Dare To Dream

While virtually everyone in corporate jobs, and even an increasing number of college students, at least vaguely, dream of becoming entrepreneurs, not many give shape to their thoughts. The desire gets overwritten by the comfort of a salary routine. Only a fraction of such people rises above the resistance, and start planning for their own ventures seriously.
For others, it is a mystery how these entrepreneurs dare to risk it all. The world belongs to those who dare.
This blog will decode the various facets of entrepreneurship.

Friday, June 13, 2008

Online presence helps build valuations and get VC funding easily

Madhav Oza entered the travel business well before the onslaught of internet, lived through the dotcom transformation of the sector and continues to enjoy a significant market share today. But he has been unable to attract venture capital investment for his company Bluestar, while wannabe travel portals, with nothing more than a website, have successfully drawn such funding. VCs have willingly fallen prey to the technology hype in what is a sound brick-and-mortar business. “They only want to make a fast buck,” Oza says ruefully. “But they fail to do so as only 10-15% make a profitable exit.” Excessive VC attention to some sectors and virtual neglect of other opportunities has led to a wide array of over-invested and under-invested segments in India, industry watchers say. Not that the fancied sectors are pouring money or the less attractive ones are devoid of profit opportunity. But the VCs’ tendency to embrace sectors, where others have succeeded, is creating a distorted scenario in entrepreneurship support across the country, they say. “It’s like a herd behaviour,” Oza complains. Even businesses considered VC friendly are hurt by this over-investment. For instance, fledgling travel businesses fashion themselves more as web portals with a predominant online model, rather than go through the pain of creating physical infrastructure and network. The logic is that the online presence helps build valuations and get VC funding easily. Oza recalls cases, where VCs funded fare discounts on travel sites out of their own pockets, and other cases where the companies folded up after the financial investors made their exit. The major victims of this beaten-track financial culture are the inventors of new products or technologies. Most of them are not business executives and lack entrepreneurship experience. All they have is the technical knowledge of their invention. Ideally, this should offer the maximum profit potential for venture capital houses, since there is value to be built from the ground up. But still, investors shy away from such ventures preferring to invest in the umpteenth search engine or yet another online exchange. VCs fail to invest in early stage start-ups, with high levels of innovation, as they are busy making late-stage investments, says Anil Gupta, a professor at the Indian Institute of Management, Ahmedabad. Even with all the buzz around innovation in many sectors, information technology and services form the VCs’ first priority. Even within services, business around outsourced contracts still get VC money, while new services are ignored, he says.
For instance, there aren’t many VC investors who understand or are interested in the farm sector, but bountiful opportunities lie there. With contract farming, farmer-corporate cooperation and newer market systems evolving, agriculture is increasingly becoming an entrepreneurial activity. Supply of seeds, herbal pesticides and nutrients are going to find robust demand in the coming years. Water purification, food processing products and no-chemical pest-control offer immense innovation possibilities.
Many entrepreneurs feel that the internet’s grip on VCs has not loosened even seven years after the dotcom meltdown. Within this segment, it is the oft-repeated themes like jobs and matrimony that get too much investment. Internet firms that deal with education, training, retail and financial services remain under-invested. Defending VCs, Rishi Navani of fund house Matrix Partners says funds prefer certain sectors considering a combination of market opportunities, management strength and return potential. The business needs to be highly scaleable for early stage funding. A great idea may really not be scaleable. But he also agrees that both VCs and start-ups are victims of herd mentality. Many VCs go by a shopping checklist to satisfy their limited partners or investment committee, taking care to do what other top VCs have also done. This is done to ensure that if something goes wrong, they wouldn’t be singled out for blame. They look for start-ups, which can expand quickly and can attract further investments in terms of next round funding or initial public offering. VCs love scale so that they can exit at the right time. Otherwise, they are not interested. The so-called “India Strategy” also plays a part in the business mix that venture funds go in for. These days, if you are doing business in India, it is mandatory to have certain sectors in your portfolio. The sectors that have caught the stock market’s fancy rank high on priority list, because companies in these businesses can be quickly packaged for an IPO. So, a real estate firm, where a big paper valuation can be built quickly and shares sold at a handsome premium, will attract VC devotion. Let innovation take a walk. On the other hand, a sector like power has no place on a VC’s mind because of its long gestation period, huge capital needs and the low potential for fancy valuations. VCs shrink away from business whose day of reckoning is far away. New Enterprise Associates, India vice-president, Ben Mathias says VCs generally look at sectors that they are comfortable with. “Most VCs with a US background have come from the tech industry and they focus on IT and ITeS. This is not because they don’t believe in the potential in other sectors such as agriculture, but because they don’t understand them sufficiently to evaluate the opportunities,” he says. Some like business mentor Sridar Iyengar feels that there is no area that is overexposed to funding. “We are growing at a good rate. We need investment in all areas. The amount of investment currently being made, which has been growing in the past few years, is still short of what is required and lags behind other countries,” he says. He says VCs would invest in a sector if they see earlier traction or opportunities. “One validation of that earlier opportunity may be one of them backing a project or company in that area. But to say the others are followers, implying that it is blindly done, is false,” he says.
Also, experience has shown that there are different paths to achieve a goal and that different teams will do it differently. “It is only natural that many teams are funded in the same space. In the end, most ideas are not wholly original. They are a better mousetrap. The game is all about execution. May the best team win,” he says. But, things may not remain the same for long and other sectors would attract interest as and when success stories start appearing, experts say. “We may be able to see some changes. Newer services for rural sector may start getting investments and also social enterprises, for which funding is almost zero, may start attracting some angels,” says Mr Gupta. A lot can be done if VCs can become a bit more imaginative and start looking at opportunities in nutraceuticals, herbals, water treatment, low-cost drugs, support for physically-challenged people, one rupee sanitary napkin for women (NIF has the technology from a Madurai-based innovator), a 15,000 wind mill by Mehtar Hussain from Assam being tested successfully in Gujarat for pumping brine solution, says Mr Gupta. There is no dearth of ideas, what is lacking is a robust mentoring, linkage with entrepreneurs and investment window. IIM-A has set up a forum for industrial interactions and an entrepreneurship club. Proposals from innovators as well as VCs are studied to help make the marriage or help both sides to reduce their transaction costs. And things are improving. Radix, a US-based company with an Indian subsidiary, has come up to take on 10 technologies with no upfront cost. It wants to explore their business development globally and then recover its costs from eventual successes. “We need many more Radixes, which provide a whole range of solutions to innovators and inventors and without any upfront costs, but exclusivity agreement for at least 120 days, which they may need to do complete evaluation,” says Mr Gupta. “If only angels and VCs were to invest in one percent of the 5 lakh technology student projects, we would have triggered 5,000 start-ups at very low cost,” he says.

Entrepreneurs focus on building long-term value

Mohit Dubey, chief executive officer of online vehicle dealer Carwale.com, had two options before him. He could run his ship on a tight budget, entice customers with discounts and make a quick profit. Or, he could invest in infrastructure and improvement in service standards. The second strategy would mean slower ramp-up in the client base and postponement of the date with profit. It was simply a toss up between quick profit and long-term value. First-generation entrepreneurs often look at their first profits as the vindication of their business model and are hence quite eager to reach there as soon as possible. After all, the ultimate goal of any business is profit and why not early? So, it may be baffling to them to see seasoned entrepreneurs and financial investors appearing comfortable with losses in new ventures month after month, worrying about everything else but profit. A lot of venture funding happens in loss-making firms, which don’t seem to have any disadvantage relative to profit-making ones. Does that mean profits are not important in a small firm? The answer lies in the decision taken by Carwale founder Dubey. He figured that short-term profit may be attractive, but long-term value is what he wants to build. So, he chose to build a critical mass for the company before opening the cash box. That meant spending for the future and taking a knock in the near-term. “We took about a year to reach the critical mass, that is take Carwale to a credible level where customers are given a standard level of service. It took us six months to make profits after that,” he says. “We could have taken an easier path earlier by giving discounts, for getting early profits but that would have been a short-term gain and a long-term loss.” Of all the tricks that a rookie entrepreneur will need to make a success out of a new venture, perhaps the most important is to figure out when the company will break even. It can’t be left to chance and the CEO must plan for increasing revenue in a graded manner, investing in infrastructure and processes to support the growth and know how to fund initial losses. The first objective, of course, is to reach a viable cash flow position when the entrepreneur knows that the business can sustain itself. Scaling up then will bring in the benefit of size and profits. Profit timeframes differ from business to business, sector to sector. Unless a business is a one-man show like home-based consultancy, “one should look for scale and size in the business rather than worry about profit when it is started,” says K Ganesh, founder and CEO of TutorVista.com. In fact, profits too early in the life of a new company can be counter-productive, he warns. “Unless the business scales up, the fact that you can make a great profit will not mean much. It is easy to break even or make a profit at small scale, but doing it on a large scale is what building a business is all about,” he observes. For product companies, the span can be longer since development, testing, validation and marketing take up time. Services companies may be able to reach profitability quicker, but they should not rush in and rupture their growth impulses. There are too many small scale industries that never became large companies, because entrepreneurs tasted early profits and stopped taking risks at some point of time.
They may spend their most productive time lobbying for government concessions or complaining about the ills of small scale industries, rather than capturing opportunities and growing out of the bonsai mindset. Early profits may also mean that not enough cash is being pumped back into the business. While everybody likes to do business with or work for a profitable company, few discerning investors will be keen to put their money on a company that drives the balance-sheet before driving the business. Venture capital funds, when evaluating companies for investment, do not look for profit figures but for the soundness of the business model. So, a company playing for the long haul and hoping to win the trust of investors, must focus on the model itself. Profits will follow automatically. “You plan revenue, not profit. You should know where the revenue will come from and when it will overtake break-even and start making profits. There is a need to go to the market to experiment and work on your strategy,” says Pravin Gandhi, president of The Indus Entrepreneurs in Mumbai. An entrepreneur who fails to invest for the future just to show a short-term profit is unlikely to have a sustainable business, say veteran entrepreneurs. Profit or loss is not a choice, only the timing and planning are. In fact, if a company can reach profitability easily, it may not need venture funding. It may also not be scaleable. “VCs never pressurise you for quick profits if you are able to explain when you aim to get profits and the details of how you are working towards it,” Kreeda Games India founder Quentin Staes-Polet says. M Sanjay Kanth, CEO of ESS Solutions, says an entrepreneur must adopt a profit stance in his mind from the first day of his business. “That does not mean that you will not scale up and be tied down with the gains,” but only that you will remain focused on the financial health of your firm. “During the refinance boom in the US, to move beyond offshoring, ESS bought a title and a mortgage company. We started off with just a computer in a small room but this doesn’t mean we will remain that way because we are making profits. That’s business. You need to take risks and expand, and look beyond profits to make more profits in the future.” Successful entrepreneurs often stray from established and easy route to profits. Vishal Gondal, founder and CEO of Indiagames, says he faced resistance from VC investors when he wanted to move to mobile phone gaming business. They wanted him to continue with internet gaming and subsequently move on to information technology services as it was already a profitable sector. But Gondal stuck to his plan and investors eventually relented. “You have to have faith in what you want to do. Then it becomes easy to fight resistance from financiers,” says Mr Gondal. Here is a thumb rule for entrepreneurs. There are two kinds, bad profits and good profits. Bad profits come at the cost of growth, reduce value to the customer and drain future shareholder value. Good profits aid growth, add to customer value and bequeath longevity.

Transforming idea into a product

It was a bit of ‘jealousy’ towards a classmate that made Phani N Raj a businessman. School time memory of a student who had personalised clothing and stationery continued to be etched strong in his mind till much later, making him leave his PricewaterhouseCoopers job and start the branding company eYantra. “He was from the US and his cap, pencil box, T-shirt, everything had his name on it. I yearned for such personalised stuff, but there was nothing in India then to meet my demand.” This got him thinking until he arrived at an idea to set up virtual stores where buyers can choose personalised stuff and get them delivered at their doorsteps. Mr Raj is one of the very few with the entrepreneurial spirit who have managed to be lucky enough to convert an idea into business. But most people end up thinking and discussing their bright ideas, but stop short of converting them to prototypes. Experts say there is a set of easy steps that could help any one to nurture a thought and take it forward to see if the kernel of a viable business is contained in it. Look for it The first thing, of course, is to remain alert to the sights and experiences one comes across, because big ideas may be lurking in the most unlikely corners. For Shalabh Sahai, who co-founded the volunteering service MITRA, it all started at the college canteen over tea. He had been trying to understand why there was a communication gap between individuals who wanted to volunteer for social service and the groups that were organising such efforts. “It became our favourite topic of discussion at the canteen,” he says. Thus arose an idea for setting up an online exchange for volunteers. It also helps to jot down an idea to see if it stands the test of time. A great idea may not sound all that great, when considered a day later. An idea is just of a few words long. Only when you sit down and pen it you realise the real picture. It is crucial to go into the details. You need to ask yourself the right questions — what is the compelling need it fulfils, who will benefit from it, is there demand for it and who will fund it? Preparing a business model answering these questions is vital, says Mr Sahai. The answers will tell you whether to pursue the idea or drop it. Read the market An idea from a rookie entrepreneur would be worthless if the product or service doesn’t have the prospect of demand in the market. Industry associations, websites, journals and professional agencies can all help, but an innovator needs to have well-defined ideas on whether a market exists. This is but the first step to gain confidence that an idea can work. If the demand picture is hazy or non-existent, one should have the courage to drop the idea and move on to other things. Sometimes, ideas emerge from necessities. When you have too many projects to handle and too few people and you can’t be at the office 24x7. Emails and phone calls may not be sufficient to handle the complexity of the work. Sahil Parikh, founder and president of Synage, came up with a solution for his office — Deskaway. A software program that helps execute projects online. “The concept was new in India, but I was sure if it is a hit in my office it will be in the market,” says Mr Parikh. Ideas can be ahead of their time Latent demand doesn’t immediately translate into a viable business opportunity and some ideas, attractive as they seem, might simply be ahead of their time. But there are people who have stuck to their business and made it a success in due course of time. An idea who time is yet to come need not necessarily fail, but the entrepreneur must be able to envision the trend of the future that might make it succeed. “I thought of specialising in cyber law and starting cyberlawcollege.com, when even the concept of internet was new,” Bangalore-based consultant Naa Vijayashankar (Naavi) says. “An idea ahead of times is not accepted well,” but perseverance pays. “Now, I have become a specialist in cyber law by default. So, you need to wait for the right time to come and don’t lose faith in your idea. Believe that if not today, five years down the line, it will click,” he says. When criminal lawyer KS Kohli wanted to start a seven-day cabin crew training for airlines, everyone thought he was crazy as all other institutes offered full-year courses. But, he knew that Indian skies were going to be opened up for competition and there would be a surge in the need for flight crew. He stuck to the idea and built a successful operation, branded Frankfinn. Customise to market needs The aim should be to gain a general sense of the type of customer your product or service will serve. Identify your clients well enough so that you can modify your product as per their need. If the business is designed to serve the domestic market, it should have that flavour. “People work differently in different countries. So, it is very important to give Indian touch to your product,” says Mr Parikh. eYantra’s Mr Raj says that he moved over from personalised stuff to corporate brand recall after the internet bust and it worked. MITRA’s Mr Sahai agrees: “We start as novices so we should never be too rigid. We need to learn and adjust our ideas to changes and be open to modifications.” It is also important to hear people out. Because sometimes your business idea may come from the person you least expect it from, just casually, even over beer. M Sanjay Kanth, CEO, founder, ESS Solutions, was originally in the medical transcription business. But, the industry was losing its sheen. He knew the president of a title company based out of Baltimore. That person told Mr Kanth that there was refinance boom in the US which has resulted into a huge backlog in terms of production. Incidentally, his brother M Sujay Kanth, who is now the COO of ESS, happened to be in US to explore business opportunities. They took up this opportunity. This was their first break. “Initially, we had no clue of what was going on and it was very hard to grasp. We took it as a challenge and Sujay got trained in their office for about 40 days after which we started the transition to my India office from 2004,” says Mr Kanth. Sell the idea to investors Money is often the biggest bridge that a first-time entrepreneur has to cross. It is important to sell the concept to potential investors. The startup should also detail a proper plan of how much money needs to be raised and how it would be spent. Projecting cash flow milestones will become easier if the homework to understand the demand had been done. There are also investment bankers who help you get venture capital against a ‘success fee’ i.e they will only charge you if you get funding. But, there is another way in which entrepreneurs get going. They first start a small establishment, may be in a garage with a bit of furniture, and ramp up as the business builds itself. Frankfinn’s Mr Kohli started his business Frankfinn Medico Infoservices by borrowing Rs 40,000 from his friend. But, when the right time came, he used his own fund for starting cabin crew training business. Remember, the customer must eventually “pay” for your business. Everybody else is waiting to get paid. Loss-making as a business virtue perished with the dotcom bust. Start now All the risk you have taken by giving up your cosy job or turning down a big offer has finally paid back. Well, once things are in place just get started. Your idea is now a viable business proposition and has a funding. So, what are you waiting for? “It is very important when starting out is to be mentally prepared for a different journey filled with uncertainty and excitement. This entrepreneurial journey will teach you more about yourself than you would have ever known doing anything else,” says Mr Parikh.

Cyber security market to grow 100 times in 5 years

Not long ago, one of India’s well-known banks received a complaint from a clerk that there may have been an accounting error in the charge of interest rates on overdraft accounts. The bank usually charged an interest rate of 10%, but on a few accounts, the charge was just 5%. The difference ran into several lakhs of rupees. All records were checked and found to be accurate, but still the money was missing. The bank hired a small firm specialising in detection of cyber crimes to check if a fraud had been committed on its network. The firm checked the 259 programs that the bank used and found in the systems nine more that were not in the official list of software. Three of them that accessed the database produced no audit trail. The firm came up with the hypothesis that someone should have briefly reset the interest rates. The extra software could have been installed when the bank was upgrading its systems to newer software. The day of the fraud was identified, the accounts named and the officer staffing a certain desk questioned. It didn’t take much to extract the confession from him. The bank took remedial action without involving the police. A small firm had busted a racket that a big bank could not initially fathom. This case is illustrative of an increasing number of cyber crimes in India and abroad, which have in turn, yielded business opportunities of various hues for small entrepreneur-driven firms. Large companies have a high cost base and depend on nimble start-ups to swoop down on online criminals threatening their business. Cyber security for large and small firms is not merely important, but critical. A leading Supreme Court advocate says the market for cyber security services and products will grow 100 times within five years, due to increased adoption of technology and higher awareness and possibility of cyber crimes. For instance, if there is a major security breach in the banking industry or the stock market, the impact on the country would be devastating. The lack of security could undermine the growth and credibility of India’s outsourcing industry, which has given the country global attention and recognition. “Terrorists and criminals will continue to add their contribution to make the security business prosperous. Be prepared to plan for a long term and you will reap the benefits,” says Naa Vijayashankar, director, Cyber Law College and founder of Naavi.org, a techno legal information security consultancy based in Bangalore. As criminals become more and more tech savvy, a war has broken out between them and law keepers. Nations and companies need an army of specially trained warriors to take the attack to the criminals, Mr Naavi says. Like any other start up in a new field, investments are the key and appealing to a venture capitalist is difficult. Unless the services are institutionalised, investments are hard to come by. Saurabh Srivastav, the president of The Indus Entrepreneurs (TIE), Delhi, says that investing in the area of cyber security is finding global interest. However, he adds: “You won’t succeed unless you have a world-class product or service, as today you are competing in a global market. You can’t offer something that is simply the best in India. Cyber security is not country specific. It isn’t like banking software, where the software for an American system of banking is different from the Indian system. Cyber security is cyber security, the world over.” It is very important for entrepreneurs not to lose sight of individuals since security is important for every information user. If ‘Mobile Security’ is a target, then millions of mobile users are also the target clients. Ultimately, client selection is part of a business strategy and a good mix of mass markets which are stable but of low individual value has to be planned along with high value clientele who would obtain services on retainership. “There is plenty of scope for start up companies in the field of ‘cyber security products’.
There are several small and large software products which are required by the netizens all over the world. There could be professional services rendered on call such as ‘Security Audit’, ‘Implementation of Security Audit suggestions’ as well as ‘Certification of Information Security Status of a company,” says Mr Naavi. Like in all fresh businesses, cyber security start-ups will have their own difficulty in terms of establishing trust in the market. Being a security business ‘Trust’ is more critical in this business than in any other. The gestation period for brand building is therefore high. Additionally, users still look at ‘Security’ as an ‘Avoidable Expenditure’. Evangelising and ‘Concept Selling’ is still required. Renowned cyber lawyer Pavan Duggal calls entrepreneurship in cyber security a highly under-populated sector. “Industries still don’t see it as a necessity and therefore people don’t see it as viable business. This is because, we as Indians have a notion that information has to be shared. The idea that information has to be protected still hasn’t been ingrained.” In fact, security education is in itself a huge business opportunity, he points out. Start-up firms could start something as simple as reselling security software, but there is a large untapped demand for more sophisticated services, Duggal said. “Experts in the area of data security will be desperately needed soon. There is an increasing amount of pressure on companies from the government to ensure compliance with the IT-Act. Within five years there will be a boom. We can expect to see the industry grow to 100 times the current size,” states Mr Duggal. With 21 years of experience in the information security business, cyber detective Rakesh Goyal highlights the mindset needed for the job. He says, “Besides the technical qualifications, an understanding of the business processes of the client they are catering to and an idea of the workings of the criminal mind and criminal intent is needed.” An information technology system has over 600 risk prone areas. Four hundred of these can be plugged, while the remaining 200 need to be monitored, says Mr Goyal, founder and managing director of Sysman Computers. Therefore, he says, there is a lot of business opportunities requiring a lot of people. There is also enough room for a large number of players. According to Goyal, banking, stock broking and e-governance offer ready market for cyber security services already as they have regulatory requirements to meet. The systems in these sectors need to audited by an IT security auditor empanelled by the central government's CERT-In. In the near future, hospitals and telecommunication companies will also have an increasing need for it. Duggal says airlines may start hiring security services firm because planes are often used as a weapon by terrorists. With an array of services and products demanded for the security of an increasing number of vulnerable businesses, the cyber sky is only the limit for online security firms.
(With Jacob Cherian)