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