Rapidly growing young companies inevitably hire a lot of senior resources and then leave them to execute their broad responsibilities without setting clear initial goals. While this can work out for many hires, there is a possibility that an expectation mismatch could cause organisational heartburn. One must remember that senior resources have had functional responsibility elsewhere and naturally tend to spend on what they know and do best. So if there is a specific expectation of the senior hire that may be different from what thier core responsibility has been earlier, it is best to discuss that earlier.
We have seen this in a few of our companies that have hired star CXOs. When they joined the portfolio company, there was an expectation that they would play a multi faceted role, like is expected in most startups at the rapid growth phase. However, since the expectations were not clearly set, they gravitated to doing what they did best in their previous job and ended up sacrificing some of the priorities in the early days.
While this worked well for some, for others this has resulted in organisational friction as the priorities of the CEO and incoming CXO were different. And sometimes this could result in a significant lost opportunity in a rapidly changing environment if senior resources are focusing on what they know best versus what is best for the organisation at that moment.
Some examples of potential conflict of initial priorities of a) CMO- Brand positioning versus customer acquisition, b) CFO- Business planning/Budgeting versus closing of accounts c) CTO - New product launch versus stabilizing the existing product d) COO - Cost cutting versus process setting.
Recently one of our portfolio companies was hiring a CXO, and there was a discussion around compensation. The CXO was offering a healthy ESOP package + 80% of the base salary he was currently making. In turn, he was negotiating for a 110% of the base salary he was currently making and was willing to take 50% of the ESOPs offered in return.
Given that this person was coming in at a senior level, it was clear the compensation being offered was healthy enough and that the negotiation from 80% to 110% of base was not to "meet" his living expenses, but more of a belief that the 30% increase in monthly cash flow is worth a lot more than a % of the company.
It is surprising that this trend is very common across the startup world in India today when there have been real examples of wealth creation across the country with employee stock options. Indian employees in our own portfolio hvae seen stock option gains on the exits of Dimdim, Netmagic, OLX, Gluster, etc. let alone the examples of Naukri, Makemytrip, Baazee, Infosys, Cognizant, WNS, SKS, etc. I believe part of the problem lies in the value of ESOPs not being understood.
The onus lies on the entrepreneurs to spend more time educating their employees on what stock options mean, what they believe could be the various exit opportunities and various values at exit with probabilities attached to those outcome along with the risks. While there is no gaurantee at the end, it is helpful for the employees to really understand how the entrepreneur is thinking and what the entreprenuer believes are the probabilities and risks attached.
The entrepreneur also needs to work on building excitement and trust with potential employees pre-hiring where the employee believes in the company's vision and dream and is viewing the company as an owner and not just an employee where he or she is contributing to the wealth creation of company and self. This is especially critical at the senior levels.
There has been a fair bit of early stage investing in the Indian internet sector over the last 6-7 years across sectors. Many of these companies have scaled, achieved market dominance, but are still burning cash and are looking for $25-50m in capital that will take them to profitability and/or a public listing.
If these companies were in the US, many would have raised a growth financing round relatively effortlessly - market leaders in their space in open ended spaces with potential supernormal return opportunities. The investors understand the risk associated with the investment and fully understand that this is a higher risk higher return opportunity and they have a portfolio strategy that take this into account.
However raising capital for many of these unprofitable internet ventures has not been easy for a variety of reasons, one of them being the legacy of investing in India at the growth/later stage that have been profits/cash flow based with structures that protect downside and limit upside. Certainty of return is more important than magnitude of return. As one of the growth investors put it succintly, "I cannot afford an investment to be worth nothing. We don't take a high risk high reward portfolio approach. I don't care how big this upside can be". Most of these investors don't have a portfolio strategy that allows for an investment to fail and are looking for safe returns on most of thier investments.
So many of the Indian internet ventures have unfortunately have had to turn to growth capital from financial or strategic investors outside India who have an interest in investing in India. But because many of them are not based in India, they are concerns on trying to manage an investment remotely without being close to the market. So it has not been easy to raise this capital.
For Innovation to thrive in India in the Technology and Internet space, India will not only need more risk capital at the early stage but also more risk capital at the growth and later stage. Hopefully, either some of the global investors in this space will decide to focus on India and set up teams or the Indian PE players will start to change their strategy and approach and start investing in these sectors. Till that happens, the Indian Innovator will have to continue to look overseas for growth capital.
You are in your mid 30s. An IIT and/or IIM graduate. Great professional track record for a decade at top MNCs. You have a CXO level offer from a fast growing venture backed early stage startup with decent equity and salary that is matched to current salary. What's the downside? If the company doesn't work out, you can always find another job at a corporate. Or join another fast growing startup. And if it does work out, you could potentially retire with the equity you hold.
Isn't it a no brainer? Well, not so in India. Some of the smartest individuals with great track records don't want to take the risk. I have been asked some really interesting questions by potential candidates that are interviewing with some of our portfolio. Here are some of them.
1. What will my friends, colleagues and family think if the company doesn't work out?
2. If the company fails, will you guarantee me a job elsewhere?
3. Can I get a salary increment from my current salary for making the plunge?
4. What if I am fired or don't like the company?
I have tried to explain to potential candidates that if things don't work out, the skill sets built in a leaderhip role at a startup are very very valuable. The pace at which a startup operates is very different from the pace in the corporate world. The pace of sales, the pace of hiring, the pace of product development, etc is very different. Often, decisions need to be taken with imperfect data or no data as you are creating new industries where data may not exist. You need to be quick and nimble and assess market response to your product and change paths quickly if needed as you don't have the luxury of the the corporate capital cushion. These skillsets cannot be taught at business school and arguably many skills cannot be built in a corporate job either. And many of these skills will be respected at any company that is looking for entrepreneurial talent.
I try and remind them that Failure is not trying and not succeeding but is not trying at all!
Luckily, I have been able to succeed in convincing a large number of candidates in taking the plunge and most of them have been happy with their decisions.
This country needs a lot of the smart brains to get rid of their suits, take the plunge into the startup world and play a pivotal role in building out the new India.
In India, we are seeing many technology startups that are being started by very bright engineers who are trying to build products that are probably the best in the world from a innovation and functionality standpoint. However, many of these super bright technologists have not given enough thought into what it takes to convert that mouse trap that they are building into a successful busineess. One of the key traits of a successful founding technology CEO the "ability to sell" both internally and externally, i.e., to either convince the first major customer to try their product and/or to convince the initial hires to join them in a business role. As VC's, we spend a lot of time introducing startups to potential new customers and helping entrpreneurs build their teams. While we can open doors to the right customers and be a sounding board/advisor to a potential senior level candidate, the customers decision to work with a startup or candidate's decision to join a startup is predominantly influenced by the chemistry and trust between the founding team and the customer or candidate.
I would recommend that all technology entrepreneurs spend some time thinking through the role of the Founding CEO and see who is best suited amongst the founding team to best play that role. This role doesnt often require an MBA and often can be played by one of the technology founders themselves. Many times, the technology founders feel that they are best suited to build the product and decides to partner with a friend or acquintaince that has business development skills to do the "selling" as the CEO. Sometimes this works, and sometimes it doesn't. What is critical is that the person who is "selling" has the passion and deeep understanding for the product to be able to initially sit with marquee customer for days and weeks and do whatever it takes to convince them to try their new product. Many times, this ability lies within the founding team itself and role is far better played by a tech founder evangilist within than an "MBA" who is brought in as a co-founder from the outside to serve this role of the founding CEO in the initial years of the company. However if a founding team doesnt have the Founding CEO" DNA, then bringing on someone from the outside maybe the only solution. it is important that all the founders of a technology company understand the skills of the team and decide on who is the best founding CEO for company.
Ecommerce is here to stay in India. There is not a single person I have spoken with in recent times who doesn't believe that ecommerce will be an important channel of consumption for Indians within the next decade. Given infrastructure challenges with physical retail, ecommerce has the ability to do to shopping what wireless did to telephony - allow a new technology to leapfrog traditional industry and bring access to the entire nation. However, the challenges that face an ecommerce entrepreneur in India are non trivial, and agruably different and more difficult than ecommerce entrepreneurs in many parts of the developed world :
1. Payment and Logistics
India will continue to be a cash economy for a long time. Various factors contribute to this including cultural aversion to debt, fear of misuse of credit or debit cards, inability to qualify for credit, lack of merchant trust (would prefer to see the product before you pay for it), and availability of cash at home driven by a cash driven economy all around.
So this requires meeting someone in person to collect the cash. This can complicate the delivery as this could now entail multiple contacts with the customers, a communication/interaction with the customer beyond just packet drop off , etc which many third party couriers are not equipped to do in a consistent, professoinal and scalable manner. Plus outsrourcing this to a third party can be an expensive proposition as the third party courier needs to factor in their own margins, etc. So an ecommerce entrepreneur has to now think about building in house logistics to be able to collect cash at the point of delivery cost efficiently and consistently.
Credit card penetration in India is still very low. Many consumers have access to debit cards which are primarily used to withdraw monies from the ATM. So while cash will remain an important payment method, an ecommerce entrepreneur has to figure out the best way to convert payements to digital both at the point of purchase and at the point of delivery . So tied to logistics is not only cash payments, but also ability ot accept other modes of payment which an ecommerce entrpreneur needs to focus on.
2. Supply chain
India's supply chain has its challenges. The systems that track inventory at the vendor's side are either non existant or antiquated. Many categories have fragemented vendors and a long tail of unknown brands which can increase sourcing complexity. An ecommerce entrepreneur needs to work with and develop this complex supply chain.
3. Value Buyers
Many of India's buyers are value conscious. Discounts and deals are expected. So maintaing healthy margins while offering affordable shopping (good prices, low delivery charges, etc) is a challenge that an ecommerce entrepreneur has to tackle.
4. Awareness and Trust
Many Indian customers are suspcious about the products and goods being purchased online as they are used to a fragmented, unorganised buying experience that focuses on making a quick buck over customer satisfaction. To overcome that perception, ecommerce entrepreneurs have to work extra hard on brand building, customer service, generous returns policy, etc.
5. Access to Capital
In order to be able to successfully address the challenges in building an ecommerce company in India, an ecommerce entrepreneur will require capital. Lots of it. Many growth investors with large cheque writing ability are trying to understand the economics of ecommerce before writing that cheque. The question on the minds of many of these investors is "how much capital is required to get to profitability?" . An ecommerce entrepreneur needs to make a growth investor comfortable that they understand the economics of the business and that they are utilizing the funds in the right way with the focus on path to profitability. Not a trivial task when you are focusing on the various infrastructural building blocks that sucks capital and are still in the early days of the life cycle of the company to really understand true lifetime value of a customer.
Being an ecommerce entrepreneur in India myself, I salute all those ecommerce entrepreneurs who are braving the extreme challenges above in the effort to build world class scalable ecommerce organisations. Kudos to all the efforts being put in to create a new paridigm of shopping in the country!!