Built to Sell.. For India

I really love this book. If you haven’t read it by now, then you should soon enough (Click on the picture for the Flipkart page). John Warrillow narrates a simple story about a person (like you and me) who wishes to sell his business off and chill.

But he can’t.

Because like many first time entrepreneurs and a majority of Indian Businessmen, he creates a business that is fundamentally unsellable.

The book walks you through a relatable story of a good guy who wants to move on and expects to be rewarded for all the work he has done in building up his company.

Unlike what Steve Jobs and his ilk might say, I feel that selling out a business, which you have created, is a very valid exit route. Steve Jobs might have found ultimate happiness in creating highly priced touch screen toys for the hipster crowd but many others just want to retire on a beach and spend time with their families. After all we are all in it to make a profit.

In this post I choose not to ‘recreate’ stuff written by others since I don’t feel good about restating what has already been written (rather well at that). However I feel that a few rules apart from those given in Built To Sell are relevant for Indian Startups and businesses.

 

10 ‘Built to Sell’ rules for India

1. Black Money – Most startups or young businesses in India really depend on Black Money in one form or another. Informal markets around India, especially in the urban centres provides most entrepreneurs with the capital to start businesses at low or moderate interest rates. Sometimes this money is from a relative or a friend who wants a piece of the action. With cash still King, not only in the financial but also the physical sense, this is a fairly easy and painless form of capital. Our risk-averse banking system really isn’t made for first time entrepreneurs and that’s where the black money market helps support millions of small businessmen across India. The problem happens when your business can not graduate from Black Money based capital and transactions to white money based business operations. If dealers, vendors, customers etc are dealing with you in off-the books transactions and black money then it becomes very difficult for a large players (who themselves are highly regulated and well known) into buying your company out. It also restricts the actual sales you can declare. With most buyers being progressive, large domestic or MNC firms who are, in general moving towards cleaner operations, this is a real issue. Even if you have a great business, the best step is to wean your business off black money and work on white.

2. The Law – Indian businesses have a penchant for breaking laws, not taking all the licenses, permissions, not getting into contracts, agreements and having a multitude of cases against them. Due to our fabulous (read slow, lousy and corrupt) legal system, most businessmen don’t really mind cases against them as long as it doesn’t lead to a stay against major business operations. However a prospective buyer will in all probability put his money only when he knows that there are no extenuating legal issues against the business. If there are, then the buyer considers it a potential threat to future revenues and business operations. A firm interested in buying you out will look at long term contracts, agreements, permissions etc since it not only considers them as safeguards to business activity but also increase long terms revenue projections and hence the valuation of the business.  

3. Family Members – Involving family members in a small business which looks to spread its wings and grow fast seems like a great idea in the beginning. After all you are ensured order, loyalty, motivation, a quasi-managerial set of people and low salary expectations. This also leads to the dreaded mix of the personal and the professional. In many cases it leads to family disputes, ego hassles, staff loyalty issues and development of company fiefdoms. This is a major turn-off for buyers.

4. Markets with major player interests – This is really a no-brainer but for some reason most people get this one wrong. A businesses’ ability to sell itself to a major player/MNC/Domestic Company only exists when (A) It’s an exciting sector where a number of players are looking at gaining traction and market share (not necessarily revenue… yet) (B) FDI limits are 100%/high/Going to increase hence ensuring that buyouts can happen by a foreign player for domestic presence. This also increases domestic competition (C) The sector is strategic in nature i.e. it is important from a technological, geographical or social perspective and not only from a revenue point of view. (D) Low regulation by government agencies.

5. Process Process Process – My biggest issue with Indian businesses and startups. The lack of process and systems. The absence of it makes most prospective buyers jittery and unsure, leading to lower valuations for your business. A proprietary process and system set up for your operations and sales will make it really easy for a professional business to put faith in your business and buy you out. A process and system oriented management shows that the company is poised to take on scalability issues head-on.

6. Documentation – Usually this would be a part of the above point, but I just don’t think that would cut it from an Indian perspective. Indian startups and businesses refuse to document. Actually it’s not in our cultural DNA since we are a verbal story-telling based culture. While this may lead to some great traditions and promote faith the in informal business sector, it also leads to bad records, adherence to policy and issues with creating processes and systems. It makes duplication of results and activities really difficult while making the business extremely people dependent and reduces organizational intelligence.

7. Don’t offer to sell everything to everyone – This is a like a disease which afflicts every Indian startup and business at some time or the other and totally goes against all practical advice regarding scalability, identifying differential advantage, identifying your TMS, creating great products/services and organizational focus. Too many companies have lost money, time and resources trying to please too many people at too many price points in too many ways. This also confuses the living hell out of a potential buyer of a business since they want to fulfil a specific need by buying your business but can’t identify what to do with all the rest of stuff that you seem to be doing. It makes your business look poorly organized and very muddled. Why? Because it is.

8. Hire a great CA – Just take it from me. Hire a great CA. Pay him more than you pay yourself if you have to. Just make sure your ass is on the right side of the law/tax department and that your financial papers look ready to be entered into the next Harvard Case Study series. It really really helps.

9. Build a Board – Most boards only exist on paper and consist of family members who either are already part of the management or don’t even know what you do. That is a fatal mistake. A board made up of local business leaders, professionals, professors and socially known /respectable citizens not only make it easier for you to do business and look good, leads to better credit ratings and it also increases valuation.

10. Don’t look at the US/EU valuations – Please understand, the US/EU (especially the US) is a crazy place where valuations go into bubble mode at regular intervals. The US/EU markets have a very well developed M&A market/players, with deals being done every day and companies being used as short/long term investments by PE/VC firms. In India we don’t have a developed market for M&As, we also have FDI restrictions, low valuations, cultural aversion to selling out and most importantly we have the Rupee (not the dollar). So don’t expect to be offered a deal on the lines of the US. You will be much happier and will also close the deal better. Don’t convert your Rupee valuation into dollar, unless you like being depressed.

5 Things that Startups can learn from the Business of Bollywood!

I want to start by thanking all of you who have taken the time to read my blog. This week Startup Yapper got over 2000 hits, its highest ever and a corresponding number of comments, emails and messages.

Today a friend asked me to write about movies, Bollywood in particular. And even though I told him that my blog was Startups centric, I decided to write on Bollywood, simply because finding connections and parallels for startups, is at the core of this blog.

Unlike other news and reviews, which concern themselves with scandals, stories, leaked footage, special effects and item numbers, I am not really writing about the ‘Magic’ of the movies but about their Business Model.

After all, Bollywood has been a thriving entertainment industry for over 100+ years. I am sure there are a ton of lessons that Startups can learn from it.

As a business model, Bollywood has been like the mirror image of Indian Societal Dynamics. It has changed a lot and yet remained the same in may ways. It is amazing, not only for the number of movies which are churned out (unfortunately 90% are sub-standard) but also for the amazing reach and cultural influence these movies have on the rest of the world, without really trying too hard.

Most of us know that behind the silver screen, there is a complex, fairly unorganized, nimble set of organizations and businesses which are responsible for the biggest Entertainment Industry in the world (by influence). This blog is dedicated to understanding 5 lessons which Startups, of any hue and color, would to well to learn.

1. The Kind of Investor is Important – Till 2000, by Government Rules, Bollywood wasn’t considered an industry and hence could not look for bank credit, private equity, and other means of legitimate commercial financing. Movies are extremely capital intensive and involve up-front payments. So, producers used other sources of funds, namely that of the real estate businessmen, jewellery industry, underworld dons and politicians who were looking for avenues to launder their black money. Not only did they charge up to 60% to 100% interest on the money, at times music rights and distribution also was included in the deal. But the real blow was dealt to the quality of movies made. If you were around during the 80s and 90s and wondered why movies suddenly turned so shitty and similar to each other, it was because the “investors” only ended up backing those scripts which appealed to them or which followed the ‘formula’ of successful movies before or were copies of successful Hollywood releases. The absence of a script, proliferation of songs, bad quality of production and un-professionalism were all part of and parcel of this era.

So the next time you go looking for funding to a VC or an Angel Investor,please check their track record, the startups they have invested in, the profile of Venture Capitalists themselves and their investment philosophy. Take some time out and speak to the startups themselves, who have received investments by them, to get a better idea of how their investors operate and support them. Because once they fund you, they too will have a stake in product/service decisions and strategy.

2. Hedge your Risk – Every venture, especially the kind which involves the amount of uncertainty associated with movies, must incorporate hedging of risks within the business model. Movies do this by, by making few capital investments, taking most of their equipment on rent, shooting at exotic locales by tying up with tourism boards, selling off music rights, satellite and TV rights for high up-front payments, giving profit share to lead actors/directors etc in lieu of a their fee and take some upfront payment by selling distribution rights. 

Big Budget movies, like Rajnikanth’s last movie, Robot (Endhiran), had New India Assurance providing cover for the production and cast of the movie for Rs 40 crore with a premium of Rs 25 lakh, while United India Insurance covered the exhibitor’s liability for the film for around Rs 50 crore.

The trick is then to create a business where your upfront costs, capital costs are low, most of your high cost items are on lease/rent and there is a certain amount of hedging when it comes to risky projects. For startups this is essential, as running out of cash is an ever present headache, especially since it takes a long time for them to breakeven and report profits. Renting, leasing and working out profit share agreements with your partners and stakeholders can help you get through more days and mistakes than otherwise possible.

3. Customers can’t always predict what they want – If Apple hasn’t already proved this point (with the ipad, ipod and i-whatever) then Movies most certainly will. Movies, in fact entertainment in general, are based on a business model which works because one must exceed the expectations of customers and/or bring new elements, experiences and content. I don’t see how people would watch the next Avengers , Krrish 2, Dhoom 3, Agent Vinod, Munnabhai etc if they knew exactly what to expect. I am not even so sure if one could do a Customer Focus Group Discussion to figure out elements for the next story. This is probably where Crowd Sourcing for movie scripts and movies has failed as of now.

Though getting customer feedback is important, I feel that in a few cases (like Bollywood), one must throw out the notion that customers know best about what they want and create something original, substantial, content oriented and most importantly, mind-blowing.

Startups would do well to remember that.

4. Staying in the News – If there is one thing that truly impresses me about Bollywood, it is its relentless pursuit of staying in the news. Have no doubt, many stars, directors, producers do well without hogging the limelight, but they are exceptions. Sure, creating fake fights, scandals, affairs, sleazy pictures and mud slinging is something no self respecting startup should ever have to resort to. But the advantages of letting out bits of trivia, like leaked pictures, a sinppet of a story, the fact that someone is doing their own stunts, that the set is the most expensive ever, the budget is over 100 Cr., some actor is being paid over 30 Cr., a Chinese stunt director is involved in the action scenes, leaked footage etc helps keep the excitement up for the general public and creates fans even before the movie is out. 

For a Startup, staying in the news for present and potential customers, employees and investors is also very important. Part of Flipkart’s alleged $1 Billion valuation is because they get interviewed like superstars and certain mind-blowing numbers keep appearing in the right places. 

Warning: If your product/service is bad then this exercise is futile. Sooner or later people will know that you are full of it.

5. Know your Target Market Segment (TMS) – Every superstar knows which demographic is their main base of viewers. Shahrukh Khan knows his viewership base is the urban middle classes of India and the NRI community, hence his movies are made and distributed accordingly. Salman Khan knows he does extremely well in B and C towns and in certain communities. Hence Dabangg, Wanted and Bodyguard were all released on Eid. Ek Tha Tiger, his next movie, will also release then.  Movies like ZNMD were promoted in magazines, newspapers and ads targeted at the aspiration, urban, upper middle classes. Even when scripts for certain theme based movies are being drafted, movie makers already have a fair idea of where the movie is to be distributed and how it should be promoted.

Far too many startups I know, make the fundamental mistake of  considering ‘Everyone’ as their TMS. They should take their cue from movie makers, who have burnt their hands while making movies with all the elements and masala to appeal to everyone, only to loose money in the long run. 

While many of you may or may not agree with the lessons (or analogies) from above, the reality is that Bollywood is a thriving and vibrant Industry which has been able to change and adapt in a major way over the last decade. It has passed from the era of the first silent short film in 1899 to today and seen wars, independence, civil unrest, economic slowdown, underworld dons and frightful competition. My respect usually lies with long distance runner and not the sprinter.

“You can borrow a big bag of tricks from a young man but learn a timeless lesson from an old one” – Startup Yapper

The economics of Indian Corruption

I write this post because every entrepreneur should understand why corruption is rife in India.

The biggest issue I have with a chunk of the ‘Social Society’ is that they behave like quack doctors who spot the disease in a patient, give out the wrong diagnosis and hence recommend the wrong medicine.

Just like fanatical and idealistic Marxism or Laissez Faire Capitalism, this stuff just doesn’t work in the real world. It just makes it worse.

This post is dedicated to all those people who really feel that Corruption in India is just wrong, because they need to know that the answer isn’t just tougher laws and better morals. The answer lies in economics.

The one amazing thing about India is its 365 days a year political churn. Unlike many other countries, there is no season of elections. They happen all the time. National, State, Municipal, Panchayat, College, By-elections etc… You name it, we have an election for it.

Now these elections cost money. Ever wonder where comes all the money for canvassing, getting thousands of people transported by trucks for speeches, helicopters, convoys of cars, feeding supporters, banners, salaries for the hundreds and thousands of party workers? And there are hundreds of parties with thousands of candidates campaigning almost every day.

Answer No. 1. Donations

There are lots of laws like The Companies Act 1956 which prohibits no more than 5% (recently recommended to 7.5%) of average profits of the last 3 years. Or the fact that parties need not keep a list of names of people who donate less than Rs. 20,000.

The joke is that many companies consider political donations as CSR since many declare it as donations to affiliate organizations of political parties. I wonder if the recent push to get companies to pay up a part of their profits as CSR had something to do with political parties arm-twisting these companies to give them white-legal money for their kittys.

In most of the cases, there is a mutual understanding between parties to allow the corporate to convert their black money into party contributions. Such arrangement also gives a leeway to hawala, untraceable and undeclared money transfer.

Donations are also non-taxable if above Rs. 20,000. Despite all the laws, most records are fudged or non –existent.

Answer No. 2 – Corruption

The reason why the commonwealth games, just like defence purchases, are under scanner is because they represent the single biggest contributor of funds to a political party in power. After all, they need to fight elections in states and a general one in a few years.

Contracts for roads, highways, public infrastructure go to the same big boys, because they are more than willing to pay a part of the contract (our tax money) to the political party who granted them that contract.

Unfortunately, to maintain profitability, most of these guys cut back on quality. And over time, due to lack of competition, this becomes the norm.

Major foreign investments not just bring in tax money and jobs, they also bring black money in chunks as ‘donations’ to political parties.

However, when people are greasing party coffers, they too are left with a little grease on their hands. That’s where they make personal fortunes.

And the real trouble begins…

A rule of organizations – “Great change always happens from within and mostly from the top of an organization. Conversely that’s where the rot steeps in”

Local politicians make money the way the Romans, Greeks and the Ottomans did. By selling offices. That’s why one hears of stories of cops being asked to cough up 30 lakhs for a favourable position, or of small time clerks paying up lakhs for their 10,000 a month salary.

This is where economics comes into play.

Since these officials have already paid up, they need to make back their investment somehow, so in collusion with higher ups, they involve themselves in the petty bribes that make it all worth their investment. Not to mention the fact that they must collect enough booty to get their sons into the system as well (in some cases).

Imagine entire government departments/arms collecting bribes just to be able to pay for our glorious and proud tradition of election and democracy.

And since there is no moral authority with politicians, judges or officials at various levels (especially the top), this just keeps going on and on.

So when you, as an entrepreneur, decide to set up your restaurant, and someone asks you to pay 20-50 lakhs for your bar license, rest assured that the money is going, atleast in part, to the political process.

My Point

If you want to solve the menace of corruption, then one has to understand and break the economic model. Only then will well meaning, moral, law abiding politicians, officials and judges (there are many) be able to enforce the multitude of laws, we already have against corruption.

If you still don’t believe me, then believe this. The max expenditure allowed per Lok Sabha Candidate per election is 25 Lakhs. The Cost of 3 Tata Sumos.