Friday, January 28, 2011

Entrepreneurship - Avoid the following hiring mistakes

In last 3 years I have seen several startups set up shop in Bangalore. Over this period of time, I have seen several hiring disasters. These hiring mistakes are specific to Indian culture and are common in many startups. But these disasters could have been avoided. I am therefore documenting them here.

1. Hiring from big name organizations for experience

Business was expanding rapidly, the company had lots of orders and to deliver them, there was great need for experienced project managers. The company hired three experienced project managers. These new employees had the right credentials and experience on working on complex projects at IBM, Accenture & Philips. The new employees had no experience working in a start up, the start up lacked systems to support its new employees - as a result the new project managers quit within few weeks putting the project in jeopardy. The founder had to scramble in the end to get the projects completed.
Experienced project managers were used to working in large well established organizations and could not adjust to the new working environment. As a result new project managers and the start up never got along. Project managers wanted a lot in terms of systems and reports to monitor the project which the company could not provide. There was absolute mismatch between the new project managers style of functioning and the company.
Hiring people based only on their past experience will not work for startups. It is essential to hire people who have experience working in startups or in a startup like environments, and there should be a cultural fit between the founders and experienced employees.

2. Hiring friends and family members

Founder of one company had hired his friend after two years of operations. By then the company was doing quite well, and was cash flow positive. He was hired on social pressure - to help his friend. The new employee often flaunted his friendship with the founder, would often bypass the organization hierarchy, and soon began to boss over other employees. This led to fall in morale and productivity in the organization. Over a period of time, the company started loosing its existing customers and only then the founder woke up to the reality. He now had to make a difficult decision of firing his friend to save the company.
Hiring friends or relatives is acceptable only if they can perform. In a startup, the hiring costs have to be minimized and founders like to hire people whom they know. But when these friends/relatives do not perform, then the founder must take swift action - either to correct the errant employee or by firing.

3. Hiring some one to please others

In India, there can be lot of undesired political advances on any organizations. One of the common tactics is to request a startup to hire persons recommended by the local politician. This leads to an uncomfortable situation for the entrepreneur. He cannot afford to antagonize the politician & often succumbs to hiring the "recommended" candidate. This new hire soon becomes a liability to the organization - thus bleeding the company of its valuable resources. Startups which have faced this problem eventually will end up firing the errant employee and thereby facing the wrath of the local politician or end up creating a constant drain on their resources.

Founders must make a clear decision on the terms of hiring such "recommended" employees - and workout an agreement with various stake holders - including the "recommended" employee & his sponsor on the terms of employment and termination criteria. Smart entrepreneurs turn this bad situation into an advantage - by seeking out favors from the politician/sponsor to grow their business.

4. Hiring house wives or students to cut costs

Many people are willing to take a lower salary in return for having the flexibility or opportunity to work from home. For a startup, this represents a significant cost savings - but such savings typically come with several hidden costs.

In India, housewives & students seek part time or full time employment - for tasks that they can do from their homes. Hiring such employees creates lots of management overheads and introduces risks to projects - in terms of delivery timelines and quality. Often times house wives and students are driven by different priorities and may not be in a position to complete their tasks in a timely manner. This could potentially upset the delivery timelines and project schedules. So for critical projects, such part time or work-from-home employees are best avoided.

Hiring house wives or students is not necessarily a bad thing. But for a startup, it can create several overheads in terms of management - that the cost savings are often washed out by management overheads. Once the company has established a process to manage house wives or students, then only it makes sense to use such resources. But this takes both time and management expertise - which many startups do not possess.

5. Hiring rapidly to scale up operations

A startup got an order to setup a media BPO operations. This project required getting 20 people hired and trained in screening cable TV channels for particular advertisements and creating reports in a predefined format. The task was simple enough for high school graduates. So the company put out advertisements in local paper and hired the first 20 people who accepted the offer. Many of the new hires had no experience working in a regular 9AM-5PM job. As a result many of the new employees quit within few weeks. Company was now desperate to staff up the operations to avoid slippage on delivery. Again the company hired few others - who too were fresh out of school, and they too quit. After a few cycles of hiring, company learnt its lesson and in next hiring cycle, the company hired the right set of employees. In the process, company wasted money, and time - but could prevent loss of customer.
Hiring rapidly for a project is mandatory, but do not cut short on the required due diligence - do not trade quality of hires for lack of time.

Closing thoughts

Hiring is a critical activity in a startup - which can make or break the company. Startups should be very careful in hiring. Getting a wrong hire can cost a lot for the startup and if the mistakes are not corrected quickly, the business can be severely damaged.

Saturday, January 22, 2011

Entrepreneurship & Size of the Business - Story of Reva

Over the weekend I was reading the book "Connecting the Dots" by Rashmi Bansal. In that book, there was the story of Chetan Maini & his "Reva Electric Car" . My wife owns a Reva car, and I am an adherent fan of Reva car. The story of Chetan Maini as mentioned in the book had to be read with the fact that Chetan Maini sold the controlling share of the company to Mahindra & Mahindra.

For many Reva fans, this was a good news. For Reva Electric Car Company, this was a major step towards becoming a success in the global stage. From a business & leadership point of view, Chetan Maini did the right thing by getting Mahindra & Mahindra Ltd as an investor in his nascent electric car company. Reva is the largest selling electric car in the world in terms of volume - but when compared to the scale of automobile industry, Reva cars account of less than 0.01% of the market.

As a business, Reva electric cars was operating at a sub-optimal scale and to be successful commercially, they needed to expand on production capacity and on dealership networks - but all this needs huge investments which Chetan Maini could not raise internally. This implied that he had to get an investment partner with automobile background and that partner happened to be Mahindra & Mahindra Ltd. With this move, Reva electric car company (now renamed as Mahindra-Reva Electric Car company) is on the move to become a large company.

Lessons for Entrepreneurs

In the world of business, it is common to see large companies buying out smaller ones. Here in this blog, I want to talk about the fundamentals of entrepreneurship & leadership needed to take a small startup on the path of becoming a big company.

Startups are of two types:
1) Lifestyle Startups: which cannot grow big - typically ends up as a Small or medium scale enterprise.
2) Enterprise Startups: Ones that can grow into a big business (say revenues of more than $100Million/year)

Small/medium business are typically run by individuals and the business is their sole source of income. These businesses are called as "lifestyle" business - as the venture is designed/built to support the lifestyle of the promoters/owners. These lifestyle startups typically start by serving a known set of customers and offer a known set of products/services. Once the business model is worked out, the business becomes profitable and the profits are used to maintain the lifestyle of the promoters. About 80% of all business fall in this category.

In case of Reva, it was not designed to be a small scale business. Reva is an enterprise startup - the one with a potential to grow into a Multi-Billion Dollar Business!

All startups have the potential to grow into a big business. Even simple sandwich shop can grow into multi-billion dollar venture - provided the leaders have the right vision and management skills.

In case of Reva, the founders had done all the right things to position the company on the path of becoming a big business. Let me explain little more about this.

Reva was started when the concept of commercially viable - street worthy electric cars was not viable. Reva was started at a stage when there were two major unknowns: unknown customer base, unknown features/functionality. Over a period of time, Reva worked on these two unknowns over 12 years to produce a car that would appeal to certain market segment. In order to do that, Reva had to:

1. Invent a business model - i.e. get vendors, channel partners etc.
2. Develop the product that meets the market requirement.
3. Develop a repeatable sales model
4. Build a team of capable managers.

It takes a high risk appetite to invest in a company that is yet to develop a business model. In other words - the startup at this stage needs a significant amount of risk capital. Reva managed to raise this "risk-capital" by raising debt financing of ~$3million in year 2000. With this funds and vision, Reva started off as a "startup".

Over the period of next six years, Reva managed to identify a small segment of customers - mainly in UK & Bangalore. Reva managed to sell ~1000 cars in Europe. By this time, Reva had to build the infrastructure that set Reva on path of becoming a large company. This involved setting up marketing systems, accounting systems, IT systems, and business measurement systems to manage the business. In the process Reva achieved a major milestone - Reva managed to validate market for electric cars through customer discovery, customer validation, get features/price trade-off worked out.

At this point, Reva was ready for its first major infliction point to start its journey to become a large company. This transition needed more capital, and Reva managed to raise a venture capital of $20 million in December 2006 from VCs.

Reva now had to build a scalable business - which implied setting up a new factory, identifying distribution & supply partners, implemented enterprise class ERP/IT, develop next generation technologies that were needed to address the needs of a much larger customer base. Reva invested in a new factory with a planned capacity of 30,000 cars per year (up from 3000 cars/year), developed a new model "Reva i" which was a major enhancement over its predecessor.

By 2009, Reva had set up a professional management in place, sales was taking off, and was ready for the big step. That big moment happened in September 2009 when General Motors licensed its technology for developing Chevy Spark.

At this stage, Reva was ready to transition from a "startup" to becoming a "large company". This transition needed a major change - the company had to join hands with a big player who could invest $200 million or more into the venture to make Reva Electric car company into a global player.

Mahindra & Mahindra was that partner who could invest big money needed to take Reva cars on the big stage & launch Reva cars all over the world. Typically during the transition, it is time for the founders to move out of management and let the company be managed by professionals. Here again, Reva founder - Chetan Maini did the right thing by handing over leadership to G.P. Goenka, who is the new Chairman of the board, and making Chandramouli as COO.

Now Reva Electric Car Company is ready for big time & is on firm path to become a large successful enterprise.

The new leadership has its job cutout: Make the company profitable, launch new products to widen the customer base, achieve rapid scale, hire more people and expand the business.

Closing Thoughts

Entrepreneurs typically start a company and set the company on the path of becoming a large business. Becoming a large company is a long arduous journey which many startups fail to complete. It takes capable leadership, excellent execution and above all sheer guts to go through the journey. And at the end, the founders must have the confidence to pass on the leadership to professional team and step aside for the new team to make their startup a truly large company. The story of Reva Electric Car is a text book case of entrepreneurship and management.

Note: I got the details of investments numbers from the book "Connecting the Dots" by Rashmi Bansal.

Tuesday, January 04, 2011

Product Management in Startups

India has seen several great success stories in the technology world - particularly in computer software. But almost all the success stories has been in services and very few - a handful of success in software products. In last 3+ years I have seen about 200+ startups in Bangalore region alone. Many of these startups died along the way and those that survived had transformed to IT services companies.

What ails Indian Startups?

There are two main reasons for death of Indian startups: Lack of funding and lack of product management capabilities. In many cases, the lack of product management capabilities has led to cash burn - which in turn leads to lack of funds & inability to raise funds - thus killing the venture.

The eco-system needed for a successful startups in India is still evolving. The main deficit in the eco-system has been lack of product management discipline. In Indian startups, most founding are from services background - as a result, the organization gets built on a services mindset - which in a product world turns fatal.

Startups are often centered around an idea - usually this idea comes from the founders - who will form the company, get some funding and hire people to develop that idea into a finished product. But along the way, other stake holders jump in with their own additions to the orginal idea. And at this point, the company ususally makes the fatal mistake of adding new ideas/features/functionality into the product which results in a grandiose product that will never see the light of the day. The product requirements would have bloated - and engineering teams are burning cash trying to implement all the features before they can launch the product. The product launch gets delayed which causes more cash burn. And finally, if the product is finally released, customers don't like it as it has too many features that they do not need and that would often be the final nail in the coffin.

To understand the importance of product management in startups, one needs to understand the basis of a start up: I got a "Great Idea" & "I am the end user"

Great Idea Syndrome

The most common trigger for starting a venture is an idea. Founders of the company develop an idea for a business, and have a strong itch to make it happen. Founder(s), jump on the idea and start off a business. Here in lies the first fundamental flaw of the start up - they started the company without validating their "Great Idea".

The business has been started without proper validation of the real customer use cases and without validating the idea. In their eagerness to start the venture fail to check with the actual customers.

The fundamental aspects of product management - What are the basic business life cycles in this business? Who are the actual users? Who will pay for this product? What are the real life problems customers have? When, Where & who will buy the product? What is their buying process?

These basic aspects of product management must be answered before starting the venture. Though these things looks like basic common sense, it is shocking to find out that many startups do not have answers to these questions.

The basic process of validating the product idea is a must for any venture. The process of validating the product idea is not an one time affair either - it needs to be constantly revisited during the course of product development just as check to see if the product development is on the right track and the external market conditions are still conducive for the product.

I am the end user syndrome

As the founders are often hypnotized by their great idea - they begin to think "I am the end user" and start developing the product in a world seperated from reality. Having a proper product mangement discipline will ensure that the real customer needs are being addressed in the product development process.

This problem of not understanding the customer is more acute in start up where the founders have deep technical expertise in their field. The founders are so deeply aware of the technical issues and often make an assumption that the problem they are seeing is what everybody sees, and hence end up developing a solution that solved the problem envisioned by the founders - but failed to solve the real customer problems.

In case of high tech product startups, the most common product failure happens with the product usability. (This happens more in software companies than in other areas.). Since the founders are experts in their area, they tend to think that if they can use the product, then the whole world can use it in the same way.

Founders fail to understand that the rest of the world are not as knowledgeable as assumed, and customers really do not want to memorize a 20 different options in a command line to use the product.

The end result of not developing a product that customers can't use and that kills the product.
Real hard nosed product management discipline is needed here to avoid "If I can use it, the whole world can" attitude in the startups. Product must be designed with the average end user in mind and there must be strong will to over come the "I am the end user syndrome"

Discipline of Product Development

Once the decision to develop a new product is taken, the next step is to have a product devleopment plan - starting with a product feature prioritization for various releases, project planning, writing up a product requirement document, developing product design specifications, project execution etc. All these activities need strong product mangement skills to address the challenges of product development:

1. Write up a market requirement document which documents the customer requirements over a period of time - typically a 2-3 year time frame.

2. Convert the market requirements into product roadmap which is a phased approach to meet the market requirements through series of releases.

3. Product roadmap then drives project plans. Project plan is a time bound activity to implement the prioritized features for the planned releases.

4. Continiously scout the market to study the market needs - and identify any changes in the customer requirements. Conduct market research to ensure that the product being developed is actually what the customers really want.

5. Product roadmap and a phased release mechanisms will will help manage sales pressure - by developing the important features first and avoiding scope creep.

6. Run alpha/beta programs at customer sites - to evaluate the product acceptance.

7. Direct the creation of product documentation and marketing collateral required for product launch.

8. Gauge the product's acceptance in the market, and make changes to roadmap accordingly to make the subsequent releases better accepted in the market.

Closing Thoughts

Startups ecosystem in India are still evolving & as of today there is a general lack of product management discipline in startups. In any startup the first order of the day is to figure out the market requirements. The need for product management is needed for both small & large companies. Large companies can afford to a few mis-steps in product development cycle & can wait around for few versions, but a startups cannot afford to get it wrong. Startups need a much greater discipline when it comes to product management inorder to be successful in the market place.