Startups: Not for Everyone – Part 2, Failure #1

I’ve failed on occassion, and miserably at that. Some stupid mistakes, some bad luck, quite a few ideas ahead of their time, some due to lack of adequate funding at my disposal, some due to bad planning, some bad execution, some due to plain ego and being a bullhead. You get the drift, yeah? Need I really say more, and firmly establish beyond all reasonable doubt, that this is one dumbass?

Well, I’ve been brilliant too and met with astounding successes, but that was after all of the above. I’m a quick learner, and have the ability to self correct and change track rather quick.

If there is one thing I have learned about myself, it’s this. That I am a lot more wary and careful when playing with corporate cash and budgets, than when I’m throwing my own cash behind my ideas. I think, I’m a good kingmaker, but not really destined to be king. Perhaps something to do with being descended from the lineage of Chanakya Pandit, that master strategist, master politician, who almost single-handedly established Chandragupt Maurya as King of the Maurya Dynasty, which is ancient history of India.

Little wonder them that I’ve been given the mantle of “consigliere”, “mentor”, “confidant”, “well-wisher and friend”.

Let’s dwell on the failures…not my preference, but this is all about the down and dirty of why startups fail, right? Having seen failure myself, and having seen others around me fail, its given me a deep perspective on what not to do, how not to do it, and when not to do it. Such that its become second nature, almost instinctive, something I rely on when I’m piled with posers.

Experiencing failures is an intrinsic part of understanding what not to do. As the wise say, don’t repeat your mistakes – learn from them. We are creatures of habit, and in general aren’t disciplined enough to avoid past mistakes. Some mistakes are really just misdemeanours having little or no real impact in the larger scheme of things, others are grave and generally set you back a bit, and there are yet others that are fatal.

I say this after careful deliberation, when I say that I’ve committed misdemeanours, made grave mistakes, and perhaps I can even say that I have made fatal errors personally and professionally.

So Part 2 of this series on Startups is about mistakes, mis-starts, failures. I’ve mentioned these in passing elsewhere in my archives, but this is the low down, the actual dirt.

Failure # 1: Near Fatal – The Stock Market Debacle

If there is something I can do very well is predict market movements very accurately, been there done that. From the Part 1 of this series, you may recall that my Stock Brokerage business has commenced. From a trickle the clients grew to a flood, from small tickets I’ve moved to bigger mandates, and finally from retail clients, I’m made the HNI preferred list, and finally from there I’ve added the Institutions to my list of clients. I’ve even moved from execution to advisory.

Cut to around 25 years ago…the Indian markets, open outcry ring trading, manual execution…dark ages….computers just coming in, and I’ve lived my formative years in the US as an exchange student, seen markets in the west, and the professionalism.

So being enamoured with this exposure to the West, what does a young lad do when he comes back to India? It would be pretty much a no-brainer to say that he wants to introduce these concepts to the new business he’s set up. And so he does just that. He does professional, slick, glossy news letters, replete with fundamental and technical analysis, based on deep study and a smattering of privy information via the informed grapevine. And thus the outcome is professional, well presented investment data to retail and institutional clients alike.

The traditional broker community, thought this all quite un-necessary, as they were raking in the moolah regardless, and couldn’t be bothered with all this malarkey. Back then, it was near impossible to get a ticket to become a stock broker. It was a vicious coterie, an elite club, a merciless and unscrupulous mafia. Gaining their trust and respect, leave along admittance was all but impossible.

So the strategy adopted was to sell these rather new-fangled methods to the institutions, simply because they were THE PLAYERS, and moved the maximum money around, still do. However, back in the day, they were still new at the stock market game, and simply had to rely on brokers. Back then, even the institutions weren’t allowed into the exchange, so the brokers ruled the roost, and then some. But since the FI’s had the cash from bank deposits, and the collective investment schemes that were just appearing, they had a say in swinging markets, except back then they didn’t have the market smarts. They were career bankers, and mostly dealt in institutional finance and lending.

When we appeared on the horizon with our approach, this was manna from heaven, and slowly we became the consultants, the advisors, albeit unofficially because at the time, they were not permitted to pay for our services directly.

How did we make money then? I think I was the first in proposing a trailblazing model. I submitted and gained approval that IF the institutions bought into my point of view on the markets and individual stocks, the market mandate to buy or sell would be mine. We organized the industry visits, made them meet the managements, and hand-held the decisioning process. Now I didn’t have a ticket on the exchange either, but routed the institutional mandates through various brokers, and took a slice of the brokerage earned. The brokerage margins then, were not wafer thin as they are today, and to top that off, the market spreads were huge, leaving a lot of money to share.

Up until now everything was according to a well crafted plan, but what happened next, was nothing short of windfall and quite unexpected.

The Corporate world heard through the grapevine, that there were these young blokes who had the ear of the institutions, and had the ability to swing markets, therefore we were approached to move markets in their favor, to source funds, to intercede when companies were in trouble, when they had upcoming IPO’s and needed the institutions not to sell stock. Short of assisting in manipulating the markets, we pretty much did it all.

This was the genesis of Integra Funds Management Ltd, a company I promoted, to formalise our business model, to seek funding, to accumulate funds from the HNI community, and become a mini institution in our own right. The route we adopted was to issue NCD’s or Non Convertible Debt to Investors, and that was the maiden launch of our pseudo-fund. We went to Mauritius, set up an Investment Trust, to secure Non Resident funds, to be invested in India, to take advantage of the double tax avoidance treaty between India and Mauritius. It was a very hard sell to the Mauritius regulators, but we got our permissions and licences, and that in itself is a tale. Another blog perhaps?

The markets were grossly overheated, abject greed had set in, people were in a tizzy and it was a one-sided, BUY, BUY, BUY scenario. The stock markets had gained widespread adoption deep into the heart of India, and everybody wanted on the bandwagon! It was as if everyone had a fever in the brain, and everybody who was nobody became a stock market guru.

It was then that I had opened subscriptions to my NCD Issue, and in the backdrop were some ugly names from the markets, driving markets crazy.

I had always known that something was really amiss, and being true to my role as advisor, I cautioned, begged, pleaded my investors that we should all get out, while we still could. Nobody and I mean nobody was willing to listen, and because I was labeled as not savvy (literally overnight), customers went to what they thought would be greener pastures…they went to other advisors, other brokers, those who would not insist on them selling.

Before this crazy bull run got started, I had been quietly accumulating for the FI’s, for my clients this one particular stock. We rode it from INR 8/- all the way to INR 1,200/- per share, and I opined that enough was enough, we should bail now and walk away with oodles of cash. Reputed clients, so-called loyal clients, grudgingly agreed, and so at 2 am IST I called a leading fund house in the US, and got then to take this mega block of shares off our hands, as they were still very bullish. The deal was sealed on the phone, and when it was time to send the contracts across, I did.

I made one fatal error, I didn’t for a moment stop to think that my esteemed clients would back away from their word, and I simply relied on trust and DID NOT secure sale contracts from the Investors. Effectively, I was short, I had sold inventory that was non existent.

What followed is not hard to guess, but let me lay it out for you. I had to make good my sale contracts to the fund house in the US and some in India, I didn’t have backing stock, and I was forced to cover the shortfall from the open markets. Guess what, the bull run was in full swing, the markets got to know I was short, and I ended up covering the stock at prices as high as 50% over what I had sold at. Of course I didn’t have that kind of cash, and so I borrowed big time, just to ensure that my reputation wouldn’t be tarnished.

I did say somewhere that hindsight is a good thing, so in hindsight, I did the right thing, I kept my word, but the price I paid for that set me back several years. I was deep in debt, at alarming rates of interest, desperate, unable to pay, and that was the fatality.

Fatal error in judging people, fatal error in not following prudent operational processes, fatal error in borrowing way beyond my ability to repay.

That was the end of Sentinel Securities, of Integra Funds Management Limited, of Sumir Nagar the market guru.

Lessor learned? Yes. Price paid? Yes. Anecdote for people to learn from? Yes. A fantastic business model, a profitable business down the tubes, because of a fatal error, something as brain dead as following processes.

What next? I had not thrown in the towel quite yet. To find out what I did next, read Part 3 of this series.