The Art of Growing a Company

8/13/2019 The Art of Growing a Company

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The Art of Growing a Company:An Entrepreneurial Monologue



A major part of the management literaturefocuses on the theoretical aspects behind theentrepreneurial phenomenon and analyses

the economic, social, and environmental issues.However, in practice, the emotional aspects are equallyimportant. Growing a company is an art. There aresome who are born entrepreneurs to whom building

companies come naturally. However, most of us haveto learn this difficult art the hard way. In this article, Itake a reflective view of the entrepreneurial experienceon how companies are started, the likely earlyexperiences, the pitfalls, the pains as well as the joys,and the growth issues.

EMOTIONAL PURSUITEMOTIONAL PURSUITEMOTIONAL PURSUITEMOTIONAL PURSUITEMOTIONAL PURSUIT

While start ing up, the init ial emotion manyentrepreneurs face is fear. For many a hopefulentrepreneur, the initial reactions are mixed, rangingfrom “probably it is not the right time to start-up” to“may be it is impossible for me to start-up,” primarilydue to the opinions you hear from the investingcommunity. Phrases like “we invest in only 50 milliondollar companies” or “we look for a management teamwith track record” or “we are not funding now” senda shiver down every potential entrepreneur’s spine.

This is a reality today. The market situation is suchthat you may not get funding. But I want to pose the

question “is there life without funding? Can you starta business without funding?” I say that it is possibleand one need not lose heart. Garage start-ups werealways the time-honoured method of starting up. I amnot making a case for bravado. It is quite likely thatmost of you may not start up immediately. It might noteven be the most ideal decision. But the option to start-up immediately exists, is possible, and can be done.What you have to be aware of are the logical issuesarising from a decision to start-up immediately, itsimplications, and how you can manage them.

At the end of the day, entrepreneurship is not acerebral kind of pursuit you can put inside managementmatrices and analyse—it is an intensely emotionalpursuit. You can read up on management literature,you can get the theory but it is really a gut-wrenchingkind of an experience. It will take everything out of youand very rarely will you be prepared on the emotionalfront—which is really the most important aspect.

A typical management framework will highlight

the following likely steps: you analyse the opportunity,you find out the idea, start the company, go through aramp-up process and finally do an IPO. That is true.But what does it feel to actually go through the steps?From my experience and those of people I know, mostentrepreneurs tend to go through certain stereotypedphases. I have found this out from personal experience,

from other people who have started out, and from thosepeople who wanted to start out but could not.

CONFUSIONCONFUSIONCONFUSIONCONFUSIONCONFUSION

The first stage which I call as the stage of confusion isone where you have the intense desire to start-up. Youmight not be very sure how you will start-up and thushave a very high likelihood of going through this phaseof confusion. Betraying my MBA background, I havetried to divide this into the three “F”s — Fright, Flight,Fantasy.

FrightFrightFrightFrightFright

The first phase is fright. If you have always been aperformer from an academic background where failureis not tolerated and you have never failed in your life,the first question always is—will I fail? The secondquestion is: “my colleagues are getting into a corporate job. From the first month onwards, they are going toget paid an amazing amount of money. I do not know

what my future is. Will I lose out?” In our parent’sgeneration, all of us have heard horror stories of “unclex” or “cousin y” who miserably failed in business. Yournightmare will be whether you will be this generation’sexample. Your fright will lead you to rationalize thus:“maybe I will start in a corporate job first and then Iwill actually start out.”

FlightFlightFlightFlightFlight

The second phase is what I call flight. Your idea may begood but there is no guarantee of success. Your inabilityto find a “guaranteed success plan” leads you to flitfrom idea to idea. You suddenly get a brainwave andyou become extremely excited. You think that this ideaseems to be good but the next day you wake up andtalk to some people and suddenly realize that it maynot be so great. You get depressed. You jump to a secondidea and repeat the entire cycle. You keep on huntingfor that perfect idea. Stories like “this friend of myfriend started a business and it is doing 100 million



dollars now” or a cover page on the “youngest billionaire” frustrates you no end since these peoplehave somehow crossed the threshold and are on thefabulous shores of success. You keep on thinking, “whyam I not getting the idea? Why can’t I focus onsomething?”

FantasyFantasyFantasyFantasyFantasy

The third stage is fantasy. If you are one of those peoplewho are not starting with a clear idea, you might startfantasizing and rationalizing that whatever idea youhave is actually the killer idea. This is a dangerousstage. When people tell you that your idea will not fly,you disregard it since it is your baby and it is really theonly idea you have. You mould your perception to suitthe situation.

CROSSING THE THRESHOLDCROSSING THE THRESHOLDCROSSING THE THRESHOLDCROSSING THE THRESHOLDCROSSING THE THRESHOLD

Probably 80 per cent of would-be entrepreneurs wouldnot cross the three stages discussed above. People whomanage to cross this threshold have made the firstserious step. What happens after you cross the threestages? Again I use MBA speak—the three “Ps”.

Peer PressurePeer PressurePeer PressurePeer PressurePeer Pressure

The first is peer pressure. You decide to break the newsto your family and loved ones. They are not likely to be

thrilled. You start facing resistance and start thinking,“should I really start out?”

ProcrastinationProcrastinationProcrastinationProcrastinationProcrastination

The second phase is procrastination. The impact of yourdecision slowly starts sinking in and you suddenly become aware of industry pundits who claim“entrepreneurship is at an all time low” or “corporate jobs are the best bet now.” There would be this studyfrom a leading international management school whichclaims that there is a close correlation between thetiming of start-ups and IPO performance which ends by saying “you should not start now, start three yearslater.” So lots of people postpone the decision and thinkabout going for a second MBA in the US.

PovertyPovertyPovertyPovertyPoverty

The third stage is poverty. You start planning out yourfinancial requirements and you suddenly realize thatyou may not have enough money saved up. So how do

you survive? You start thinking: “may be I should workfor eight months and save up.”

But, when it comes to-crunch, only you can findthe answer. The question is a Hamletian “to be or notto be.” Really, there is only one way to do it. Starting upis like jumping off a cliff—you close your eyes and doit. There is no other answer. If you want to start, just do

it. But it does not mean that you just blindly jump.Before jumping off, we have to pack some practical baggage and what are those?

First, definitely a parachute! Carry at least sixmonths of financial expenses. This is important whenyou are starting out since you will be generating clarityfor yourself. When you are looking at opportunities,the last thing you want to worry about is survivalmoney. Questions like “how do I get my food? Can Ipay my rent?” should not be a drag on you.

Second, develop an activity plan for the firstmonth. The first 30 days would be full of confusionand there will be a million things happening. So, beforeyou actually are in that stage, try to chalk out a 30-dayactivity plan which will make your transition intoentrepreneurship easier.

Third, carry plenty of “hope.” Ninety-nine per centof us start out with dreams of striking successimmediately. The reality is that it rarely happen s. Whenit does not happen immediately, hope is the only thingwhich will help you carry on. However, there is a rider

—use your “hope” wisely. When you are in the marketfor six months and you keep getting negative reactions,hoping against hope can be dangerous and can easilyturn to “blinders.”

Finally, pack up your “ideals” and stow them away.The market is cruel and your only objective is to survive.Do not throw them—you will get the opportunity touse them later. But, do not ever confuse your idealswith your main objective. You might want to be aphilanthropist, you might want to help people—butfirst you have to survive. I have seen enough people

who try to implement their “ideals” before they surviveand end up with neither ideals nor a business.

STSTSTSTSTARARARARARTTTTT-UP: KEY ISSUES-UP: KEY ISSUES-UP: KEY ISSUES-UP: KEY ISSUES-UP: KEY ISSUES

How Do YHow Do YHow Do YHow Do YHow Do Y ou Set Up a Tou Set Up a Tou Set Up a Tou Set Up a Tou Set Up a T eam?eam?eam?eam?eam?

Two important aspects are composition of the teamand delineation of responsibilities. If you start out fresh,



most often your team would comprise friends whereeveryone is equal. You tend to confuse friendship withprofessional equality. Everyone in an organizationcannot be equal. If the line of responsibility is not clear,how does the organization take decisions? Is there oneperson with whom the buck finally stops? We need torealize that responsibilities can never be equally shared.

You need a leader. If something is not working out,there has to be someone who will stand up and say, “Iam responsible.” And, when it comes to the crunch,somebody has to say, “this is the way we will do it, may be it is wrong or may be it is right. This is the only wayto go ahead.” I am not advocating autocracy but a clearunderstanding—not only an intellectual understanding but also an emotional understanding that when it comesto the crunch, there is one person who will take the call.

With start-up among friends, the first and foremostrule is “do not start off with clones”. Most of us arefriends because we are from the same background withthe same expertise. That does not work in a businesssetting. The whole idea of a team is to complementeach other. So the first rule is to try and get variety intothe team.

How Should Equity be Divided?How Should Equity be Divided?How Should Equity be Divided?How Should Equity be Divided?How Should Equity be Divided?

Let us look at a situation where four or five of you arestarting up. How will you divide equity? I recommendunequal sharing of equity. The leader should have the

highest equity even if it is higher by one share. Acompany cannot be run as a cooperative. Higherresponsibilities have to be matched with larger equity.For most of us, it is an extremely difficult step to takesince it is counter-intuitive and does not feel “right.”When friendship is involved, it can be quite difficult.

When and How Should YWhen and How Should YWhen and How Should YWhen and How Should YWhen and How Should Y ou Goou Goou Goou Goou Gofor Fund Raising?for Fund Raising?for Fund Raising?for Fund Raising?for Fund Raising?

A fundamental question today’s entrepreneurs face iswhether to start with or without funding. As I readsomewhere, the three traditional sources of money arefriends, fools, and family. You can still start a companywith these three options.

However, if you decide to go for fund raising,guard against unscrupulous financiers. When you areyoung and desperately want to see your ideas succeed,you can make a wrong choice and get eaten up. Peoplemight tell you “I will give you x amount and I will take75 per cent of the company.” And, you might take the

money rationalizing that “you still have 25 per cent of the company.” If you really require large funds forstarting up, may be this is the only way to start out.But, in that situation, you should go to people withtrack records instead of “fly by night” operators.However, if you can generate revenues by less capital-intensive service models, why should you raise funds?

Do YDo YDo YDo YDo You Consider “Equity” as Cash?ou Consider “Equity” as Cash?ou Consider “Equity” as Cash?ou Consider “Equity” as Cash?ou Consider “Equity” as Cash?

In the initial stages, entrepreneurs need advisors,lawyers, and “contacts” for business development. Onecommon mistake is to overuse the option to pay forservice with your equity. When you are starting up,equity seems the cheapest currency. Unfortunately, asthe company keeps growing and valuation changesfrom a notional valuation to a real valuation based onrevenues and cashflows, the true value of equity becomes clear. You should conserve equity to themaximum extent possible.

FIRST THOUSAND DAFIRST THOUSAND DAFIRST THOUSAND DAFIRST THOUSAND DAFIRST THOUSAND DA YSYSYSYSYS

Let us assume you have crossed all these hurdles andhave actually started out. What happens now? Oncethe business starts, there is a saying that “the first 1000days define success or failure.” It is in these first 1000days when you really experience the emotional rollercoaster associated with entrepreneurship.• I n i t i a l c l i ent s t ake adv an t age o f you : I n i t i a l cl i e nt s t ak e advan t age o f you : I n i t i a l c l i ent s t ake adv an t age o f you : I n i t i a l cl i e nt s t ak e advan t age o f you : I n i t i a l c l i en t s t ake advan t age o f you : You will

struggle very hard to capture clients. When you arestarting out and have no track record, clients areunlikely to pay market rates. When you go to a client,he immediately thinks, “here is a bright young guy,I can get a project out of him by paying him Rs100,000 when I am paying an existing guy Rs 1million.” So he will tell you to do the project for himat Rs 80,000. At that point, what do you do? Youhave a company to run. So you go ahead and do it.

You will constantly fight this pricing war. Theonly way to get out of this pricing cage is to growstronger and stronger till one day the equationchanges. Obviously, this is applicable only to agarage start-up. If you have sufficient financialmuscle, you will not necessarily go through theabove experience. I am narrating the worst-casescenario.

• Y Y Y Y Y ou face del ays i n pay ment :ou face del ays i n pay ment :ou face del ays i n pay ment :ou face del ays i n pay ment :ou face del ays i n pay ment : It is a truism that thestrong crushes the weak. You do not get paid ontime. They will tell you “I will give you Rs 100,000”



but at the end of the day, they will not give even Rs80,000—that too after a three month delay. Whatcan you do? You have to face it and understand thefact that this is the name of the game. You cannotget depressed about it.

• Y Y Y Y Y ou b eco me Jack -o f - a l l - t r ade s: o u b ecome Jac k - o f - a l l - t r a d e s: ou b eco me Jack -o f - a l l - t r ade s: o u b ecome Jac k - o f - a l l - t r a d e s: o u bec om e Ja ck -o f - a l l - t r ade s: When you arestarting out with a small team, you have to be jack-

of-all-trades. Unfortunately, you cannot have aspecialized finance or an operations guy. You mighthave to do accounting, coding or whatever thesituation calls for—the bottom line is this : nothingis beneath dignity. At the same time, you necessarilyhave to be the master of all. There is nobody elsewho is going to stand up for you. If your accountingis not done properly, if you have not planned yourcashflows properly, you yourself will pay the price.

• Hav e your pr i or i t i es clear : Hav e your pr i or i t ies c lear : Hav e your pr i or i t i es clear : Hav e your pr i or i t ies c lear : Hav e your pr i or i t ies c lear : I had this interestingexperience. We went to the office of a newly fundedcompany and we were actually amazed to see astate-of-the art “recreation room” filled with dart boards, TT tables, video games, etc. The company’sargument was “we want to keep our employeeshappy. They need to be motivated so that tehy can both party and work hard”. The company did nothave a single product or any revenue in its books.It later faced cashflow problems and was on theverge of closing down. The moral of the story is—have your priorities clear. Dart boards can happen

later. Your first priority is to succeed. Make money.All the rest flows automatically. This is obviouslynot to say that you cannot have employee satis-faction programmes or benefits. But you have tospend money appropriately—if you do notabsolutely require a glass-fronted, four-storiedcorporate house—do not take it.

• Change i s constant : Change i s constant : Change i s constant : Change i s constant : Change i s constant : Everything changes constantly.You will change. Your original ideas will changeonce they hit the market and your business itself might change. You have to be flexible. Typically,

you start off with an idea and hit the market. Youmight succeed or realize that probably it is not doingvery well. You still keep on thinking that the marketis just not “seeing” the true value of the product.You do not change. You become so wedded to youridea in its original form that you cannot do anythingelse. You will fight on this sinking ship and see it godown.

On the other hand, if you are intelligent enough

to listen to the market signals, you might realizethat your product is not what the client wants. Yourealize that adding two extra features can make yousucceed. You change your plans and hit the marketonce again.

• Changing r Changi ng r Changing r Changi ng r Changing r ela t ionship dynami cs:ela t ionship dynami cs:ela t ionship dynami cs:ela t ionship dynami cs:ela t ionship dynami cs: When you startout, you tend to form a very close-knit team—almost

a family. But, over time, people change and some of them might leave. It might be because you cannotpay salary on time or things are not working out asexpected. A typical entrepreneurial reaction is togo into depression. You tend to think, “he/she wasmy friend, he/she was my family, how can he/sheleave?” This is going to happen to all of us. Theearlier we learn to accept this reality and be focusedon our objectives, the better it is.

• Y Y Y Y Y ou ar ou ar ou ar ou ar ou ar e not y our ow n mast er : e not your ow n master : e not y our ow n mast er : e not your ow n master : e not your ow n master : There is a commonfeeling before you start up that once you are anentrepreneur you are your own master: “I do nothave a boss. I can do whatever I like.” I can guaranteeyou one thing—if you start coming to the office at12 noon, your employees are likely to be there onlyat 11.45 am. If you take a vacation, they will alsodemand a vacation. Your responsibilities are goingto be the sum total of the responsibilities of theorganization. There is no running away from that.Your responsibilities will increase rather thandecrease.

“HARD” ISSUES“HARD” ISSUES“HARD” ISSUES“HARD” ISSUES“HARD” ISSUES

FinanceFinanceFinanceFinanceFinance

You start a company, you have a product, you have asolution. You go into the market and slowly moneystarts coming in. Typically, what happens now? Thefirst flush of money makes you lose your balance—you may buy a swanky car, move into a plush office,and have an acre-wide director’s table. You think thatyour investor will support you even if you run out of

money. You have made your first critical mistake whichis not building up a war chest to tide over bad days.

You have to understand this vital point—“cash isking.” Only after you go through a cycle where you donot have cash would you actually understand theimportance of this truth. Even if you cannot appreciateits importance today—hoard cash during early days.If you are one of the lucky few who built a companywithout going through a cash flow crisis, you will find



one day that some unfortunate decisions you took haveimpacted your cash flow and led to a crisis. On thatday, you will realize that even though you have clients,even though you have built up your reputation, eventhough you have employees — they are of no availwhen you run out of cash—because cash is the life- blood of an organization.

If cash is king, then debt is the prince. Even if youhave investments from a venture capitalist, do not blowup your investments. I am assuming that you have aproduct or a service that is capable of generating acash flow. Go and raise debt. Put the investment moneyinto a fixed deposit and raise a loan against that. Doeverything possible to stretch your cash—your marginsmight suffer, but it will be for a worthwhile cause.

MarketingMarketingMarketingMarketingMarketing

You should hit the market early. Many entrepreneurssuccumb to the temptation to keep on refining theirproduct or service instead of hitting the market early.This is especially common if you are developing atechnology product. You must realize that market isthe truest advisor you can get. Even if it is version 0.9,go to the market and test it out. The market might giveyou signals that ‘feature x’ is not right or ‘feature y’ isrequired or the pricing is not right or even that theentire product is of no value. If you realize that earlyenough, it is better for you.

Secondly, getting your product to speak for itself is the most efficient marketing method. If you do agood job with the first client, he will talk to five otherpeople. You can then leverage this cycle.

Thirdly, you should not use expensive optionswhen cheaper marketing options will suffice. Youshould do cross-selling, cross-subsidization, part-nerships, in fact, anything that can give you reach atlow cost.

TTTTTechnologyechnologyechnologyechnologyechnology

Technology can be one of the most powerful weaponsan entrepreneur can have to steal a march overcompetitors. If you build appropriate technology toreduce your costs or improve quality, you have a verypowerful asset for success. However, the operativeword is “appropriate.” I knew this example of acompany which started off with a sizable investment.The first thing it did was to make a website with thelatest technology and host it with the most advanced

hardware available which cost it Rs 6-7 million. Almost50 per cent of its investment was put into a website towhich customers never came since they could not spendenough on marketing. They ran through 60 per cent of their investment in just the first three months.

Essentially, your motto should be : if having cuttingedge technology is not critical, low tech is high tech. If

you can work on 486 machines, work on them.However, if technology is a core focus, by all means, goout and build technology which is better than yourcompetitors.

Partnership and AlliancesPartnership and AlliancesPartnership and AlliancesPartnership and AlliancesPartnership and Alliances

Partnerships and alliances are theoretically very useful.However, for a start-up, when you are small, it is quitedifficult to build any kind of meaningful partnershipsor alliances.

To have real partnership, you need to ownsomething of value. Ideally, both of you also need to beof comparable sizes. In the initial stages, you areunlikely to have anything of value to a large partner —your discussions and meetings frequently come tonaught. So, before you get into partnering, figure outwhether you have what the other guy wants. That is auseful lesson we learnt the hard way—krills are goodonly as food for whales. It is much better to grow fastand then talk as equals.

THE JOYS OF ENTREPRENEURSHIPTHE JOYS OF ENTREPRENEURSHIPTHE JOYS OF ENTREPRENEURSHIPTHE JOYS OF ENTREPRENEURSHIPTHE JOYS OF ENTREPRENEURSHIPIn the midst of all the gloom and doom, is therehappiness? Yes, there is! You slowly start seeing yourdream take shape. You see clients starting to showrespect, you get excited about new possibilities, andnew faces join the organization. You realize that youare on a winning track. So, during your initial 1000days, what is your primary objective? Your objectiveis to grow at any cost. Grow, grow, and grow more. Youshould do whatever is required during the first 1000days. You have to work very hard—that is the onlyway you can succeed.

GROWTHGROWTHGROWTHGROWTHGROWTH

Suppose you are one of those lucky few that have madeit through the first 1000 days. You have actually builta company which is showing profits. You can see ahealthy client list, your revenues are increasing, and



your company is taking shape. Then comes the difficultpart.

I have heard from people that the most difficultpart in the lifecycle of a company is when growthhappens and success is at hand. Even moderate successcan be dangerous. In the initial stages, things are sotough that you are just trying to survive and nobody

has any time to think about anything else. When moneycomes in and you feel the survival pressure lifting,suddenly, egos start kicking in.

Apparently, Indian entrepreneurs are happiestduring tough times because this is something that reallygives them moral courage and certainty. When thingsare bad, they will fight. But, they cannot handle success.They go to pieces at the first sign of success. Themoment money comes in, they will take an extendedvacation, join industry association, and will generallydo everything but focus on the business. This invariablyends up in disaster as business goes down and clientssuffer. The organization achieves a fraction of thepotential it could have achieved if sustained focus had been generated in growing the business.

So, the first question an entrepreneur should askhimself is—“do I want to grow? What is it that I wantto get out of entrepreneurship?” You really do not haveto go through growth pangs if your psyche is not builtfor that; you have to decide whether growth is right foryou and be prepared for the issues arising out of growth.

Second, if your objective is to build somethingsubstantial, something really world class, you shouldnot lose focus. Great companies are built by continuouseffort which pushes the organization from moderatesuccess to great success.

Third, to keep growing, you have to constantlyseparate out the investor in you from the “entrepreneur-manager.” Your returns are going to come not fromsalaries but from appreciation of the equity. While yourrole as an employee in the initial phases of theorganization is critical, in the later phases, your role as

a financial investor becomes more and more important.On many occasions, your equity appreciation mighthappen through somebody else playing the role of aCEO or a Chief Marketing Officer. You might be mosteffective as a sleeping partner. You have to learn to letgo and start trusting other people. Only when youseparate your two roles would you realize that yourpotential returns could be hundred times more thanwhat is evident today. You will then have the motivation

to focus on organizational growth on a sustained basis.The fourth issue is recruitment and retaining. You

always go through a chicken and egg situation wheregood people would not join you because you do nothave money—but to generate money, you need goodemployees. You have to break out of this vicious cycle by necessarily building enough money via internal

accruals or by getting an investor. Only when you breakthis cycle can you get to the next level.

Fifth, as your company keeps on growing, yourimportance as an individual to the company inevitablykeeps on diminishing. Your organizational evaluationand reward structure needs to reflect this reality.Initially, you would have brought in all the business but today your market ing chief is bringing all the business. So, you may not continue having the sameequation you had in the initial days. If important peoplein your organization do not have equity, you have togive them equity. This ensures that they are aligned toa common organizational vision.

CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

To conclude my discussion on the entrepreneurialperspective, I would like to leave you with someinteresting thoughts and learning which I have hadduring the course of entrepreneurship.

Cash is king : He who has cash lives to fight another

day.• Mind over heart : Take rational decisions. Watchmovies for emotions.

• Trust your sixth sense : Cut mistakes at the earliest.• Take one step at a time : Vision is fine, but walk towards

it.• Enjoy the journey : You never know what destination

you will reach.

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The Art of Growing a Company