Entrepreneur April 2009

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Two’s Company Authored by Shrey Goyal, this article explores the importance of choosing the right co-founder for your dream venture, and enumerates the various points which you may have to consider before committing to a partnership for your company. They say choosing your spouse is the most important decision you will make in your life. Similarly, choosing your co-founder(s) is the most important decision you will make while building your startup, since one could argue that at least for some period of time, you’ll be spending more waking hours with your co-founder than your significant other. Great partnerships are like marriages, they need a lot of common ground, strong mutual attraction and a willingness to work hard - especially through the inevitable issues. You first need to dispel the delusion that you don't need a co-founder. You do. You may have all the requisite skills, but even then, co-founders help spread the work and make better decisions. Sure, you can talk to your brilliant self, but that's not as effective. The selection of cofounder(s) is one of the key determinants of long-term success in a startup. But if you have the wrong guy, that's a hard problem to get over with.

Knowing them beforehand The idea is that by having gotten to know the person, you’ve already had a chance to see how they work, how they think and whether you’re likely to get along. This makes your college or workplace friend circle a very useful hunting ground for a potential business partner. Consider Chad Hurley, Steve Chen and Jawed Karim, for instance. Chen and Karim were classmates at the University of Illinois, who then met Hurley at PayPal, where all three were employees. They then founded YouTube, which received funding from Sequoia Capital, whose partner Roelof Botha, who also joined the YouTube board of directors, was the CFO of PayPal. You better be good friends with them as well, since you're going to spend a lot of time working together. Also, there will be times in the startup lifetime that will test your relationship with your co-founder, so make sure you understand the stakes before going in.

Someone you can trust Mistrust can be a cancer for your startup. The good news is that you can avoid it by choosing a founder you trust, and then work to foster deeper trust in your relationship over time. Keep in mind that it’s a never ending process. Play fair. You can’t expect others to care as much about the business when they don’t see themselves getting a fair share. This goes hand-in-hand with trust.

Great minds think alike There should be aligned interest and commitment from your cofounder. You both have to (at some level) be committed to not only building a company, but the same company. If one of you wants to create a company you run forever (and reap profits) and the other wants to take a shot at a high-flying startup that gets sold or goes public some day, you’ll have a problem. Of course, co-founders may influence each other’s decisions in this context. Afterall, Larry Page’s "BackRub" might just have remained a research project on citation backlinks in research papers, with limited commercial value, unless Sergey Brin, a fellow Stanford Ph.D. student

and close friend, had not come to the rescue and worked with him to make it what we today know as Google.

Choose your compliment A co-founder should be strong in areas you are not. A great compliment to your skills is someone who loves to do things you hate, someone who makes the sum of your parts greater than the whole. If Steve Wozniak had remained the n e rd w h o wa s s i m p l y sceptical of the idea of selling computers, and had not been convinced by Steve Jobs, the born-entrepreneur, to come up with a company so that they could at least say that to their grandkids, neither would’ve conceived Apple Computers independently. Make sure at least one of the founders has the technical expertise. This is so you don't have to try and outsource the actual product development. Similarly, make sure at least one of you can sell. No great idea is of any use to a startup that can’t market it properly. Effectively, you need to identify your “type”, and look for the corresponding complementary skill in your partner.

Practice, not just preach You need a co-founder who can get things done. If you have a great idea, and you want to bring it to life, find someone who is passionate about your vision, and who is willing to work for it. Since startups involve lots and lots of work (some fun, some not so fun), part of the value of your co-founder should be that the work can be distributed. If your co-founder is too “strategy” focused too early, you’ll get buried because there’s too much to do. Passion is easy to spot. Years after the two had befriended each other in Lakeside School, Seattle, where they used to tweak the school’s scheduling program to place themselves in classes with more female students, and had faced several penalties for other naughty uses of their programming skills, one of them dropped out of Washington State University and called on the other (in Harvard then) to do the same, for starting a venture together. Both understood each others’ passion and immediately complied. They were Paul Allen and Bill gates, and thus we have, Microsoft.

Talk the talk Have the hard discussions around equity, compensation and responsibilities early. This stuff does not get easier over time – it gets harder. How should the division of shares be controlled? Who will make the decisions? What happens if one of us leaves the company? Can any of us be fired? By whom? For what reasons? What are our personal goals for the startup? Will this be the primary activity for each of us? What part of our plan are we each unwilling to change? Will any of us be investing cash in the company? If so, how is this treated? What will we pay ourselves? Who gets to change this in the future? Deferring these conversations is a great way to ensure problems later. So what are you waiting for? Step out and start looking!

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Integrity - A Corner Stone of Entrepreneurship By Mr. R. Ravimohan, MD and Region Head of Standard & Poor’s South and South East Asia division, and also the appointed chairman of the CRISIL Board of Directors. In wake of the recent Satyam scandal that has caught the entire corporate world in a flurry of uncertainty, Mr. Ravimohan discusses about the moral issue that every entrepreneur today needs to address.

The recent episode of fraud by the Chairman of Satyam and all the several other frauds perpetrated by other entrepreneurs around the world is a shame on the name of entrepreneurship. These isolated episodes have a tendency to make other entrepreneur's life tougher. They bring a bad name to the ilk. They are usually followed by tougher regulations, which have a tendency to restrict freedom of business choices for entrepreneurs. They make conduct of business more expensive. Financiers too increase the risk premium and generally make entrepreneurs grovel more to get at their money. All because, someone got greedy and unscrupulous. The price that genuine entrepreneurs pay for the fault of these scamsters is so huge that it is worthy of a self disciplined vigil within the community itself. There is a case for them to become active policemen of themselves and blow the whistle when they see one of their cohorts behaving funny.

charges of flouting of excise rules. Azim Premji did not buckle down; let the plant remain shut, while fighting the case legally. It took reportedly 3 years for him to come out victorious, thanks also to the support of the employees of the plant who were also suffering, and reopen the plant. While it was painful, the episode surely sent a clear message to all that Azim Premji is not to be messed around and I seriously doubt if he has ever been harassed on that front ever after. More importantly, it is still remembered and recounted as a legend in principle based entrepreneurial behavior. The way I look at it, Mr Premji invested the suffering caused by that incident, including massive financial losses in creating a credibility capital, from which he is still reaping benefits. This early strength in his resume ensured businessmen and financiers around the world respect Mr Premji as a trusted business partner, aiding him considerably in his ventures to date.

While there are connotations of ethics and morality associated with the notion of integrity, I am focusing on the competitive advantages of integrity In my long experience funding, raising funds and as a corner stone of entrepreneurial behavior. Once rating the entrepreneurs over the past thirty years, I have seen two stages when the bug of cheating an entrepreneur earns the credibility as a person of bites the entrepreneurs hardest for different integrity, doing business becomes that much Mr. R Ravimohan (Left) reasons - at the initial phase and once success is established. When the easier. Partners will seek to do business with such an entrepreneur who project is in the initial phase there is a focused pursuit of a limited they can trust, and might be even willing to pay a premium for that objective – may be a small project- driven by a passion to succeed and feeling of comfort. Financiers will vie with each other to provide funds, gambling everything to increase the prospects of success. There is not as they know their money is relatively safe with such an entrepreneur. much care given to forms, rules and norms, perhaps not affordable as Once the entrepreneur sets the limits on acceptable behavior based on well, as typically entrepreneurs start poor, are up against established principles of integrity, he and his team in the organization know that players who are much more powerful. Some entrepreneurs mistakenly they can not resort to short cuts and need to be genuinely competitive believe that their only way to succeed is to pursue some short cuts, to succeed in business. This makes them seek real competitive which seem to work for sometime. Unfortunately the road that greets advantages and conduct business to succeed against not only other entrepreneurs in India is often littered with obstacles and tempting routine businesses, but also some that may 'enjoy' advantages due to chances for wrongdoing and many fall prey to those temptations and practicing business without integrity. This is not easy and I am not asking compulsions. This it seems has become the norm rather than the the entrepreneur to be a monk. exception. It is unfortunate because, those entrepreneurs of lesser competitiveness and objectivity do fall prey to this and compromise so Let us take a live example from the field of road contract business. Let us much of their business future. They never learn the right way of doing assume there is one contractor (called Mr I) who behaves with business. They do not understand competition and believe corruption to completely integrity and there are others whose integrity quotient lets be a legitimate part of business. They do not develop strong work culture say varies from awful to 'godawful'. The challenge that Mr I faces when and leadership within their organization, filling them instead with he bids for a contract are that he needs to take into account the incompetent staff that will learn to manipulate rather than work smart possibility that the bidding process is perverted to favor the others to ensure business success. Most harmful of all they will earn for because they may ply bribes, or for someone in the bidding organization themselves an ill reputation, which may be tolerated, but never to let these corrupting bidders know the lowest bid amount, so they can respected and hence will not ever be the choice partners for financiers quote a marginally lower prices and win the contract, etc. Can Mr I can overcome this challenge while maintaining integrity? Yes. There are and businessmen. many things he can do, including, finding technological solutions to The second stage when entrepreneurs go off track is when the flush of render road building less expensive and hence can quote so low that success many times powers them with a sense of invincibility. There is others without that technology may find it unattractive to bid at those either a cooling off or a phase of complacency that sets in or a prices. He could resort to the new provisions of Right To Information megalomania that prods them to play 'god'. In either case, focus shifts (RTI) to shed the required extent of transparency in the bidding process. away from managing the business with the edge that ensured its initial He could build high quality roads on a pro-bono basis to demonstrate success, and business falters. Instead of correcting that in the right the longevity and riding comfort, and hence win the support of the manner, entrepreneurs resort to short cuts that their newly acquired users, who could be used to campaign for him. Incidentally these are 'power status' offer them and set down the path of wrongdoings which ideas I picked up from several good contractors' real life experiences. often brings them to a collapse. Some of the well known global philanthropists, such as Rockafellers went through this process of Let us not kid ourselves. It is tough to be straight. But who said being an metamorphosis, reportedly starting of as bootleggers, but who them entrepreneur is a cake walk? But setting your behavior right from the redeemed themselves before it was too late and earned a respectful beginning, though might make it tougher, straightens a lot of stuff for the lifetime of clean, successful business. Giving into pressures or place in society and history by becoming philanthropists! temptations to cut corners usually sets entrepreneurs on a slippery slide The initial period of struggle sets the tone for the character and behavior that look so inviting and harmless at the beginning and then keeps of entrepreneurs through the lifecycle of their ventures. Azim Premji in getting harmful over time to what Ramalinga Raju calls the 'riding the the early 80s, is reputed to have declined to 'take care' of some corrupt tiger, without knowing how to get out without being eaten' officials in his hydrogenated oil plant in Karnataka in the early stages of phenomena. his entrepreneurial life. As a result, the officials closed the plant on false Contd on page #7

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Different models of shares used by start-ups for its employees Authored by Shikha Singh, the article explores the various share models used as a compensation by start-ups to attract employees during the initial stages of its business. A glossary section provided at the end of the article, elaborates on certain phrases that are marked with an ‘*’ in the article below. In a start up it’s important to maintain the balance between interests of operating the company within the fiscal budget and attracting, developing, retaining, and rewarding high quality staff through wages and salaries which are competitive with the prevailing rates for similar employment in the labor markets. If you have a startup, cash is not something you can afford to squander. But at the same time you need to hire good employees, who will share your vision about your startup and work with you to reach there. In general there are four tools for employee *compensation namely, 1) Base salary 2) Short term incentives and bonuses 3) Long term incentive plans (LTIP) 4) Employee benefits

various factors such as regular compensation, bonus for better performance, etc. Your company can either grant ESOPs to prospective employees at the time of joining itself or the employees might become eligible on completion of one or more years of service with the company. Typically, the maturity period for ESOPs is three to five years - allowing the company issuing ESOPs to retain talent and keep them motivated. But ESOPs have also been issued by companies with a provision for employees to offload a certain percentage of their ESOPs in the very first year itself. The balance is then spread out over the remaining period of maturity, with the bulk of the options to be cashed at the end of three or five years from allotment. This lock-in period is fixed so that it acts as a deterrent to employees wanting to change jobs. In case an employee does jump ship, then he can at least cash in on some of his earnings. Some companies also structure ESOP in such a manner that no dividend is paid during the tenure of the lock-in.

Start ups need to work on the forms of non cash compensations. Employee stock options (ESOs) and Employee stock ownership plans (ESOPs) come under this head. Furthermore you may frequently find it necessary to borrow money in order to finance corporate growth. One disadvantage of *debt financing is that repayment of the loan principal is not a deductible expense. An ESOP can be used to mitigate this problem by having the company issue newly issued *stock or treasury stock to an ESOP. The resulting tax savings can then be applied against the principal payments so that tax-deductible rupees are used to pay part, or all, of the loan principal.

An ESOP is an equity-based deferred compensation plan. As such, it is in the same family as profit sharing plans and stock bonus plans. An ESOP, however, differs from a profit sharing plan in that an ESOP is required to invest primarily in employer securities, while a profit sharing plan is usually prohibited from investing primarily in employer securities.

An ESOP is nothing but an option to buy the company's share at a certain price. This could either be at the market price (price of the share currently listed on the stock exchange), or at a preferential price (price lower than the current market price).If the firm has not yet gone public (shares are not listed on any stock exchange), it could be at whatever price the management fixes it at.

An ESOP also differs from profit sharing plans and from stock bonus plans in that an ESOP is permitted and authorized to engage in leveraged purchases of company stock. Consequently, an ESOP required different accounting procedures and a different method of allocating stocks and other investments among the employees than other types of plans.

The ESOP is particularly advantageous for startups, whose growth requires the reinvestment of profits, resulting in a shortage of cash available for employee benefits.

The ESOP, like a profit sharing plan, must cover all nonunion employees who are at least age 21 and have one year of service. However, an ESOP may either include or exclude union employees.

There are many ways in which this can be done. If your company has already gone public, suppose you buy shares worth Rs100 in the employees’ name when he joins and keep buying shares worth Rs100. You can give these shares to him as a bonus after three years of his employment. Or if your company is not public, you can tell your employees that they will earn x number of shares for every year they work and at the end of say 5 years he will get those shares.

In practical effect, share ownership under the plan is usually proportionate to the relative salaries of the participants in the plan.

How the Plan is Designed

How the plan works

There can be many more ways. This is the philosophy of sharing wealth with the employees. It encourages an ownership feeling among them and they work accordingly. It is also a tool to motivate employees to perform better and to retain talented hands.

The Employee Ownership Plans use a host of plans through which they deliver the goodies. It could be a stock option scheme -- which is the most commonly used. A stock option gives an employee the right to purchase a set amount of shares at a fixed price for some years into the future. It could be a stock purchase or a *restricted stock. Some types of plans involve actual purchase and holding of stock or a phantom stock, or could be a cashless exercise.

With employees owning stocks in the companies they work in, their performance would directly result in better prices for the stock and dividends, not to mention better capital appreciation for employees and dealers. Thus the story comes a full circle here. Your startup can allocate stock options or ESOPs depending upon

A phantom stock is a bonus that rewards employees based on the increase in the value of the company's stock, the dividend performance of the stock, or both. Some MNCs offer global stock options for stock listed outside India. The *vesting period, that is, the period for which the option has to be held,

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differs from 2 to 5 years depending upon the industry, company and management policy. A company could have more than one stock option plan.

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website at www.sebi.gov.in under the categories “Legal Framework” and “Issues and Listing”.

Glossary In order to assure marketability of the stock subsequent to distribution, the employees must be given a *“put” option, which enables them to require repurchase of their stock at fair *market value. The plan is administered by a committee established by the directors of the company. All voting rights are normally exercised by the committee. However, employees are allowed to vote on any matters involving *liquidation, dissolution, recapitalization, merger, or sale of all the assets of the corporation. Contrary to common misconception, selling stock to an ESOP need not result in any loss of control by the current owner. In most cases, the existing Board of Director members serve as the ESOP Trust fiduciaries. Thus there is no loss of voting control.

*Employee compensation means the total cost incurred by the company towards employee compensation, including basic salary, dearness allowance, other allowances, bonus and commissions. *Stock, is a share in the ownership of a company. Whether you say shares, equity or stock, it all means the same. *Option means a right but not an obligation granted to an employee in pursuance of ESOS to apply for shares of the company at a pre-determined price. * Liquidation, when a business or firm is terminated or bankrupt, its assets are sold and the proceeds pay creditors. Any leftovers are distributed to shareholders. *Vesting means the process by which the employee is given the right to apply

Nothing in the law requires that financial statements be shared with plan participants. The only financial disclosure that is required is the requirement that each participant be furnished at least annually with a benefit statement that shows the number of shares allocated to his or her account, and the fair market value of those shares. The other issues that need to be dealt with relate to the determination of the total compensation cost and the period over which this needs to be used. Experts contend that as ESOPs are still in a nascent stage in India, they should be valued using appropriate pricing models, and the compensation expense should be reflected in the profit & loss account.

for shares of the company against the option granted to him/her in pursuance of the ESOS. *Vesting period means the period during which the vesting of the option granted to the employee in pursuance of the ESOS takes place. *Initial public offering (IPO), also referred to simply as a "public offering" or "flotation," is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. *Debt financing is when a firm raises money for working capital or capital

Lately, companies have started to treat the difference between the option price and the existing market price as an expense to be writtenoff over time. This could be the time between the granting of options and the time when they would be allowed to be sold in the open market.

expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. *Restricted stocks are insider holdings that are under some other kind of sales

For instance, say ABC issues ESOPs to its employees at a price of Rs 10 as against the current market price of Rs 7,000. The difference of Rs 6,990 would be written-off as an expense in the books of ABC over a period of three years, i.e. Rs 2,330 each year multiplied by the number of shares allotted via ESOPs.

restriction. Restricted stock must be traded in compliance with special SEC regulations. *Employee stock option scheme (ESOS) means a scheme under which a company grants option to employees.

Eli Lily Ranbaxy is an example of a pharma major which extends its overseas ESOP to its Indian employees. Infosys, leading Indian software major, has been credited as having created a large number of Indian millionaires. The employees who received the stock of the company have benefitted manifold by the spectacular rise in the share price.

listed.

These are a few examples of the companies which have tried and succeeded with this concept in India.

issuing corporation

As the capital market watchdog on securities transactions and issuance, the Securities and Exchange Board of India, or SEBI, has formulated guidelines for the issue and maintenance of ESOPs. They have been formulated under Section 11 of the SEBI Act, 1992.These guidelines, called SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999; apply to any company whose shares are listed on any of the recognized stock exchanges in India. This circular and the entire text of SEBI (ESOS & ESPS) Guidelines, including the amendments made in 2008, are available on SEBI

*Employee stock purchase scheme (ESPS) means a scheme under which the company offers shares to employees as part of a public issue or otherwise. *Market price of a share on a given date means the closing price of the shares on that date on the stock exchange on which the shares of the company are

*Treasury stock is the outstanding shares of stock reacquired and held by the

*Capital Appreciation refers to a rise in the market price of an asset *Lock-in period refers to the period under which a person cannot sell his shares, generally with regards to an ESOP. Under this a person who has been granted some stocks of the company cannot sell them immediately. *Put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time

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SEEKING INTERNSHIPS THIS SUMMER START-UPS ARE HIRING !

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Knowledge Camp on Youth Initiatives in Social Entrepreneurship The discussion was moderated by people who attended the Tata Jagrity Yatra from IIT Kharagpur. People learnt about the unsung heroes across the length and breadth of the country. Lijjat Papad: Lijjat has a one point agenda about empowering women by employing them in a labour-intensive industry producing papad. It identified a need and a potential workforce, and brought the two together to create a successful business. It accepts all its working members as the owners and an equal partaker in both profit and loss. Dabbawalas: They are employed in a unique service industry whose primary business is collecting the freshly cooked food in lunch boxes from the residences of the office workers (mostly in the suburbs), delivering it to their respective workplaces and returning back the empty boxes by using various modes of transport. There is only one mistake in every 6,000,000 deliveries, statistically equivalent to a Six Sigma (99.9999) rating, even though they are mostly illiterate. Rule of success is that employees are shareholders in the business. Aravind Eye Care System: Its mission is to eliminate needless blindness from the country. It works on differential pricing, that is, more charge for rich and less for poor. It operates on economies of scale. They have introduced innovation for cutting down costs. They involve surgeons only for surgery and the rest of the work is done by the paramedics. It is a very efficient and sustainable system. Each doctor does about 2600 surgeries per year in Aravind Eye Hospitals as compared to an all India average of about 400. Naandi foundation: It has the largest kitchen (also very modern) in Asia catering mid-day meal to a large number of schools. The CEO

(Chief Executive Officer), also an IIT alumnus, takes up only large projects as they want large volume because margin is very low. In the discussion it was realized that the business model of a social enterprise needs to be sustainable. Also, a need was felt for the present day NGOs (Non Government Organizations) to be sustainable, they need to create livelihoods for the masses. There are a lot of opportunities in the social sector and we need to tap them.

Innovation Platform Innovation Platform is a new initiative by the Entrepreneurship Cell aimed at nuturing innovation at the grassroot level. Innovation platform is an organised group of selected first year students getting together to discuss each other’s ideas. This discussion is now being done on a wiki page. The discussion helps the students stay motivated to work on their idea as well as helps build their idea into something feasible. Student mentorship, 4th and 5th year students in related departments, is provided to the students to help them further build their idea. The more developed ideas are being mentored by professors in similar fields. Funding for developing a prototype of the product is also being provided by Entrepreneurship Cell as are mentors from the industry. Therfore a complete package is being offered to the students who are part of the Innovation Platform- from starting to develop their idea to student mentors to industry mentors to small seed funding to a sustainable business. Students part of the Innovation platform will hopefully start their own venture in 2 to 3 years.

Integrity (Contd from page #3) Many times it costs them their entire business and lifetime work. For me, any day, 'Honesty as the best' policy works well in building sustaining business. It is indeed an important behavioral aspect that individual entrepreneurs need to inculcate from the beginning. It is also equally important that entrepreneurs collectively act to prevent unacceptable behavior in their own collective self interest to promote good business practices in their communities. All this certainly calls for a large dose of bravery and courage on part of entrepreneurs. But isn't that courage what first made someone an entrepreneur?

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Social Entrepreneur of the Year 2008 - Arbind Singh, Executive Director, Nidan An initiative of The Nand & Jeet Khemka Foundation and The Schwab Foundation, these awards are given on a yearly basis in recognition of Social Entrepreneurs in the country. The 2008 social entrepreneur of the year award was conferred upon Arbind Singh, Executive Director of Nidan, at the World Economic Forum’s India Economic Summit. Nidan is developing sustainable businesses, cooperatives, trade unions and “people's institutions” led by the most excluded categories of the poor in Bihar. It has promoted and built 20 independent profit-making ventures governed and owned by the urban poor including waste

workers, ragpickers, vegetable vendors, construction labourers, domestic helpers, microfarmers, street traders and other marginalized occupation groups. As legitimate competitors in the mainstream economy, the collectives negotiate with the government for their rights and entitlements. Other finalists included Prema Gopalan from Swayam Shikshan Prayog who co-creates businesses with rural communities and corporations, and Brij Kothari from PlanetRead and IIM Ahmedabad who uses “same language subtitling” on popular television shows to build literacy across the nation.

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The Entrepreneur

From a Venture Capitalists perspective Authored by Hridya Ravimohan, the article focuses on analyzing what exactly Venture Capitalists (VC) look for while investing in a new venture. It comes straight from a VC’s perspective, containing excerpts of a number of VC interviews conducted via online. Venture Capital. The term catches the attention of every aspiring entrepreneur like probably no other. It is a form of private equity funding, that is typically provided by professional outsiders to a new, growth business. Generally made as cash in exchange for shares in the invested company, venture capital investments are usually high risk, but offer the potential for above-average returns. A venture capitalist (VC) is a person who makes such investments. Ventures usually prefer VC funding to any other form of investment, such as loans, as they get the added benefit of the resources and expertise that a venture capitalist provides. As the venture capitalist shares a common desire for success with the company, he no longer plays the role of a passive lender, but more that of a partner. The VC will want to bring on a managing partner or team to help run the company. The VC's goal is usually a high (30-40 percent per year) return on the investment over the period of his involvement in the company. Thus the VC ensures that the company follows an aggressive growth strategy He contributes expertise, experience, contacts, and discipline. The presence of a venture capitalist also lends credibility to the venture. Also, if the venture fails, the losses are distributed between the entrepreneur as well as the investors, thus cushioning the blow to the entrepreneur personally. But consider the flipside – by foregoing outside investment, the entrepreneur retains all of the equity, and thus all of the control, in his venture. When money is accepted from a venture capitalist, the company is no longer solely the entrepreneur's property, and hence usually will not run as such. This shift in control alone is a compelling reason for many entrepreneurs to self-fund. VCs expect certain qualities in a venture that they are going to fund in, the two most important being - a good managerial team and a large market in a fast-growing sector. Through the eyes of Venture Capitalists: Q: What do VCs look for in a venture that they might invest their money in? A: Alok Mittal - Canaan Partners: “At the highest level the question is: can they build a real large business? All these proposals sitting in front of us - it breaks down into three main aspects. Market, Industry structure, and the Team. One is the size of the market. You cannot build large businesses in small spaces. So either the market has to be large, or it has to be growing fast enough so that it will become large in the next 3-4 years. The second aspect that we look at is how the industry is likely to shape up. Is this going to be a space where 100 companies each get 1% of the market share? Or will there be one company with 30% - 40% market share, a relatively consolidated position? I think the third part, perhaps the most important part, is the team. Is this the team that can make it happen? All business plans undergo change and face crisis. We need to be confident this team has their ears to the ground; they have the passion; they have the staying power to see the finish line. So I think those are really the 3 main factors. There are lots of details to each one of those but essentially that.” Balaji Srinivas - Aureos Capital: “So, first thing, you are taking a call on the sector, saying that this sector is good and will continue to grow, and India has an advantage in this sector. You first have to be able to see the big picture. Then you are saying that this company has the right elements in terms of business model, customers -- whatever it takes to be a player in this industry and capture market share. And thirdly, the most important thing after all this is: do you really like the promoters, the founders of the company? Do you somewhere think that these people are compatible?

Fourth, you see the valuation - only after all this valuation comes - and it has to be acceptable.” Avnish Bajaj - Matrix Partners: “I think the frameworks that investors use to evaluate early stage companies are very simple and very consistent. Number one: is the market opportunity large enough? When we say large, we are looking at whether is there a current market of at least 500 million dollars or a billion dollars. The second thing that is extremely critical is: how good are the entrepreneur and the team? What is their understanding of the market opportunity, and what is their track record? We look for various clues, because it is almost impossible to predict who will succeed or not. But typically our view is that success and achievement are not accidents. They are the outcome of a very methodical process followed in life, though of course there are outliers to this. You know: what have been they been their academic achievements, what have been their professional achievements, what do other people think of them? Thirdly, we focus on the industry dynamics within that opportunity: what is the state of competition, how can these guys grow. It is little bit more about the strategy the company is following in order to be able to take advantage of that market opportunity. So you said great market opportunity, great people…now, are they understanding their environment and how they will have to operate? And do they have a differentiator by virtue of which they can create a sustainable business? So that is really the framework.” Russell Siegelman (HBS MBA '89) - Partner, Kleiner Perkins Caufield & Byers : “The most important requirement is a large market opportunity in a fast-growing sector. We like a company to have a $100 million to $300 million revenue stream within five years. This means that the market potential has to be at least $500 million—or more, eventually—and that the company needs to achieve at least a 25 percent market share. The second factor involves a competitive edge that is long lasting. It is usually an engineering challenge that is tough enough to give the company an edge, resulting in several years lead or longer, if we're lucky. We look for a tough problem that hasn't been solved before. The third thing is team. We look for engineering vision and execution, sales, and entrepreneurship in a team. Entrepreneurs have to have a clear sense of the opportunity and how to build the business. But the best ones are willing to re-examine their assumptions and are willing to veer left or right or pivot all the way around when the data suggests they're headed in the wrong direction. So overall it's a funny mix. When we review an investment opportunity, entrepreneurs have to have a pretty good story to tell about what they want to do. I think it helps to be cocky, there's no doubt about it, but if you're not sufficiently confident, you're not going to be successful in selling your idea.” Sonja L. Hoel (HBS MBA '93) - Managing Director, Menlo Ventures: “I always look at the market first. By that I mean a strategic view that includes evaluating market growth, market size, competition, and customer adoption rates. We have a process here called SEMS, or Systematic Emerging Market Selection. We do a SEMS project for every investment we make. Twice a year at our planning meeting, we talk about new markets or problems that need to be solved. We track four things and relate them to the success of our investments: market size, the team, unique technology, and whether the product is developed at the time we invest. We found proprietary technology is important but doesn't make much of a difference as a unique differentiator for significant returns. Market size and a developed

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product matter most. We have much better luck if the product is in beta or shipping, although we do invest in start-ups without a developed product. Often someone has a great new technology, but hasn't looked at the market the technology is going to serve. In order to create a barrier, the technology has got to be hard to execute. Some companies have patents; some don't. We encourage them to have patents because it's a more litigious environment than it was ten years ago. We also look at the management team. If we've got a founder who's in it for the lifestyle or unwilling to upgrade the team if necessary, we have a conversation about the willingness to hire new team members.” Robert Simon - Director, Alta Partners: “ There are two schools of thought in evaluating new opportunities. In the first, the venture capitalist invests in only smart people with a keen sense of opportunity. In the other, the venture capitalist only cares about markets. If management isn't up to the mark, the venture capitalist will fix it. The truth is obviously somewhere in between, but I tend to place more weight on the market opportunity versus the team. In our experience, markets trump both people and technology. When analysing the market for a new product or service, we try to determine whether the product is a replacement for an existing product or whether the product is offering something new and previously unseen. The replacement product can be called the better, cheaper, faster model. With these opportunities you can estimate market size by looking at the revenues of the existing product shipments. Conversely, a product that provides new functionality previously unseen, we call the brave new world model. Here, the market size and demand are really unknown. These often are in the consumer sector. Netscape, Yahoo!, and the Sony Walkman are examples. The brave new world model certainly has a greater market risk but not necessarily more technical risk. Additionally, there are market-timing issues. If we're too early, there's no market demand, and we have to survive until the demand reaches us. In that period of time, we have two problems: We have to keep the doors open and feed everybody, and we may be susceptible to being leapfrogged by technology. So we don't want to be too early, but we don't want to be too late. We also look at the technology to see how proprietary and difficult the solution to the problem is. The ideal case is four Ph.D.s solving a problem they've been working on for two years, and somehow they've struck upon the magic solution. And it's two orders of magnitude better than whatever else is out there. Finally, we want the team to have conviction. We get a little concerned when the entrepreneur comes in and says, "I'm in this to flip it in a year." So if we get the impression they're not in it for the tough times, then it's definitely a problem.” Q: Would you back a first-time entrepreneur? A: Balaji Srinivas - Aureos Capital “I would back a first time entrepreneur. But today my first time entrepreneurs are different: they have substantial experience. They are not figuring out their businesses; rather whether their company will succeed, because they know their business. I'm not willing to live with the other option, which is: I don't know what I'm doing but I will figure it out. That is not acceptable to me. Today what is acceptable to me is: I know my business and I have done this for X number of years, and now I have this idea which is the extension of this business. I don't know whether it will work or not, but I know the big picture, and I know that I have all the elements. This is what I back today.” Alok Mittal - Canaan Partners: “40% of our business in the US comes from repeat entrepreneurs. This implies that the larger part comes from people who are first time entrepreneurs. And we're very open to backing first time entrepreneurs in the Indian context. Here you see more first time entrepreneurs than in the West simply because the whole model of building a fast-growing enterprise and then exiting is fairly new.”

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Avnish Bajaj - Matrix Partners: “I was a first time entrepreneur when I got funded by ChrysCapital. I don't think the issue is first time entrepreneurs. In fact, if you look at some of the world's most successful entrepreneurs, they are all first time entrepreneurs: Bill Gates, Steve Jobs, Larry Ellison. Indeed, if you look at the track records of entrepreneurs who have succeeded in their first venture, they typically don't succeed after that. But yes, absolutely we would look to back first time entrepreneurs. I think it comes back to whether they have a track record of achievement in their lives. It doesn't have to be as an entrepreneur.” So to encapsulate the views of the above VCs, most of them are looking for a good technology, backed by an efficient managerial team to launch the product into a large market at the right time, irrespective of whether or not the person is a first-time entrepreneur. Another source of outside investors are 'angel investors'. These investors differ slightly from VCs. The largely accepted difference between the two modes of funding is essentially that angel funding is more of 'emotional money', whereas venture capital is 'logical money'. Many angel investors are successful entrepreneurs who want to help other entrepreneurs get their business off the ground and usually expect a lower rate of return than a VC. Usually they are the link from the self-funded stage of the business to the point where the business needs the level of funding that a VC would offer. 'Angels' typically offer expertise, experience and contacts in addition to money. Not much is known about angel funding due to the individuality and privacy of their investments. Venture Capitalism is one of the most popular forms of funding available to entrepreneurs today. It is one of the few doors that one could unlock in order to enter the actual entrepreneurial world.

INTERESTING FACTS ? Etymology of 'venture': "to risk the loss" (of something), shortened form of aventure, itself a form of adventure. General sense of "to dare, to presume" is recorded from 1559. Noun sense of "risky undertaking" first recorded 1566; meaning "enterprise of a business nature" is recorded from 1584. Venture capital is attested from 1943. ? ARDC (American Research and Development Corporation) was the first venture capital firm to be in existence. Its main purpose was to encourage private sector investments in businesses run by soldiers, who were returning from World War II. ? .Georges Doriot is known as the 'father of venture capitalism'.

He, along with Ralph Flanders and Karl Compton, founded ARDC in 1946. He is also co-founder of INSEAD Business School (1957). ? In 2007, U.S. venture capitalists invested $1.4 billion in China and $1.0 billion in India. ? The origin of the Angel Investors occurs at the beginning of the era of Broadway Productions to define those individuals who used to fight all odds to put up the high risk and early stage seed money to launch Broadway shows. ? Angel Investors accept an average of 3 deals for every 10 considered, whereas VCs accept 1 for every 400. ? According to a Wells Fargo survey in 2007, 73% of all ventures in the USA are self-funded.

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The Entrepreneur

Company Registration Registering a company is an obligation which every entrepreneur has to undergo. This article written by Rahul Kumar, is aimed at providing complete information about the various nitty-grittys of the procedure involved and the costs incurred in getting your company registered. The selection of right business entity is very useful for the success of an entrepreneur. The choice of entity depends on the circumstance of each case. A company is a separate legal entity as compared to its members. In a company, liability of shareholders is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder. On the other hand, a partnership is a sum total of persons who have come together to share the profits of the business carried on by them or any of them. It is not a separate legal entity. The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm. Registration of partnership firm is not compulsory up to the extent of 20 partners, though registration has extra advantages. Registration of companies under the Companies Act 1956 is under the categories of private and public limited companies. The most common form is Private Limited Company. Private Limited Company: It is a company limited by shares in which there can be maximum 50 shareholders, no invitation can be made to the public for subscription of shares or debentures, cannot make or accept deposits from public and there are restrictions on the transfer of shares. The minimum number of shareholders is 2. It must have at least 2 directors. Minimum share capital is INR 1 lakh. Public Limited Company: It is a company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The minimum number of shareholders is 7.It must have at least 3 directors. Minimum share capital is INR 5 lakhs. Recently the concept of Limited Liability Partnership (LLP) has been introduced in India. LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm. LLPs are intended as an alternative business organisation for small scale industries and service sector enterprises, such as lawyers, chartered accountants etc, which at present, are primarily constituted as partnership firms in India. A Sole Proprietorship is the most common type of business (like the small grocery stores). It is a business entity owned and managed by one person. It requires almost no legal formalities. For liability purposes, the individual and the business are one and the same. Steps of incorporation of a company: 1. Purchase DSC (Digital Signature Certificate) for Directors: It is used on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. 2. Obtain DIN(Director Identification Number) for proposed directors: It is obtained by filling eForm DIN-1. 3. Name approval of the company: Availability of names could be checked at MCA (Ministry of Corporate Affairs) portal. Apply to the concerned RoC (Registrar of Companies) to ascertain the availability of name in eForm1A by logging in to the portal. A fee of INR 500 has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the form. Select, in order of preference, at least one suitable name up to a maximum of six names, indicative of the main objects of the company. Ensure that the name does not resemble the name of any other already registered company. The names can be the coined name from the objects of the proposed company or even the name of the directors, and of such kind. Whatever be the case, it should be indicative of the main object of the proposed company. The name justification is required to be specified along with the application. Further, the last words in the name are required to be "Private Ltd." in the case of a private company and "Limited" in the case of a Public Company.

Availability of names requires authorised capital for certain key words: Keywords

(1) Corporation (2) International, Globe, Universal, Continental, Inter-Continental, Asiatic, Asia, being the first word of the name. (3) If any of the words at (2) above is used within the name (with or without brackets) (4) Hindustan, India, Bharat, being the first word of the name. (5) If any of the words at (4) above is used within the name (with or without brackets). (6) Industries/Udyog (7) Enterprises, Products, Business, Manufacturing.

Requierd Authorised Capital (INR) 5 Crores 1 Crore

50 Lakhs

50 Lakhs 5 Lakhs

1 Crore 10 Lakhs

4. After the name approval file for registration of new company by filing the required forms (1,18,32) within 60 days of name approval Memorandum of Association (MoA): It is a document that sets out the constitution of the company. It contains, amongst others, the objectives and the scope of activity of the company besides also defining the relationship of the company with the outside world. It has: 1) Name clause: The name of the company is mentioned in the name clause. 2) Situation of registered office. 3) Objects clause: It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity which is not authorised by its MoA. 4) Liability clause: A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The MoA of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. The effect of this clause is that in a company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liability towards the company. 5) Capital clause: The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum. Articles of Association (AoA): It contains the rules and regulations of the company for the management of its internal affairs. While the Memorandum specifies the objectives and purposes for which the Company has been formed, the Articles lay down the rules and regulations for achieving those objectives and purposes. The important items covered by the AoA include:1) Powers, duties, rights and liabilities of Directors 2) Powers, duties, rights and liabilities of members 3) Rules for Meetings of the Company 4) Dividends 5) Borrowing powers of the company 6) Calls on shares

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? Arrange for the drafting of the memorandum and articles of association by the solicitors, vetting of the same by RoC and printing of the same. ? Arrange for stamping of the memorandum and articles with the appropriate stamp duty. ? Get the Memorandum and the Articles signed by at least two subscribers in his/her own hand, his/her father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person. ? Login to the portal and fill the following forms and attach the mandatory documents listed in the eForm a) Declaration of compliance - Form-1 b) Notice of situation of registered office of the company Form-18 c) Particulars of the Director's, Manager or Secretary - Form-32. Submit the above eForms after attaching the digital signature, pay the requisite filing and registration fees, and send the physical copy of Memorandum and Article of Association to the RoC of the state where the registered office of the company is to be located. ? After processing of the Form is complete and Corporate Identity is generated, obtain Certificate of Incorporation from RoC. Although a private company can commence business immediately after receiving the certificate of incorporation, a public company cannot do so until it obtains a Certificate of Commencement of Business from the RoC.

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Additional steps to be taken for formation of a Public Limited Company: To obtain Commencement of Business Certificate after incorporation of the company the public company has to make following compliance: File a declaration in eForm 20 and attach the statement in lieu of the prospectus (schedule III) OR File a declaration in eForm 19 and attach the prospectus (Schedule II) to it.

? In addition, businesses liable for income tax must obtain a tax identification card and number [known as Permanent Account Number (PAN)] from the Income Tax Department. Processing fee is INR 66 (certificate of registration by RoC is required). It must be indicated on all the returns, documents and correspondence filed with the Income Tax Department. ? We can also get the Common Seal (costs INR 1000 approx.) which is used to for putting seals on share certificates. ? Register with EPFO(Employee's Provident Fund organisation). ? Open bank account ? Register for value added tax (VAT) before the Sales Tax Officer of the ward in which the company is located. Apply for IEC (Importer Exporter Code) number if import-export is to This process of incorporation is completed in about 20 days. Auditors will ? be made (PAN is mandatory for obtaining it). charge around INR 10,000 for their service.

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The Entrepreneur

Entrepreneurship Cell ABOUT US

Editor: Naveen YS Asst. Editors: Rahul Kumar, Hridya Ravimohan, Shikha Singh Write to us at [email protected]

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Entrepreneurship Cell [E-Cell] is a non-profit student organization with the aim of fostering the spirit of entrepreneurship among college students in India and nurturing young people with bright ideas. With a team of highly motivated group of IITians from Kharagpur and the support of encouraging faculty, E-Cell boasts to be one of the most active student bodies in India - with more than 15 start-ups from IIT Kharagpur itself within its three years of inception. We, at E-Cell, strive to make all the worthwhile support available to budding entrepreneurs and also present successful examples by conducting guest lectures by eminent people. Case study competitions, Knowledge Camps, patent workshops, and other focused business plan events are conducted throughout the year to involve students in activities that help them gain an entrepreneurial bent of mind. Our annual competitions include: Concipio: An exclusive in-house business plan competition, aimed at transforming the raw ideas that are born here into full fledged business models Pensez: A unique case study competition, with problem statements designed to inculcate innovative thinking in topics relating to entrepreneurship Eclairez: A social entrepreneurship challenge aimed at those individuals who have the gumption to empower those at the bottom of the pyramid Envision: A product design competition, catering to those visionaries who have it in them to impact our present, and revolutionize our future Negocio: A web and mobile services based business plan competition that focuses on individuals aspiring to startup in this very popular sector of today Clean Tech Challenge: An event that aims at tapping the immense potential of this promising sector of the future