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.