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.

Social Media under Fire! The Court Order & My Questions

It has been almost a month since I wrote my last post and many of you have written to me, asking me if I had relegated this endeavour to the bin just like many others. I haven’t.

I recently read the Court order related to the case against various Social Media Networks/Companies in India on Pluggd.in (The Court Order) and felt that the drab document contained some exciting and disturbing stuff. This news has been doing the rounds of almost every (English) newspaper and website in India.

So I decided to write a set of Questions which indirectly analyze the possible fallout related to this Court Order. I feel that this may be a watershed moment not only for how we communicate and use social media, but also for freedom of expression, national unity, publication, blogging etc

Its important to note here that this court order is not the final decision/judgement related to the matter but a ‘Summons Order’ dated 23 Dec 2011 which contains a list of the accused, the complaint and the complainants and reasons given by the judge on why the court feels that the case should be heard.

Just like the printing press and the telegraph in their time, new inventions/nascent fields are like the wild west, where for a long time when almost everything and anything goes due to lack of policy, rules and regulations. Indeed, regulation becomes necessary only when authorities know the contours, the effects, loopholes and the potential fallout from activities related to a particular space.

Social Media (in India) is the latest space being tackled by the government, courts, players and regulators. Hence it is but natural that we hear laws, decisions and orders (such as the one I am writing about) baffling.

Part of the problem lies with our new found generational ADD (Attention Deficit Disorder) aka ‘Multi-Tasking’ ‘Trivia-Centered Learning’ etc, part of it with the way we consume media aka ‘Aaj Tak Syndrome’ (through headlines and/or sans meaningful analysis) and part of it is the fact that the overwhelming readership on the net is educated, urban, middle class with secular, idealistic and righteous opinions (I belong to this class).

 

The basic Info

The Judge – Shri Sudesh Kumar

Court – Patiala House, New Delhi

Date of Summons Order – 23 Dec 2011

Complainant – Vinay Rai (Senior Journalist and editor of weekly Urdu, Akbari)

Accused – Facebook India, Facebook, Google India, Orkut, Blogspot, Youtube, Google, Yahoo India, Yahoo, Microsoft (India), Microsoft, Exbii, Zombie Time, My Lot, Boardreader.com, IMC India, Shyni Blog and Topix.

 

The Analysis

1. The court order mentions harm to national unity, riots, inflammatory language, debasement of religions, danger to communal harmony, hatred etc as the among the litany of accusations against the Social Networks and Websites. While this may seem farfetched to many people, however one has to remember that just like pamphlets, newspapers, posters etc a facebook group/page created to incite violence may have the same/similar effect and purpose. Since there is a law to regulate other media, the question here is why should Social Media stay out of the purview? 

2. As per the court order, enough reasons and evidence has been provided to initiate a case against the accused (summons have been/will be provided to the heads of these organizations including some really big names). Putting in big names, ensures that the case gets the visibility that it should. Apart from the legal aspect, it makes great copy too. For various parties concerned, it makes sure that the average guy hears about this. But why include Microsoft? And Yahoo? Last time I checked they had no major play in the Social Media space. Why are they being dragged into this?

3. The accusation includes the fact that many or some of these social networks/websites have colluded and in fact promoted such activities to increase page views, accounts, hits etc and thereby revenues. This is especially troubling since not only is it ethically and morally wrong, it is also inviting Government (over)regulation and control over this medium. And one must not fail to mention the damage this does to the reputation of the fledging world of Social Media Startups. However, I beg to understand how they hope to prove in court that Social Networks have ‘Colluded’ to spread hate messages? Reposting material from one site to another is done by users. How does one create a formal or informal mechanism to co-operate between social networks aimed at increasing page views/hits through lewd, disgusting, anti-community and anti-national messages/pictures? I don’t for a second mean that the accused are beyond guilt. I just want to know how they worked together.

4. As per the complainant, the government has turned a blind eye towards this menace. Will the government now take concrete steps to take care of this? Will there be pan-chewing bureaucrats sitting in front of computers reading out my updates and pages? Will the local police station, with staff that hasn’t been trained on how to use a computer, be able to record an FIR? Or will there be another ‘Special Cell’ set up for this? What will they do? And if they can really control all this, then when can I open Google and expect to see the right map of Kashmir in India?

5. This court order may even lead to clarification on who legally owns the information/content created by you and me on Social Media. If the Social Networks don’t own it, then they can safely say that though they will try to clean up their sites, the legal fallout is not theirs to suffer. If they do own it, then they might as well sell the info which we put up on their sites. So who, as per our laws, owns this info? 

6. Where is the info/data/pages stored? On servers within India or outside. If it is outside then the courts have no jurisdiction over the data. In which case they will have to look at ways to prosecute erring individuals or a company subsidiary or just block the page/website all together. So who should get punished? The company which owns the servers, which leases the servers, which owns the social network, the user who originally posts content or the reposting individual?

7. Who will regulate what is national or anti-national? The Government? That will be scary because we have heard what Mr. Kapil Sibal proposes. Media outlets have been fighting government censure laws for decades. Do we as the middle class have any hope of fighting unjust laws against us, when we can’t even get the cops to register a stolen mobile phone? Will any casual comment against a Politician or Govt Employee seen as defamation and get punished?

8. Finally who discusses standards of morality? Me, You, The Government, The Neighbor… who? Yes, when it comes to disturbing national unity, communalism, ethnicity based hatred and other harassment based material, a line must be drawn. But along with that, the laws must also recognize the fact that this line may be re-drawn and misused? Or are we looking at a future with POTA type laws for Social Networks?

 

I would like to clarify that I am 100% for sound punishment against those who have created such content consciously or otherwise. Even if Eric Schmidt himself must spend some time in Tihar, I believe the guilty must be punished. What I do not stand for is the kind of laws that usually get thrust on 99.99% of law abiding citizens in such situations. Laws, which seek to do nothing more than collate information & control the general population. Because no matter how democratic we become, we can and should never lose the right to express our opinions.

Smart Phones and the future of Indian Credit Markets

Go to your kitchen. Pick up a fruit, any fruit. No matter how fresh that fruit is, it has probably changed hands about 5-7 times before landing up in yours. It has arrived via the Azadpur Mandi, trucks, trams and trains. Impressive, until you realise that fruits are mighty expensive to procure these days. Then you just get pissed.

Part of the reason why this happens is because of ‘Arathiyas’ who act as middle men for our nation’s Vegetable and Fruit produce. In a country where electricity, illiteracy, road connectivity and food processing infrastructure is really bad, there is only one thing worse. The Credit Market for the rural masses.

That’s why these ‘Arathiyas’ exist because apart from being the transporters, guaranteers, collectors and distributors of farm produce, they also act as Credit Providers for rural farmers. Without this credit small, impoverished and rural farmers would never be able to buy seeds, fertilizers, implements etc for the next crop.

And this unfortunately isn’t just true for farming households who form an approx 60% of our population, it is also true for artisans, weavers, small time businessmen, far flung kirana stores etc. It’s because of the paucity of good ‘formal’ credit that many of these areas continue to remain impoverished and underdeveloped. To help out, the government has come up with a number of schemes (leaky) and the private sector has also chipped in with micro-financing. They have been successful only in a few areas. The rest continue to have money lenders charging above 50% compound interest or in worst case scenarios, bonded labour (as a way of paying off debts).

History has shown that those countries which invest in the development of credit and insurance markets, show greater investments (since there are more places to put capital in), higher velocity of money(consumption increases) and efficient markets (smart money always finds the best things to invest in, within the right conditions). All of this leads to better living conditions and a control on famr prices. 

Europe and the US have always had great credit markets and hence, continue to reap the benefits even today (yes, even today). 

However in India, we don’t see the availability of credit, even for many middle class families and SMEs. And the reason for an under-developed credit market, apart from physical infrastructure (like employees, bankers, offices, field staff etc) is the absence of authentic data/information.

Information?

Yup. If you don’t get it then do this little mental exercise.

Let’s say you were in school again, happy happy school days.

Your parents give you Rs. 100 a month out of which you usually end up saving Rs. 20. Now since you are a smart kid (ofcourse you are, you smartass) you want that money to give you some return if you invest it. But you don’t want to lose it by being too aggressive (you are smart and scared) and so decide to put it in the safest investment possible. 

Soon God gives you that opportunity. He presents 3 people in front of you. 

1. Your friend. Wants to borrow money and promises to pay you back in 1 month with Rs. 2 (10%) extra

2. Your adult working neighbour. Wants to borrow money and promises to pay you back in 1 month with Rs. 1 (5%) extra 

3. A nice stranger. Wants to borrow money and promises to pay you back in 1 month with Rs. 6 (30%) extra

Now if you are a smart person, which I think you are, you will choose option No. 2. (If you haven’t remind me to unfriend you or unfollow you or just un-whatever you)

Why? Simple. You know him (not the stranger) and you know he has a source of income (your childhood friend does not) and you can always tell Daddy if he doesn’t pay up.

So basically you had some leverage (Daddy) and Information.

Credit Markets work exactly like that where they need leverage (The Law of the land, the property as security etc) and Information (Your Credit Score, financial background, history, reputation, income statements etc)

Needless to say most of India may have provisions for leverage (excluding maoist, ulfa, terrorist badlands etc) but not the information. I mean who has authentic information about small farmers and labourers when they probably haven’t even been issued ration cards or birth certificates. With their transactions solely in cash, they remain out of the banking system and hence have no financial history.

Will you get to the point??

OK I agree I have taken longer than usual to get to the important stuff but as someone once told me “Context is a Bitch, Man!”. He was high and poor but he made sense.

So where do smart phones come into play?

Smart Phones have slowly become a vital part of our lives, just like mobile phones (non-smart) have become vital for rural India.

You now have sprinklers which turn on/off based on missed calls by farmers. You have money being transferred by migrating labour through the transfer of talk time. Farmers and businesses make trades based on market prices in the city thanks to mobile communication. 

Now imagine what smart phones meant for the masses can do?

Once these smart phones are equipped with various Indian languages and dialect recognition software, powerful batteries, tough outer shells, easy to understand functionality, voice command capability, social media apps for rural India and default bollywood ringtones (a must), they can potentially be used to collect information about purchases through m-commerce, family health, social connections, complaints, issues, financial position etc of a person. 

Once the smartphone has been made easy to use and integrate a ‘frictionless’ experience for rural populations to do transactions or feed in information or to stay connected, we will slowly be able to create the kind of personal and financial picture required about a person to give him/her credit.

I understand that many of you are by now jumping with either incredulous fury (about issues of privacy) or just snickering at the idea for its outlandishness. So take this. Yes, there will be privacy issues which a regulator and the government will have to sort out. But I would rather that farmers not commit suicide, children not go malnourished and families not remain bonded labour because of this reason. 

For those of you who are snickering at this idea of information being used to judge credit worthiness, get this. It’s already happening.

No, I am not talking about some new government initiative like Aadhar (which will also help a lot). I am talking about your CIBIL score. 

Yes my friends, we all have a credit score, already used by banks, called the CIBIL score. You, me and the guy next to you. We all have one. Look it up (If you have started working or ever worked or have a bank account).

My Prediction

Smartphones will be become the single biggest aggregator of personal information for our country. With m-commerce around the corner, cheaper handsets, better batteries and growing consumption of media through smartphones, this may be our chance of leapfrogging into a well developed credit system.

And the torchbearers will be startups who have the ability to develop apps and services for this market.