Venture capital

I have never had the chance to go up to a VC and pitch for funding, and funnily never built a business plan either. My Dad gave me the startup capital we needed, and thankfully didn't ask me to present about market size, and growth plans. We've just grown on sheer luck and hard work. But, I've lately been toying with the idea of approaching VC's to get funding for some of our expansion plans. Although, we're very close to starting our own Middle East operations, we'll definitely need funding if we are to establish local presence in the US or Europe or Singapore. Unless we decide to keep growing organically at the current pace.

I have spent some time reading up on building business plans, and managed to get through Mike Mc Keever's "How to Build a Business Plan". It's pretty useful and has some nice reality checks in it. There's really a lot of material out there on building business plans and pitching to VC's. One of the best resources I've found is the MIT Entrepreneurship Center.

Browsing through Guy Kawasaki's blog, I also came across a couple of interesting postings: Top Ten Lies of Entrepreneurs as well as the previous posting Top Ten Lies of Venture Capitalists. Having sat through some business plan presentations of MBA grads, I have come across about half of those reasons. But then again, if I were presenting my case, I'd probably also be talking about market size, and our potential share of the market. Hmm...how else does one get a VC interested in what returns they could be looking at? Most people are really passionate about their ideas. I think one of the key things is competitive analysis. In my experience, most ideas, although original, aren't usually unique. So if you could truly show you plan to measure up to the competition it might help. Also demonstrating that competition exists, also proves that the market exists.

There are other options for funding besides VC's - bank loans, hedge funds, and angel investors. It all depends on how much money you need, at what terms, and what state of your business you're already in. For us, as a profitable company looking to expand rapidly, we'd probably still prefer VC funding, because of the scale of the funding we would be asking for, as well as for the potential contacts a VC might bring in.

Incidentally, if you're looking at starting your own business in India, and need some funding or mentoring, drop me a line.

Partnerships

If you're just starting out, or even if you've been in business for quite some time, the value of partnerships cannot be discounted. When we were starting out, we were completely unknown entities, but because we knew our stuff, most of the projects we did were sub-contracted by larger companies. As a consulting firm, we started by working with other slightly larger consulting firms, then biggers ones, until finally we were being sub-contracted work by the Big 4.

Another important use of partnerships is for overseas business. Being based out of India, offers us the cost advantage, so we can talk to overseas partners to get us business, and then outsource it to us. Just that the specific line of consulting we are in, involves senior management, so it's not always easy for an overseas partner to sell Indian consultants. But as the client base expands, and the expertise grows, this becomes much easier.

The first place to look out for partners is among your competition. It doesn't hurt to drop them an email saying they can outsource work to you should they fall short of resources. Next you could look at larger firms who do work in a number of areas, one of which is your niche. They're always ready to outsource work if you can deliver on one or two assignments. Thirdly, you could network in industry associations or meetings. I am terribly bad at doing this. But there was one time I attended a conference, and at tea managed to start talking to someone. Turns out he worked for one of the larger audit firms, and they were interested in our niche services for their clients. What started out with a casual conversation ended up giving us business worth millions of rupees. One of the employees who worked at this audit firm left them and went to work for one of the Big 4 in the Middle East. He then introduced us to the head of practice there, and we got further business from them.

Partnerships save you the trouble of the sales cycle, they save the headache of explaining to a billion-dollar organization how you as a 2-person consulting firm could provide them good service, it keeps the bread on the table, gives you the experience, and helps you build the contacts to get some initial traction going.

Website!

Most entrepreneurs make the cardinal error of not getting a good website up and running. Having struggled through really amateurish versions of our website, it took us almost two years to come up with a professional looking website. Some helpful tips:
1. You don't need Flash: well not to begin with in any case. In fact, you don't need anything fancy at all. Some of the best websites are liked purely for their simple elegance.
2. Use existing templates: don't go looking around for neighbourhood developers to help you out. Well not at first. After a lot of mucking around, someone suggested using www.template-monster.com. We purchased our first template for 60 euros, and recently rehauled our website with a new template. The first time around, I took about a week struggling with the template, mangling it, adding content to it, until we had a much better looking website up and running. Then recently, we had one of our technical writers do the same to a much better looking template, and now the website looks even better.
3. Search engine optimization: this topic deserves a whole blog entry by itself if not an entire book. I can easily claim to have made hundreds of thousands of dollars simply because our website figures well in search engine results. No matter how much effort you put into doing this is less. The returns are mind-blowing.
4. Content: the content on your website must be really well thought-out and properly organized. Don't just have content about how great your services are, but also put things which people would find useful - articles, papers, helpful hints, tools, etc. If you can put samples of your work online then do so. Don't worry about people stealing ideas or content and competing with you. They'll find enough of that elsewhere on the Internet in any case.
5. Alive: your website must be alive. Regular visitors will quickly notice if it hasn't been updated in a very long while, and soon it starts looking dull and boring. This is more so if you have a News & Events page, which should be updated constantly. We used to put even the littlest piece of news on this page during the first few months, when we didn't really have much to say. It just showed that as a company, we were still alive and kicking.

Starting your own business in India

So you want to start your own business. Well that's excellent, but instead of having to learn the hard way, what route is best, here are some pointers:

1. Proprietorship. If you are starting a one-person, self-employment kind of thing, then you're better of starting a proprietorship firm. This is usually for enterprises like digital artists, consultants, trainers, etc. Even if you're a work-from-home Mom, it's always a good idea to run your enterprise under a proprietorship account. My Mom does. :) That way, you can put in a lot of your daily expenses and reduce your tax burden. I started out this way, and eventually converted the proprietorship into a private limited company. If you run your proprietorship firm from a location other than your home, you'll also need clearances from the Municipality and local authorities. Also, you can't run a full-fledged commercial establishment from out of your residence. So if you start to grow well, move into a reasonably good commercial area.

2. Private Limited company. This is a more complicated option, but has a number of advantages. The complications arise from the need to comply with various regulations and laws. For instance, I got trumped once, when we realised we had to not only file our income tax returns with the IT department, but also with the Registrar of Companies (RoC). The fines for not doing this are pretty steep. So for the moment, we've decided to simply go ahead and continue not filing returns with the RoC, and hope they come up with some sort of an amnesty scheme. For a Private Limited company, you need:
a. Startup capital - I think the minimum is Rs. 2 lakhs, and that's what I started off with
b. Registered office - I had given my home address, although our office was elsewhere
c. Name of the company - you need to fill up the form with suggested names and go to the RoC. Avoid generic names, or you'll have to end up adding words like (India) or (Mumbai) to your name. Makes it kludgy. You also need justifications for why you chose that name.
d. Directors - I think you need at least 3 directors. I have my Dad and sibling registered as directors, and they have an equity holding in the company as well. When your company becomes successful, you can pay them a salary, thus increasing your expenses, reducing tax, and getting the money back into your own account. Needless to say, paying them a salary means increasing their tax liability, so you need to balance it all out.

For all this, you'll need to hire the services of a good Company Secretary, who will fill up the necessary forms for you, prepare the Articles of Association and Memoranda of Association, and do the rounds of the necessary departments to register your firm. Remember, keep this as generic as possible. More information on this is available at the ICSI site.

3. Partnership firm: I think this option is open to lawyers, CA's and such-like. I never explored this option, and can't provide much inputs. But you'll probably know someone else who's in a partnership firm, and can advise you on the legalities and advantages of it.

In any of these situations, a good Chartered Accountant is a must. When you're starting out, the fees you pay to the CA might seem very high, but a good CA will save you tons of money in the long run by reducing your taxes, and showing you the best way to increase your expenses.

Don't forget to register for service tax. A very wide range of services now come under the ST net.

Tax woes

While, we've never really had any major issues with the tax department, we're now beginning to hit their radars. Also, given our current size, the outflow of tax this year was a pretty significant number. I sat down to list out all the different sorts of tax we pay:

1. Income tax: the most straightforward of them all, calculated at 33% of our profit. However, this needs to be paid as advance tax every quarter, not just at the end of the year. The advance tax is estimated at 30% of 30% of revenues for that quarter. So approximately 10% of quarterly revenues. If at the end of the year, calculations reveal that we ended up paying less advance tax than was actually due, we pay the remaining with interest! Or else, the IT department refunds the excess, also with interest.

2. Tax deducted at source (TDS): for all payments made by us to others, including employees, we need to deduct tax at source. The rates of deduction differs based on the service provided to us. It is also our responsibility to pay the tax liability of our employees. This is pretty important, as the fines for not paying this are pretty severe. TDS is to be paid monthly.

3. Service tax: This was the real killer. Till last year it was 10%, plus a 5% cess for education - some government scheme for providing education to underprivileged kids. This year, it became 12% plus the cess. So every service, we provide we pay 12.24% service tax. This is also paid monthly. But you get a rebate for the service tax you pay out to entities that provide services to you.

4. Fringe benefit tax: One of the greatest benefits of running a company is that a wide range of expenses can be booked to the company, thus reducing the profit and saving on tax. I am sure, I'll have a tough time explaining to the IT department how exactly a new Tag Heur watch could be a business expense. But the government got smart and decided to impose a tax on all these antics - so food, travel, beverages, and a whole host of other perks and privileges given to employees and us poor founders are now taxed at 6%. Also payable monthly.

5. Sales tax and Octroi: We not only sell services, but every now and then manage to sell one of our products (software) as well. This entails a sales tax payout, and if being sold outside state boundaries, Octroi as well. I still haven't gotten a handle on the whole VAT system, but I think that will now replace the Sales tax.

6. Professional tax: How could I forget this one! Depending on the salary slabs, there is a monthly payout of professional tax per employee. Its just about Rs. 200 per employee per month. I had no idea this existed, and last year we had to end up paying all the professional tax we owed for the previous 4 years, and then the interest on it as well. Sheesh!

It's a wonder, we manage to keep the business running! We're left with not much choice except to establish an overseas entity in a tax-free country, probably somewhere in the Middle East, at least for the revenues from clients in that region. Hmm...now where's that forex rulebook?

Gratefulness

One of the things that being an entrepreneur teaches you is gratefulness. I cannot help but be immensely grateful to the people and the events that have helped get us where we are today. I am reminded of Paul Coelho's line in the Alchemist - the world conspires to help you get where you want to go.

The first person on my list would be my Dad. He's played such a wonderful role in guiding me when I needed his advice, and generally staying out of the running of the business, so that I was able to develop the confidence in my own decision-making and operational abilities. In the initial years, I think I disagreed with him on almost every aspect, but now it's almost strange the number of times we both come to the same conclusion on almost every decision. I guess I am also very grateful to both my parents in that they didn't throw a fit, when I came back home one day and announced I was quitting college, and wanted to start my own business. They've stuck by my whacky decisions, and weird ideas, and possibly have had more faith in me than I did in myself at times.

The next person would be my uncle - who though disappointed at my quitting college, allowed me to use an office he had in South Mumbai for no rent to begin with. For 6 months, I saved on the monthly rent, and didn't have to pay an upfront deposit. When I could finally afford it, I did pay him rent for all those months, but keeping my expenses low during those first few months was crucial to our survival.

Then there's our US business partner - who flew me down to the East Coast, and gave us a couple of small, but significant contracts that ensured monthly revenues in what is essentially a feast-or-famine business. We still continue to do business with him, and his advice as a mentor has been truly valued over the years.

Then of course, there's Lady Luck. I don't consider myself one of those really hard-working 16-hour a day people. Most of the deals we've done, the projects we've won could be attributed to sheer luck. Just being in the right place at the right time. Sending out an email, just to say hello, and finding a contract lands up in our laps. All those little seemingly insignificant actions, meetings, events, that led to much bigger contracts and sustainable revenues.

In a weird way, I am also very grateful to all those people who doubted me over the years. I remember the head of HR at the company that offered me a job during college. When I told him I was not taking up the job and was going to start my own company, he gasped: "But that's like jumping off a cliff, not knowing whether you can fly or not!". And I remember saying: "Funnily, that's exactly the way I look at it too! And to be able to do that - isn't that amazing?". He didn't quite agree, and I think his last piece of advice was that people like me would be better off in the Himalayas. Add to that list ex-girlfriends, their parents, uncles, aunts, college friends. I've had a lot of inspiration going there.

And finally, all those people who worked with us over the years, and those who work with us now. Especially during the initial years of struggle and uncertainty, when we all worked for low pay, and long hours just to see us get to the other side. Most of them have moved to lucrative jobs at larger consulting firms, but the goodwill we maintain ensures we continue to get business, and continue to exchange notes, and live life to the hilt. The current team is amazing as well, and as we continue to grow the excitement grows as well.

Though, it sounds like I got myself a "Thank-you" speech all prepared, it's really wonderful to have people and events come together and help save your skin.

PS: Just landed on an excellent blog posting by Guy Kawasaki with a very wonderful poem by Saxon N. White Kessinger - The Invisible Man

The flywheel effect

I read about the Flywheel Effect in Jim Collins' book "Good to Great" some time ago, and could really identify it, although at a more personal level than the way he was indicating. It talks about a giant flywheel, which you keep pushing against, and it just refuses to budge. Then it moves just a wee bit, then a little bit more. As you keep pushing and straining against it, it completes the first full circle, and then moves more easily. Until its simply flying along and all you have to do is keep tipping it with your finger. The outside world sits up and notices when its flying at full speed, but easily forgets to ask about the days, months, and years spent straining and pushing against it, when it would simply not budge.

I remember the times when I had to take a bus to the railway station, because I couldn't afford a taxi or a rickshaw. Or the times, when we had to keep the AC shut during summers, because we couldn't afford to pay the electricity bills. Or the one and only time, a check bounced because we had insufficient funds. That incidentally was in Oct 2002, and was an inflection point for the business. Since that day, we've never been short of funds - well not critically short. It seemed like such an unending struggle back then. It's been such a long, eventful and wonderful journey these past 5 years - to arrive at a stage where we're looking at 6 figure deals, and hopefully our first 7 figure deal in the next quarter.

So if you're having one of those days when nothing seems to be going right, and all your leads are turning into dust - hang in there. Keep the faith, and it'll see you through to the other side.

5 Reasons not to be an entrepreneur

If you don't know what you're getting into, here's why you should think again:
1. It's sheer agony. If you think love is agony, try running your own business. There are days when you feel like the skin of your back is being torn away.
2. They just don't get it. Don't even try explaining to your family and the rest of your social circle, why you're doing what you're doing. The only proof they'll ever accept is when you finally make it. So save your energy.
3. You could fail. Statistics say only 1% of all entrepreneurs actually succeed. And when you've put almost everything on the line, failure can be a very scary option. Even more scary - you could succeed, and then fail spectacularly!
4. You'll have to live with uncertainty - daily. No matter how well one succeeds, you never actually know what your Inbox may bring tomorrow. Most people can't live with that kind of uncertainty.
5. Your faith will be severely tested. And I don't mean just theosophically. Your faith in yourself will be severely tested, when you're staring down the barrel, or when you don't have the money to pay next month's bills, or when a large deal falls through.