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!