Monday, 16 December 2013

What You Must Do When Funding A Start-up

Every start-up entrepreneur with a dream believes he has an excellent idea and raising money should not be a problem. Yet, I have seen that getting adequate money to sustain a project is possibly the single most important challenge faced by any entrepreneur.
A start-up entrepreneur should try and keep sufficient funds to meet at least 12 months of projected burn. Without providing for sufficient funds, the stress on the entrepreneur becomes intense and diverts his energy from the primary task of building his business. Meeting planned business losses becomes a huge challenge.

The safest way to build any business is with your own funds but for most promoters, these funds are finite and not sufficient - especially if your dream is bigger than your savings. I had earned and saved money in my professional life. Before I started out on my own, I set aside some money which I call "drop dead" money. This money, I believed, would be sufficient for my family to continue to maintain their standard of living if something were to happen to me.

After investing all my surplus funds, except the funds I had set aside as my "drop dead" money, I first turned to my family for funds. It is not the quantum of the money that matters, but the confidence one's family shows in your dream. Nothing shows more commitment to a business enterprise than a family investing its own money.

Once my family had invested the money they were able to, I turned to my friends and a number of them took a decision to invest in my dream. But their investment was driven more by their trust and confidence in me as a person.

As the company started to grow, a number of friends, former colleagues and friends of friends started to contact me to invest some funds. In order to receive their funds into the company, we had to quickly set up systems to manage these funds. A lot of time was spent in preparing presentations to share my dream with these investors.

As the company kept growing, more and more individuals expressed a strong interest in investing their money. Today, Guardian has more than 45 investors and I am grateful to each one of them for the trust and confidence they have reposed in me and my colleagues. So far, they haven't got returns on their investments, but I am sure they will be able to get substantial returns when we list the company.

Raising money from friends of friends, people whom you have never met, can become a challenge. While I have a moral commitment towards the investment of my friend's friend, this person looks at the investment differently and I faced a few shareholders who had actually asked me to refund their equity after their share certificates were issued, knowing fully well that under the law, this cannot be done.

It is always good to sign an agreement with each shareholder - so that no differences would arise later on. Also, it is important for the entrepreneur to ensure that he gets the appropriate rights to keep the business of the company moving. Matters such as "tag along rights" and "drag along rights" are best discussed and agreed upon at the time of signing the shareholders' agreement, rather than leave it as an open issue for discussions and debate at a later date.

About the author: The author is the chairman of Guardian Pharmacies and the writer of the best-selling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh 

Monday, 2 December 2013

To Be Successful In A Business You Need To Be Transparent To Your Suppliers

For a startup company that is growing its business aggressively cash flow is always tight and therefore prioritizing cash payments is necessary.

Most startup businesses in their early days delay supplier payments to fund growth and meet other critical payments. It is important to realize that if you want to delay payments to suppliers it is very important to carry them with you. Suppliers must feel that they have a stake in your success. With your success they will succeed as well.

Payments to meet monthly salary, rental, utility and communication bills have to be provided for every month without fail. I remember many meetings with my finance head, trying to figure out which supplier to pay and when and how to prioritize payments so that the supplies would not suffer and the suppliers would be happy!

Each time payments were delayed the rumor mills would start working overtime and I would start getting feedback that our suppliers were nervous because they had heard that the company was closing down or that I had sold off the company.

Suppliers are also businessmen and know that delayed payments does not mean that their money was not safe – they simply wanted a confirmation of the delayed payment so that they could plan their own cash flows better. Once we had given them a fresh date and if we honored the revised schedule, they would happily fund our short term credit needs in future as well!

In order to reinforce the confidence of our suppliers, I used to hold meetings with them in our offices and over a cup of tea accompanied with one Samosa and one Pastry, I would explain to them that the company was growing fast and that their payments would be delayed for the next few weeks. Every supplier always supported us whole heartedly throughout our journey.

On the other hand, there were distributors of some of the big brand fast moving consumer goods companies who would simply not accept any payment delays because they knew that the consumer demanded their products from our stores. We needed these distributors and suppliers more than they needed us and we made sure we never delayed payments to them.

Whenever we delayed payments beyond the agreed norm, and this did happen several times, a few suppliers would stop supplies to us.

The moment we would start ordering goods from another supplier, I would receive a complaint from them stating that we had stopped buying from them and that their business with us was reducing!

They did not want to stop supplies to us! At best they would try and reduce the margin they offered on the supplies to compensate for their funding cost. The moment payments started regularly, the margin would be restored by our suppliers.

Suppliers understandably want payments on time but they do not want to stop doing business with the company. This was a clear indication to me that they trusted the company, they trusted our business and most importantly, they trusted our dream.

We stretched the payments to the suppliers but we never let the relationship break. As a wise man once said “Stretch the thread of a relationship as long as you can but don’t let the thread break. Once the thread breaks, no matter how hard you try to rejoin the parts, there will always be a knot in it”

The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh

Thursday, 7 November 2013

Personnel Challenges Faced In A Start-up And How To Overcome Them

Personnel Challenges Faced In A Start-up And How To Overcome Them
Ashutosh Garg

One of the biggest dilemmas I was faced with as I built the company needed good management people but the good people were not willing to join a startup company. I found it to be a huge challenge to get strong professionals managers to leave large companies and join a startup. Good managers, I realized, are generally poor risk takers and only when they see the stability of a company and they see other professional managers making this leap of faith do they agree to make a change.

The human resource function of any retail company can make or break a company since retail companies are people intensive and our people are our ambassadors and our “face” in front of our customers.

This function must have a strong leader and must have complete support of the entrepreneur. The entrepreneur must outline his philosophy for this function but in words and in deeds because this is what will set the management culture of the company.

Since I am the oldest member of the management, I used to often have to stop younger managers coming in to touch my feet and “seek my blessings”. I would tell them that there was no need to touch my feet at all, no matter what the culture of our country in India of respecting older people may be. If I had allowed this to continue, other senior managers would have expected something similar from their juniors. It has taken me time and this practice of touching one’s feet in the work place has now been stopped.

Similarly, I was often requested that the company must celebrate Founder’s Day on my birthday. My response was that while I was the founder, we should celebrate the foundation day of the company and there was no reason to celebrate my birthday. We now celebrate 25th August as the company anniversary where we honour our top performers.

Each time I walked into a manager’s room or I walked down an office aisle, people would stop their work and stand up. I have never understood how standing up and stopping work is a way to show respect to a senior.

To me, continuing with your work when a manager walks down the aisle is a much stronger way to show respect to the senior individual as well as the organization. It has taken me time but the message in the company is very clear – continue with your work when a senior manager happens to walk past you and keep sitting at your chair if a senior manager walks into your office to discuss some work.

Some of our guiding human resources principles that I established very early in our development were,

1.    Guardian would rapidly move towards professional management and that we would not build a family run organization.

2.    We would have professional growth based on meritocracy and not based on relationships or patronage

3.    Any relationships between managers would need to be disclosed at the time of hiring and approved by the management committee of the company. We also specified that two managers who were related would not be allowed to work in the same department.

4.    Performance management would be done based on agreed and quantifiable key result areas for each manager

5.    Salary increases would be based on achievement of results and not based on seniority.

The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh

Tuesday, 29 October 2013

The Corner Office - at No 1 at WH Smith, Delhi Airport

Startup Losses And Cash Burn. What’s The Difference?

Startup Losses and Cash Burn
Ashutosh Garg

Every new business will lose new money. This has to be taken as a “given”. Making a planned loss is never a problem. Making an unplanned loss and then having to try and justify it is a huge problem.

Most entrepreneurs tend to look only at the rosy and optimistic picture without recognizing the problems that will be faced and without factoring in a number of unplanned costs that will have to be incurred. Inspite of the company growing in high double digits entrepreneurs are always on the back foot with their board of directors because they had not met their over aggressive business plans. No amount of growth over previous year is relevant if one has not met the budgets. This will always cause frustration at most board reviews for the management team of the company.

It is important for every entrepreneur to understand that making money is not going to easy. Don’t believe for a second that revenues will instantly start coming in and customers will start flocking to buy your products. The reality is far different, and you will fare much better if you understand this reality and plan for it beforehand rather than get surprised later.

It is better to plan for losses and state this in your business plan. When monthly reviews are held with the board of directors, it is always better to explain how you have over achieved your numbers rather than take high targets initially and start with explaining negative variances each month.

Always remember that it is easier to “under promise and over deliver” rather than “over promise and under deliver”. A wise thing to do is to build a “stretch” in the business plan which will give you the cushion you need to handle any contingencies

No one likes to lose money and yet it is a well-recognized fact that most new businesses will lose money. Some businesses will lose money for longer periods than others because of the nature of the business and retail businesses have very long gestation periods. There is nothing to be ashamed of if your business is losing money as long as you can see the light at the end of tunnel.

All businesses will burn money and it is necessary to have sufficient funds in the bank to meet the burn. Most entrepreneurs and startups should plan for their losses and understand what the monthly burn is likely to be so that at no stage will the business run out of funds.

“Cash burn” should be defined as the amount of money that is committed to be spent each month, irrespective of whether or not a business is generating any cash flows. This is also the amount of money that is needed to be put in every month to meet the cash losses of the company. These expenses are for basic necessities such as salaries, rentals, utilities and communication costs as well as for expenses of a capital nature such as store build out and fixed assets.

All businesses will be confronted with several unplanned costs which will throw the entire cash planning out of gear and that is when the entrepreneur will have to scramble to raise additional funds.

The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh