Entrepreneur vs freelance consultant, startup vs small business,

Two readers, Sachin Garg and Prashant Bairy, respectively, asked questions about:

1. the difference between Entrepreneurs and freelance consultants (this blog refered to the "subtle difference" between the two), and
2. the difference between startups and small businesses

While these may seem like rather inconsequential semantic differences, i thought it would be interesting to dig a little deeper, figure out if there indeed are differences between the terms, and to share my views:

1. Entrepreneurs and freelance consultants
A few good links to understand the etymological meaning difference between the two terms are:

• Wikipedia:http://en.wikipedia.org/wiki/Freelancer and http://en.wikipedia.org/wiki/Entrepreneur
• Dictionary.com - http://dictionary.reference.com/browse/freelancer and http://dictionary.reference.com/browse/entrepreneur
• Another interesting link, http://en.wikipedia.org/wiki/Self-employment, explains the difference between self-employment (a super-set of freelancing) and business ownership (a qualifier for entrepreneurship).

Now, the next question could be, if the difference is so great (freelance consultant provides his individual skill for a fee and is therefore like an employee "soldier of fortune", while an entrepreneur is trying to build an enterprise, with considerable risk, initiative and responsibility), then why did I say the difference is "subtle"? To this, my answer would be, that many entrepreneurial ventures, especially bootstrapped ones, begin as freelance consultancy operations... i.e. the entrepreneur begins as a freelancer, but slowly expands, adds people, processes and capabilities beyond his direct individual output, to create an enterprise. Since in real life, a freelancer may gradually morph into an entrepreneur (depending on his vision, preferences, capabilities, opportunities etc), I suggest that the difference could often be subtle. You may find freelancers who call themselves entrepreneurs, and that is not wrong, if indeed they are on that path... but you would probably never find an entrepreneur, who calls himself a freelancer.

2. Startups and small businesses Have attempted to explain through a diagram:


















Thanks for your questions, hope this is useful to other readers as well!

The road to entrepreneurship – part 3: Creating a fail-proof business model

As in the earlier parts of this series, our focus is on the bootstrap entrepreneur who may not have a fixed and firm business plan, who funds his business through modest and limited savings of his own, and has no major advantages, such as patented killer products, or a captive customer who will pay a profitable price. If you do happen to have some or all of those advantages, however, this could still be useful!

In the first several months of a startup’s life (often, the first few years), the main objective should not be to maximize revenues or profits, or to accelerate growth; it should instead be, to guarantee survival. For this, you need a fail-proof business model (FPBM), which will ensure that your startup would survive indefinitely if there are no major changes in conditions. The FPBM may not make you rich quickly, but it will give you freedom from worrying about survival. It will therefore allow you to build more sophisticated and profitable product or service offerings, or create advanced strategies for fast growth later on. However, not having an FPBM could render your startup vulnerable, and even prone to collapse, even if you have very compelling products and capabilities. I am sure that the vast majority of startups which fail, (especially many “surprising failures” founded by very capable and intelligent entrepreneurs), do so because of the absence of an FPBM.

So what is an FPBM? As we all know, nothing in the universe is 100% fail-proof – no matter how well you plan, a greater-than-expected disaster might strike. The point is, while you can never achieve 100% safety, you can keep traveling as far as you want towards the target of 100% safety… and the further you travel, the more risk-free you make your startup, which will guarantee its survival, and strengthen its base for future growth.

To explain FPBM, let us start with the simplistic explanation of profitability which everyone understands: you invest a certain amount of resource to deliver a product or service (let us call it “offering”) to a customer – this is your cost. The customer consumes your offering and pays you a higher amount – this is your revenue. The revenue you realize, should recover for you your total cost, plus it should leave you with some surplus, which is your profit. Now the entire concept of FPBM, which is the complete mantra to guarantee survival of the startup, is just the simple equation above, with three additional variables thrown in: hidden cost, risk and cash rotation!

So let us move on to the math which will help us create our FPBM – consider one single business transaction to begin with:

Equation 1: Profit = Revenue – Cost
Equation 2: Profit = Revenue – (Cost + Hidden Cost)

Equation 1 is the simplistic definition that everyone knows, while Equation 2 is a more precise calculation of profit. Notice that “revenue” is the same in equation 1 & 2… it is easy and unambiguous to measure, as it is the actual amount that the customer pays, so all you need to do is count what you get or read the amount on the cheque!

However, “hidden cost” could contain lots of fuzzy details, including examples such as:

• As a startup entrepreneur, are you paying yourself a fair salary?
• Are you at least collecting from your startup business enough money to cover your personal and family expenses, without postponing important purchases?
• If your revenue collection happens very late, what is the interest you pay on working capital?
• Did you have to borrow money to fork up the initial investment for your first business transaction, which you will have to pay back later, with interest?
• Did you make a commitment on this sale, for which you may have to spend time on this transaction later, for which the cost is not known, but the revenue is already limited to its initial value?
• Currently, you may be working from home, so your pricing does not cover the cost of an office. If your scale goes up and you move to an office, but overlook changing your pricing, or you are unable to due to market pressure, this is another hidden cost which can creep in.

Now quite often, real profit may turn out to be negative, if you measure hidden cost over-strictly… but an entrepreneur could disregard this, as he should also, by nature, maintain a healthy degree of optimistic and selective approximation, which we will suitably temper by applying our additional variables as shown below:

Equation 3: Profit = (Revenue – Revenue Reduction due to Risk) – (Cost + Hidden Cost + Cost Increase due to Risk)

Equation 3 is an even more realistic calculation of profit. So now, we have a potential reduction in revenue, as well as a potential increase in cost, due to risk. Risk is difficult to measure and may or may not happen, while hidden cost is difficult to measure, but will definitely get incurred. An example of risk is that the customer refuses to pay part of, or the whole of, what you bill him … so revenue may get reduced, or wiped out altogether.

If by now, you feel that the startup’s prospects are getting gloomier by the minute, let me assure you there is hope in the final variable, which is both an opportunity and a challenge – cash rotation.

Let us rewrite Equation 3 with the following symbols:
P = Profit
R = Revenue paid by Customer
rR = revenue reduction due to risk
C = Cost of delivering the offering to the Customer
HC = Hidden Cost
rC = cost increase due to risk

Equation 3: P = (R – rR) – (C + HC + rC)
Over a large number of transactions, the total would be the sums of all the transactions, or the sigma (∑):

Equation 4: ∑P = (∑R –∑ rR) – (∑C + ∑HC + ∑rC)

This would describe the total profit on transactions, for say July, Aug & Sep, to be the difference between total real revenue (revenue – loss due to risk) and total cost (cost + hidden cost + increase due to risk).

However, in reality, transactions happen continuously across time periods – July may have carried over transactions from June and even earlier, the closure of transactions in Sep may happen in Oct or later, and so on. Also, how you recognize revenue and profit for a period (whether on accrual, or project operation, or on cash basis) is a subject by itself, and one which we will not get into here.

What matters is this: the cash that comes into your startup company as revenues, after reductions due to risk, should be enough to cover the cash that is going out of the company not only to fund the production of offerings being delivered to customers, but also to cover fixed periodic expenses such as office rent, salaries for staff, electricity, internet & phone bills, installments on loans etc. If we denote these fixed expenses, or fixed costs, as FC, then we have an even more precise measurement of profit

Equation 5: ∑P = (∑R –∑ rR) – (∑C + ∑HC + ∑rC + FC)

The technical treatment of measurement of actual profit of a firm is obviously a huge ocean of a subject in itself, bringing in other factors such as depreciation, amortization, tax and so on, but we are restricting ourselves here to creating an FPBM for a simple, unfunded small business, so we can ignore these complexities for the moment.

Now, the actual FPBM that you create for your business, should satisfy the following conditions, for every rolling quarter (three months taken together, eg July-Aug-Sep, then Aug-Sep-Oct, then Sep-Oct-Nov, then Oct-Nov-Dec etc)

1. ∑P should be positive in Equation 5: ∑P = (∑R –∑ rR) – (∑C + ∑HC + ∑rC + FC)
2. Cash collected from revenues should cover cash being spent on delivery of offerings as well as fixed costs… this includes a few more points:

• The cash collected could be for offerings delivered in July, but the costs being paid for, could be for offerings to be delivered in Sep... that does not matter!
• One way to ensure that cash available from collections covers all payouts to be made is to collect a lot of cash, really fast from Customers… but this is not always possible
• The other way, is to negotiate for extended credit periods from suppliers, so that your cash payout also slows down
• Either way, inflow should be as fast as possible, while outflow should be as slow as possible (without hurting basic business ethical considerations, of course, such as paying salaries to employees on time!) This is in fact, the essence of cash-flow management for a small business

Creating and stabilizing an FPBM which does all the above, may take weeks, months, or even a couple of years, but it is well worth the effort:

1. If you are a serious startup entrepreneur, looking at creating the next business behemoth, but currently bootstrapping, then stop everything else and first build a strong FPBM
2. To design and build that FPBM, focus on just two target variables: profitability and cash-flow management
3. To get profitability and cash-flow management right, analyze your customer revenues (and therefore pricing), your risk, your cost of delivery, hidden cost and your cash rotation

Once you get your FPBM right, the world is your playground :) - it is worthwhile to sacrifice other tempting preoccupations in the short term, like diversifying into new products, expanding into other geographies etc, until you have a good grip on your FPBM. After that, even as you expand and diversify, never lose sight of your FPBM!

In the next part, we will talk about how a bootstrap startup can acquire customers, retain them and manage relationships to grow predictably.

The ugly duckling’s career graph

This is a true story, which illustrates a rule rather than an exception, but of a rather less apparent and seemingly paradoxical aspect, of professional growth. It may help you to strengthen yourself or your team members, while they are going through tough work situations and assignments, and see the light at the end of the tunnel... a long tunnel perhaps, but one, at the end of which, you will emerge amply rewarded!

In the mid-1990s, the job market for ERP consultants in India was exploding. Production engineers with significant experience on the shop-floor, who were earning about INR 15,000 a month would get retrained as SAP consultants and suddenly get jobs in the US for USD 100K+ a year… similarly, Chartered Accountants and Sales Managers would get jobs as ERP consultants for finance and distribution, and so on. Of course, the fact that this was big news, ensured that tons of professionals of all shapes, sizes, experience levels and qualifications were doing their best to become ERP consultants in a hurry, so the competition was also getting fierce.

Around the same time, I was trying to get my bootstrap business running and would do anything (well, nearly!) for a buck… one of the areas I dabbled in was placement (also called executive search, recruitment consultancy and so on). It was then that a friend walked into my tiny office saying, “koi acchi naukri dila re” (“get me a good job”). This friend (let’s call him Subbu) had an undergrad in mechanical engineering from a good university, and after three years of work, had gone to a top B-school for an MBA, after which he’d already moved two companies in a matter of months. Seeing his CV, I remarked that while his qualifications were good, his work experience post-MBA was insignificant, and quite bizarrely, he had not even mentioned his work experience for three years between his undergrad and MBA. When I asked Subbu why he had not written about his pre-MBA job, a shadow passed across his face.

With a pained expression, he told me how he’d worked in a “really depressing” (according to him!) public sector unit (PSU) which manufactured electronic products – a bureaucratic behemoth, where everyone wore a khaki uniform, went to lunch at the sound of the factory bell, took the bus home at the next bell, and were programmed to do almost the same thing everyday, until their retirement about 30 years later. “I was lucky to get out of there”, said Subbu, “they actually put me in materials management, which was the most boring place in the company, and I had to track inventory of thousands of parts with a foxpro program. Even in business school, a guest lecturer once said the dullest employees in a factory are put into inventory management, and everyone looked at me. All my colleagues in that department were double my age, and had no intentions of moving anywhere in life”, he said, wincing.

Something told me that it was important to include Subbu’s “depressing” PSU experience in his CV, as after all, it was 3 years of honest work, not to be trifled with. We argued, I won, and we had a new CV version.

A couple of weeks later, at an alumni dinner, I ran into a very senior alumnus, Chakravarthy (nicknamed Chax), who was a legend in the IT industry. Senior partner in a big-5 consulting firm, Chax was a rock star CEO, heading a team of several hundred top notch ERP professionals bagging all the big consulting and implementation contracts in the market. Chax asked me if I could find some good ERP consultants who were about my age and experience level – “JK, just so we don’t waste each other’s time”, he said, “don’t throw any fresher CVs at me, you know, like bright youngsters with degrees from great colleges and no work experience. I’m sure we’ll need them too, one day, but right now, I need people with solid experience in difficult areas of work, who have dirtied their hands… know what I mean?”

“What difficult areas, Chax”, I asked.

“Stuff like materials management”, he said, “for instance, people who have actually done it for a few years, in big manufacturing units… not learnt it from textbooks”…. EUREKA!! ...VOILA!! ...WHATEVER!!

The rest is history… Subbu joined Chax’s elite team (only because his work experience gave him a decisive edge over competitors), went on to become a national, regional and then a global tech resource, certified several times over in all kinds of stuff, and now, although he has moved out of ERP, he heads a 1,000+ man delivery center for a large global tech consulting organization.

For me, the moral of the story is simple: when you are doing the toughest, dirtiest work, it is highly probable that you are actually adding the most value to yourself, and in the process, differentiating your profile most sharply from competition.

Indeed, the software program manager who has never spent days and nights coding, the brand manager who has never sweated it out in field sales, the production manager who has not been on the shop-floor, the finance manager who has never pored over books of accounts, the investment banker who has not done hours of back-breaking research, the HR manager who has not resolved serious conflicts, the academic who has not spent hours in the classroom, the social worker who has not worked at the grassroots… all run one common risk – they may just NOT have the credibility to stand their ground, when their fundamentals are challenged. Every senior manager worth his salt, always has tales to tell about the real tough projects he or she has worked on, and the more you dirty your hands, the more you learn, the more confident you become… a fringe benefit is, the more war-stories you can recount to youngsters when you become the boss:)

Unfortunately, the image buildup about work in industry, is often inversely related to the actual value of work done – it is not fashionable to work hard, it is better to have the bells and whistles of a swank job. But the job that feels great in the short run, could be your greatest enemy in the long run – beware the cushy high-paying job, in the early stages of your career, where you are hardly breaking a sweat – it could just be the virus which destroys your career! On the other hand, if you are slogging it out in the trenches, sweating, bleeding and of course, cursing liberally, then, every minute you spend, will add oodles of value to your CV, your confidence and your personality. Not only that, as Subbu and I learned, you can, and MUST, talk with pride about the hard work you’ve done instead of being embarrassed by it! All you need is, the tonic to keep going when you are going through the grind – for this, you could use auto-suggestion to motivate yourself, like Johann Cryuff, the great Dutch footballer… “While I run uphill, I tell myself, I am running downhill!”

The road to entrepreneurship – part 2: preparing for the leap

In the first part of this series, we talked about all the things you don’t need, to become a successful entrepreneur (“exploding the myths…”); so now, let us focus on the things you do need. These essentials apply all the more strongly, if you do not have a watertight business plan, an existing killer product idea, strong funding and ready customers. But, even if you do have all or any of these strengths, it only means that you have an early start, and could still be exposed later on, to the brutal open market… so, you may still want to ensure that you imbibe these essential prerequisites to make the leap into entrepreneurship!

There are four major composite prerequisites for successful survival as an early stage entrepreneur anywhere:
1. Fiscal prudence – to ensure that you can survive indefinitely, or at least as long as possible, with as low a probability as possible of collapse
2. Preparation for failure or delayed success – most entrepreneurial ventures have about as much of navigation and acceleration control, as a leaf on a waterfall… which is to say, it is almost pointless to make rigid plans, when you are a tiny, insignificant speck in a huge, complex, competitive market. I have seen tons of six- and twelve-month plans fail miserably! However, just as a leaf on a torrential flow actually has a somewhat predictable trajectory over a longer stretch, if you do the right things long enough and often enough (as the saying goes), you may achieve much more than your expectations, but over something like, a thirty six month period! Which is to say, the market follows its own cycle, not that of the startup strategist… but the wise and patient entrepreneur who understands the cycle and correctly rides the tide, may earn rich dividends!
3. The ability to evolve naturally – just as many entrepreneurs tend to be wrongly optimistic about the results they will achieve in capturing market demand and delivering their offerings, they are sometimes overly pessimistic (or just disregarding) about their own ability to learn, grow their organizations, build and leverage new partnerships, and so on. Entrepreneurship is also a great teacher – the receptive student would learn enough over a few years to be many times more than the man he set out as! Therefore, just as the first time entrepreneur may overestimate success in the short run, he is more than likely to underestimate success in the long run.
4. Burning ambition – pt 1 above gives you a full fuel tank, pt 2 gives you a method of finding the right route and not getting stressed out about the time you take for the drive, and pt 3 gives you a method of continuously learning to drive on new types of terrain… but it is pt 4 which is the force on the accelerator!

Let me now try to elaborate on, and deconstruct the above prerequisites:

1. FISCAL PRUDENCE
1a) Staying power: If you are a working professional who has decided to become an entrepreneur, the first thing you need to do is a cash flow forecast which is approximate for the next three years, a more detailed estimate for the next one year, and as precise as possible for the next six months. Do you have a spouse who works? How much of your monthly expenses will her/his income cover? Do you have growing children to support, are there any major new expenses expected for them? Any medical expenses for aged family members? Do you have a home loan or a car loan, and how many installments to go? What is the net present value of your investments? As you prepare for the leap, you should be like a squirrel preparing for the winter, putting away every bit of resource you can find, cutting down expenses to the bare essentials such that your basic lifestyle standards can be maintained undisturbed for the longest period possible. If you have any assets you may need to convert to cash later, make sure they are liquid enough (eg, they should not be like property where you have a shared ownership and cannot sell, without agreement from your brother!)
1b) Minimize capital expenses: One of the only assets which appreciate with time is real estate. A smart entrepreneur friend of mine invested a part of his inheritance to buy a building when land prices were down, and he then converted it to a business center, let out to temporary offices – his point was, if the business idea failed, he could always recover his money and also make a profit by selling the property later (of course, he did well, so he never had to!). Any other asset you buy to start a business like vehicles, computers, furniture, interiors, machines, equipment – they all depreciate, and fast! So, do not over-invest in capital, unless you have someone who is funding you, and will not take a pound of your flesh, if the business goes belly-up! Even if you buy land, do not do so with too large a loan, and take care that you buy when land prices are not at their highest! You may need basic technology like a laptop and mobile phone, but keep it to the minimum that you actually need!
1c) Ensure that your business model is always fairly cash-flow positive: Whatever product or service you sell, it must get in money fairly soon, compared to the speed with which money goes out. As a rough estimate, your staying power could be high enough to cover 20 business cycles, for investing the money, and then recovering it with a profit margin – i.e., if you do projects where you have to invest some money, and only after completion of the project, you get back your capital plus some… then, you should be able to invest in 20 projects without receiving payment, before your cash (not only to cover your business expenses, but also your family and personal expenses) runs out. If you are able to get projects with investments small enough, and time cycles swift enough, to support 20 of them with your resources, then make sure you do handle NOT more than 5 to start with. By the time you take project 6 to 10, the money from the first 5 should start trickling in. This is a method of small, conservative and incremental risk taking, which will ensure you grow but do not risk going bankrupt!
1d) Avoid loans until your business cash-flow stabilizes: Many of the best run businesses have no long term debt, right from their inception until they grow huge in scale. The option of taking loans, especially secured, should be the last option, and only to execute orders already in hand. Once your startup is doing well in sales, revenue growth and cash-flow, if you run short of working capital, bill-discounting is a good way to get relatively low risk finance. Debt often works like a cancer which starts eating the insides of the business before you realize it… take it at your own risk, if you hate sleeping at night!

2. PREPARATION FOR FAILURE OR DELAYED SUCCESS
2a) Patience: probably the most important quality of an entrepreneur is the recognition of the fact that neither external factors in the market, nor even internal factors within his startup, work according to his timetable. Almost everything in an early stage startup takes longer than you expect – the time to get the first (or even the first 10) orders, the time to execute those first orders, the time to receive customer payments, the time to train employees internally, the time to achieve predictable quality, the time to build a brand. Startup operations which begin with statements like, “I’ll give this exactly one year…” are almost sure to die, even before they are born.
2b) Humility: Entrepreneurial activity is almost always a leap into the unknown. To say we know the unknown is not just vain and stupid, it is suicidal! Therefore, the entrepreneur must be hardwired to receive learning from all sides, from all sources. A complaining customer, a resigning employee, a critical observer – they are all great teachers, if only we stay humble enough to listen and learn from them!
2c) Resilience: Just as success is tough to come by in entrepreneurship and triumphs are not permanent, so also are failures not fatal. Loss making projects, failed product launches, spoilt customer relationships… are all both reversible and also opportunities for spectacular resurgence, for the entrepreneur who can learn, stay positive, and return to fight another day.

3. THE ABILITY TO EVOLVE NATURALLY
3a) Flexibility and rapid learning: No great entrepreneurial venture, whether it is Google, Microsoft, Infosys, Reliance or whatever, had the same capabilities on day-1 as on, say day-3600 (when they were about 10 years old)… that means, all these epic success stories, and thousands of others less famous but also successful, learned continuously. If your startup has fulfilled all the previous prerequisites and you have hit the market with a product or service offering, all you have to do is listen with 200% attention to everything your customers say. If you act on good quality, well intended feedback from serious customers, and quickly come back with changes, your startup is already accelerating on the road to growth!
3b) Opportunism: The striving entrepreneur often meets many fellow-travelers in his journey – not just customers, but competitors, suppliers, other startups and so on. I recently heard of a startup which was trying to break into a duopoly of two very large suppliers to the Government. Fortunately, the startup came across a good mentor, who advised them to instead become an ancillary supplier of a few essential parts to the two large suppliers, instead of competing with them. The startup is now building a robust, fast-growth business, because it was able to see a completely different opportunity (with the mentor’s help, no doubt), reorient itself, and then scale up fast.
3c) Innovation and incremental experimentation: Clearly, the kind of startup you will be 24 months after you have started, would be different from the kind of startup you are on day one. If you have a growing team, then that is a fertile ground for innovation, which after all, takes place first in peoples’ minds. Not all innovations are successful – some can achieve a breakthrough to give you a leadership position over competition, (if only temporarily), while some may be complete failures. While preparing for the leap to entrepreneurship, what you could do as preparation, is to commit yourself to the principles of innovation and small, low cost experiments, to test out innovation. A successful service sector entrepreneur I know, keeps a list of new ideas he and his team try out every quarter and actually has a target number (does not matter if they fail – they just must try so many new things, every three months!)
3d) Relationship management – 360 degrees: In entrepreneurship, as in politics, there are no permanent enemies or even competitors. It is critical to always keep building and strengthening relationship with all people you meet, whether they are customers, employees, your former employers, suppliers, partners and even your competitors. You don’t have to be a “people” person, if that does not come to you naturally – you must however, evolve a style of relationship management which suits you, which enables you to keep strong, fair, ethical and professional relationships with all your contacts. The reason for this is, that the entrepreneur is continuously learning and evolving, and often, the conduit for this learning is from the people he meets. Therefore, managing strong relationships with people all around helps the entrepreneur accelerate his evolution and therefore his probability of greater growth and success.

4. BURNING AMBITION
The wrong reasons to get into entrepreneurship are to make money quickly (you may make lots of money, but don’t bet on the “quickly”), to have more free time (you may be able to do that as a self-employed freelancer, but that is quite different from an entrepreneur), because you had a fight with your boss (that’s a good catalyst, but if that’s the only reason, it’s weak!). The most enduring right reasons are to create an organization according to your personal vision (however fuzzy that may be at this point in time), to create new products or services, of a type or quality which do not exist, to create value, to create employment, to change the world, or simply because you see entrepreneurship as the modern day equivalent of conquest, and you just MUST go out there and build that empire! You should be ready to make sacrifices in your personal choices and time (although, as I have said before, the prudent entrepreneur will take steps to see that his family can continue a satisfactory lifestyle and not make large sacrifices on that count), and you should be ready to be knocked down a number of times, and keep getting up. Therefore, with all the other rational “planning” and personal orientation you can do before you take the leap, there is really no substitute for this last ingredient – the fire in the belly to keep you going, for the next decade or three!!

The next parts in this series will start delving into some of the more detailed strategies that could be adopted by new bootstrap entrepreneurs. If you have any questions, please email me at jayaramk1968@gmail.com.

The road to entrepreneurship – part 1: exploding the myths

“Kuch karna hai, yaar, bahut pak gaya…” – roughly translated from modern Hindi, and meaning, “I’m fed up, I need to do something (meaningful)…” an oft-repeated sentence by organization employees who want to start their own businesses, build their own organizations, and become the masters of their own fate (at least to a slightly greater extent, supposedly)!

Well, talking about entrepreneurship is like an addiction – I’ve been to quite a few panel discussions on topics ranging from B-school education to leadership, which have all finally devolved into an animated debate on what makes some startups succeed and others fail, what kind of education or work experience prepare you best to run a startup, what choices you need to make to succeed, the mindset and personality type you need and so on… many young (and not so young) working people spend hours of constructive day-dreaming and discussion to figure out how and when they must make the jump to entrepreneurship.

There are different startup models of course, ranging from intra-preneurial ventures spawned by large organizations with funding, clear business plans, product offerings and so on, to absolute bootstrap operations. This year, like each year, several startups will be founded by well qualified professionals with rich experience, powerful contacts, well-laid business plans and product ideas, and even sufficient funding. Several other (bootstrap) startups will begin without any of these advantages. Yet, within the next five years, many of the former type of startups will flounder and collapse, while several bootstrap startups will thrive and grow. What is the explanation behind this? To share some first hand observations, as well as actual experience to help deconstruct what it takes to make a startup succeed, I now present a multi-part series of write-ups on the “road to entrepreneurship”, which focus mostly on the latter type of startups mentioned above, i.e. pure bootstraps. These are the kind of startups I am most familiar with, and their success is proof of the ultimate litmus test for entrepreneurship – if you can survive and grow with a sustainable business model without external funding, you are indeed doing things right.

While I do not claim here that bootstrapping is the best way to start a business, I think there is a strong case for putting in perspective some realities about the entrepreneurial journey, and so my series begins with the explosion of a few popular myths:

Myth 1 – you need lots of money to start a business: not true unless you have already decided on a resource-heavy, capital-intensive venture. Many successful startups have been self-funded by entrepreneurs with moderate savings from a few years of work. You do need money, and the more the better, but that is to take care of essential expenses, which could be either business related, or just maintenance expenses for your personal lifestyle. My most recommended and safest way is, for a would-be entrepreneur to assess his savings and any other sources of funds, if he were to completely stop working in a regular job, estimate the amount of time for which he could stretch these savings without affecting his lifestyle (depending on whether he has a family to support, children to educate, house rent etc) and then get into a business which would take minimal investment. Today, there are huge possibilities for businesses you could set up with just a laptop and an internet connection as investment.

Myth 2 – you should not start a business without first having a clear business plan: A large proportion of successful startups have either not had much of a business plan, or have constantly changed it, especially in the earliest stages. Flexibility and opportunism are often far more important for the startup than the illusion of clear vision. As a piece of actual data from first hand experience: I started a business in 1997, and it was only in 2006 that we made a vision and mission statement, although the business was actually performing and growing well!

Myth 3 – you must have something unique to offer, to succeed in a startup: Well, this is a myth depending on what you mean by “something unique” – for instance, if you are a tech worker working in a neighbourhood of tech companies, and you decide to quit your job to start a coffee & snack stall because there isn’t a nice one in the area… now, the business itself may not be unique, but the fact that you have started it in an area with no competition could make it unique… at least for some time! My point is, entrepreneurial ideas do not have to be rocket science or nano-tech all the time… if you see a sustainable revenue stream which can be secured by providing a good product or service with quality achievable by you, then maybe you should just go for it!

Myth 4 – you must (or must NOT) start a business with partners: Even if you are young and relatively inexperienced, you can always find complementary help from your peer group or mentors, who are a growing breed. While it is good to have a like-minded fellow traveler to share the uncertainty, doubt, frustration and triumphs of the entrepreneurial journey, unless you are sure that an equal partnership creates value, which on the whole is, greater than the sum of the parts, go it alone. At least you will not have the added stress of managing a relationship internally, in addition to getting a foothold to survive and grow. Conversely, it is equally wrong to say “you must start a business without partners” – there are enough instances of highly successful startups, some of which have become monsters on the global scale, founded by partners who have an excellent understanding of working together.

Myth 5 – you cannot start a business unless you have some unique and exceptional skills, or experience: the job of an entrepreneur is to create value, and often, that happens by bringing together different inputs such as customer demand, an arbitrage opportunity, skilled manpower supply, a good environment to work and so on. If you are an excellent designer, software programmer, financial analyst or any other type of specialist or multi-specialist professional, that is a great platform to start a business on. But very soon, your role would change to putting together the work done by other specialists (unless you wish to be a freelance consultant, which is subtly different from being an entrepreneur). Therefore, while specialist skills may help you to start, paradoxically, the sooner you are able to grow beyond your own specialist skills, the faster you are likely to scale up as an entrepreneur. It is often the generalist with an open and flexible mindset, and not armed with decades of experience, who becomes the successful startup businessman, living to tell his tale!

Myth 6 – you should be in a big city to start: Not any more! Thanks to the internet and technology, you could provide products or services to customers far away. Thanks to incremental economic growth and evolving customer preferences in the hinterlands, at least in India, you could build very interesting businesses around service offerings not yet available in upcountry locations.

Myth 7 – you should have strong educational qualifications to start: Good qualifications from premier institutions, or good grades for that matter, could be an asset if you have them. But, and I say this with full conviction, not having them cannot hold you back from becoming a successful entrepreneur. Most often, I have seen entrepreneurs who are graduates from reputed institutions, using this asset mostly for networking with batchmates, seniors, juniors and peers from similar institutions. Both globally and in India, there is no shortage of astonishing success stories of school and college dropouts starting the business institutions of the highest quality.

Myth 8 – for your new startup to survive and grow, you need LOTS of customers: I’ve heard this from many startup businessmen. When I was actively running my startup, friends and well-wishers would introduce me to more customers than I could handle. Actually, for a small, new, bootstrap startup with meager resources, one of the biggest costs is business development and marketing. Therefore, it is often beneficial to find one large customer organization and grow with it, until you have built the resources to build new relationships. Of course, you need to de-risk your business, but if your customer is large enough and professionally run, and your products or services are up to the mark, then de-risking by adding more customers is a distant problem, to be attended to much later. At the risk of making a sweeping statement, I would say – it is better for a small business to do business with the largest customers it can, at least until it is beyond the survival stage… avoid small businesses like your own, as customers :)

Myth 9 – to be a successful entrepreneur, you have to bend rules and ethics: Not so. In India itself, we are lucky to have a growing legion of role models in recent years to prove that you do not have to flout government laws, universally accepted business and personal ethics, and find shortcuts to all problems.

Myth 10 – to ensure that your startup grows, you have to create the illusion of size, pedigree, a sweet sounding address and so on: I have come across tiny sole proprietorships in Bangalore with MNC-sounding names containing words like “global solutions”, “Inc” and so on. Some of them also have an “India” for good measure, to suggest that they are part of some very large international network, with office addresses in different cities, countries, and avoiding even street names which may sound down-market. While I understand that in some situations a smart entrepreneur with sufficient panache may benefit from creating the illusion of size or pedigree, I think it is not sustainable. Customers, or any other stakeholders who matter, are too smart to be conned by window-dressing of this type, and anyway, if they want to do business with you, it is because of your value propositions and not your size. When you do achieve size, it will speak for itself. It is better to build a sustainable reputation as an honest entrepreneur with realistic claims, rather than one who tells tall tales.

Myth 11 – to build an organization, you have to be a stern, feared team manager (with whip in hand, perhaps): I’m not sure if that’s a good avatar even for a prison warden. For an entrepreneur, it most certainly is NOT. As a startup businessman, you are always trying to stretch your meager resources to get more for what you spend, and this goes for hiring of people as well. You should try to attract and hire people who are likely to get paid much more than what you would pay them, and that is possible only with inspiration, promises (which you will hopefully deliver on, one day) like stock options, profit sharing and so on. Now, human beings are pretty much the same, whether they are sweepers or vice presidents, and we need to respect their intelligence and sensitivity. Therefore, irrespective of level, it is better to trust, give responsibility, inspire and rely on, rather than enforce discipline. An inspired workforce will automatically be disciplined as well, if the leader serves as a live example. Also, out of necessity, the bootstrap entrepreneur must sometimes hire youngsters with little or no experience and give them high responsibility. If the quality of the entrepreneur’s leadership is good, he would seldom be disappointed by taking such risks.

Myth 12 – to manage cash flows in a startup, you should delay supplier payments as much as possible (and perhaps even more): There are times for startup business when suppliers are more important than customers. While prudent cash flow management is one of the most important aspects of startup management, it is unwise, unfriendly and unethical to squeeze suppliers beyond a point and default in their payments. As a corollary: to be a successful bootstrap entrepreneur, you do not have to be too tight-fisted, or hard-bargaining. A more sustainable mode to hit is to always seek a win-win, both on the sell-, as well as on the buy-side.

Myth 13 – the best way to start a business is to catch a large opportunity but in a temporary time window: While short-lived windows of opportunity sometimes look very compelling, I would strongly recommend against these, unless you really know what you are doing. Some years ago, a friend had suggested that we import a large number of hand-held computers from a US company which was closing down, to sell them in India for a high margin. Fortunately, I was so slow to move on the opportunity (partly because of lack of conviction and partly because of inertia!), that before we had put any money on the table, new products were launched by competition, which made the hand-held computers useless. If we had moved fast, rather than slow, we may have lost a lot of money and been stuck with useless inventory. The point is not it is better to be slow than fast, of course :), but that limited time opportunities are all the more risky for startups. Large corporations trying to leverage such opportunities would generally be able to write off any resulting losses without blinking!

Myth 14 – the most important objectives for bootstrap startups are profit, growth and brand-equity: For most bootstrap startups, all these come later. The most important objective is positive cash-flow, which means, are you receiving enough money to cover all your expenses, at the same (or better) speed? Many startups die because they run out of cash at the critical time, and not because their margins are small, or because their sales are low. Cash for a startup is like oxygen… everything else gets built on positive cash-flow!

Myth 15 (added 03-Aug-2010, a month after the original posting!) - most successful entrepreneurs are big risk takers: nothing can be further from the truth... in fact, most successful entrepreneurs never take bigger risks than those that they can write off - some risks that entrepreneurs take may seem big, but actually, they are either affordable in terms of cost in relative terms, or, they are so well calculated that the probability of failure is pretty low... which means, they are not large risks in reality. Most successful entrepreneurs are most likely to admit to taking calculated, incremental risks as they grow their business, but not to the level that the risk of loss exceeds the upside of gain.

So, if we go beyond these myths, then what does it take to actually succeed as an entrepreneur? If the critical factors for success are not capital, strong business plans, special skills, educational qualifications or large numbers of customers, than what are they? Well, you just need to wait a later part of my series – watch this space!

The paradox of sustainability of developmental organizations through business revenues

The idea has been growing in popularity and has all but snowballed into an immutable law – it is considered unfashionable, pessimistic and cynical to question the idea, and in fact, why should one question it? It is a beautiful win-win, an elegant theoretical solution, and proper management should make it a success which can be scaled. The idea I am talking about, is that developmental organizations, such as NGOs, can morph into revenue earning businesses, and manage their P&L well enough to sustain their operations without grants. They would market and sell products and services produced by the members of the poor communities they strive to help. The benefits for customers are that, more products and services become available for consumption, probably at competitive rates and better quality. The benefits for community members are that jobs are created and incomes improved. Over a period of time, the profits from operations would be enough to sustain the management overhead costs of the business exchange, and responsible ploughing back of profits, and eschewing of the greed that sometimes comes into pure commercial businesses, would ensure that this entire model would grow.

Now, my view is that this model can work within limited frameworks only, and the operating profits earned would never be high enough to cover the entire overhead of managing the operation. In short, you can NOT run a true developmental organization without some grant funding.

My logic for taking the counter view to popular thought is as follows: A developmental organization should go where market forces do not go. There is no great achievement in uplifting a micro-entrepreneur who is already on his way up… there is no great glory in supporting a community or group which is competitive enough to safeguard its interests and speak with a voice which is regularly heard. A true developmental initiative should therefore actually go against the market, and try to provide growth opportunities to those whom the market has already declared as uncompetitive.

Now, suppose with some seed capital, a developmental initiative succeeds in building the skills, resources, capabilities, market reach and overall competitiveness of a community of people whom the market on its own will not sustain; is it not conceivable that over a period of time, this community would actually become competitive and therefore provide enough returns to the developmental organization to now cover its costs?

The simple answer is yes, but if this happens, then, the developmental organization would now need to milk the asset it has created (even if only to a moderate extent, without “greed”), to cover its operating costs going ahead. As this point in time, what do we have? A “developmental organization”, which is actually an early stage investor, taking back returns from a community or group of people, who have now become competitive enough to win in the market, with the capabilities that they have developed. Therefore, while this would be a fair and justifiable outcome for the developmental organization, giving it a well deserved positive return on investment, the fact is, that it has ceased to be a developmental organization, since it does not any more go where the market refuses to go!!!

To remain a true developmental organization, if indeed that is its vision, then this organization, at the first sign of sustainable profitability in a community initiative, should actually exit it! This is because if the community is able to earn sustainable profit, they do not require developmental support any more. Therefore, the true developmental organization works with communities which need support, strives to improve their capabilities, competitiveness, effectiveness and productivity… but even as the community starts approaching the tipping point to achieving these very qualities on a sustainable level, the developmental organization must exit, foregoing all the returns it could have earned, and seeking out some other community which now needs its support. If the developmental organization stays on and remains engaged with the now productive community to get a share of the returns, it is an investor or a venture capitalist, (though a benign one with a social orientation), for the main focus would then be managing the portfolio of investments and returns, rather than doing developmental work. Then in this case, how does the true developmental organization sustain itself, if it walks away from the asset it has created at precisely the point in time when returns start emerging? The answer, clearly, is through grants.

While it is again a fashionable cliché to say that grants will not go on forever, the simple truth is they will. At least, they are as likely to go on as revenues in a market economy, no more and no less. As long as there is a sovereign government, there would be some government spending on welfare. As long as there are corporate organizations eager to bolster their image as responsible entities, there will be CSR (corporate social responsibility) spending. Therefore, my simple view is that a developmental organization can achieve sustainability, but not necessarily through business revenues only. In fact, sustainability would be largely achieved only through grants. This has a deep and all powerful impact on the business plans and projections that developmental organizations and social enterprises would make, since as per this view, their revenue projections only have to cover a portion of their cost, and the rest must be covered by grants. The next question would therefore be, how do we bring long term predictability in grants, but that is a separate problem. This is therefore very different from making unrealistic claims to cover all costs over time from business revenues. If the developmental organization, along with the members of the community it is trying to uplift can actually be completely sustainable, then they are competitive already – therefore, where is the support needed?

NGOs trying to build a sustainable business model would therefore do well to mull over the actual identity they wish to create for themselves in the long term; Similarly, social investors would do well to question where the thresholds lie, between returns they look for on investment and actual developmental impact they want to bring about, where it is needed most.

Transformation and social mobility

Mallika (name changed) was four years old when her mother migrated to Bangalore city from a small village near Thiruvanamallai back in the late ‘80s. Although Mallika’s mother was an illiterate agricultural labourer, she was lucky to find stable, permanent residence in poor but safe slum area. Regular employment as a domestic maid in a number of apartments in a nearby affluent area enabled the mother to send Mallika to the government school close by, and Mallika surprised everyone by going all the way to standard 10 and passing with a second class in Kannada medium. By then, Mallika’s mother had won enough goodwill with a few benevolent employers to fund her education through PUC (plus 2), and also help her learn some basic English. The young girl was showing a liking and an aptitude for math and science, but no one was prepared for what was to come… Mallika got a 1st class in her PUC second year, and even got a rank (though it was over 8,000) in the state common entrance test. With the help of a valid reservation category certificate, Mallika went on to do a BE in Computer Science in an engineering college at Bangalore, during which time she also did a project in which she learned java and C++. After a tense 6 month wait following successful graduation, Mallika landed a job in a small software development company where she made a reputation as a hard worker, even if not exceptionally brilliant. Two years later, she was picked up by her former manager, who had switched jobs by then, to join one of India’s big 5 software companies, which has a market capitalization of a few billion dollars and a headcount of several thousand tech professionals. Today, Mallika lives in a small but comfortable and well furnished apartment with her mother who has stopped working. She has visited Singapore and the US to work on projects for clients and is a team leader.

Mallika’s story, though quite extraordinary and fairy-tale like, is not unique. The transformation in her life has been played over, though less dramatically perhaps, and starting from more favourable levels, with hundreds of thousands of young men and women in India over the last 20 years. Most working professionals today enjoy a better standard of living than their parents and grand-parents. However, in general, the growth opportunities start from a much higher base level than the one that Mallika began at. In fact, in her case, a number of favourable factors combined with her diligence to help her pole-vault to a higher economic level… for instance, she and her mother lived in one house for several years, the government school she went to was actually functioning, she did get support in terms of funding, encouragement and occasional guidance from her mother’s upper middle class employers. The sad part is, that just as there are hundreds of thousands of people who have been transformed by education and new economic opportunities, of which Mallika is a more extreme example, there are tens of millions of young people who are unlikely to ride the wave of transformation.

So what is this transformation? What is the destination of this desired change? To a large extent, it is a transformation from being employed in the unorganized sector to the organized one. I say to a large extent, because there are notable exceptions. Everyone in the unorganized sector is not poor, and everyone in the organized sector is not comfortably off and above being vulnerable to economic shocks. There is however, a strong correlation. In the organized sector, employees have structured compensation, some level of job security and predictability, some level of leave with pay, especially for emergencies such as medical conditions; in the unorganized sector, nothing is sure for daily wage worker or labourer, in terms of where they would be working and how much they would be earning even a few weeks later. Often, there is no insurance, no protection of earnings for periods of illness or injury, no long term job security. But, probably the most important difference is, that in the organized sector, a person can grow professionally by getting training or varied experience. A person can change her field, such as an engineer who gets an MBA and moves to finance; a person can get promoted by getting an advanced training; in the unorganized sector, no such opportunities exist. A labourer remains a labourer all her life and can continue to earn wages as long as she has physical strength to perform the same level of work. Even a relatively skilled unorganized sector worker, such as a self employed motor mechanic on the road side, cannot claim a faster growth path by attending a training program – market conditions simply do not allow such a change practically, though it could be theoretically possible. The market may also not be willing to pay a higher wage for a higher level of skill to an unorganized sector worker simply because standard mechanisms do not exist for benchmarking, assessment, certification and additional training. For instance, the salary that a qualified accountant can command in the organized sector would be a function of his experience in terms of time, performance, different assignments handled and so on. Also, in any new job, he would get paid leave, insurance coverage, savings fund and other benefits as part of a standard package. On the other hand, the wage and benefits that a domestic maid can receive would only depend on her negotiating ability and the benevolence of her employer.

The stark reality is that in India today, over 90% of the working population is in the unorganized sector. The solution is clearly not to try to transform this huge, fragmented work force of over 400 million, to the formal sector… its always tempting to try to simplify problems to address them more effectively, but in doing so, we create an illusion of simplicity which we may try to solve through a single silver bullet. In fact, post-independence, the Indian government tried exactly this, i.e. to provide state-controlled organized sector employment (through PSUs, or public sector units) and hope that progressively the entire working population would be covered. Unfortunately, even without considering the number of PSUs which have gone sick or are loss-making, this idea is a relative failure as far as creating mainstream employment goes, because all PSUs together do not employ more than 30 million people.

Then what is the solution? I’m not sure what it is in terms of a series of executable steps, but I think I can visualize what the solution would mean in terms of visible change.
On the one hand, it would mean more Mallika’s climbing up the social and economic ladder by getting and converting more opportunities. Clearly, once an individual has received education and the capability to secure higher value jobs, to a large extent, she becomes competitive and secure from economic shocks, vulnerability and exploitation. Her dependents and she make a permanent climb to a higher social and economic orbit.

On the other hand, it would mean more standards which are organized-sector-like stretching down to prevail in the huge, anarchic, jungle-law-governed unorganized sector. This would mean a complex set of levers to be applied, including state legislation, recognition by employers of the need for more fair and humane practices, improved professionalism among workers to increase their bargaining power, pay for performance irrespective of the type of work (i.e. a general acceptance of the concept of dignity of labour and delinking type of work from caste, class and community). For instance, today, sewer cleaners in many parts of the country come from particular Dalit communities, and they are looked down upon because of the work they do, for which they are paid peanuts and exposed to dangerous and unhealthy conditions. Now, sewerage systems exist in every country of the world, but in developed countries, sewer cleaners are trained, certified, insured, provided with protective clothing and equipment, and respected for the job they do. If sewer cleaners would have such fair conditions to work in and get paid fair wages which may include special allowances for hazardous work, then who knows, cleaning sewers could become a competing alternative career path to accounting and software development – at the end of the day, it’s a job!

So, we need that magic method, or a combination of several hundred methods, to push more Mallika’s up, and to push better practices and standards down, to provide transformation, mobility or just better conditions, to people like Mallika’s mother… just imagine what would happen, if the 90% of our work force who make up the unorganized sector are empowered to perform and produce, and are also treated, more like the 10% who hold up much of the organized economy!