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

Equal Partnerships? No.

When starting a business, founders tend to divide ownership equally among the partners. Many start-ups are incepted with founders knowing each other. When friends join together, they are equal and hence they must get equal share in the venture they are starting with. If the partners are not contributing equally, is it desirable?

Let me share a case example. Ankit, Joseph and Dimple were in the same college. Ankit is one year senior to the other two and is also the harbinger of starting this venture. He knew Joseph, for his technology passion and Dimple for her outgoing public speaking and reach-out skills. Ankit, quite convinced with his idea, shares it and asks them to join him. Joseph has issues with non-supporting family to his start-up idea and Dimple can’t relocate to the city the venture is starting in.  Still, Ankit is left with these two, as he has approached many others in the past three months, with a promise of they joining him but never did. Ankit settled for this option. They agree that Joseph and Dimple will be in full time job and support the venture by contributing Rs 20,000 each month, besides shouldering some responsibilities relating to their area of passion, for an equal share in the venture. Dimple plans to join Ankit, full time in a year’s time.

The understanding is innovative as is expected from a startup founder. But there are two problems in this arrangement. One, Ankit is left alone to manage the affairs of the enterprise with very selective and specific role shouldered by others. That makes his team a no-go before any investor. Second, the venture needed about Rs 20 Lakhs over two years, 50% of which Ankit will need to invest from his side. Ankit is full time. Joseph and Dimple are not. Major risk is borne by Ankit.

If we analyze further, simplistically, let’s take only two key parameters into consideration – role and investment.

There are roles of CEO, CFO, CTO, CMO and CHR to say the least in any venture. In the above case example, CEO and CFO roles are with Ankit, CTO with Joseph and CMO/CHR with Dimple. If not in full time engagement, would Joseph and Dimple be able to perform their CTO and CMO roles completely or any spill over will need to be managed by Ankit himself or through outsourced help? Joseph being at Mckinsey argues that his technical prowess and work environment will help him come up with better technical solutions faster, to make up for his less time involvement.

The investment share of three is in 50%, 25%, 25% composition. It is also unequal. In such a scenario, should the share of three in the venture be equal? I feel no.

What is likely to be fallout from such an arrangement? Is it not an innovative method of win-win-win situation created by the founders of this venture?

The venture soon will see the frustration of not only Ankit, but also of other two. Most likely decisions will be taken by Ankit, sometimes not in consultation, as generally is demanded of the situation in any small organization. Also, Ankit’s un-intentional encroachment on CTO or CMO roles, as necessitated, may not find approval from Joseph and Dimple. Soon, based on human psychology, every chance is for Ankit to feel cheated and frustrated for doing ALL the work, while others are not contributing enough, but is equal partner.

The solution thus is to make unequal partnership based on these two factors – role and investment. Give weightage of 70% to the role and 30% to the investment. This is also the way to indicate defined leadership with adequate authority to make final decision and sufficient compensation to remain motivated. In the scheme of things, only distribute 90%, keeping about 10% of the share reserved for ESOPs that will come handy to attract key talent later. Considering each of Joseph and Dimple are able to contribute about 75% to their role in this fashion and kind of investment mentioned, the share of partnership should be 38%, 26%, 26% amongst Ankit, Joseph and Dimple respectively. When Dimple joins full time after a year, this percentage should change to 35%, 26% and 29%. Whatever is the share, keep a period of vesting from 3 to 4 years at least.

It is equally important to note what happens in the real life. Circumstances change and partners do quit. In the identified situation, some partners due to their peripheral involvement have low risk to quit the venture and thus have more likelihood. It is pertinent to design the smooth exit safeguarding the interest of all involved. As revenue results and valuations may not be available (quit decision less likely if they are available and sound) by the time quit decision comes from any of the three, it is prudent to provision for about double the market rate returns (of 10%) on the invested amount in the year 1 and triple the returns in the year 2.

The given solution is indicative and variations in situation may impact a change in the share, keeping approach the same.

I support the arguments of un-equal share in partnerships even if all the co-founders are on-board full time. Differentiate by small percentage, based on the amount of investment, but the governance structure must be clearly defined in case of disagreements. All significant decisions must be made on consensus, transparency kept fully else partnership will break sooner than one thinks. However, clearly defined conflict resolution goes a long way in smooth running of the enterprise and bringing in order.

Ashish Jain, Chief Evangelist

www.thestartupboard.com

About Author - Ashish mentors founders of start-ups on strategy

Social pullback from Start-up dream

Start-up dream is now-a-days seen by many youngsters but not everyone ends-up with his /her start-up.

I happen to know a youngster, who passed out in 2015 from a prominent southern private engineering college. Let’s call this youngster Pranav. He has been active in college fest, organizing activities for “societies” and getting “tech-app” made from his juniors. Highly connected with students, professors and evangelists from other colleges in the area, he had a dream to commence with his own start-up and even had firmed-up his ideas on technology and domain to venture into. On campus placements, he rejected four such offers, including from the big Indian IT companies and consulting MNCs. He knew, for sure, the challenges he was likely to face in his start-up. Usual ones were finding a team with same zeal and passion as he had, funding it, getting the product ready, competing against competition, sustaining the various ups-and-down of a startup and then making it big to succeed. He graduated and was ready for all of these challenges.

He was ready but his family was not. He has discussed the options with his parents before rejecting his campus placement offers, but parents were under pressure from the “society”. Few relatives were skeptical of his choice in life and were not seeing the vision and life he was seeing for himself. Anyone, Pranav or his parents discussed the idea with, brought the rejection of the start-up idea in favor of more established options of higher studies (post-graduation) or taking up a job.

Pranav isn’t along. There are numerous graduates, hailing from middle-class, who are facing challenges even before starting their own venture. The society in India is yet to reconcile to what’s-the-big-deal-to-failure mentality. Is it a big blow if someone fails in an experiment? What about the learning from such a failure?

I did a simple arithmetic of the options that are available to be engineering graduate, soon after college.

Please allow me to exclude the outliers from IIT and IIM.

Based on latest figures, an engineering graduate gets about Rs 3 – 3.50 lakhs as his starting salary. Assuming everyone, who gets into a job gets an increment of 25% in the year 2 and 3 appraisals, 20% for the next two and 15% subsequently, as the base salary is growing and this percentage reflect the general 60% of the candidates who fit in the middle of the bell-curve. An engineering graduate gets about 11 Lakhs after about year 9, unless he reskills himself or switches jobs too frequently, with a cumulative earnings of Rs 61 Lakhs after 9 years of service.

			25%	25%	20%	20%	15%	15%	10%	10%
	Option	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9
1	Job, Right now	3	4	5	6	7	8	9	10	11
			7	11	17	24	32	41	50	61	Cumulative
2	Higher Edu India - PG (2 Years)	(5)	(5)	7	8	10	12	13	15	16
			(10)	(3)	5	15	27	40	55	71
3	Higher Edu Abroad - PG (2 Years)	(20)	(20)	10	12	14	17	19	21	23
			(40)	(30)	(18)	(4)	13	32	53	76
4	Startup - Failed, Join Job after 2 years	(20)	-	15	18	22	25	29	31	35
			(20)	(5)	13	35	59	88	119	154
5	Startup - Successful	(20)	-	40	48	58	66	76	84	92
			(20)	20	68	126	192	268	352	444

Consider the same graduate going for higher post-graduation studies within India. He invests about 10 Lakhs in the fees and hostel and gets to start at about Rs 7 Lakhs. Assuming the same increment percentages as earlier, his CTC at year 9 is at 16 Lakhs, with cumulative earnings of 71 Lakhs over 9 years of service. If the same graduate had gone for higher studies abroad, he had to invest about Rs 40 Lakhs an would have been much better taking CTC of Rs 23 Lakhs (cumulative 76 L) after the same period.

Consider starting a venture. What does it take for founders to start a venture and take it to a level recognized in the industry? He needs to build product (technology savvy), understand market dynamic including competition (marketing plan with branding), define go-to-market strategy (led sales), arrange funds (CFO role), hire and retain people (CHR role), manage organization growth, address regulatory compliances, etc. If this venture has made its presence, founders have learnt which no other course in the world can teach them! Innovative and modern outlook companies are constantly looking for such people who are not only all-rounder, but also possess fighting spirit and attitude to solve problems as they come. It makes these founders in-valuable, whether they lose out on their venture or make success out of it. Anyone who fails still has a better market value and conservatively valued at 15 Lakhs as starting salary, if he had to resume job after venture failure. Not to mention, he is better off than any of the earlier discussed cases, even if he has burned about Rs 20 Lakhs of his own.

What if he succeeds? There is no looking back. What one earns is un-comparable to job that could have given. Pranav has been able to convince his parents to travel on this path.

If one argues higher education in India or abroad provides connect with fellow batch-mates and this can be leveraged for better opportunities in life. This is no-doubt a take away. However, this is much more explicit had one started his venture.

It is also pertinent to mention that business is not for everyone. Only some have the aptitude and attitude to take the risk and have the endurance to undergo the hard work physically and emotionally. So, for all those we are appropriate for it, startup venture is the right way to go.

It is time that as parents we support our wards to take the path less traveled and enable them to be the torch bearer for the generation to come, without compromising self-interest.

Ashish Jain

www.thestartupboard.com

About Author - Ashish mentors founders of start-ups on strategy