Much at stake

About a month ago, one of our mentees attended a startup event where he met some angels. One of them expressed interest in our mentee’s business and a second meeting followed. I had told our mentee very clearly that he should not sign any document without running it by me first. The discussion obviously went well and the angel said he would invest Rs.75 lakh for a 45 percent stake. He then produced a term sheet and asked our mentee to sign on it. So, our mentee said, “I have a mentor and I need to run it by her. I will sign only after discussing with her.”

The angel turned ugly. He said that the deal could not be discussed with anyone, least of all the mentor. “If you don’t sign the term sheet now, the deal is off the table,” is what he said. Our mentee then managed to buy a day’s time by saying he needed to take permission from his father who is also a director in the company. The angel reluctantly agreed.

Lucky break

When our mentee called me, I told him that 45 percent stake for Rs.75 lakh was worse than a deal Shylock would strike. So, he needed to think this through before signing and one day was not good enough to take that decision. I also told him that there would come a time when not only would the angel have two seats on the board (he had asked for them in the term sheet), he would even have his own guy running the company and it will soon become the angel’s vision and not his anymore. Fortunately, we managed to dissuade him from going ahead and he soon met an NRI from his domain who came on board as a strategic investor. But we were not so lucky with another mentee who decided to sign a similar term sheet, much against our advice and much to his peril.

Caught unprepared

My second peeve is about their high-handedness and shallowness and how, combined, they architect a forgettable encounter. Some time ago, one of our mentees met a large and reputed VC organization through some connections. As they had already invested in a competitor’s company, our mentee sent them an NDA (Non-Disclosure Agreement) before meeting them. Pat came the reply that they don’t sign any NDAs. Our mentee, who did not want to sound churlish, went ahead to the meeting. He was told that he had 15 minutes. Being a mature professional, he played ball. He was very surprised when, during the conversation, the gentleman made random statements with respect to his business, claimed he had gone through the website, but the observations belied that. How hard is it to actually do some homework before meeting an entrepreneur? Everybody understands they will not invest in every business idea that comes their way but given their aerial perspective, they can at least make sensible observations, right?

I am waiting for a time, in India, when entrepreneurs can be as choosy about their VCs as the latter are. Right now, it is a lopsided market, with all the dice loaded in the VCs’ favor. But I am sure there will come a day when entrepreneurs will do due diligence before divesting their stake, and they will do so on a level-playing field.

At all these points of transition, an FOB is vulnerable and, if not managed carefully, this impacts the long-term survival of the business. Again, most FOBs in India do not have a plan to proactively manage succession in a planned, pre-determined manner. There is, however, intent to become more structured about how a new family member will be inducted. In most cases, this is still triggered by the entry of a specific member into the family or by extraneous circumstances that demand transition.

No plans in place

Our global research indicates that only 19 percent of FOBs have a plan in place for when one generation retires. It is important for us to acknowledge that managing succession in an FOB involving family members is more complex, given that multiple factors, such as aspirations of the incumbent family member, their place and role in the ‘family’, ownership implications, and capability/personality fit, play a contributory role.

The approach that a FOB takes to such issues is driven largely by the inclinations, principles and concerns of existing family members or the patriarch and the ‘managing/controlling’ family member. In fact, the ’influencers’ can be many. Our research indicates that almost 80 percent ‘retired’ family members continue to have involvement in business matters.

In many cases, the owner is driven by the need to preserve the institution. This comes from the fundamental difference in the way most entrepreneurs in India view the organizations they have built. They see this as an extension of themselves, not just as a mere business. A large part of their identity is inexorably linked to the organization they have built. This is their most defining legacy; hence, their actions are motivated by the primal need to protect, preserve and perpetuate that legacy. This feeling is the strongest among first-generation entrepreneurs.

Cases in point

One of the larger business houses in India is run by the first-generation patriarch. He has four children who are in their late 30s or early 40s. However, till date he has only allowed them to have managing control of the new businesses that each of them have established and incubated, keeping management control with himself for the two larger group businesses. He has put into place a process and mechanism which prevents his children from dividing the company after his passing away. Either they manage all the companies together by consensus (while continuing to have management control of the business they have initiated and incubated), or they will have no choice but to liquidate their holdings.

Preserving the entity

In another large business conglomerate in India, the first-generation entrepreneur created a holding company and divided the business into four non-competing businesses for his three sons and one daughter. While all have cross holding in each of the companies, the management control for each company lies very clearly with one sibling. This enables the siblings to follow their aspirations and passions, and at the same time preserves the group entity.

In another case, where the first generation has been more intuitive, leaving it to the next generation to jostle and find space, the experience has been a mixed one. In this case, the first generation comprised two brothers, with the elder brother having the larger controlling share and being the perceived patriarch. They were succeeded by their sons, who entered the business in close succession. Their advent into the business resulted in the next four-five years being a constant tussle between the two cousins, with both jostling for space, respect and management control. This resulted in confusion and the division of the leaders into loyalty-driven camps. This was propounded by the fact that the management aspirations of the cousins overlapped and the previous generation did not play the role of mentoring/arbitrating them in the manner required.

In all cases, the impact of indecision or delayed decision to act is always on the business and its ability to capitalise on the opportunities in the market, and in time such businesses will lose ground to their competitors.

Multiple claimants

These problems are propounded when there are multiple claimants to the business. Unlike the West where a number of owners (including family members) don’t necessarily play a management role but keep their ownership, the drive to be at the helm of affairs of their businesses is much stronger in India. Also, it is rare to see multiple successors head one unified business. Typically, the businesses are either split and each unit is led by one successor or the family identifies one inheritor to be at the helm. This is in contrast to the West, where we do see more examples where FOBs have managed to own and govern the company as one entity with multiple owners.

However, we are now seeing greater awareness and inclination to put in place family governance process that will ensure perpetuation of the entity and create space for family members to jointly participate in governance.

Another lever that FOBs are using to enable multiple family members to co-exist as owners while protecting the business from any adverse effect of this, is to induct ‘professionals‘ into key management roles; thereby pushing the family members to play the role of the investor/entrepreneur rather than lusting after management control of businesses.

Also, there is a greater realization of the need for planning for the induction of new family members, bearing cognizance of their individual aspirations and passions, their ability and knowledge, and the perceived impact on the business. Entrepreneurs are also making more conscious and concerted efforts to pass on their values, specially business values and knowledge to the next generation.

Earlier, in most parts, this was covered by two generations overlapping for extended periods of time in the business and by families staying together, allowing the natural transfer of the ways of working.

Now, with family members taking longer to come into business (after professional education and sometimes working in other firms), this overlap is not a given. Also, the entering family member has their own opinion on what they would like to do and how they would want their careers to pan out. Hence, understanding and working with new family members to understand their interests and then mentoring them to ensure that they are effective and productive as they play out their individual passions, is critical.

Tussles and tangles

However, FOBs in India continue to struggle with whether or not they should protect the sanctity of the institution: keep the entity as one with shared ownership among multiple successors or split it up into individual businesses among the next-gen successors.

The decisions FOBs take will be the result of the interplay between the various family and business issues, and the two fundamental questions:  (i) what’s good for the family, and (ii) what’s good for the business.

The result of this tussle will impact how the baton passes from one generation to the next and whether it will create or destroy value.

How do you manage it all?
Whichever is your chosen industry,
the first project you deliver to the client teaches enormous lessons, both good and bad. Learn from it and set a simple process that works. The process should be easy to manage. It should also be people-friendly, at the same time it should let you to monitor, measure and manage on a daily basis. I have not been to Ivy League management
schools to learn about processes. I have learnt about it from successful businessmen in my hometown, who understood and followed the two fundamentals of the books diligently: income and expenditure. Get a hold on the incoming and outgoing flow, and you will do well. Financial discipline is key to business success.
Managing people includes clients and employees. As you begin to get more projects, managing everything
yourself will become difficult, so you will need to identify and hire the right people who understand your vision and grow with the company. This is the toughest part—getting talent that is both smart and committed. I have hired people from villages and small towns of India and trained them so that the company culture is built in, rather than hire smart talent from outside and spend resources on grooming them to fit into the culture, where usually there is a mismatch of expectations from both the parties.
A true entrepreneur knows how to bring people together. You may have the greatest product but the company is nothing without
its people. I would like to quote N.R.Narayana Murthy of Infosys, who said that at 9am Infosys is worth billions but at 6pm everyday, the company is worth nothing.

Fit for the role
Bootstrapping is all about being disciplined about resources, and this includes time, people, process and money. Just because you spent money doesn’t mean you get great quality people or products. It helps to be upfront with people about your expectation
on their performance.
Beyond these, there is one key factor that separates a successful
entrepreneur from a failed one: continuous self-motivation and courage to go on, despite challenges. You have to learn to swim your way through the waves and learn to fight the school of fish and avoid the sharks. Therefore, it helps to stay fit, both mentally and physically.
Often businesses fail, not because of the product or quality of service, but because over a period of time, business leaders tend to lose focus and belief in their idea.Once this happens, its time to say goodbye, and join the mourners in the long list of the have-been-there types. But it is such an unfortunate thing to let your dream die. Hence, you should revisit your dreams and reenergize yourself often.

Muki Regunathan is Founder and CEO of pepper square.

Opportunity
Entrepreneurs must pick spaces with potential. India Life did HR outsourcing but Teamlease is trying to fix India’s people supply chain; a big and complex problem. Hard work and smart ideas are important but there’s no point putting lipstick on a pig; you can’t scale a company beyond the potential of its market.

Team
Steven Spielberg was right when he said directing is 90 percent casting. Putting together a team is key and every entrepreneur has to kiss many frogs to find his princess. We did our frog kissing in India Life. In Teamlease, we not only got senior people early but we hired people who had diverse skill sets.

Color of money
Most entrepreneurs obsess about money but few realize that the color of money is more important than the quantum of money. Find an investor who understands that a company is not a spreadsheet and building one is hypothesis testing: you cannot prove anything right but have to prove it wrong.

Organization structure
Organizations with better metabolism—faster and more effective decision-making—have clear roles and responsibilities, forums for conflict resolutions and a leadership team comfortable with making trade-offs. The ‘everybody does everything’ chaos of India Life was replaced by clearer organization structure at Teamlease.

Ambition/risk
The biggest difference between India Life and Teamlease has been our appetite for risk. We are young enough to think about the next 20 years but old enough to have the credibility of having created a venture. We know that entrepreneurship is a leap into the unknown; if you are going to jump from the 10th floor you might as well jump from the 50th floor; the outcome will be the same! That is why our goal is to become India’s largest private employer and this star simultaneously beckons and motivates us. India offers unique entrepreneurial opportunities. Also, entrepreneurship is a journey with unique financial, spiritual and intellectual personal rewards. I’ve never met an unhappy successful entrepreneur but know many unhappy successful employees of big companies. May a thousand flowers—or babies—bloom.

Gold edge
I plumbed for the one option still open to me: to become an entrepreneur. But this needed money. So, I approached my aunt to lend me that much-needed initial capital. I wanted to buy garments from Tirupur and sell these at an exhibition in Bengaluru. She had faith in my abilities and promptly gave me her gold bangles to pawn. I took them to a Marwari pawnbroker away from the locality I stayed in. As he checked the precious yellow metal, I felt as if he was touching my aunt’s hands. I was almost in tears. But he seemed to sense my feelings. “You are young. Work hard and take them back with the money you earn,” he said, handing over a bundle of notes. Armed with my precious money, I headed to Tirupur. That was my first tryst with business. And I succeeded not only in getting back my aunt’s bangles in half the time but also bought my first bike with the profit.

Believe in yourself
This initial success only fuelled my entrepreneurial spirit. I didn’t want to sell garments all my life. So, I started focusing on computer graphics as I was inspired by the 1991 James Cameron’s movie Terminator II.
Now, I have an arsenal up my sleeves which every entrepreneur must possess: I do not fear failure. I have failed in math, failed to get a girlfriend for a long time and failed to get jobs in companies like Infosys and Wipro because I am a diploma holder, not a graduate. But I never give up hope.
I learn from every opportunity life throws at me and do a course correction when things don’t go right. I have been through the dotcom bust, 9/11 and a recession in 2007. If there is one thing I believe in, it is in myself. I am an atheist and believe there is nothing you cannot do if you make up your mind and focus on it. Focus and hard work are the weapons with which you can fight failure.

Let go of ego
I believe in taking people along in my journey of success. People relations and finance are the two things I have successfully balanced all along. As for finance, it is crucial to control money. Don’t run after money, it will come to you if you keep doing what you love. I meet my clients with an open and empty mind, free of ego and expectations. I have learnt that ego is suicidal. Business is about trust.

Rise and shine
When I mentor youngsters, I see myself in them and want to share my experience. I would have benefited so much if I had the right mentors. I have learnt more from my failures than at school. I may be in the digital business, but I am very analog and very human. That, I feel, is a better state to be in.

Muki Regunathan is Founder and CEO of pepper square.

Now for some disappointments
My view about reasonably acceptable progress in India on the fiscal and monetary front backed by government measures fell flat on the ground as attempts on retail FDI and similar reforms cannot be termed as acceptable progress, by any means.
Geo-political events: While prediction on geo-political events didn’t materialize, the preventive checks by way of natural calamities in various parts of the globe emerged as the new threat. Expect such natural calamities to sustain with global warming.
So that’s an 8 on 10. While one expects 2012 to still be turbulent, it may not be as frustrating as 2011. In the interim, wishing all my readers a healthy 2012 and praying for the courage to hold the nerves!

(The views expressed here are personal.)

Bharat Banka is the Founding CEO of a leading private equity firm.

Budgeting is a crucial part of financial planning where projected income and expenses at various junctures are ascertained and balanced in order to achieve important financial goals. Budget is a careful earmarking of a portion of income to meet regular expenses. It also serves as an elaborate plan for saving to invest and borrowing to meet financial goals. Budgeting is an essential management tool in the construction of a financial plan, in its revision to modify existing goals and include more goals and also as a resource allocation and management tool.
The annual personal budget of post-tax income and expenses is an effective tool in financial planning. The past spending pattern and debt servicing schedule are required to have a tab on what is needed to be provided for consumption.
Added to this a one-time creation of contingency fund and a little scope for discretionary expenses, we arrive at a surplus in the budget which needs to be allocated to goal-based investments. Borrowing to meet basic expenses is a fractured proposition where a person is not initiated in financial planning.
Borrowing to meet discretionary expenses defies the discipline in financial planning. Once we have a basic financial plan constructed, the investment discipline is built in. To keep a proper control on the expenses, it is advisable to meet the investment regimen first as already decided in the financial plan, and spend the remaining part of the income. Spending is an art. We get experts to advise on what and where to invest. Spending in order to derive value from every rupee spent is a discipline which is inculcated the hard way, only with experience. The expenses can be fixed, variable, avoidable and essential.
Cutting across this nomenclature, two important categories of expenses are regular/irregular and discretionary/non-discretionary expenses.
These categories are also overlapping. The diagram on the facing page describes an interplay of these groups across major heads of expenses and guides how to distinguish them and thereby exercise due control over them.

Pattern of expenses
It can be seen that expenses covered in quadrants II & III are of essential nature giving us little choice for dropping or postponing them. Quadrant I expenses give us choice of quantum and time of such spends.
Quadrant IV has certain expenditure which financial planners scarcely recommend, though such expenses are not always unavoidable.
Such expenses should be incurred only when they enhance the performance of our professional jobs. Thus, having once partitioned our net income into investments and expenses, the expenses part should have a disciplined outgo towards quadrant II expenses. We should have a contingency fund built and supplemented at times to meet quadrant III expenses. A certain portion, say 5-10 percent of expenses part every month, should be set aside for discretionary expenses of quadrant I & IV.
Rather, a corpus for discretionary expenses should be built from the monthly budget and from such a corpus, first quadrant I and then quadrant IV expenses should be met. This will then give us a good mechanism to have control and discipline in our expenditure.
Investment planning is not about just quantum. It is more about a well-defined systematic approach in a strategic and sometimes managed asset allocation to achieve investment goals.
For financial goals of long term nature like distant education and marriage of kids and retirement, an asset allocation with more exposure to equity is preferable to effectively beat inflation and create wealth.
The equity returns in the short and medium term are volatile. However, over a longer duration of 7-15 years, volatility reduces and returns exceed 12 percent per annum. Thus, for goals maturing in 7-15 years’ horizon, one may take higher exposure of 60-80 percent to equities. Debt instruments provide stability to portfolio and generate regular returns and an exposure of 20-40 percent ensures the same. For goals maturing in the short to medium term, say 3-5 years, one may have larger portion of 60–70 percent in debt instruments and 30-40 percent in diversified equity.
There should be higher alertness and also proclivity to book profits and also to lock-in to gains from equity in the medium term goals.
It is further advisable to avail the services of a certified financial planner or CFP professional who, after scrutinizing the spending and saving habits of a household, orchestrates the same to suit financial goals and ascertains risk profile for optimum asset allocation to achieve the goals.

Step 1: Stay on Target
A mistake often associated with the first step is signaled by an entrepreneur’s inability to clearly and concisely convey his idea. You have to be able to generate buy-in from investors, partners and potential employees, so nail down your “elevator speech”—what you would say if you ran into an important potential investor in an elevator. Try to refine the essence of your concept into just 140 characters. Once you’ve done that, expand your message to a maximum of 500 characters. Remember, the shorter your pitch is, the clearer it will be.
An associated error is lack of focus. If your start-up has been tagged as “the next big thing,” the adrenaline rush that comes with building buzz can lead to impetuous decisions and a loss of a sense of purpose. Clearly define your goals, then establish a timeline.
Getting too far ahead of yourself is also dangerous. If your product or service is still on the drawing board, don’t get sidetracked by plans for future versions. Looking two or three years ahead is best, but the nature of your business and feedback from your investors will help you determine how far ahead you should plan.

Step 2: Be Realistic About Costs
Don’t shortchange your start-up when estimating the funds you’ll require. Keeping expenses under control is vital, but don’t confuse capitalization with costs.

Step 3: Hire People You Need, Not Like
As tempting as it may be to staff your new business with friends and relatives, this is likely to be a serious mistake. If they don’t work out, asking them to leave will be very tough. Take full advantage of the knowledge pool you’ve created; when a problem comes up, remember nobody has all the answers, including you. One of your goals should be to find a manager who shares your vision, and to whom you can someday confidently hand the reins to carry out the next step.

Step 4: Know When to Say Goodbye
A great entrepreneur knows when it’s time to leave the CEO role. It’s seldom easy, but it has to be done: few entrepreneurs make great managers. In my case, managing the daily operations of a business simply isn’t in my DNA.  Stepping back doesn’t mean turning your back on your business. Founders shouldn’t hesitate to re-insert themselves into their businesses when necessary—look at Larry Page, who temporarily returned to the CEO role at Google in April. That said, I had to laugh when I heard this news, wondering how many managers at Virgin businesses had thought, “Wow, I hope this doesn’t give Richard any ideas.”
RICHARD BRANSON is the Founder of the Virgin Group.
©Entrepreneur Inc. All rights reserved

Entrepreneur
(How I love this animal!)
Dictionary says: One who organizes and manages an enterprise, especially a business, with considerable initiative and risk.
Entrepreneur says: A person running a business, the way he chooses to, without being answerable to a boss, coming to work when he pleases, making money and keeping it all.
Mentor says: A selfish person who doesn’t like the way the world around him is, sets out to change it and in the process leave his footprint.

Serial entrepreneur
(The word reminds me of a serial killer!)
Dictionary says: One who starts one business after another by successfully exiting the previous one.
Entrepreneur says: A person who starts a company, gets bored with it after a point,  sells it, shuts it or forgets it.
Mentor says: A person who likes to validate how often he can keep repeating the same mistakes or how creatively he can make new mistakes!

Customer
(Has discovered lately that he is actually the king!)
Dictionary says: One who buys goods and services.
Entrepreneur says: Any sensible person who buys my product because I know better what is good for him.’
Mentor says: A person who makes or breaks
an entrepreneur.

Venture Capitalist
(Never have two alphabets sounded more ominous!)
Dictionary says: Private equity investment in a business which does not have access to capital market.
Entrepreneur says: Capital which announces that I have arrived to the rest of the world.
Mentor says: Capital that you will raise when you don’t need it, not when you’re desperate for it.

Profit
(Used to be an ugly word with all failed capitalists!)
Dictionary says: Monetary gain resulting from employment of capital in any transaction.
Entrepreneur Says: The difference between over invoicing and under booking of costs.
Mentor’s definition: The meeting point between your vision and execution.

Mentor
(A new species troubling Darwin in his grave!)
Dictionary says: A wise guide, adviser, preceptor.
Entrepreneur says: Not sure what he’s supposed to do but is expected to wave his magic wand and make the negative effect of all mistakes vanish.
Mentor says: One who will never claim he knows it all, is willing to share what he knows and learn what he doesn’t, will open doors for you, and choose the good of your organization over you.

These words define an entrepreneur’s existence, yet there seems to be such serious disconnect in perception. India badly needs entrepreneurship education today.

Nandini Vaidyanathan teaches entrepreneurship in several ivy-league business schools across the world. Her company, CARMa (www.carmaconnect.in), mentors startups, family businesses and mature enterprises. She is the author of bestseller Entrepedia—A Step-by-Step Guide to Becoming an Entrepreneur in India.