Archive for June, 2009

LUCK? RIGHT PLACE, RIGHT TIME? DIVINE INTERVENTION?

We hear all the time about the amount of money that’s available to fund startups. For example, that private equity funds invested over $ 3.3 billion in just the first 3 calendar months of the current year. That VCs are always looking out for good deals as most of the plans they see merit little or no attention. That they invest in about 5-10 a year out of the 500-1000 business plans they get. And so on…But the truth is that a majority of deals that get funded are those that come through a referral or because the VC knows (of) the entrepreneurs; its natural because VCs don’t have the time to look at all the plans that they get to pick out the Rediff, Naukri, or Tejas Networks. Deals that come through some trusted source or through a trusted filtering process are therefore valued higher and rise to the top of the pile of business plans. It is therefore easy to see how many plans don’t get funded. And also how competitive the race to secure funding really is. Given this situation, what then makes a VC fund an unknown company started by an unheralded first-time entrepreneur? Imagine this situation: A first time entrepreneur in say, Bengaluru with degrees from Tier 2 educational institutions, average work experience in a regular job in a reasonably well-known company, but with no experience in building a business, no references you know or care for, and with no experience in building products or delivering productized services, sends you an email describing his vision of the way software will be used in the future.

Now ask yourself: Will you take that entrepreneur seriously? Will you invite the entrepreneur for discussions? Will you then fund the business to the tune of say, a couple of million dollars with no business plan? Answer honestly.

What then makes VCs fund companies started by such entrepreneurs? Sure, there is passion in the eyes of the entrepreneurs; sure, they have conviction and confidence; sure, they have researched the market and the business model; sure, they have a powerful business idea; sure, they know what they were talking about; But then so do many other entrepreneurs. Is it the element of chance? Is it that elusive thing called luck? Is divine intervention? What would have happened to such a startup if the founder had not had a chance meeting with the VC in a conference? After all, it was only because the founder met the VC at the conference was he able to talk about his plan, a plan that made the VC resonate with his business idea, right? Surely that meeting was due to luck, right? Especially, when other VCs had rejected the idea? Well, in our haste to qualify it as luck, we overlook the fact that the business idea and model had emerged out of research and market validation. Not from a pipe dream. We overlook the fact that the entrepreneurs at the startup were superbly prepared. And yes, they were in the right place at the right time. Luck,is what happens when opportunity meets with preparation. Without preparation, opportunities cannot be recognized and capitalized upon. Without opportunities, preparations can go abegging. So the next time somebody ascribes something to luck or chance, ask them if they were adequately prepared to exploit the opportunity.

It seems that “lucky” people constantly encounter such opportunities whereas unlucky people don’t. A 10 year research project that led to the 2003 book The Luck Factor by psychologist Richard Wiseman has revealed that “lucky” people generate their own “good fortune” through four basic principles that every entrepreneur will do good to internalize:

i) They are skilled at creating and noticing chance opportunities
ii) Make “lucky” decisions by listening to their intuition
iii) Create self-fulfilling prophesies via positive expectations
iv) Adopt a resilient attitude that transforms “bad luck” into good

What do you think?

This article was first published in The Financial Express

Governance

GOVERNANCE

Sanjay AnandaramThe young founders of the young company looked happy. They had just finished a long meeting with a top class candidate for CEO of one of their soon-to-be-launched businesses. They had decided to bring on board seasoned professionals to help them achieve their long term goal of building a nationally admired and respected company. The CEO candidate too felt energized after the meeting with the founders and was excited by the passion and drive exhibited by the founders. He was impressed by their open style, frank assessments of themselves, their understanding of the market landscape and by their willingness to share financially. Yet, he was a little uneasy. He called up the next day and wanted to meet the founders. He was concerned about “governance”. The founders were taken aback – what was this guy talking about?! They were taken aback only because of their lack of awareness about the intangible issue called governance. Sure, they had heard about it but hadn’t really worried about it enough to find out what it really meant. It was something, they thought, that only large public companies needed to bother about, that it was something bureaucratic that would only hamper their freedoms. The above situation regarding governance related concerns is quite common in India. In an India that’s globalizing rapidly on multiple dimensions, Indian entrepreneurs too need to wake up to the important issue of governance. Especially in family owned companies. What is this thing called governance and why is it important for startups? A few sample concerns from the CEO candidate illustrate the types of issues that come under the umbrella of “governance”.  “Are the founders taking salaries or are they siphoning money out of the company?’“Are all family members getting involved in the management of the company just because they happen to be shareholders?”“Do family members report to each other in the hierarchy? How do they then do performance appraisals?”“Does the company do business with related parties or persons?Is there a proper arms-length relationship”“Is there a board that takes decisions or does the family decide?” The delineation between ownership and management is an important aspect of governance. All too often, the distinction gets blurred and downright murky in India. It is important for a startup to seriously think of governance because good governance results in the creation of truly valuable, respected and admired companies. Professional executives tend to migrate to better governed companies. Investors feel very comfortable dealing with well-governed companies. Employees believe that their company will be fair not out of a patronizing attitude but out of respect for due process. Customers and partners trust a company that practices good governance. Stock markets reward well governed companies. However governance, like many other things, isn’t a set of statements that’s written on a piece of paper, laminated and hung on a wall only to be forgotten. Governance is something that the company has to relentlessly demonstrate every day. There are multiple so-called “moment of truth” that will confront employees and management each and every day. It is through the execution of “well-governed” practices that the truly great company emerges.  The founders of the company have to practice it every day. It is hard work especially for a startup when cutting corners to achieve a short term goal seems very appropriate. But remember that there are others in the company who are watching and observing. And if the right company culture, namely one of a well governed company, is to be really brought into play, then each and every action has to be weighed against the yardstick of governance.  One of the critical issues relating to governance in a startup comes from the fact that the founders tend to identify themselves with the company. It takes emotional maturity to see that the company and the founders are two distinct entities with different interested stakeholders. What is therefore good for one might not always be good for the other. So, the realization that “what’s good for the company is almost always good for the founders” and that “what’s good for the founder isn’t usually good for the company” is what makes or breaks the governance issue.  What do you think?

______________________________________________________________________________Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

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This article was first published in The Financial Express

This

BUZZ WORD COMPLIANCE

BUZZWORD COMPLIANCE

Sanjay Anandaram A friend narrated this to me this morning. He was on a business trip to Taiwan and bumped into a colleague from a much larger division of the same company at Taipei airport. After exchanging some chit-chat, the colleague told my friend that he was likely to be now based out of Taipei as it was an important part of the division’s “China strategy”. On further enquiry it transpired that instead of long distance phone calls and faxes and emails to Taiwanese vendors and partners from Bangalore, he would now be able to visit them and make local phone calls and send local faxes and email! Ostensibly, this would result in enhanced relationships leading to furtherance of the division’s “China strategy”. One of the banes of our times has been the gross trivialization of word meanings. Words like “innovation” and “strategy” have been almost trivialized into banality – almost every trivial act of improvement or approach is either an innovation or a strategy. There’s this almost manic desire to being “buzzword compliant” in speech. It’s almost a ritual that one feels one has to go through to be accepted as an inner member of some exalted club. Entrepreneurs too easily fall prey to the usage of buzzwords. Sample these lines from some business plans I’ve received:QUOTE

  1. We See this as a Unique Opportunity to Build a Service Model that Boxes ‘IBM’, SAP, ‘McKinsey’ & ‘Silicon Valley’ to Serve Healthcare Players in India & the USA-EU, Specially the SME
  2. Our Financial Managed Services Leverage 3 Innovations that Enable Business Technology Services to be Delivered on Internet (Virtualization, Software-as-a-Service, IP Telecom) Media & Economics. We Inject Financial Domain Best Practices & Models into the Services
  3. We Will Offer a Range of Multi-Channel Service Chain Offerings to Both Supply & Demand Chain Customers Combining Customized Products/Services for Profit-Making in the Aftermarket
  4. Our Innovative Organizational Initiatives that include (i) a hard-to-find engineering team with experience of integrated dual-shore software engineering and (b) Atypical sales, patent management and HR initiatives tailored to effectively leverage tools, solutions and high-end engineers

UNQUOTE I, for one, am not sure what to make of such language. At an event recently a budding entrepreneur asked me “Will VCs fund incremental innovation or quantum innovation?” I had to tell him that VCs only fund businesses that they believe make money!  The point I’m driving towards is that presentations and business plans need to be written in simple straightforward language that drive home the point that the team, market opportunity, the offering of the company, the business & revenue model, all support the creation of a valuable business. Given the short attention spans of most people (especially VCs!), it is important to grasp the attention of the reader in the shortest possible time without having the reader reach out to a buzzword dictionary to decipher the language. It is also a testament to how well the entrepreneur and the team have understood the business and the value to customers. Only when something is very well understood can it be explained in very simple terms that even a lay person can make sense of. If customers, investors, employees and others cannot understand what the value proposition of your company is how likely are they to buy the product, invest or join your company? One of the tests that VCs use is to ask the question: “What’s your elevator pitch” i.e. explain your business to me in a few short sentences (in the time it takes the lift/elevator to travel to the desired floor) in under a minute or so. If one has to draw maps and figures and language to explain the offering, there’s a problem. It is said that Einstein explained his Theory of Relativity to a lay person thus: If you are sitting for an hour on a park bench with someone you love, it seems like a minute; If you are sitting for a minute with someone you hate, it seems like an hour! My theory explains this phenomenon.  Now, can you describe your business in simple terms? What do you think?

______________________________________________________________________________.Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own

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 This article first appeared in The Financial Express 

CONFLICTS OF INTEREST

CONFLICTS OF INTEREST

Sanjay Anandaram 

Julius Caesar the great Roman emperor divorced his wife Pompeia as heconsidered his honour and position compromised because Pompeia was indirectly associated with a trial for sacrilege. He explained that his wife should not only be free from sin but from suspicion. Given the state of our political system, this kind of requirement seems laughably quaint. But if the system is to improve, keeping this principle in mind is crucial because it is a pre-requisite for good governance in the political as well as the business spheres.

 In the last Indipreneur column, I had talked about the need for more entrepreneurs to enter the political sphere. But, and there always are buts, this comes with a significant caveat. The caveat of suspicion of “conflict of interest” becomes therefore especially applicable to those entrepreneurs who’ve decided to be in public service. Our courts which enjoy enormous credibility amongst other institutions in India have a well established system in this regard. Recently, in the case of Ajmal Kasab the Mumbai terror accused, judge Mr M L Tahiliani debarred lawyer Anjali Waghmare from defending Ajmal Kasab on grounds of conflict of interest since she had accepted the legal brief of a surviving witness in the Mumbai attacks.  

It would be rather unprecedented for a CEO of a startup that’s in the process of finalising its initial funding to suddenly declare that he would be involved in another venture in an altogether different area and that he or she would be able to do justice to both adequately. Both the existing startup and the new venture call for passion, active and intense hands-on involvement if they are to truly deliver on their promise. The new venture will require the CEO to spend over a 100 days a year in another city and spend an enormous amount of time catering to a totally different set of stakeholders than in his startup. On what basis can the respective stakeholders believe that the CEO will deliver on the promises in spite of the enormous pressures and constraints? Now, what if the new venture was politics and that the CEO was standing for elections with the hope of becoming a Member of Parliament?

 

Stakeholders want to see focus and be confident that the person in charge is concentrating on delivering the best possible results for them. In addition, people around the world frown upon the CEO having multiple interests especially when there’s enormous potential for serious conflicts of interest issues to arise.

 Good governance requires interested parties to recuse themselves from being involved in any situation or decision that can cause a conflict of interest. For example, can a CEO be part of the committee that decides on his own compensation? Can a CEO be involved in writing his own appraisal or that of a subordinate who’s a relative? Should a CEO do business with a company run by family member or a very close friend? If so, what should be the safeguards? Is the relationship at an “arms length?” to address concerns of conflict of interest and prevent suspicion? Increasingly, companies are realizing the virtues of being transparent and above board. Entrepreneurs in politics will hopefully bring about the much needed impetus to the issue of good governance. An issue that cannot be overstated. Therefore, they need to set the standards for the rest of the political system to follow.  Mr Rajeev Chandrashekhar is well known as the founder Chairman of BPL Mobile. He’s a  Rajya Sabha MP from Karnataka and currently Chairman of Jupiter Capital which has  interests in infrastructure (transportation, logistics, utilities, aviation, electricity),  defence technology and media. His company is developing the first non-metro greenfield airport in Karnataka at Hassan. Mr Chandrashekhar is backed by the BJP the current government in Karnataka.  Mr Vijay Mallya Chairman of Kingfisher Airlines is a Rajya Sabha MP and on the Parliament Consultative Committee on Civil Aviation.  Captain Gopinath founder of Air Deccan (merged with Kingfisher Airlines) is now the founder CEO of Deccan Express Logistics which is in the process of raising Rs 300 crore in initial funding out of a total estimated Rs 1000 crore over 3 years. The business of logistics and air-freight involves central and state government regulations. Captain Gopinath is a Lok Sabha aspirant. There are potential conflicts of interest in the above cases. Shouldn’t the principle of Caesar’s wife be applicable? Can the CEO do justice to two sets of diverse stakeholders (employees and investors in one and the general public in the other) without compromising one or the other? 

What do you think?

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Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

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 This was first published in The Financial Express 

INDIAN CRICKET NEEDS A KERRY PACKER

INDIAN CRICKET NEEDS A KERRY PACKER!

Sanjay Anandaram 

That cricket is a religion in India is a cliché. That cricket exists as an “international” sport largely because of India is a fact. More people, perhaps, play cricket in Mumbai’s Shivaji Park than there are first class cricketers in Australia. Yet how is it that the country where its been played in for over 100 years, that has tens of millions playing cricket, many more fanatical millions following it, that generates billions of dollars, who’s media gets on hyper-drive when India plays, that provides relevance to sundry has-beens and wanna-bee experts, that has one of the world’s richest sports bodies “controlling” the sport, does not have a world dominating team like the Australian team? Especially when there are only 8 countries in the world really playing the sport! How is it that not one noteworthy innovation in cricket has emerged from India – be it in technology (e.g. stump-cams, hawk-eye, snickometers), team selections (e.g. separate teams for one-dayers and test matches), score calculations (e.g. Duckworth-Lewis system), TV broadcasting, sports kinesis experts (Murali’s doosra had to be analysed in Australia by the experts),and so on? The best balls and bats are not Indian. Even the way the grass is cut (e.g. chess-board pattern seen on overseas grounds) is not innovative!

 

The answer, in my opinion, lies in the total lack of innovative and entrepreneurial thinking in the way we manage the most popular sport in India. The way we manage any other sport is not even sad. The farce is incredibly tragic and sordid. Just look at the recent Asia Games fiasco. Surely innovations have not originated from India because of a lack of talent and capability. Innovations have not occurred because we have a corrupt, petty, feudal, cronyism, bureaucratic patronage and politically managed system that continues to deal with the country’s number 1 sport. Where even the awarding of TV rights and elections is not without terrible drama. In any business venture demanding customers rapidly drop products that are 2nd rate and produced by inefficient producers and driven by marketing hype. Yet, how is it that we continue to accept the way cricket is run in this country? Are we not demanding consumers of the sport? Does it only take hyper-ventilating media anchors and coverage of trivial off-ground charades to make us forget the dismal state of cricket in India?

 

In the late1970s, a man called Kerry Packer revolutionized cricket. He set about changing the way the game was played and has been played since. He brought (bought?) the world’s best cricketers to form teams, introduced night cricket under flood-lights, white balls, limited overs, coloured clothing (the fossilized establishment called pejoratively referred to it as pyjama cricket), cheer-leaders, great in-your-face marketing (“Big boys play at night”, Night cricket is played with two balls” are some of the memorable advertising by-lines from that period), use of technology (including on-pitch microphones and stump-cameras), top class commentators and multiple TV cameras with well-trained cameramen behind them for an incredibly viewing experience for both the in-stadium and at-home viewing public. Kerry Packer was a billionaire Australian media baron (he owned Channel 9 Sports in Australia) and more importantly, an entrepreneur who was not afraid to take risks. Cricket has never been the same since the Kerry Packer era both for the paying public, the TV viewers and for the cricketers themselves.

 

Isn’t it high time that we too had a Kerry Packer to shock our comatose and moribund system into action? Isn’t it high time that we too had a top class team with an entrepreneurial mindset at the top to change the status-quo? A high caliber professional top management team that has the passion and vision to develop and sustain a set of unique abilities that allows our sports teams to dominate an opportunity. A team that can think big, that does not treat competence as a substitute for loyalty, a management team that understands the needs of modern sport and the importance of science and technology, deploys innovative training and management practices, and can build an efficient and organized development and delivery system of high caliber sportsmen. Is this that different from any other innovative & entrepreneurial venture?

 

What do you think?

______________________________________________________________________________Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

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 This article was first published in The Financial Express in 2007 before IPL and Lalit Modi happened to Indian cricket!

ENTREPRENEURIAL MBA?

ENTREPRENEURIAL MBA?

Sanjay Anandaram 

An increasing number of universities and colleges are offering courses in   “Entrepreneurship” as part of their business education. Around the world, business plan competitions are held by academic institutions at regular intervals. The wide publicity given to “entrepreneurship” in recent times has resulted in entrepreneurs gaining respect and being acknowledged as critical participants in a country’s economy, wealth and job creation.

 

But does taking a course or two in entrepreneurship while pursuing a business degree make one a better entrepreneur? My own view conditioned by many years of experience is that a business degree, with or without courses in entrepreneurship, is not material at all. Then are all these courses useless? Well, no they’re not! They’re useful for learning and understanding multiple aspects of entrepreneurs and entrepreneurship but don’t, in any way, make one a better and successful entrepreneur. A small percentage of any population become entrepreneurs while the vast majority become employees. There’s nothing good or bad or right or wrong about this – it is just the way it is and indeed should be as both entrepreneurs and managers-employees perform complementary activities in the growth of an economy.

 

It is said that entrepreneurship cannot be taught but it can be learned. And what better learning environment than the real world, through interacting with other more or differently experienced entrepreneurs, customers, investors, partners and suppliers?

 

Entrepreneurship is not a traditional discipline with theoretical constructs unlike say, engineering where one needs to spend many years in a classroom learning the sciences and mathematics. Entrepreneurship is more an art therefore than a science. The study of entrepreneurship offers opportunities for researchers and academics though! One doesn’t, for example, learn swimming from reading books in a classroom but by being in a swimming pool with the help of a coach. But even the best coach in the world will not and indeed cannot prevent the novice swimmer from unintentional and painful swallowing of water the first few times! Without that experience of “drowning”, learning from others and then through rigorous practice, it is impossible to be a quality swimmer.

 

In countries like India, most students doing their MBA have no or little work experience. Their ability therefore to spot opportunities, appreciate scenarios, develop and leverage relationships is limited compared to those with experience. It also doesn’t help that academic institutions in India are insulated from industry, entrepreneurs and the entrepreneur eco-system.

 

Yet, why are investors almost always are biased in favour of entrepreneurs with degrees from well known business schools? The reason is that, all other things being equal, the degree is a filter – demonstrates that the holder has passed other stringent selection criteria. It is obviously not perfect. On the other hand, many professional  investors and many senior executives in the corporate sector are usually business school alumni so having a degree leads to membership into alumni networks that can be leveraged by the entrepreneur. Business schools teach students to analyse situations and excessive analysis leads to paralysis. Business schools teach students to   manage risks. Business schools, however, don’t teach students to take risks while solving  problems and addressing opportunities because risk-taking cannot be taught. In real life, decisions are taken with incomplete information with imperfect people being involved. Decisions are taken on a “leap of faith” basis and persevering when all analysis suggests otherwise requires self-belief and conviction. These cannot be taught in a class-room situation. They can only be learnt through experience, introspection and with the help of a mentor.

 

Now here’s an exercise worth doing. Business school education in the US is about 100 years old and about 45 years old in India. During this time, how many “successful” companies, across all sectors of the economy, were founded by MBA entrepreneurs in either country? “Successful” meaning wealth creators and not lifestyle income-substitution businesses like consultancies. I believe that this number would be a very small fraction.

 

keep in mind therefore that while there are many attributes of a successful entrepreneur, having a MBA isn’t one! What do you think?

 

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Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

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 This article was first published in The Financial Express 

DIVERSITY IN HIRING

One of the things that intrigued me when I visited a startup recently was the amazing conformity and homogeneity on display. Most of the team members were from a particular community, from a particular part of the country, had studied in the same set of colleges and had worked in similar roles in similar companies prior to this startup. Only two of the more than 15 members I met did not conform to the profile of the majority. The CEO subsequently mentioned that one of them had resigned and was on his way out soon while they were looking for a replacement for the other. 

The above may not be a very typical case but it is also not atypical. Companies are started by people who share a certain set of common bonds and vision. These common bonds are a function of backgrounds, gender, age, education and prior experiences. In addition to these bonds, there are other bonds e.g. of community. The bonds of community are generally perceived to provide something that the other bonds don’t. Namely, that of trust and loyalty. There’s an implicit assumption that people of the same community can be trusted with confidential information about the affairs of a company. There’s a self-policing and self-supporting mechanism at play that has history, family and social forces behind it. It is therefore not unusual to see strong representation of members of a community in businesses where these values are prized above all others. For example, the Jain community in the diamond trade, the Reddy community in real estate, the Marwari community in jute. Even where there are professionals employed by the business, the reigns of the company are in the hands of members of the community. Several  Parsi founded businesses are a case in point here. The former Satyam board and executive leadership too were heavily biased towards Andhra members.

 

However, there’s a difference between loyalty and competence. Between a professional attitude that keeps the company’s interests in mind and respects all and clannish  attitudes that tend to favour those from a particular group. Diversity is an important element in hiring. There’s strong empirical evidence that suggests that a diverse workforce is more innovative and productive. Silicon Valley in particular and the US in general are great examples of the success of diversity. Meritocracy has no skin-colour or community. Having homogeneity and conformance mindsets is not very conducive to innovation but more suited for say, ordered production and shop floor environments. Less diverse workforces in say Germany and Japan therefore are far less innovative than the US. Look at the top leadership of US companies and the top leadership elsewhere for another view of the role of diversity in workforces. One of the big challenges for our IT services companies is create and manage a diverse workforce as the world they inhabit becomes increasingly global. Equal employment opportunity and wanting to hire the best for a role are complementary.

 

India is fundamentally a very diverse country and therefore as our country, minds and attitudes grow, the workforces in our companies will increasingly reflect this. Startups too should keep this issue of diversity in mind especially if they’re to innovate. Hiring should be for the job as opposed to fitting a person into a job. For example, there’s a tendency for some youth oriented businesses to hire young people for various jobs under the assumption that they would appreciate the customer and company better. These companies tend to confuse youth with youthfulness. Most of the great youth oriented businesses like MTV, Disney, Virgin Mobile are in fact run by “boring” old people who are youthful!

 

As Mitch Kapor, founder of Lotus, says: One must be careful not to create mirrortocracies in place of meritocracies. Mirrortocracies are companies where people tend to hire people like themselves as opposed to hiring the best people for the job. The company will inevitably suffer as a result. Hiring and sustaining a diverse workforce requires an open company culture, transparency in decision making and equitable governance. We need to take steps fast in that direction.

What do you think?

This article was first published in The Financial Express 

Marc Andreessen raises $300MM for early stage investments

Very interesting news. In this climate of fear, uncertainty, and doubt, noted entrepreneur Marc Andreessen (who led the development of the first web browser and co-founded Netscape, among other things) and Ben Horowitz have raised 300 million dollars for early stage investments:

Sources said the fund–which was nicknamed “Project A” but is actually called Andreessen Horowitz–will be $300 million. It is $50 million over the $250 million he and Horowitz had planned.

Several major institutional investors–from universities, for example–have invested large chunks of up to $20 million or more, while a spate of Silicon Valley luminaries has put in amounts of $1 million or less.

The quick completion of the fund raising, in the midst of a national econalypse, is a good sign perhaps for the forward-leaning culture of tech, which has seen some pullback by VCs over the last six months.

They certainly have the entrepreneurial chops, and are talking the talk about doing early stage deals and being patient:

His new effort will focus on early-stage investments, he said in the interview with Rose, noting that “our claim to fame is, we’ve actually, you know, by entrepreneurs for entrepreneurs, we’ve done it, we’ve been on that side of the table for a long time; we know what it’s like.”

Andreessen said then that he and Horowitz had made 36 investments over the last three years of up to $200,000, but that his new firm will make up to $1 million bets on companies they decide to invest in.

Plus, he said then he would be patient: “Like with our new fund, if we fund a company today, we’re thinking about a return in seven to 10 years, so we can go through three or four or even five years of economic downturn, as long as, at some point, we come out the other end.”

Entrepreneur-Board Dynamics

ENTREPRENEUR-BOARD DYNAMICS

Sanjay Anandaram

 

You’re delighted to have successfully raised capital. You can now execute the plan and grow the business. One of the first things you do is hire senior sales and marketing people. You negotiate their compensation with them and are about to issue an employment contract. Then you remember that you’re supposed to get the approval of the board before hiring certain categories of people. The board does not approve the hiring. You feel humiliated, dejected and angry. The board is upset that you didn’t consult them before taking the decision to hire. Soon, the relationship sours.

 

You get irritated and annoyed with some board members because of the enormous micro-managing that they do. It seems that every little decision needs to be run past the board leading to frustratingly long decision making. In addition, you feel upset that you are no longer the driver of the company but just enacting someone else’s decisions. Not a conducive environment for a company to blossom in.

 

First and foremost, it is important to realise that accepting capital from an investor will lead to their taking board seats in your company. Often times, your company might not even have a board! So a board will need to be formed and board formalities and procedures as enshrined in the shareholders’ agreement will need to be followed. Having a board is supposed to serve several purposes. These range from corporate governance (“Is the company compliant with the law?” “Is the largest vendor to the company also the CEO?” “Is the company being run effectively and efficiently?”) to financial discipline (eg. regular reporting of financial data and management analysis thereof) to advice, counseling and develop and leverage relationships.

 

It is important to understand that there needs to be total transparency and trust in the relationship between the board and the entrepreneur CEO. This implies that information is shared in advance often times going beyond the legal obligations of the agreements. Bad news is to shared before any good news (“we just lost our best sales person” or “we lost two big sales orders this week” to “we will not be able to meet our numbers”) and not camouflaged if trust is to be developed. The guidelines of operation need to be also discussed and understood between the two parties. Back-seat driving is to be avoided by the board members by constantly advising the CEO about each and every activity. Another no-no is micro-management where, say, the CEO is questioned on the compensation being paid to each and every individual in the company or requiring approvals from the CEO even to buy office stationery! This is absolutely not good for the company. The CEO needs to be polite but firm in case the board members demonstrate back-seat driving and or micromanagement. It is usually useful to have frequent meetings in the early days to ensure that both parties are comfortable with the protocol being followed.

 

The entrepreneur needs to be therefore be very careful prior to accepting money from an investor. As mentioned before in these columns, it is imperative for the entrepreneur to do QCs (quality checks) on VCs! Not just on the firm but on the individual member of the VC firm who will be dealing with your company. There needs to be due diligence by the entrepreneur as well on the investor as well.

 

It is a good idea to have a mix of investor, founders and outside independent directors as board members in the company. Having an odd number of members helps break any deadlock. Usually, 3 to 5 members is sufficient for a young company. Independent directors are usually compensated with some stock or cash or both. It is a good idea to have some stock compensation as it aligns the interests of the board member with that of the company. The board should demonstrate maturity, agility and skill set in decision making that’s relevant to the small growing company. Having the right balance in the board is as important as having flexibility as well since many times, things don’t go according to plan. There needs to be an understanding of the business, the entrepreneurial situation and a realization that no business plan is cast in stone. There needs to be flexibility and adaptability by the board to the changing situation inside and outside the company.

 

What do you think?

 

Right CEO?

The Right CEO?

By Sanjay Anandaram

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Most entrepreneurs (especially wannabees) believe that they should naturally be the CEO of their venture because “hey, its my idea and my company!” Really? are you indeed the right CEO to steer your entrepreneurial dreams to success?  Entrepreneurial ventures are usually created in either or both of these ways: you get “THE BIG IDEA” and then decide to talk to some friends and colleagues to get them to join or, you together with some friends decide that its high time you “did something” and then figured out what to do. Sometimes, both of these happen in parallel. But whichever way the venture forms, the thing to remember what, according to most VCs are the 3 most important factors in a startup:  “people, people, and people”!  Lets talk about people. However, most startups don’t start with all-star teams. This team will need to be together through thick and thin and must share a common vision. Look for people who thrive on risk, are optimists, have integrity, have dogged persistence, have energy and enthusiasm. But make sure they pass the “chemistry test” with you – do you enjoy hanging out with each other? Share jokes together, go out for a drink together…? A single poor member can ruin a company – the road to startup heaven is littered with startups destroyed by tensions within the management team. Important lesson: If the chemistry isn’t right, the arithmetic will never work! You have to decide, and early on at that, who ought to be the CEO. Usually, good friends get together and do a startup. The chemistry is great, there is shared vision and commitment and there is no real decision making process or hierarchy. This works well initially but there needs to be someone who is more equal than the others. This is not as easy as it sounds as equity holdings in the company are a direct function of responsibility. So, another set of questions to ask yourself and of the (potential) team members: Are you willing to be replaced by more professional management if need be to help the business grow? Will you move aside if proven to be less than able? Are you open to hiring your own replacements? After all, your commitment must be to creating a successful business and you should be willing to do the right thing for the business. What is good for you need not be good for the company while what’s good for the company will always be good for you! All bottlenecks are at the top of a bottle! It goes without saying that the quality of the people -especially those at the top- determine the success (or failure) of a company. This much is well known and understood by all. And it is usually not the salaries that attract the best.  Attracting top talent to a startup is a function of several factors: the quality of the other senior executives, the investors, the advisors, the challenge on hand, the work atmosphere, and of course the compensation. The quality of the people around the CEO is a surrogate measure of the quality of the CEO. Often times, the initial team is created out of a few friends, colleagues and associates of the CEO. However, while all of this is wonderful, it is worthwhile to keep the following in mind while creating the team: - Loyalty is no substitute for competence. Usually, the team is picked by the CEO based on his/her sense of comfort with the person. “Why were you selected as the CEO? Who selected you as the CEO?” How would you respond to this question? - Culture of empowerment and Sharing. The best people want freedom to take decisions, to work in a professional environment, to be part of the success they’re helping to create.   Remember the fable about the goose and the golden eggs? Great CEOs are interested in creating and nurturing the geese that lay these golden eggs for the company; Also-ran CEOs are interested in the golden eggs. We all know what happened to the goose when the farmer and his wife focused on the eggs and not on the goose! 

What do you think?

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The article was first published in The Financial Express in 2006