during the trial phase.

    C2. Right Price - Selling products at very high price will deflect customers and selling it cheap will erode the capital for further growth. Pricing has to be right. Networked organization also exposes one to know what is expectated and how competition behaves.

    C3. Cash is King - One single most important reason for startup to fail is to struggle over working capital to pay for operating expenses. If one has planned for a one year of expenses and ensured their availability, promoter can focus on selling and/or making the products, away from every day finance related distractions. Most college graduates have better chance of stiking gold as there is no perennial sword of meeting expenses. Bill gates, Steve Jobs, Karsanbhai Patel are few examples.

But to sum it up, two more things that are important. One, keep publise organization with "I exist" phenomenon. Keep spreading the word about your existence to be in top-of-mind recall, through low cost but positive messages. Second, use mentor services. Mentor could be another friend's organization with whom you can share your issues and discuss openly on reciprocal basis or an individual who can be unbiased. Mentor is different from co-partner and brings in fresh perspective from outside without mired in the daily problems.

Ashish Jain 

Leading International Business - Locally

KFC entered India with Beef and Pork products, without realizing the potential retaliation from the local market. The result, it had to close shop for nearly two years. Future Group with Kishore Bayani as its first generation entrepreneur setup 80 people core team in Bangalore which visits stores, observes customers, meets them, engage with them and alike to gather what he considers core facts for his retail strategy. When Big Bazaar was started, the floors were neat and clean akin to large malls. Customers were reluctant with missing market buzz of shopping. Big Bazaar swiftly adopted the change to succeed, based on the facts gathered through their market insights. Is it business knowledge or cultural knowledge? I would attribute it to knowledge of local culture (India) as same factors may not work in another country just the same way even if other business parameters are kept similar.

Knowledge of local culture, therefore, is as much important as knowledge of business itself. This is hygiene factor, without which, chances of failures increases leaps and bounds. Leaders are expected to have this market knowledge before launching their country strategy. In an International environment, mistakes are costly, not only from financial perspective but also from the damage to the brand.

Insights here are not intended to be exhaustive, but are catalyst to generate interest and help through few guiding rules. Some insights work on the region while others work on the country.

The first exposure is to communicate in International markets. Americans and British like to crack jokes and involve humor with business while French, German, Dutch and Japanese would not mix the two, till they have become ‘friends’. It is strict ‘No’ to discuss politics, religion, family, children, and salary with Americans and Brits. Safest bet is to discuss local sports like baseball, basketball in US and Soccer in Europe apart from Weather. French likes to discuss art, wine, travel experiences and sports. It is kind of ritual in Latin America to discuss health issues in great details. French do not like to get a smile from passer by, just the opposite of Brits. It is compulsory not to discuss family and criticize king / queen in Islamic countries, else…you know best. Italy does not take discussion on Mafia, taxes and politics easily. In Australia and NZ, avoid discussion on politics, racism, labor issues, kangaroo population and highly of NZ in Australia and vice versa.

Australian, Brits, French, Canadian and Americans use chit-chat to familiarize fast. China and Hong Kong uses chit-chat just to discuss the travel experience but swiftly moves to elaborate conversation on even personal topics like family, Income etc. People in Middle East and India like to engage in conversation for a long duration. Eye contact is positive in US and Europe unlike Asian and Latin American, as it is seen as attentiveness, alertness, self confidence, truthfulness and respect. Japanese, Koreans and many Asian countries find stare quite uncomfortable, to the extent of doubting and not agreeing. Accent is very important to Brits and is able to find out educational background from the accent. Standard English were found in supervisory positions more often than were persons who speak with pronounced accent. Americans like to speak slower. In Middle East, Italy, Germany and Taiwan, they associate volume with strength and sincerity and thus speak loudly. Japanese prefer to speak and hear softly.

One of the most authoritative work as a project was carried out by Geert Hofstede (www.geert-hofstede.com) on cultural dimensions. Geert analyzed a large data base of employee values scores collected by IBM between 1967 and 1973 covering more than 70 countries, updated in 2001 with scores for 74 countries / regions.

Hofstede developed a model that identifies five primary Dimensions to assist in differentiating cultures: Power Distance - PDI, Individualism - IDV, Masculinity - MAS, and Uncertainty Avoidance – UAI and Long-Term Orientation – LTO. Values of some countries are mentioned here.

Country	PDI	IDV	MAS	UAI	LTO
Arab World	80	38	52	68
Australia	36	90	61	51	31
Belgium	65	75	54	94
Canada	39	80	52	48	23
China	80	20	66	30	118
India	77	48	56	40	61
France	68	71	43	86
Germany	35	67	66	65	31
Italy	50	76	70	75
Japan	54	46	95	92	80
Mexico	81	30	69	82
Netherlands	38	80	14	53	44
New Zealand	22	79	58	49	30
Pakistan	55	14	50	70
United Kingdom	35	89	66	35	25
United States	40	91	62	46	29

Power Distance Index (PDI) - Society's level of inequality is endorsed by the followers as much as by the leaders. Higher the number means higher the inequality.

Individualism (IDV) – This is opposite to collectivism - in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families. Higher the number, lower the collectivism bond.

Masculinity (MAS) – Distribution of roles between genders. Masculine assertiveness over feminine shows higher number.

Uncertainty Avoidance Index (UAI) – Factor to show society's tolerance for uncertainty and ambiguity. Laws and rules are stick for uncertainly avoidance in high scoring countries / regions. People in uncertainty avoiding countries are more emotional. The opposite type, uncertainty accepting cultures are more tolerant of opinions different from theirs. Long-Term Orientation (LTO) - It can be said to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift and perseverance; values associated with Short Term Orientation are respect for tradition and fulfilling social obligations.

Knowing cultural diversity and its impact on business is any leader’s dream. HSBC aptly characterized it in its punch line “Think Global, Act Local”. Leadership can only be better by avoiding traps KFC found itself in.