Startups. We see then all around, we read about the most fantastic and oftentimes unbelievable rags to riches stories, and thus the Startup is one glorified place to go work.
Statistics Tell a Horrid, BUT Truthful Tale
Statistically, the failure rate of Startups far exceeds the rate of success. Pity then that not much is really said of startups that fail, why they fail, how they fail. In their failure, complicit are the ones promoting the startups, the ones who fund them, the ones who value them, the ones who deal with them and the ones who run them. Perhaps that’s reason enough to write about this. Perhaps I will be serving some greater purpose, by sharing my experiences with startups. Some my own ventures, some ventures I know about, and some ventures I have worked with, either directly or indirectly. Let it serve as a heads up to people looking to work for startups, people who want to deal with startups that hold much promise (arguably). More on this in subsequent supplements of this series.
So Startups and one other topic has been foremost in my mind as topics to write about and the time has now come to write about it.
Hindsight is Great
Isn’t hindsight a great thing? So this is me reflecting and reminiscing from the time I first went to work for my father, launched my first startup, then graduated to the big corporates in India and internationally, and finally found that I was back into yet another startup, this time promoted by an ex-colleague and friend.
My latest experiences are in the Not for Profit and Social Enterprise space, but, those are things I will write about when the time is right. This is not that time.
Startups are my DNA
In some way shape or form I’ve been doing startups all my life, way before the word became common parlance, and more or less got beaten to death. Everybody seems to be doing a startup these days, either setting up one or working for one. And in case you haven’t noticed, plenty of them are falling by the wayside, leaving in their train wonton damage, chaos and mayhem. How many of them are actually raking in the cash? How many are at operating profit? How many are at post tax profit, or for that matter pre-tax profit? And even though I don’t quote statistic after statistic, believe me they are at proportions that are alarming. It’s like they are businesses that are ab initio doomed to fail, yet the kind of money they attract is quite disproportionate to the kind of money sound businesses seem to attract.
Some of the Biggest Names aren’t Profitable
Some of the biggest names, way past the startup stage by now, are not actually making money, but rather surviving on flawed business models, models surviving on perception, valuation, smoke and mirrors, rather than fundamentally sound business models. They are also surviving because good money is being thrown after bad money in the hope that things will even out. In several cases, where business models are initially sound, there is this morphing away from fundamentals, to models that play the game, paving the road to unrealistic valuations. In the end, someone is left holding the short straw, and more often than not, it is the investor, the employee, the client, the regulators, the tax authorities, and so on.
I would urge that this is not viewed from a point of view of negativity, but rather from a position of taking caution.
I am not an Investment Banker, nor am I a VC, nor have I worked for a VC or a known investment bank, yet here I am speaking from the pulpit. That confessed, what gives me the right or the authority to provide my opinion? Its more than a couple of decades of experience on the front line.
My Introduction to the World of Business
I had just returned from the USA after having completed my time as a Rotary Exchange Student in a small town called New Philadelphia, Ohio. The original plan was for me to stay on after my 12th grade and continue my studies at Duke. Then came the letter (no emails back then people) from my mother, saying that my father needed a son by his side. Didn’t know what I would contribute, since I was green behind the gills, but still a son was needed by his fathers’ side and therefore there was no question, no discussion. I made a choice of returning back home, a decision that I will never regret. Would I have been better off staying back and maybe settling in the US? Maybe. But had I not chosen, as I did, I would not have been exposed to realities of life, the good, the bad, and the ugly.
I came back to adversity, discovering that my father had been badly duped by seemingly trusted business associates and banks, and therefore in more ways than one, it was a baptism by fire.
To continue with my studies, I attended The Sydenham College of Commerce and Economics, and at the same time I was my dad’s chauffeur, and errand boy. I would drive him to his office downtown, then attend college, and then head back to dad’s office to take up my duties there. It was here that I learned the ropes of business, manufacturing, trading, imports and exports, paperwork, book-keeping. Skills that I find useful to the present day. My fathers manufacturing and trading business itself was small-scale in nature, but that meant that I got to learn so much, getting involved in every aspect of the business.
Fundamentals – Hands on Experience
See, in those days there was this brilliant Chartered Accountant who my dad appointed, and he was one tough task master. I learnt to write the books….Sales, Purchase and Stock Registers, Cash and Bank Books. No cellular, no internet, no computers back then. So you get the drift? Learning the ropes via the manual route, the school of very hard knocks, long hours, tedious and often repetitive work. Another invaluable experience set was that of dealing with the rigid and more often than not, the inflexible, unreasonable and extremely corrupt regulatory framework and practices. No school, no degree can ever teach you what I learned the hard way.
For some reason or the other, the damn trial balance would refuse to tally, and my CA mentor, would say, “Trial Balance MUST tally”. Well yes, I understood the concept perfectly, but getting the TB to tally was a whole different story. The leeway he gave me, and the personal training was to sit with me and help me trace the errors, all sort of errors… compensating errors, etc. For those from the Accounts field, I’m sure you know the pain. But still, that was such good learning of fundamentals, laying a rock solid foundation that would only serve me well in later years. Now I benchmark good ole’ manual work, brick and mortar business models to what we have today…..the digitization and often the virtual. All too often the brick and mortar is completely relegated to the unimportant, whereas without a fundamentally strong underlying brick and mortar model, all digital and virtual models will surely fail. This is something I realised a long time ago, and therefore I would always scratch my head, when the PE valuations and the rate of cash burn, ie: the underpinnings were grossly overstated, at the time of investment appraisal. Back in the day startup businesses were actually urged to overstate the cash burn to be eligible for investor interest. I never did get it, and I still don’t get it.
This then lays the foundations of the actual topic I’m blabbing on about. I’m pretty sure that there will be a degree of unpopularity, and even some quarters staring askance at my comments, observations, opinions. No matter, I stand by my convictions, my opinions simply because, I have been trained and inculcated under old school methods.
My First Startup
At some point in time, I became disillusioned with the business of my father, and decided to do something different. With the active encouragement of my dear father and through his introductions, I entered into the Stock Market Brokerage business. My dad has his office in Downtown Bombay, in a rather prestigious heritage building, which was at one point owned by Harold MacMillan, the British Prime Minister. See, before he became the PM, he ran MacMillan Publishing Company, and the office building was owned by the British PM’s Publishing Company. History of Dad’s Office Building
Being a Heritage Building, it was made of stone, had high ceilings, and we were running out of space. Not being able to afford buying another office, or for that matter, renting one, I hit upon a rather ingenious way to create space. Simple. Create a mezzanine floor (on account of the high ceiling), and lift and shift my dads setup to the mezzanine, and use the newly created space below, for my fledging stock market business.
So how was this going to be funded? Funding came from a financial services company founded by a Chartered Accountant, a friend of a dear friend, who literally gave me the money with nary a business plan, nor an agreement, nor any post dated checks. Purely relying on my cred, my word (and that of my friend), and my sincerity of purpose, we completed the paperwork only when the monies had been spent on the renovations.
We inaugurated the old-new office with a little do, and we were all set to do business. Really? What about the photo-copiers, what about the EPABX, binding machines, etc? Those were funded by loans from relatives, mainly my aunt and a couple of friends? Now business would take time to establish, so how do I finance payroll, interest on the loans, the EMI on the finance raised for renovation? The solution was to rent out office space, much like the co-working spaces available today (that’s not what they were called back then, back then they were called “business-centers”), and over a period of time claw back the rented space for own use. The model worked perfectly, to the extent that my dad (now semi-retired from business) rents out that space, and uses the mezzanine level for his own purposes. I even remember creating a photo-copying business, by taking copy jobs from people who didn’t own copy machines. Heck, I even remember manning the copiers myself, when there was too much work, and working all night to deliver jobs the next morning! So when I say I have learnt from the school of hard knocks, I say it with great authority and pride.
This was the startup that succeeded, but let’s talk about failure as well to put things in perspective. Read more in Part 2.