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8/14/2019 Entrepreneur April 2009
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They say choosing your spouse is the most important decision you will
make in your life. Similarly, choosing your co-founder(s) is the most
important decision you will make while building your startup, since
one could argue that at least for some period of time, you’ll be
spending more waking hours with your co-founder than your
significant other. Great partnerships are like marriages, they need a lot
of common ground, strong mutual attraction and a willingness to work
hard - especially through the inevitable issues.
You first need to dispel the delusion that you don't need a co-founder.
You do. You may have all the requisite skills, but even then, co-founders
help spread the work and make better decisions. Sure, you can talk to
your brilliant self, but that's not as effective. The selection of co-
founder(s) is one of the key determinants of long-term success in a
startup. But if you have the wrong guy, that's a hard problem to get
over with.
Knowing them beforehandThe idea is that by having gotten to know the person, you’ve already
had a chance to see how they work, how they think and whether you’re
likely to get along. This makes your college or workplace friend circle a
very useful hunting ground for a potential business partner. Consider
Chad Hurley, Steve Chen and Jawed
Karim, for instance. Chen and Karim
were classmates at the University of
Illinois, who then met Hurley at
PayPal, where all three were
employees. They then founded
YouTube, which received funding from
Sequoia Capital, whose partner Roelof
Botha, who also joined the YouTube
board of directors, was the CFO of
PayPal.
You better be good friends with them
as well, since you're going to spend a
lot of time working together. Also,
there will be times in the startup lifetime that will test your relationship
with your co-founder, so make sure you understand the stakes before
going in.
Someone you can trustMistrust can be a cancer for your startup. The good news is that you
can avoid it by choosing a
founder you trust, and then work
to foster deeper trust in your
relationship over time. Keep in
mind that it’s a never ending
process.
Play fair. You can’t expect others
to care as much about the
business when they don’t see themselves getting a fair share. This goes
hand-in-hand with trust.
Great minds think alikeThere should be aligned interest and commitment from your co-
founder. You both have to (at some level) be committed to not only
building a company, but the same company. If one of you wants to
create a company you run forever (and reap profits) and the other
wants to take a shot at a high-flying startup that gets sold or goes public
some day, you’ll have a problem.
Of course, co-founders may influence each other’s decisions in this
context. Afterall, Larry Page’s "BackRub" might just have remained a
research project on citation backlinks in research papers, with limited
commercial value, unless Sergey Brin, a fellow Stanford Ph.D. student
and close friend, had not come to the rescue and worked with him to
make it what we today know as Google.
Choose your complimentA co-founder should be strong in areas you are not. A great compliment
to your skills is someone who
loves to do things you hate,
someone who makes the
sum of your parts greater
than the whole. If Steve
Wozniak had remained the
nerd who was s imply
sceptical of the idea of selling
computers, and had not
been convinced by Steve
Jobs, the born-entrepreneur, to come up with a company so that they
could at least say that to their grandkids, neither would’ve conceived
Apple Computers independently.
Make sure at least one of the founders has the technical expertise. This
is so you don't have to try and outsource the actual product
development. Similarly, make sure at least one of you can sell. No great
idea is of any use to a startup that can’t
market it properly. Effectively, you need
to identify your “type”, and look for the
corresponding complementary skill in
your partner.
Practice, not just preachYou need a co-founder who can get
things done. If you have a great idea,
and you want to bring it to life, findsomeone who is passionate about your
vision, and who is willing to work for it.
Since startups involve lots and lots of
work (some fun, some not so fun), part
of the value of your co-founder should be that the work can be
distributed. If your co-founder is too “strategy” focused too early, you’ll
get buried because there’s too much to do.
Passion is easy to spot. Years after the two had befriended each other in
Lakeside School, Seattle, where they used to tweak the school’s
scheduling program to place themselves in classes with more female
students, and had faced several penalties for other naughty uses of
their programming skills, one of them dropped out of Washington
State University and called on the other (in Harvard then) to do the
same, for starting a venture together. Both understood each others’passion and immediately complied. They were Paul Allen and Bill gates,
and thus we have, Microsoft.
Talk the talkHave the hard discussions around equity, compensation and
responsibilities early. This stuff does not get easier over time – it gets
harder.
How should the division of shares be controlled? Who will make the
decisions? What happens if one of us leaves the company? Can any of
us be fired? By whom? For what reasons? What are our personal goals
for the startup? Will this be the primary activity for each of us? What
part of our plan are we each unwilling to change? Will any of us be
investing cash in the company? If so, how is this treated? What will wepay ourselves? Who gets to change this in the future?
Deferring these conversations is a great way to ensure problems later.
So what are you waiting for? Step out and start looking!
Two’s CompanyAuthored by Shrey Goyal , this article explores the importance of choosing the right co-founder for your dream venture, and
enumerates the various points which you may have to consider before committing to a partnership for your company.
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h t lT e recent episode of fraud by he Chairman of Satyam and a l thee s a dsev ral other fraud perpetr te by other entrepreneurs around the
l i e i T swor d s a shame on the name of entrepr neursh p. hese i olated
s a r iepisode have a tendency to m ke othe entrepreneur's l fe tougher.
h i a e l tT ey br ng a b d name to th ilk. They are usually fol owed by ougher
r nregulations, which have a tendency to rest ict freedom of busi ess
h f a e o rc oices or entrepreneurs. They m k c nduct of business mo e
e o r k r m lexpensive. Financi rsto increase the is p emiu and genera ly make
o e e g o y. b eentrepreneurs gr v l mor to et at their m ne All ecaus , someone
r n r h hgot g eedy a d unsc upulous. T e price t at genuineentrepreneurs pay
r t efo he fault of th se scamsters is so huge that it is
pworthy of a self disci lined vigil within the
mco munity itself. There is a case for them to
a t m vbecome c ive police en of themsel es and blow
h t ythe w istle when he see one of their cohorts
behaving funny.
g e n g nIn my lon exp rience fu din , raising fu ds and
v t erating the entrepreneurs o er the pas thirty y ars, I
s nhave seen two tages when the bug of cheati g
h h d sbites t e entrepreneurs ar e t for different
p n e hreasons - at the initial hase and o ce succ ss is established. When t e
t t r o m teproject is in the ini ial phase he e is a f cused pursuit of a li i d
i bobjective – may be a small project- dr ven y a passion to succeed and
i se h egambling everyth ng to increa t e prospects of success. Th re is not
i d a rmuch care g ven to forms, rules an norms, perh ps not affo dable as
l a r ewe l, s typically entrepreneurs sta t poor, are up against establish d
a e h ipl y rs who are muc more powerful. Some entrepreneurs m stakenly
h t i to e s c ,believe t at he r only way succeed is to pursu ome short uts
n t r ewhich seem to work for sometime. Unfortu ately the road tha g e ts
nt n ae repreneurs i Indi is often littered with obstacles and tempting
a o d g y to h ptach nces f r wrong oin and man fal l prey t ose tem tions and
m hcompulsions. This it seems has beco e the norm rather than t e
sexception. It is unfortunate because, tho e entrepreneurs of lesser
t i ss y a l ocompe it vene and objectivit do f l prey to this and compr mise so
s t emuch of their busine s fu ure. They nev r learn the right way of doing
s h o d s c p b e o ubusine s. T ey do n t un er tand om etition and eli ve c rr ption to
l n . d p g k lbe a egitimate part of busi ess They donot evelo stron wor cu ture
a h t n l mand le dership wit in their organiza io , fi ling the instead with
c p i r iin om etent staff that w ll lea n to man pulate rather than work smart
s f lto ensure business success. Mo t harmful o all they wi l earn for
v e ta h m nthemsel es an ill r pu tion, w ich ay be tolerated, but ever
e t r b c e nrespected and henc will no eve e the hoic partners for fi anciers
n mandbusi ess en.
h sh f The second stage when entrepreneurs go off track is w en the flu o
c s p s e isuc ess many time owers them with a ens of invincib lity. There is
i r e l c y a seither a cool ng off o a phas of comp a enc th t set in or a
a p p , smegalomani that rods them to lay 'god'. In either case focus hifts
o a u h e d t taway fr m man ging the b siness wit th e ge that ensuredi s ini ial
c d d r isuc ess, an business falters. Instea of co rect ng that in the right
n r e e s r o uma ne , entr pren ur es rt to short cuts that their newly acq ired
a s o c'power status' offer them nd et down the path of wr ngdoings whi h
n a l loften bri gs them to co lapse. Some of the we l known global
l nt l nt f phi a hropists, such as Rockafel ers we through this process o
o e r s o o r ometam rphosis, r po tedly tarting f as bo tlegge s, but wh them
e t m urede med he selves before it was too late and earned a respectf l
b l ntplace in society and history y becoming phi a hropists!
i a o t e tThe niti l period f struggle se s th tone for he character andbehaviorg i c e e s. Pr i iof entrepreneurs throu h the l fecy le of th ir v nture Azim emj n
l e te v e k a othe ear y 80s, is r pu d to ha e d clined to 'ta e c re' f some corrupt
h y r o a t l ta f officials in is h d ogenated il plant in Karnatak in he ear y s ges o
e i ehis entrepr neurial l fe. As a result, the officials closed the plant on fals
charges of flouting of excise rules. Azim Premji did not buckle down; let
the plant remain shut, while fighting the case legally. It took reportedly 3years for him to come out victorious, thanks also to the support of the
employees of the plant who were also suffering, and reopen the plant.
While it was painful, the episode surely sent a clear message to all that
Azim Premji is not to be messed around and I seriously doubt if he has
ever been harassed on that front ever after. More importantly, it is still
remembered and recounted as a legend in principle based
entrepreneurial behavior. The way I look at it, Mr Premji invested the
suffering caused by that incident, including massive financial losses in
creating a credibility capital, from which he is still reaping benefits. This
early strength in his resume ensured businessmen
and financiers around the world respect Mr Premji
as a trusted business partner, aiding him
considerably in his ventures to date.
While there are connotations of ethics and moralityassociated with the notion of integrity, I am
focusing on the competitive advantages of integrity
as a corner stone of entrepreneurial behavior. Once
an entrepreneur earns the credibility as a person of
integrity, doing business becomes that much
easier. Partners will seek to do business with such an entrepreneur who
they can trust, and might be even willing to pay a premium for that
feeling of comfort. Financiers will vie with each other to provide funds,
as they know their money is relatively safe with such an entrepreneur.
Once the entrepreneur sets the limits on acceptable behavior based on
principles of integrity, he and his team in the organization know that
they can not resort to short cuts and need to be genuinely competitive
to succeed in business. This makes them seek real competitive
advantages and conduct business to succeed against not only other
routine businesses, but also some that may 'enjoy' advantages due to
practicing business without integrity. This is not easy and I am not asking
the entrepreneur to be a monk.
Let us take a live example from the field of road contract business. Let us
assume there is one contractor (called Mr I) who behaves with
completely integrity and there are others whose integrity quotient lets
say varies from awful to 'godawful'. The challenge that Mr I faces when
he bids for a contract are that he needs to take into account the
possibility that the bidding process is perverted to favor the others
because they may ply bribes, or for someone in the bidding organization
to let these corrupting bidders know the lowest bid amount, so they can
quote a marginally lower prices and win the contract, etc. Can Mr I can
overcome this challenge while maintaining integrity? Yes. There are
many things he can do, including, finding technological solutions to
render road building less expensive and hence can quote so low that
others without that technology may find it unattractive to bid at those
prices. He could resort to the new provisions of Right To Information
(RTI) to shed the required extent of transparency in the bidding process.
He could build high quality roads on a pro-bono basis to demonstrate
the longevity and riding comfort, and hence win the support of the
users, who could be used to campaign for him. Incidentally these are
ideas I picked up from several good contractors' real life experiences.
Let us not kid ourselves. It is tough to be straight. But who said being an
entrepreneur is a cake walk? But setting your behavior right from the
beginning, though might make it tougher, straightens a lot of stuff for
the lifetime of clean, successful business. Giving into pressures or
temptations to cut corners usually sets entrepreneurs on a slippery slide
that look so inviting and harmless at the beginning and then keepsgetting harmful over time to what Ramalinga Raju calls the 'riding the
tiger, without knowing how to get out without being eaten'
phenomena.
Integrity - A Corner Stone of EntrepreneurshipBy Mr. R. Ravimohan, MD and Region Head of Standard & Poor’s South and South East Asia division , and also the appointed
chairman of the CRISIL Board of Directors. In wake of the recent Satyam scandal that has caught the entire corporate world in a
flurry of uncertainty, Mr. Ravimohan discusses about the moral issue that every entrepreneur today needs to address.
Mr. R Ravimohan (Left)
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tIn a start up it’s important to maintain the balance between interes s of
operating the company within the fiscal budget and attracting,
developing, retaining, and rewarding high quality staff through wages
and salaries which are competitive with the prevailing rates for similar
employment in the labor markets.
If you have a startup, cash is not something you can afford to squander.
But at the same time you need to hire good employees, who will share
your vision about your startup and work with you to reach there.
nIn general there are four tools for employee *compensation amely,
1) Base salary
2) Short term incentives and bonuses
3) Long term incentive plans (LTIP)
4) Employee benefits
Start ups need to work on the forms of non cash compensations.
Employee stock options (ESOs) and Employee stock ownership plans
(ESOPs) come under this head. Furthermore you may frequently find it
necessary to borrow money in order to finance corporate growth. One
disadvantage of *debt financing is that repayment of the loan principal
eis not a deductible expens . An ESOP can be used to mitigate this
problem by having the company issue newly issued *stock or treasury
stock to an ESOP. The resulting tax savings can then be applied against
uthe principal payments so that tax-deductible r pees are used to pay
part, or all, of the loan principal.
An ESOP is nothing but an option to buy the company's share at a
certain price. This could either be at the market price (price of the share
currently listed on the stock exchange), or at a preferential price (price
elower than the current market price).If the firm has not y t gone public
(shares are not listed on any stock exchange), it could be at whatever
price the management fixes it at.
The ESOP is particularly advantageous for startups, whose growth
requires the reinvestment of profits, resulting in a shortage of cash
available for employee benefits.
There are many ways in which this can be done. If your company hasalready gone public, suppose you buy shares worth Rs100 in the
employees’ name when he joins and keep buying shares worth Rs100.
You can give these shares to him as a bonus after three years of his
employment. Or if your company is not public, you can tell your
employees that they will earn x number of shares for every year they
work and at the end of say 5 years he will get those shares.
There can be many more ways. This is the philosophy of sharing wealth
with the employees. It encourages an ownership feeling among them
and they work accordingly. It is also a tool to motivate employees to
perform better and to retain talented hands.
With employees owning stocks in the companies they work in, theirperformance would directly result in better prices for the stock and
dividends, not to mention better capital appreciation for employees
and dealers. Thus the story comes a full circle here.
Your startup can allocate stock options or ESOPs depending upon
various factors such as regular compensation, bonus for better
performance, etc.
Your company can either grant ESOPs to prospective employees at the
time of joining itself or the employees might become eligible on
completion of one or more years of service with the company.
Typically, the maturity period for ESOPs is three to five years - allowing
the company issuing ESOPs to retain talent and keep them motivated.
But ESOPs have also been issued by companies with a provision for
employees to offload a certain percentage of their ESOPs in the very
first year itself. The balance is then spread out over the remaining
period of maturity, with the bulk of the options to be cashed at the end
of three or five years from allotment. This lock-in period is fixed so that
it acts as a deterrent to employees wanting to change jobs. In case an
employee does jump ship, then he can at least cash in on some of his
earnings. Some companies also structure ESOP in such a manner that
no dividend is paid during the tenure of the lock-in.
How the Plan is Designed
An ESOP is an equity-based deferred compensation plan. As such, it is in
the same family as profit sharing plans and stock bonus plans. An ESOP,
however, differs from a profit sharing plan in that an ESOP is required to
invest primarily in employer securities, while a profit sharing plan is
usually prohibited from investing primarily in employer securities.
An ESOP also differs from profit sharing plans and from stock bonus
plans in that an ESOP is permitted and authorized to engage in
leveraged purchases of company stock. Consequently, an ESOP
required different accounting procedures and a different method of
allocating stocks and other investments among the employees than
other types of plans.
The ESOP, like a profit sharing plan, must cover al l nonunion employees
who are at least age 21 and have one year of service. However, an ESOP
may either include or exclude union employees.
In practical effect, share ownership under the plan is usuallyproportionate to the relative salaries of the participants in the plan.
How the plan works
The Employee Ownership Plans use a host of plans through which they
deliver the goodies. It could be a stock option scheme -- which is the
most commonly used. A stock option gives an employee the right to
purchase a set amount of shares at a fixed price for some years into the
future. It could be a stock purchase or a *restricted stock. Some types of
plans involve actual purchase and holding of stock or a phantom stock,
or could be a cashless exercise.
A phantom stock is a bonus that rewards employees based on theincrease in the value of the company's stock, the dividend performance
of the stock, or both.
Some MNCs offer global stock options for stock listed outside India. The
*vesting period, that is, the period for which the option has to be held,
Different models of sharesused by start-ups for its employees
Authored by Shikha Singh , the article explores the various share models used as a compensation by start-ups to attract
employees during the initial stages of its business. A glossary section provided at the end of the article, elaborates on certain
phrases that are marked with an ‘*’ in the article below.
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differs from 2 to 5 years depending upon the industry, company and
management policy. A company could have more than one stock
option plan.
In order to assure marketability of the stock subsequent to
distribution, the employees must be given a *“put” option, which
enables them to require repurchase of their stock at fair *market
value. The plan is administered by a committee established by thedirectors of the company. All voting rights are normally exercised by
the committee.
However, employees are allowed to vote on any matters involving
*liquidation, dissolution, recapitalization, merger, or sale of all the
assets of the corporation.
Contrary to common misconception, selling stock to an ESOP need not
result in any loss of control by the current owner. In most cases, the
existing Board of Director members serve as the ESOP Trust fiduciaries.
Thus there is no loss of voting control.
Nothing in the law requires that financial statements be shared withplan participants. The only financial disclosure that is required is the
requirement that each participant be furnished at least annually with a
benefit statement that shows the number of shares allocated to his or
her account, and the fair market value of those shares.
The other issues that need to be dealt with relate to the determination
of the total compensation cost and the period over which this needs to
be used. Experts contend that as ESOPs are still in a nascent stage in
India, they should be valued using appropriate pricing models, and the
compensation expense should be reflected in the profit & loss
account.
Lately, companies have started to treat the difference between theoption price and the existing market price as an expense to be written-
off over time. This could be the time between the granting of options
and the time when they would be allowed to be sold in the open
market.
For instance, say ABC issues ESOPs to its employees at a price of Rs 10
as against the current market price of Rs 7,000. The difference of Rs
6,990 would be written-off as an expense in the books of ABC over a
period of three years, i.e. Rs 2,330 each year multiplied by the number
of shares allotted via ESOPs.
Eli Lily Ranbaxy is an example of a pharma major which extends its
overseas ESOP to its Indian employees. Infosys, leading Indiansoftware major, has been credited as having created a large number of
Indian millionaires. The employees who received the stock of the
company have benefitted manifold by the spectacular rise in the share
price.
These are a few examples of the companies which have tried and
succeeded with this concept in India.
As the capital market watchdog on securities transactions and
issuance, the Securities and Exchange Board of India, or SEBI, has
formulated guidelines for the issue and maintenance of ESOPs. They
have been formulated under Section 11 of the SEBI Act, 1992.These
guidelines, called SEBI (Employee Stock Option Scheme and EmployeeStock Purchase Scheme) Guidelines, 1999; apply to any company
whose shares are listed on any of the recognized stock exchanges in
India. This circular and the entire text of SEBI (ESOS & ESPS) Guidelines,
including the amendments made in 2008, are available on SEBI
website at www.sebi.gov.in under the categories “Legal Framework”
and “Issues and Listing”.
Glossary
*Employee compensation means the total cost incurred by the company
towards employee compensation, including basic salary, dearness allowance,
other allowances, bonus and commissions.
*Stock, is a share in the ownership of a company. Whether you say shares,
equity or stock, it all means the same.
*Option means a right but not an obligation granted to an employee in
pursuance of ESOS to apply for shares of the company at a pre-determined
price.
* Liquidation, when a business or firm is terminated or bankrupt, its assets are
sold and the proceeds pay creditors. Any leftovers are distributed to
shareholders.
*Vesting means the process by which the employee is given the right to apply
for shares of the company against the option granted to him/her in pursuance of the ESOS.
*Vesting period means the period during which the vesting of the option
granted to the employee in pursuance of the ESOS takes place.
*Initial public offering (IPO), also referred to simply as a "public offering" or
"flotation," is when a company issues common stock or shares to the public for
the first time. They are often issued by smaller, younger companies seeking
capital to expand, but can also be done by large privately-owned companies
looking to become publicly traded.
*Debt financing is when a firm raises money for working capital or capital
expenditures by selling bonds, bills, or notes to individual and/or institutionalinvestors. In return for lending the money, the individuals or institutions
become creditors and receive a promise that the principal and interest on the
debt will be repaid.
*Restricted stocks are insider holdings that are under some other kind of sales
restriction. Restricted stock must be traded in compliance with special SEC
regulations.
*Employee stock option scheme (ESOS) means a scheme under which a
company grants option to employees.
*Employee stock purchase scheme (ESPS) means a scheme under which the
company offers shares to employees as part of a public issue or otherwise.
*Market price of a share on a given date means the closing price of the shares
on that date on the stock exchange on which the shares of the company are
listed.
*Treasury stock is the outstanding shares of stock reacquired and held by the
issuing corporation
*Capital Appreciation refers to a rise in the market price of an asset
*Lock-in period refers to the period under which a person cannot sell his shares,
generally with regards to an ESOP. Under this a person who has been granted
some stocks of the company cannot sell them immediately.
*Put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified
price within a specified time
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SEEKING INTERNSHIPS THIS SUMMER
START-UPS ARE HIRING !
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u a i a . h m c e e a i n yVent re C p t l T e ter cat h s th ttent o of ever
sp r r p eu i r a l h a f r f va i ing ent e ren r l ke p ob b y no ot er. It is o m o pri atei u i g h t s p c l r b r s o t d toequ ty f nd n , t a i ty i a ly p ovided y p ofe si nal ou si ers a
g w s n s Gen r l y d c n a e o a nnew, ro th bu i e s. e a l ma e as ash i exch ng f r sh res i
e s o p y, u l nvest ent r u l i hth inve ted c m an vent re capita i m s a e sual y h g
i , t f er t po i o a o a g etu n rr sk bu o f he tent al f r b ve- vera e r r s. A ventu e
a l ( ) i a er o a ch nvest e tc pita ist VC s p son wh m kes su i m n s.
u u a l e er d n to a o er m oVent res su l y pr f VC fun i g ny th for f
nvest e t su h a o n h y g t t a d t o hi m n , c s l a s, as t e e he d ed benefi f t e
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n r p ta st sh r a mm n es re o u c i hve tu e ca i li a es co o d i f r s c ess w th t e
o p y, e n o er th l p ss ve e , bu e th tc m an h o l ng plays e ro e of a a i lend r t mor a
a p er h l wa t r n a a i g a e r tea oof artn . T e VC wil n to b i g on a m n g n p rtn r o m t
p u t h o l us l a i h er e t ehel r n he company. T e VC's g a is ual y h g (30-40 p c n p r
a r o t o r th e o o ent n hye r) retu n n he investment ve e p ri d f his involvem i t e
o p . T u h C u h t e o l w n g rc m any h s t e V ens res t a th company f l o s a a g essive
o h r e c nt i u e t s , xp o t a dgr wt st at gy He o r b tes xper i e e erience, c ntac s, n
i l T e p c f r a i i a s s c ed b l odisc p i ne. h resen e o a ventu e c p tal st l o lend r i i ity t
e u t u a s, t o e a e i r tedth vent re. Also, if he vent re f il he l ss s r d st ibu
e h t en u w l a he rs t s h o hbetw en t e en repr e r as e l s t investo , hu cus i ning t e
to h ep r ers a y.blow t e entr reneu p on ll
u c n e i si e b f eg u i e nvest e tB t o sider th fl p d – y or oing o ts d i m n ,
e r eneu r ta a l f th i y, t s a o t r nth ent epr r e ins l o e equ t and hu ll f he cont ol, i
u en e i a ep o a vent e c l hhis vent re. Wh mon y s cc ted fr m ur apita ist, t e
m a i o l n s l th n epr r s p p y, a d hco p ny s n o ger ole y e e tr eneu ' ro ert n ence
a y w l t u ch. h s s t n o r l n i a lusu ll i l no r n as su T i hif i c nt ol a o e s compel ing
s f r ny n e r rs s f drea on o ma e tr p eneu to el -fun .
C p t c t i u l t es i vent e h th e o nV s ex ec er a n q a i i n a ur t at ey ar g i g to
u i , t w m o a b n o m g i l tea df nd n he t o most i p rt nt ei g - a go d ana er a m an a
a e m k i a st g w n s c ol rg ar et n fa - ro i g e t r.
h u h e eye o u a i a i sT ro g th s f Vent re C p t l st :
: W o C lo k f en t a h t in hQ hat d V s o or in a v ture h t t ey migh vest t eir
mo ey ?n in
A:
A M t a t erlok it al - Can an Par n s:
“ t h g e vel t q i n i a ey u l a gAt he i h st le he uest o s: c n th b i d a real l r e
b i ess l ese p p a i n n f u r ks wus n ? A l th ro os ls sitt ng i fro t o s - it b ea do n into
t ee m n s thr ai a pec s.
M k d r st u t e a e T aar et, In ust y r c ur , nd th e m.
O e s t s ze e a e . a n u l g b ses ln i he i of th m rk t You c n ot b i d lar e usines in sma l
s es. o i h he r t h s to a e, r t h s to b g ow npac S e t er t ma ke a be l rg o i a e r i g fast
en u h s h t i w l a g in t e e 3-4 e s.o g o t a t i l become l r e h n xt y ar
Th s n a ec t t k i h t u s i y h pe eco d sp t ha we loo at s ow he ind stry i l kel to s a e
u th s i g e a a w e 0 et 1 hp. Is i go n to b sp ce her 10 companies each g % of t e
m k s O i l t e n i h % a ear et h are? r w l her be o e company w t 30 - 40% m rk ts a i y o o i a o ?hare, a rel t vel c ns l d ted p sition
I h n t i a p a s h m st i p r n p r , s t tea Ist i k he th rd p rt, erh p t e o m o ta t a t i he m.
t t t a th t n k i en A l b i e s l n derhis he e m a ca ma e t happ ? l us n s p a s un go
c a g a i W n d to b f h s m t r ea sh n e and f ce cr sis. e ee e con ident t i tea has hei r
t h g u ; e h e p ss o h ve th i g w ro t e ro nd th y ave th a i n; t ey ha e stay n po e to
s e f leeth inish ine.
S i k t s a e e l h 3 i f c o r l t lo I th n ho e r r al y t e ma n a t rs. There a e o s of detai s to
ea n f th se b s i l h .”ch o e o o ut e sent a ly t at
Ba r iv s i al:laji S in a - AureosCap t
“ o, r t yo a e k n a h e r, ay n a i toS fi st hing, u r ta i g a c ll on t e s cto s i g th t th s sec r
i o a d i o e o n i a d a ta e n h ss go d n w ll c ntinu to gr w, a d Ind a has n a v n g i t i
s cto o f h o s e e b g t e.e r. Y u irst ave t be able to e th i pic ur
T en u r yi g h t i c m a h s e t em s n msh yo a e sa n t a th s o p ny a th righ el ent i ter
o us n m d l c sto r h te t es b n h sf b i ess o e , u me s -- w a ver i tak to e a player i t ii d r a d a u r t a e.n ust y n c pt re ma ke sh r
A i d y, e m s i r n t f er l t i e l l end th r l th o t mpo ta t hing a t al his s: d o you r al y ik
t p m ter h n t c m a o yo s w e ihe ro o s, t e fou ders of he o p ny? D u ome her th nk
t t h s p e a e c m a ?ha t e e peo l r o p tible
Fourth, you see the valuation - only after all this valuation comes - and it
has to be acceptable.”
Avnish Bajaj - Matrix Partners:
“I think the frameworks that investors use to evaluate early stage
companies are very simple and very consistent.
Number one: is the market opportunity large enough? When we say
large, we are looking at whether is there a current market of at least 500
million dollars or a billion dollars.
The second thing that is extremely critical is: how good are the
entrepreneur and the team? What is their understanding of the market
opportunity, and what is their track record?
We look for various clues, because it is almost impossible to predict
who will succeed or not. But typically our view is that success and
achievement are not accidents. They are the outcome of a very
methodical process followed in life, though of course there are outliers
to this. You know: what have been they been their academicachievements, what have been their professional achievements, what
do other people think of them?
Thirdly, we focus on the industry dynamics within that opportunity:
what is the state of competition, how can these guys grow. It is little bit
more about the strategy the company is following in order to be able to
take advantage of that market opportunity.
So you said great market opportunity, great people…now, are they
understanding their environment and how they will have to operate?
And do they have a differentiator by virtue of which they can create a
sustainable business?
So that is really the framework.”
Russell Siegelman (HBS MBA '89) - Partner, Kleiner Perkins Caufield &
Byers :
“The most important requirement is a large market opportunity in a
fast-growing sector. We like a company to have a $100 million to $300
million revenue stream within five years. This means that the market
potential has to be at least $500 million—or more, eventually—and
that the company needs to achieve at least a 25 percent market share.
The second factor involves a competitive edge that is long lasting. It is
usually an engineering challenge that is tough enough to give the
company an edge, resulting in several years lead or longer, if we're
lucky. We look for a tough problem that hasn't been solved before.
The third thing is team. We look for engineering vision and execution,
sales, and entrepreneurship in a team. Entrepreneurs have to have a
clear sense of the opportunity and how to build the business. But the
best ones are willing to re-examine their assumptions and are willing to
veer left or right or pivot all the way around when the data suggests
they're headed in the wrong direction.So overall it's a funny mix. When we review an investment opportunity,
entrepreneurs have to have a pretty good story to tell about what they
want to do. I think it helps to be cocky, there's no doubt about it, but if
you're not sufficiently confident, you're not going to be successful in
selling your idea.”
Sonja L. Hoel (HBS MBA '93) - Managing Director, Menlo Ventures:
“I always look at the market first. By that I mean a strategic view that
includes evaluating market growth, market size, competition, and
customer adoption rates.
We have a process here called SEMS, or Systematic Emerging Market
Selection. We do a SEMS project for every investment we make. Twice
a year at our planning meeting, we talk about new markets or problems
that need to be solved.
We track four things and relate them to the success of our investments:market size, the team, unique technology, and whether the product is
developed at the time we invest. We found proprietary technology is
important but doesn't make much of a difference as a unique
differentiator for significant returns. Market size and a developed
From a Venture Capitalists perspectiveAuthored by Hridya Ravimohan , the article focuses on analyzing what exactly Venture Capitalists (VC) look for while investing in
a new venture. It comes straight from a VC’s perspective, containing excerpts of a number of VC interviews conducted via online.
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o ct t e t. We h be te k r du is tapr du ma t r mos have muc t r luc if the p o ct in be
s ippin , lt ou w inv t in a ps w t a de lop dor h g a h gh e do es st rt-u ithou ve e
o t. fte h s gre c log , s 't k dpr duc O n someone a a at new te hno y but ha n loo e
a rk t h e hn gy ing o e.t the ma e t e t c olo is go t serv
I orde re a rrie , te hn y a go to be ha d on r to c ate ba r the c olog h s t r t
e ut c nies pate d e ou axec e. Some ompa have nts; some on't. We nc r ge
th m o have p a e beca lit ious vironment thae t t nts use it's a more ig en n it
w s t y goa en ears a .
We a loo t the ma ge a . I w 'v got fou wlso k a na mentte m f e e a nder ho's in itfo the s or unw u de h a if neces ry, we ar life tyle illing to pgra t e te m sa have
c er n out illing ss to te m mem e .onv satio ab the w ne hire new a b rs ”
R b Si n t r, A r eo ert mo - Direc o lta Pa tn rs:
“ he a e o s h ug in e a t g ne op t nitie nT re r tw c ools of tho ht v lua in w por u s. I
the f st h ve pitalist in s on pe ple w k nir , t e nture ca ve ts in ly smart o ith a ee
se s o rtunity I t e t e , ent r pitalist only c rn e of ppo . n h o h r the v u e ca a es
a ut mark ts. I m n nt is ' h ma vebo e f a ageme n t up to t e rk, the nture
c pit lis w ix it. he ru h is ob io w e be e ba a t ill f T t t v usly some h re in tw en, ut I
te t pla e r e n the ma ortun y ve u h t mnd o c mo e w ight o rket opp it rs s t e ea .
I o e perie e, rket t ump t p op nd ech logy.n ur x nc ma s r bo h e le a t no
W e na sing the rk t f r a new p o t r s e e toh n a ly ma e o r duc o ervic , w try
d t w ther produ t a r c me fo a ist ge ermine he the c is epla e nt r n ex in
p o t o h the the prod t is of ring th ne ndr duc r w e r uc fe some ing w a
p ev usly unse T e p e ct c n b c tt rr io en. h re lac ment produ a e alled the be e ,c pe , fa t de ith se o rt nitie y n sthea r s er mo l. W the ppo u s ou ca e imate
ma e siz y k g at r e ue e is ctrk t e b loo in the ev n s of the x ting produ
ship ntsme .
C r ly, c provides new un na y viou lyonve se a produ t that f ctio lit pre s
u e , we ll br e orld m del. H e, t e ma e s e dnse n ca the ave n w w o er h rk t iz an
d ma a a nkno n. T se o n re in con u r c oe nd re re lly u w he fte a the s me se t r.
N ts a , Y ho , d So y W lkma a e mple h r nee c pe a o! an the n a n re xa s. T e b ave w
w model cert inly ha r er mar risk but no n c ss rilyorld a s a g eat ket t e e a
mo e te hni l r k.r c ca is
Ad ally, ther a ma - s. I we' too early, ther sdition e re rket timing issue f re e'
n rk t de nd nd e v to sur e nt t e d re c so ma e ma , a w ha e viv u il h deman a he
u . I that o time e have two r blem av k e hs n period f , w p o s: We h e to e p t e
d op n n fe e ryb d e may e susc ptible o be goors e a d ed ve ody, an w b e t in
leapf ge e hn gy. So w on t wa t e oo ear , b wrog d by t c olo e d ' nt o b t ly ut e
d a be t o .on't w ntto o lateWe a o ok a e h gy to ee how pr priet ry a dif ul hls lo t the t c nolo s o a nd fic t t e
solu io t the problem is. he id a ase is fou . s solvingt n o T e l c r Ph D. a
p o m h y' b e w g for w y a , an h y'r ble t e ve e n orkin on t o e rs d somehow t e ve
s ck pon the ma t n. An it' tw order o ma it de t rtru u gic solu io d s o s f gn u be te
tha h ev r lse ut t e . ally, nt the a on w at e e is o h re Fin we wa te m t have
c . We get l t co e e he e epre e m inonviction a it le nc rn d w n the ntr n ur co es
a say "I m i lip ye r. So if e ge ss nnd s, ' n this to f it in a a " w t the impre io
the in r h ou time then 's f ely a problem.”y're not it fo t e t gh s, it de init
Q: W l yo irst- e entrepren uou d u back a f tim e r?
A:
Ba a i in va - u Capi ll j Sr i s A reos ta
“ w ld ck f st time e epre . u o m irI ou ba a ir ntr neur B t t day y f st time
e t p ene r are d re y e u t ntial x nn re r u s iffe nt: the hav s bs a e perie ce.
T a no f ing o h ir bu in ss ; he r theirhey re t igur ut t e s e es rather w thec ny w suc d, beca y n h ir s e .ompa i ll cee use the k ow t e bu in ss
I n illing o live ith the t e pt n, hic I n't w hat'm ot w t w o h r o io w h is: do kno w
I oing ut w fig ut. h is no c a me'm d b I ill ure it o T at t a cept ble to .
Tod h is a c pt ble o usine nd I av onay w at c e a t me is: I know my b ss a h e d e
this f r X number of e rs an I e is hic ho y a , d now hav th idea w h is t e
e t h usine d know w h r w w or not, butx ension of t is b ss. I on't het e it ill ork I
kno big t r nd I kn at have e nts T isw the pic u e, a ow th I all the leme . his
w t Iba k t day.”ha c o
A o M l n a rtl k itta - Ca a n Pa ners:
“ 0% of ou busines in S rom epe t ent neurs his4 r s the U comes f r a repre . T
implies h la ger pa c s from pe ple h f stthat t e r rt ome o w o are ir time
e p ene rntre r u s.
An e ve open to b king ir ime e pre e t e nd nd w 're ry ac f st t ntre n urs in h I ia
c e t. re y se f t t ntre u s tha the We tont x He ou e more irs ime e prene r n in s
simply e au e hole de f bu a fa t-g o ing e rpb c s the w mo l o ilding s r w nte rise
a then in is fa ne .”nd exit g irly w
Avnish Bajaj - Matrix Partners:
“I was a first time entrepreneur when I got funded by ChrysCapital. I
don't think the issue is first time entrepreneurs. In fact, if you look at
some of the world's most successful entrepreneurs, they are all first
time entrepreneurs: Bill Gates, Steve Jobs, Larry Ellison.
Indeed, if you look at the track records of entrepreneurs who have
succeeded in their first venture, they typically don't succeed after that.
But yes, absolutely we would look to back first time entrepreneurs. I
think it comes back to whether they have a track record of achievementin their lives. It doesn't have to be as an entrepreneur.”
So to encapsulate the views of the above VCs, most of them
are looking for a good technology, backed by an efficient managerial
team to launch the product into a large market at the right time,
irrespective of whether or not the person is a first-time entrepreneur.
Another source of outside investors are 'angel investors'.
These investors differ slightly from VCs. The largely accepted difference
between the two modes of funding is essentially that angel funding is
more of 'emotional money', whereas venture capital is 'logical money'.
Many angel investors are successful entrepreneurs who want to help
other entrepreneurs get their business off the ground and usually
expect a lower rate of return than a VC. Usually they are the link from
the self-funded stage of the business to the point where the businessneeds the level of funding that a VC would offer. 'Angels' typically offer
expertise, experience and contacts in addition to money. Not much is
known about angel funding due to the individuality and privacy of their
investments.
Venture Capitalism is one of the most popular forms of
funding available to entrepreneurs today. It is one of the few doors that
one could unlock in order to enter the actual entrepreneurial world.
INTERESTING FACTS
?
Etymology of 'venture': "to risk the loss" (of something),shortened form of aventure, itself a form of adventure. General
sense of "to dare, to presume" is recorded from 1559. Noun sense
of "risky undertaking" first recorded 1566; meaning "enterprise
of a business nature" is recorded from 1584. Venture capital is
attested from 1943.
?ARDC (American Research and Development Corporation)
was the first venture capital firm to be in existence. Its main
purpose was to encourage private sector investments in
businesses run by soldiers, who were returning from World War
II.
?.Georges Doriot is known as the 'father of venture capitalism'.
He, along with Ralph Flanders and Karl Compton, founded ARDCin 1946. He is also co-founder of INSEAD Business School (1957).
?In 2007, U.S. venture capitalists invested $1.4 billion in China
and $1.0 billion in India.
?The origin of the Angel Investors occurs at the beginning of
the era of Broadway Productions to define those individuals who
used to fight all odds to put up the high risk and early stage seed
money to launch Broadway shows.
?Angel Investors accept an average of 3 deals for every 10
considered, whereas VCs accept 1 for every 400.
?According to a Wells Fargo survey in 2007, 73% of a ll ventures
in the USA are self-funded.
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Company RegistrationRegistering a company is an obligation which every entrepreneur has to undergo. This article written by Rahul Kumar , is aimed
at providing complete information about the various nitty-grittys of the procedure involved and the costs incurred in getting your
company registered.
The selection of right business entity is very useful for the
success of an entrepreneur. The choice of entity depends on the
circumstance of each case. A company is a separate legal entity as
compared to its members. In a company, liability of shareholders is
limited to the extent of unpaid share or to the tune of the unpaid amount
guaranteed by the shareholder. On the other hand, a partnership is a sum
total of persons who have come together to share the profits of the
business carried on by them or any of them. It is not a separate legal
entity. The major disadvantage of partnership is the unlimited liability of
partners for the debts and liabilities of the firm. If property of
partnership firm is insufficient to meet liabilities, personal property of
any partner can be attached to pay the debts of the firm. Registration of
partnership firm is not compulsory up to the extent of 20 partners,
though registration has extra advantages.
Registration of companies under the Companies Act 1956 is
under the categories of private and public limited companies. The mostcommon form is Private Limited Company.
Private Limited Company: It is a company limited by shares in
which there can be maximum 50 shareholders, no invitation can be made
to the public for subscription of shares or debentures, cannot make or
accept deposits from public and there are restrictions on the transfer of
shares. The minimum number of shareholders is 2. It must have at least 2
directors. Minimum share capital is INR 1 lakh.
Public Limited Company: It is a company limited by shares in
which there is no restriction on the maximum number of shareholders,
transfer of shares and acceptance of public deposits. The minimum
number of shareholders is 7.It must have at least 3 directors. Minimum
share capital is INR 5 lakhs.
Recently the concept of Limited Liability Partnership (LLP) has
been introduced in India. LLP is an alternative corporate business entity
that provides the benefits of limited liabil ity of a company but allows itsmembers the flexibility of organizing their internal management on the
basis of a mutually-arrived agreement, as is the case in a partnership
firm. LLPs are intended as an alternative business organisation for small
scale industries and service sector enterprises, such as lawyers,
chartered accountants etc, which at present, are primarily constituted as
partnership firms in India.
A Sole Proprietorship is the most common type of business (like
the small grocery stores). It is a business entity owned and managed by
one person. It requires almost no legal formalities. For liability purposes,
the individual and the business are one and the same.
Steps of incorporation of a company:
1. Purchase (Digita l Signature Certificate) for Directors: It
is used on the documents submitted in electronic form in order to ensure
the security and authenticity of the documents filed electronically.2. Obtain (Director Identification Number) for proposed
directors: It is obtained by filling .
3. Name approval of the company: Availability of names could
be checked at (Ministry of Corporate Affairs) portal. Apply to the
concerned RoC (Registrar of Companies) to ascertain the availability of
name in by logging in to the portal. A fee of INR 500 has to be
paid alongside and the digital signature of the applicant proposing the
company has to be attached in the form. Select, in order of preference, at
least one suitable name up to a maximum of six names, indicative of the
main objects of the company. Ensure that the name does not resemble
the name of any other already registered company. The names can be
the coined name from the objects of the proposed company or even the
name of the directors, and of such kind. Whatever be the case, it should
be indicative of the main object of the proposed company. The name
justification is required to be specified along with the application.Further, the last words in the name are required to be "Private Ltd." in the
case of a private company and "Limited" in the case of a Public Company.
DSC
DIN
eForm DIN-1
MCA
eForm1A
Availability of names requires authorised capital for certain key
words:
Keywords Requierd Authorised
Capital (INR)
(1) Corporation 5 Crores
(2) International, Globe, Universal, 1 Crore
Continental, Inter-Continental, Asiatic,
Asia, being the first word of the name.
(3) If any of the words at (2) above is 50 Lakhs
used within the name (with or without
brackets)
(4) Hindustan, India, Bharat, being the 50 Lakhs
first word of the name.
(5) If any of the words at (4) above is 5 Lakhsused within the name (with or without
brackets).
(6) Industries/Udyog 1 Crore
(7) Enterprises, Products, Business, 10 Lakhs
Manufacturing.
4. After the name approval file for registration of new
company by filing the required forms (1,18,32) within 60 days of
name approval
Memorandum of Association (MoA): It is a document that sets out the
constitution of the company. It contains, amongst others, the
objectives and the scope of activity of the company besides also
defining the relationship of the company with the outside world. It has:
1) Name clause: The name of the company is mentioned in
the name clause.2) Situation of registered office.
3) Objects clause: It specifies the activities which a company
can carry on and which activities it cannot carry on. The company
cannot carry on any activity which is not authorised by its MoA.
4) Liability clause: A declaration that the liability of the
members is limited in case of the company limited by the shares or
guarantee must be given. The MoA of a company limited by guarantee
must also state that each member undertakes to contribute to the
assets of the company such amount not exceeding specified amounts
as may be required in the event of the liquidation of the company. The
effect of this clause is that in a company limited by shares, no member
can be called upon to pay more than the uncalled amount on his
shares. If his shares are already fully paid up, he has no liability towards
the company.
5) Capital clause: The amount of share capital with which thecompany is to be registered divided into shares must be specified
giving details of the number of shares and types of shares. A company
cannot issue share capital greater than the maximum amount of share
capital mentioned in this clause without altering the memorandum.
Articles of Association (AoA): It contains the rules and regulations of
the company for the management of its internal affairs. While the
Memorandum specifies the objectives and purposes for which the
Company has been formed, the Articles lay down the rules and
regulations for achieving those objectives and purposes. The
important items covered by the AoA include:-
1) Powers, duties, rights and liabilities of Directors
2) Powers, duties, rights and liabilities of members
3) Rules for Meetings of the Company
4) Dividends
5) Borrowing powers of the company
6) Calls on shares
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?Arrange for the drafting of the memorandum and articles of association
by the solicitors, vetting of the same by RoC and printing of the same.
?Arrange for stamping of the memorandum and articles with the
appropriate stamp duty.
?Get the Memorandum and the Articles signed by at least two
subscribers in his/her own hand, his/her father's name, occupation,
address and the number of shares subscribed for and witnessed by at
least one person.
?Login to the portal and fill the following forms and attach the
mandatory documents listed in the eForm
a) Declaration of compliance -
b) Notice of situation of registered office of the company -
c) Particulars of the Director's, Manager or Secretary -
Submit the above eForms after attaching the digital signature, pay the
requisite filing and registration fees, and send the physical copy of
Memorandum and Article of Association to the RoC of the state where
the registered office of the company is to be located.
?After processing of the Form is complete and Corporate Identity is
generated, obtain Certificate of Incorporation from RoC. Although a
private company can commence business immediately after receiving
the certificate of incorporation, a public company cannot do so until it
obtains a Certificate of Commencement of Business from the RoC.
This process of incorporation is completed in about 20 days. Auditors will
charge around INR 10,000 for their service.
Form-1
Form-18
Form-32.
Additional steps to be taken for formation of a Public Limited
Company:
To obtain Commencement of Business Certificate after
incorporation of the company the public company has to make
following compliance:
File a declaration in and attach the statement in lieu of the
prospectus (schedule III)
OR
File a declaration in and attach the prospectus (Schedule II)
to it.
?In addition, businesses liable for income tax must obtain a tax
identification card and number [known as Permanent Account
Number (PAN)] from . Processing fee is
INR 66 (certificate of registration by RoC is required). It must be
indicated on all the returns, documents and correspondence filed with
the Income Tax Department.
?We can also get the Common Seal (costs INR 1000 approx.) which is
used to for putting seals on share certificates.
?Register with (Employee's Provident Fund organisation).
?Open bank account
?Register for value added tax (VAT) before the Sales Tax Officer of the
ward in which the company is located.?Apply for IEC (Importer Exporter Code) number if import-export is to
be made (PAN is mandatory for obtaining it).
eForm 20
eForm 19
the Income Tax Department
EPFO
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Entrepreneurship Cell [E-Cell] is a non-profit student organization with theaim of fostering the spirit of entrepreneurship among college students in India and
nurturing young people with bright ideas. With a team of highly motivated group of
IITians from Kharagpur and the support of encouraging faculty, E-Cell boasts to be
one of the most active student bodies in India - with more than 15 start-ups from IIT
Kharagpur itself within its three years of inception.
We, at E-Cell, strive to make all the worthwhile support available to
budding entrepreneurs and also present successful examples by conducting guest
lectures by eminent people. Case study competitions, Knowledge Camps, patent
workshops, and other focused business plan events are conducted throughout the
year to involve students in activities that help them gain an entrepreneurial bent of
mind.
Our annual competitions include:
Concipio: An exclusive in-house business plan competition, aimed at transforming
the raw ideas that are born here into full fledged business models
Pensez: A unique case study competition, with problem statements designed to
inculcate innovative thinking in topics relating to entrepreneurshipEclairez: A social entrepreneurship challenge aimed at those individuals who have
the gumption to empower those at the bottom of the pyramid
Envision: A product design competition, catering to those visionaries who have it in
them to impact our present, and revolutionize our future
Negocio: A web and mobile services based business plan competition that focuses
on individuals aspiring to startup in this very popular sector of today
Clean Tech Challenge: An event that aims at tapping the immense potential of this
promising sector of the future
ABOUT US
Editor: Naveen YS
Asst. Editors: Rahul Kumar, Hridya Ravimohan, Shikha
Singh
Write to us at [email protected]
Entrepreneurship Cell
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