February 28, 2008

The Trap of Past Success - By Sanjay Anandaram

Everyone around the serial entrepreneur was telling him that they couldn’t see anything unique about the startup’s offering. Everyone was pointing out the various similar offerings already available in the market. They were pointing out technical, marketing, and business model problems but the serial entrepreneur was not listening. After all, hadn’t he sold his first company very profitably when all seemed lost? Of course, that his first company was acquired rather fortuitously, something that occurred through a chance meeting with a potential partner- not something that was consciously engineered.

One of the important traits of an entrepreneur is humility. But a humility that’s coupled with confidence. Humility allows the entrepreneur to learn from others while confidence permits him to go around meeting players in the network, weed out “noise” to distil the essence of the learnings, and make appropriate course-corrections but without compromising on the fundamental vision of the company.

While many entrepreneurs have perfected the art of interacting with “confident humility”, an unfortunately great number are trapped inside cages of their own making. These are the entrepreneurs who are convinced that their technology product or service offering is destined to change the world only because they think so. Their personality is stamped all over the startup. These entrepreneurs have blinkers on that impede the flow of market signals, limited understanding of the industry, market, customer needs and competitive positions. They are the ones spoilt by earlier success either in an earlier startup or in corporate life. Never mind what their specific contribution to that success was.

Taking a cue from their earlier experience, they think that lightning can indeed strike twice at the same place. They start believing that their PR releases are gospel and start discarding the cloak of humility. They start thinking they are invincible, that their companies are indeed making a huge difference to the world and are creating enormous value. Over time, they stop listening. They don’t read about what’s going on in their industry or meet people who are knowledgeable about their world. They rationalize their ignorance by saying that the world doesn’t yet understand their company. Over time, people around these entrepreneurs stop providing feedback since they don’t see anyone listening.

The entrepreneur now displays one of two behaviours: behaviour style one is to ignore or even dismiss all the signals from the outside world, work only with people who listen, use the halo of the success of the earlier startup to blind others into submission. Behaviour style two occurs where the entrepreneur’s demeanour changes to incorporate a studied intellectual indifference or nonchalance and indeed, sartorial tastes also change to showcase expensive branded accoutrements. They now go out only to conferences (including of course, press conferences), meet only people of “stature”, are unwilling to travel to rural and semi-urban areas of the market, and have their underlings meet the various industry players.

In both cases, the entrepreneur enters the twilight zone of “living in denial”. Arrogance replaces confidence. Discarding of humility results in ignorance. Increased ignorance results in a continued life of denial. Increased denial results in increased or continued arrogance. A dangerous cycle, “Arrogance of Ignorance”, therefore comes into play. This feeds on the insecurities and the anxieties of the entrepreneur and those around him. It is not surprising therefore to expect such an entrepreneurial company to start imploding. Unfortunately, the implosion doesn’t occur in one grand finale. It is a process that’s painful as it drags on for several months as the entrepreneur clutches at fewer and fewer straws while still refusing to see the writing on the wall. This is emotionally draining for all concerned especially for those around the entrepreneur. For the entrepreneur himself, the learning from a failure is more than from a success. Failure forces introspection and encourages humility. If nothing else, there’s no arrogance of ignorance.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

February 08, 2008

Start-up Chemistry - By Sanjay Anandaram

The young founder-CEO was excited about the email he had just received. The email was from an -apparently wealthy - NRI from Canada who wanted to invest in the CEO’s company. According to the email, the NRI had “found” the company thanks to the internet and had in fact done background work on the company and was now ready to invest Rs 50L for 10% of the company. The CEO wanted to immediately respond with a “Yes!” as he was in need of cash. He had to meet his employee payroll expenses in 10 days.

He had no idea who this benefactor was and searches on the internet yielded no results. The NRI’s email also said that he was going to be in town that week just for a day and wanted to close the deal. He had also emailed a copy of an agreement. The CEO’s joy knew no bounds. He went for the meeting ready to return with a cheque for Rs 50L and grow his company to the next level. During the meeting, something didn’t seem right. Whenever any issue relating to his background, his experience, and the reasons for his interest in the investment came up, the NRI provided less than satisfactory and vague answers. The founder was not comfortable with this but the NRI sounded nice and sweet and was ready to sign. The founder was desperate for money to pay his employees at the end of the month. In spite of knowing how much the cash infusion would’ve helped his company, the founder found it in him to say “No, thank you” to the NRI at the end.

Another founder had been in conversation with a senior industry executive to join his startup as CEO. The dialogue had been going on for the last 5 months and everything seemed to be going well. Salary and stock options were being negotiated for the last 30 days. The executive wanted extreme clarity on issues of bonus, stock prices, taxation, reimbursements and so on. He wanted every discussion in writing with legal opinions and financial implications. The founder was getting frustrated. Finally after another round of discussions on the same topics, the founder said “NO” to the industry executive.

Here he was, an entrepreneur with passion who was clear about where he wanted his company to be in the next 5 years. He was willing to bring on board external talent to help achieve the company’s goals. He was willing to learn and make the changes necessary to become a professionally run company. He was looking for experienced leaders who were also entrepreneurial in their thinking. He was looking for leaders who would help drive the change in the company, could deal with ambiguity and of course the risk inherent in a young company. He was not looking for someone with a big company mindset, expectations, and approach. Today, this founder has found other experienced and entrepreneurial industry executives but it has not been easy.

Both the founders had learnt important lessons that other entrepreneurs will do well to keep in mind:

If the chemistry isn’t right, then the arithmetic will never work. That is, if there’s no comfort between the players, then no amount of money can help keep the partnership alive.

Don’t forsake long term benefits for immediate gratification. While it is difficult to do, great entrepreneurs instinctively know the value of different kinds of trade-offs. Opportunistic moves that have the potential to be a drag on the company’s long term goals should be unceremoniously dumped. The founder-CEO who declined the investment from the NRI went on to borrow money from friends and family to meet his payroll expenses. Today, he’s VC backed and doing very well.

Be ware of a “confirmation bias”. That is, both parties wanting to explore opportunities together tend to keep looking for confirmations of their initial interest and enthusiasm, rather than reach a confirmation based on a discovery of each other. So, don’t paint yourself into a corner thinking that an agreement has to be done just because both parties started the dialogue and have made substantial progress.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.