Resource crunch faced by start-ups

Those of you who were wondering why I was not active for so long, here’s an explanation which is not too difficult to believe: I was busy running a startup. I was and still am short of time and everything else. But I thought I should share my hardships with you all.

For a startup this shortage is in everything: manpower, cash, office space, customers, support, etc. Everyone will have to multi-task and the sales cycle will have to be short in order to ensure that cash is coming in at right times.

First question, when is the right time to start hiring and in which area? When you are boot-strapping the venture, the intention is to keep the costs as minimal and variable as possible. Hence usually founding team is the one who brings out at least the beta version or prototype of a product. For a product firm, there usually won’t be any revenues initially. The initial hiring requirement in all probability would be for product development team and later for a sales team when the prototype is ready. In many instances, founders are the ones who do the initial sales. The actual marketing team would be formed only after the product is fully ready for distribution or deployment. For a service based company, the hiring would start earlier. The head count is directly proportional to revenues usually.

The most significant resource is cash. Startups always loose opportunities due to cash crunch. They cannot hire either on sales side or on support side or build infrastructure since they cannot burn cash at a fixed rate. They cannot take in large customer since they might not have the bandwidth to service the customer. They usually prefer smaller customers who bring in cash at frequent intervals and thus funding their operations. Unless there are investors who are willing to bring the required cash, startups which bootstrap usually grow slowly.

The next important resource is people. Hiring is an issue with both startups and large organizations. But more so with startups since they cannot pay the market salary. It is also very difficult to convince potential employees to join them. Ideally, like-minded people who are willing to join them on the journey of entrepreneurship are the initial hires. Fresh graduates would also be willing to join either as interns or employees (though retention is an issue) since it would add value to their career.

Marketing is another major area which is affected by resource crunch. Whether to hire and when to hire a sales person is an important question which no one is sure of answering. Ideally initial leads are through the network of founders and initial sales are made by founders themselves. But after a point, sales and marketing becomes an overbearing task on the founders who are multi-tasking. Ideally, one of the partners should market the product full time while others work on building the product or improving the service offered.

Though there are other constraints which startups face these are the important ones and there is no easy way out of it.

Procedures to setup a company

1. Apply for Director Identification Numbers (DINs)
a. Submit Ids proof (Pan cards), Residence proof (passports), Photos
b. Challan of Rs. 110
c. Apply for Digital Signature for director (Separate fee of Rs 1100)
d. DINs will be sent through email and also through post

2. Register Company Name
a. Give choice of three names (Form 1A)
b. Challan of Rs. 500
c. Confirmation will be emailed and also through post

3. Register Company
a. Prepare MOA, AOA on stamp papers (to be prepared by local CA)
b. Form 32 stating the details of Directors
c. Form for stating the details of share capital
d. Challan depending on amount of share capital
e. Certificate of Incorporation will be sent through email and post

4. Apply for Company PAN
a. Apply in any of the PAN centers (fee of Rs 90)
b. PAN card will be sent through post

5. Make MOA/AOA/COI booklets

6. Get letter heads and stamp done

7. Open Current Account with a Bank
a. Give board resolution stating that the a/c be opened with the bank
b. Submit MOA booklet along with directors’ details
c. Deposit share capital by cheque from shareholders

8. Apply for Service/Sales Tax Number

9. Apply for TAN number to allow TDS for employees

10. Register company logo (trademark registration is not mandatory but might be required for some business brands)

Type of Company

Now that you have decided to take the plunge, what is the next step? To form a company. I am not going to explain various types of companies, assuming that you know about them. Basically the company types to consider in India are: proprietorship, partnership, public limited, private limited, limited liability partnership. I am only going to discuss those that are relevant for knowledge-based businesses such as ours.

Partnership

This is basically for professionals like chartered accountants, lawyers, etc. Less paper work to form a partnership. Registration is not mandatory, but is given weightage in case of legal issues. Need at least two members and not exceeding 20. Capital is decided by the partners.

Since there were two of us, we could have gone with this type. But the liability for partners was unlimited. So we did not consider this.

Public Limited

We weren’t going to be listed yet and weren’t going to offer our shares to public. Minimum number of shareholders required is 7 and we dint have that many at that time. So we dropped this option.

Limited Liability Partnership

This new addition to company format was an attractive option. We seriously considered this type. This came with the advantages of a partnership without the downside of liability to partners. But the law was newly formed and there wasn’t much clarity in the procedures and legal issues. We dint want to get caught with our foot in the wrong boat down the line. Though attractive, we had our apprehensions about this.

We came to know that we can change our company registration later with minimal procedures i.e we can change from a partnership to LLP to private limited.

After speaking to couple of CAs and legal experts we dropped this option as well since there wasn’t much clarity regarding what the procedures expected of us were.

Private Limited

We are left with the option of setting up a private limited firm. We thought this was the best option if we needed to limit our liability or increase the stake holding or invite investment from outside or even go for public listing later. Most of the IT firms anyway started as private limited firms. So here we are – XXXXXXX  Software Solutions Pvt Ltd.

Want to more about the name and actual procedures? You got to wait for my upcoming blogs…

Thought Process – Part2

Once the seed of an idea is there and you have decided more or less to go ahead, the next thing is to give the idea some shape. What we did:

• Read a lot of relevant material (both online and offline)
• Spoke to various people (especially those in relevant industries)
• Gathered information on various products/ services already in market
• Kept abreast of current developments in various industries
• Went for long walks alone (important since you need to collect your thoughts without any disturbance)

After some point you start getting the feel of what the final product or service you intend to offer. Then you can

• Focus on gathering relevant information
• Make a list of features offered
• Note various milestones to achieve
• Set yourself a broad deadline

NOTE that there is no end to the amount of research that you can do. So stop at a logical point and start the next step.

On the personal front:

• make a list of all your commitments (financial, emotional,… everything)
• think of the impact of your decision on them
• decide for yourself whether you are prepared to face any foreseeable hurdles (there will always be unforeseen ones)

Did we do all this? Yes we did – for many months. As a matter of fact, when we quit our jobs our idea was just a seed. All the research happened later.

Family Support

One of the important pre-requisites to start on your own is to have the backing of your family. Family has impact on your stress levels and hence your work.

If you are not from a business family and intend to be the first generation entrepreneur, most of the objections and negative feedback comes from the immediate family. Don’t really blame them, since taking care of them is your duty. You have to think how your decision would affect them. Usual objections are:

• But you have a nice job or you are earning well enough now
• What do you know about business?
• Who will finance you?
• How do you intend to foot your/ our bills?
• Don’t become the black sheep of our family
• What if you fail?
• What would everyone else think?

Try to convince your family as best as you can. If you have clarity in your thought process, it would be easy to communicate your decision and answer their apprehensions. Most important and difficult part is to convince your spouse. Involve him/ her in your decision, otherwise you will have to live with the nagging.

We dint need to convince each other, but we needed to convince our parents. We gave them few reasons with which they agreed:

• we both did our MBA from IIM which equipped us with necessary skills
• we have planned for this financially and can take care of our family
• we intend to give this a time period of 2-3 years and see how it goes
• in case of failure we shall return to our jobs
• we need to do this to satisfy our inner urge to achieve something

There are bound to be hurdles in your path and times when you find that things are not going smoothly. During that time you do not need to hear “I told you so”. If you have family support to fall back on, then they give you positive talk, help you financially, lift your moods and give you energy to move on. 

If you are a person with “I care a damn” attitude, then go ahead and enjoy the journey.

Thought process – Part1

We firmly believed that having a good idea is the starting point, then execution as per plan. We thought success will follow. So we sat down to jot down all ideas that we had. Then we short listed some of them based on self evaluating criteria like:

• our core strengths
• our knowledge/ experience in that area
• idea potential, market
• capital required
• time take to go to market
• Our network, etc.

After we short listed to three ideas now we thought was the time to decide.

We honestly assessed our personal situation: our financial commitments, our personal responsibilities, etc. Then we asked ourselves few critical questions: 

• Can we do it?
• Are we willing to sacrifice? 
• Is this the right time considering our family responsibilities?
• How much time should we give ourselves? 
• What are our goals? 
• Is our strategy correct?
• What if we fail?

For some we have clear answers, but for some we did not. We went ahead anyway. Why?

We decided that rather than live with ‘What if…’ it is better to live with ‘We tried but failed…’.

Background

The first thought of running my own business probably came to me when I was an undergrad. That was in mid-90s when the field of Information Technology was just opening up in India. By that time I was pretty sure that IT was the professional route to me. My jobs in the software industry gave me the needed exposure and experience. But it did not open any avenues to satiate my quest for entrepreneurship. Thankfully I found a like-minded person as my life partner which kept the fire alive within me.

We both had various thoughts of how we could go about it but nothing was concrete. Whenever we read/ heard some news one of us would have an idea. Then we used to discuss it for couple of days and later forget about it in our daily routine. A few weeks later we used to read/ hear about exactly the same business idea started by someone else. We knew that our thoughts were in line but we did not know how to start acting upon them.

We invested in a cold storage chain and got to know about the franchise model. Our bitter sweet experience taught us that we should build our own brand from scratch and not rely on someone else’s name.

After an year, we thought that we needed either good financial credit or excellent resume in order to get the needed confidence to come out of our comfort zone. We choose the latter.

We worked hard for almost 5 years before we entered the sacred community of IIM. All these 5 years we strategized about how to get the maximum out of our two years on campus. (More latter about this phase)

Since we both were from the software industry we thought we should take a look at the latest technology. After our graduation, we tried our hands on the internet technology. But we learnt that traveling on two boats is not possible. One cannot learn swimming without getting into the pool. So we quit our cushy corporate jobs and sat down before the drawing board to decide what to do next.

A warm welcome

I wanted a dedicated blog to share my experiences as an entrepreneur and hence this one. I hope that those who are planning to start on their own learn from my experiences and hopefully share some of their learning with me.

A warm welcome to those who have unfulfilled dreams within ..