The fault in our startups

Just a few days ago, the front pages of newspapers were full of stories reporting that Grofers shut down operations in nine cities. I’m not speaking here with the benefit of hindsight. But it was meant to happen.

To get to what I’m trying to say, visualize the math on a transaction I am just about to describe. A friend spotted an employee from Grofers at a neighbourhood store. For those who came in late, this is a phone-based app that allows you to order pretty much anything and it gets delivered to your place. The intent is to save time you would otherwise spend shopping.

Anyway, to get back to the point, this bloke wearing a T-shirt that indicated he is from Grofers, picked up a half litre bottle of Pepsi and a Cadbury Dairy Milk chocolate.

Strategic Alliances

Definition:
An arrangement or relationship among independent businesses with corresponding goals, established for a specific purpose and often for reducing costs and improving customer service. The collaboration is usually managed by a team with members from each business and held together by one agreement giving an equal share of risk and opportunity to each business.

Types:
Sales: A sales alliance occurs when two companies agree to go to market together to sell complementary products and services.
Solution-specific: A solution-specific alliance occurs when two companies agree to jointly develop and sell a specific marketplace solution.
Geographic-specific: A geographic-specific alliance is developed when two companies agree to jointly market or co-brand their products and services in a specific geographic region.
Investment: An investment alliance occurs when two companies agree to join their funds for mutual investment.
Joint venture: A joint venture is an alliance that occurs when two or more companies agree to undertake economic activity together.

Essential elements:
Skin: Each party needs to have some skin on the table. This does not necessarily have to be money but each needs to be prepared to dedicate resources to the alliance. Identify what each party brings to the alliance in terms of time, money, resources.
Accountability: Someone from each side needs to be recognised as being accountable for his or her deliverables and milestones in the strategic alliance.
Communications: Good communications are always more about listening than telling. Be all ears. Listen to your potential partners. What they tell you will not only give you clues to their needs but may influence your thinking in ways you’ve never even imagined. In the formal agreements establish clear lines of communications and establish a dispute resolution methodology in the case of an impasse

Advantages:
Achieve Strategic Objectives: A business partnership can help a company to achieve strategic business objectives through the collective objectives of the partners.
New Markets: Growth opportunities exist from business alliances by enabling companies to penetrate new business markets. Alliances open access to each partner's network of customers and distribution channels.
Knowledge Sharing: A business alliance provides access to the unique know-how of the partner company
Economies of Scale: Economies of scale might develop from business alliances. Economies of scale relates to the cost advantages that a company gains from expansion. In business alliances, this might include access to wider marketing channels, which a company might not otherwise be able to afford outside the partnership. Costs reductions might also result from joint investments on matters like research and development, or access to a partner's operational facilities.

Disadvantages:
Lack of Control: When you align with another company, you lose some degree of control over the way your business is perceived.
Unequal Benefits: Unless you have a carefully vetted contractual agreement, you have no assurance that your business alliance will be beneficial to you, or that you'll get as much as you give in terms of referrals.
Merged Reputations:When you form an alliance, you open yourself up to being judged based on the actions of your alliance partner regardless of whether your customers actually use the services of your business partner or not.
Liability:In the event something goes wrong with your business alliance partner, you can be held liable as well.

Some examples of Strategic Alliances

In R&D:

• Microsoft and Nokia - a software partnership for Nokia’s Windows Phones.
• CISCO Systems’ agreement with China’s biggest on-line commercial company Alibaba, to explore business services for SMEs.
• Claris (India) manufacturer of sterile injectables has an out-licensing agreement with pfizer to develop products for the US.

Manufacture:

• Chrysler – Fiat partnership to build compact and subcompact jeeps
• GSK – Dr. Reddy Labs: The Indian company will manufacture nearly 100 products mainly under GSK brand name for sale in some emerging markets.

Marketing:

• Abbott (US)’s alliance with Zydus - Cadila of Ahmadabad whereby Abbott will license 24 branded generics of Zydus in 15 emerging markets.
• WIPRO – GE joint venture to distribute approximately 85% of GE’s healthcare products and solutions in India.
• Pfizer and Biocon: To market Biocon’s insulin biosimilar products in world markets.

For Market Entry:

• Tommy Hilfiger / PHV group last October acquired a stake in Murjani group’s Arvind Murjani Brands in a possible move to bring the former’s brands into India
• Transcend Information Inc, a global player in many telecom accessories has an agreement with Bharti Teletech to distribute the entire portfolio of Transcend products in India.

For Sales:

• Nestle and General Mills (US) agreement whereby the product Honeynet Cheerios was made in General Mills’ US plants, shipped in bulk to Europe for packaging at a Nestle plant and then marketed in France, Spain and Portugal.

Equity (participation) alliance

• Ford’s 33.4% share in Mazda
• Daimler Chysler’s acquisition of 34% in Mitsubishi 

How to register your startup in India?

To begin with, here is a witty quote on existence by Friedrich Nietzsche, “Art is essentially the affirmation, the blessing, and the deification of existence.” The art of entrepreneurship lights up the minds of all and sundry. To give your own venture or a startup a legal existence, the first and foremost initiative to be considered is ‘Registration.’ Be it a sole proprietorship or a joint venture, registration is must to make huge strides towards your career goal of becoming an owner of a startup. However, the complete process of registration is a bit tedious with mind numbing propositions.

Diving further into the details, it becomes imperative to list the rules to be adhered to register your Private Limited company:

• Any new Private Limited company should have a minimum of two directors. In addition, a minimum of two shareholders is another pre-requisite.
• Transfer of shares of directors and shareholders is never left to their own volition. They have to abide by the law.
• Interestingly, there is an upper limit on the maximum number of shareholders. Well, the maximum number of shareholders should never exceed fifty under any circumstances.
• General public are obviated from purchasing the shares or debentures of any newly established private limited company.
• Talking about the deposits, deposits from the relatives of shareholders are encouraged. However, deposits from the unknown and general public are dismissed.

Here is a simple 4 step procedure to register your startup in India:

1. Apply for DIN (Direct Identification Number):

As the name clearly explains, DIN is a unique identification number that is given to the existing director of a company which is incorporated. After the insertion of the sections 266A and 266B into the Companies Act, 1956, DIN has become an absolute must have. The chief motive behind DIN is to store and maintain the details of directors and to prevent the vested interests of double-dealers. This takes around 1-2 days.

Fill in the application provided in the following link:

http://www.mca.gov.in/MCA21/

What it takes to complete the formalities is just a one-hundred rupee note.

2. Apply for Digital Signature Certificate:

Digital Signature Certificate is important to ensure the security and genuineness of the documents submitted electronically. It takes around Rs400-2650 to complete the formalities. A list of documents, bank accounts, photographs of directors etc. are to be submitted to the authorities concerned. This takes around 4-7 days. For further details, please visit the link: http://www.mca.gov.in/MCA21/certifying-new.html

3. Approval of Company name:

This is a tedious task. You have to file 4 forms – FORM 1A, FORM 1, FORM 18, and FORM 32.FORM 1A allows you to apply for a company name.  You shall receive an acknowledgement from Registrar of Company expressing his/her approval. This takes around 2-3 days. FORM 1, FORM 18 and FORM 32 are required to get certificate of Incorporation. For certificate of incorporation, you have to wait for 7 days. For further details, you may visit: http://www.mca.gov.in/MCA21/RegisterNewComp.html

4. Apply for TAN (Tax Account Number):

TAN signifies Tax deduction Account Number. To apply for TAN, one has to fill the form 49B. Here is the link to the form: https://tin.tin.nsdl.com/tan/form49B.html One has to pay a sum of Rs 62/- (well, this figure may vary). It takes around 7 days to get TAN.

While the complete process of a company registration may take around 30-45 days, unlike Public Limited companies, Private Limited companies may start their operations immediately after receiving the Certificate of Registration.

Private Limited/OPC over LLP?

As a startup, they are obviously conscious about saving costs and want to invest in something that gives them full freedom to do business yet doesn’t have very high annual maintenance cost. Out of 10 startups, more than five do not have any knowledge about legal terms . All they have is an idea, but are not sure how to and from where to start.

In the last three months,  we have seen that in the  Incorporation of Legal Entities there has been an almost 26% rise in private limited company formation and also One Person Company (OPC) formation is also increasing. Every month more than 5,000 businesses are incorporated in India and, out of these legal entities, more than half are in three states only i.e. in Delhi, Maharashtra, Uttar Pradesh.

Questions to be asked while choosing which legal form to create:

1. Are we ready to bear the legal consequences/ Compliances? For a startup, it is best to first consider, whether they are ready to bear the legal consequences and compliances in the form of annual filings, balance sheet signing, that come with the formation of a company.

2. How many people will be‘promoter’ in the company? The first thing that will create value for the company is the formation of the core team structure and then choosing the best Form of Business.

3. How much Capital Contribution/Capital will be Introduced by the promoters? Seed funding is the first seed that a promoter sows to reap the startup tree. Capital is the seed fund and also the main factor of choosing the main form of business like what amount of contribution promoters are willing to introduce in the company.

4. Are there any Funding/Investment Requirements in the future? This, too, has to be decided at the very onset as it is the deciding factor for the kind of business to choose.

What factors make the Private Limited/One Person Company (OPC) more favorable than an LLP?

1. Sense of Ownership: Like in OPC/Private Limited, Shareholder contributes the amount and gets shares of the company 100% in OPC, and in proportion in Private Limited, but in LLP , everytime partners contribute the amount and do not come up with the result, there is conflict over who is the major partner or who is the minor one.

2. Acceptance of Foreign Payments/Investments Ina Private. Ltd. Company, any foreigner can become a shareholder and can easily route the money from a foreign country to India but in LLP there are many restrictions.

3. Atmosphere for Investors In the initial stage:Most startups, begin with the hope of a ROI in the near future, Investors always invest in the business in lieu of some stake which onecan get only in a Private Limited and not in an OPC. InvestorsIt is possible only fter conversion of an OPC into a Private Limited one by filingthe INC 6 form to MCA.

4. Going Public in Future: In the recent Budget and new notifications from SEBI, the government has plans to be lenientabout going public for startups.. In Private Limited companies, one can go public by converting Private limited into Public limited company, but in an LLP, the LLP Act does not permit the conversion of LLP into Private Limited or into Public Limited. One can choose to be aOne Person Company (OPC) in the initial stage of the startup if he/she is the single owner of the company, and later with the introduction of new persons in the company, OPC can easily be converted into a Private Limited one, but that can’t be possible in the case of LLP

Conclusion

While choosing the best form of business, keep in mind that this selection is as important, as the execution of the idea. Although, compliance cost and formation cost of LLP is much less than in One Person company (OPC)/Private limited but if your idea needs funding and in future you have the plan to grow big, then Proprietorship and partnership cannot not give the right plough back that your business needs

Startup failure stories 2014

Success stories are important but there are always many failures which build towards that success. It is important to talk about these failures. Sharing these stories helps others learn and avoid repeating mistakes. It also makes the environment more real. And this is especially true in the space of startups. More than 80% startups die within the first three years of starting but we hardly hear about them.

The most common reason for failures among our respondents was the lack of a cohesive team, or differences with co-founders. Other shut down because they were unable to raise funds or utilise funds raised effectively. Some founders said unfamiliarity with the business in which they were operating led to the shutdown. Interestingly, more than half the founders have opted out of entrepreneurship and have taken up jobs in companies.

The response has been majorly from the very early stage startups and it gives an interesting perspective to startup failures. 

(update: couple of companies have been removed on request)

1) Name – Shubhamilana.com
Founder – Channaia

Shubhamilana was a Matrimonial Site. Lack of technology support according to them was the key reason for their failure.

Current Status – Corporate Job

Important Tips by the Founder – Find a very good cofounder who can bring technology expertise.

3) Name – Pirate’s Kitchen

Founder – Gaurav

Pirate’s kitchen was a theme based find dine restaurant. The team was not able to scale it up that well. According to the founders, lack of deep knowledge in the field of hospitality industry.

Current Status – Corporate Job

Important Tips by the Founder –

1. Concentrate on one thing to the core (never tie up rope and try learning swimming)
2. If there are too many family pressures. Get married first and then startup, gives you more time.
3. Take risk and don’t wait for right co-founder, instead be the driving force.

4) Name – SASLAB Technologies

Founder – Saurav Karmakar

This start-up was in the field of Information Security Services and Products. Problems like getting the right team, lack of funding, unable to grow with the market rate were the major reasons of their failure.

Current Status – Starting up again

Important Tips by the Founders – Build the Proper team, As Jack ma said “Hire the right people not the best people” and proper market survey and research.

5) Name – BlogTard.com

Founder- Yash Shah

Startup used to  set up a blogging network for enterprises. A closed network of employee blogs for each other. A little less gossipy than yammer, and more engaging than collaboration tools. According to the team, they could not match the customer expectations and thus leading to lack of customer acquisition.

Current Status – Starting up again

Important Tips by the Founder – I am starting up again. Working on Gridle.io. It is a productivity platform for enterprises through task management and multiple communication channels within teams in an enterprise. Our clients (decision makers) can see productivity increase in less than a couple of months and our customers (employees) can prioritize and be result oriented. We have started generating revenue and are coming across people who are receiving it well. If all goes well, we will introduce an enterprise blog like feature in Gridle as well.

6) Name- HashTag

Founder – Paritosh Sharma

The start-up provided a Crowd sourcing platform for start-ups to validate their idea/ products. Though accelerated by Intel & UCB as part  of the t2ma, they failed to make money.

Current Status – Consulting + Helping startups + Starting up again

Important Tips by the Founder –

Reduce noise around you. Bootstrap + Make money and not run after raising.

7) Name- Blahdiary

Founder- Lijin John

Aggregated interesting content on politics, social life, branding , and took copyediting projects with the promise of instilling best copywriting and marketing concepts . The idea lacked clarity, form and direction.

Current Status – Corporate Job

Important Tips by the Founder – Make sure that the face of the organisation, its core offering and the team behind delivering this is on the same page. Focus and put efforts at being the master of one being the core product.

8) Name – Follow up manager

Founder – Vikas Mulchandani

This venture created a CRM product to increase sales/support performance for SME’s through timely follow up’s. The application was designed for owners who run small companies and want to know how the staff is performing. The reasons that led  to shut it down were:
1) Implementation – Shifting cutsomers from Pen and paper to Software is very difficult
2) Customization – No matter how good you make it, the customer would tell you some changes in it
3) Co-founder could not dedicate time.

Current Status – Corporate Job and working on next Startup

Important Tips by the Founder – In the first start up I had capital crunches and wanted to use more of “part timers” to save money.  In my 2nd start up I am outsourcing work to full time professionals.

I also believe the co founder lacked passion and was only in the business for money (which is not a bad thing) but however the missing that dive in a co-founder can bog you down. In my 2nd start up “No Co founder”;  atleast yet.

9) Name- Academic Ventures

Founder – Arpit Agarwal

They helped  institutes  in India commercialize their technology. According to the Founders, after working for a period of 18 months both the supply and demand side showed no traction.

Current Status – Corporate Job

Important Tips by the Founder –

1. Use Lean Startup from day zero

2. Build a solid founding team with complementary skill sets (I started almost alone)

11) Name- Benarasisarees.com

Founder – Abhishek Kumar

It was an An E-Commerce portal of handloom products from the Looms of Varanasi. Weak business model, lack of customer satisfaction and not full involvement of the team led to the downfall.

Current Status- Starting Up again

Important Tips by the Founder –

1. Focus on one work at a time ( Don’t work on two start-ups at the same time ).
2. Get the terms clear with the core team

12) Name – Virtuplus

Founder – Vinay Mehta

It was an ecommerce website for niche goods. Could not compete with the market leaders and thus lost the customers and had to shut down.

Current Status – Corporate Job

Important Tips by the Founder – Work more on raw sketches before implementation.

13) Name – FTW

Founder – Siddhant Gupta

Was a website which used to sell sunglasses of various types like wooden, or sarcastic messages written on them. They knew the marketing side but dint know the construction side of it, wooden glasses used to cost them a lot.

Current Status – Starting Up again

Important Tips by the Founder – First of all, try to know the crux of the industry you are operating in. Be a bit more open about  the idea. Build a team. Connect to more and more mentors who can guide the way to go about the idea. The biggest mistake I did was I tried to deliver “perfection” in my first shot, which is never possible.You need to deliver whatever you have and then improvise gradually.

14) Name – Oravel Stays (pivot to OYO Rooms)

Founder – Ritesh Agarwal

The company served as a Marketplace for Bed and breakfast.The reason of failure was not proper building of a team which led to arguments in the team and ultimately the downfall.

Current Status – Starting Up again

Important Tips from the Founder – Do the paperwork well and build a proper team.

15) Name – Discountbull.com

Founder- Venkataramana / Prabhu

Online e-commerce for showing discount on clothes. Didn’t find the proper team and a less than attractive website couldn’t attract the customers. Lack of money inputs led to the downfall.

Current Status- Corporate Job

Important Tips by the Founder – Build a good team and see for the funding initially.

16) Name- TechBloggerz

Founder – Arjun

The company used to deliver online technology news. Main reason for the failure was lack of cash inflow.

Current Status – Starting up again.

Important Tips by the Founder – Look for funds initially.

17) Name- Uncafe.in

Founder – P Karan Jain

Social networking kind of portal which used to make portfolios of users. Lack of team building led to failure.

Current Status – Studying

Important Tips by the Founder – Build a good team which could complement the work.

18) Name- Opus Content Solution

Founder – Enoch Joy

The website used to provide content for websites and SEO providers. The founder himself lost interest and could not really scale up later.

Current Status – Sabbatical

19) Name – MSN Advertisers

Founder – Vikas kataria

The company was working in the domain of Printing /Flex banner/ visting cards/ paper printing etc. Major reason for the downfall was financial issues.

Current Status- Corporate Job

Important Tips by the Founder – Get good team in sales and marketing and also backup yourself with some good amount of money.

20) Name – Late night food

Founder – Gaurav Sharma

The company was a late night food delivery service started with outsource food ,bouquet and every essential items whatever you want in dark hours .Some issues and financial problems led to closure of the venture.

Current Status- Corporate Job

Important Tips by the Founder – Scale up your idea properly and also back yourself with money.

21) Name – Visify Books

Founder – Sanket Shah

It was a company which provided Video Cliff Notes for Business Books. The main reason behind the failure was that one of the founders had given it a 3 month try period also funds became an issue.

Current Status – Starting Up again

Important Tips by the Founder  – Choose your co-founder properly.

22) Name  – bonafidesoftwares pvt ltd

Founder – Chirag Dhori

It was a software product company working on software product dental software and school erp software. Lack of team support led to closure.

Current Status – Starting Up again

Important Tips – Do your work yourself. Do not depend on the other co-founder for the work.

Types of Shares

Ordinary shares

These carry no special rights or restrictions.  They rank after preference shares as regards dividends and return of capital but carry voting rights (usually one vote per share) not normally given to holders of preference shares (unless their preferential dividend is in arrears).
Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example, for pre-emption rights to apply to some shares but not others.
In some cases, different classes of ordinary share may be of different nominal values – for example, there may be £1 Ordinary shares and £0.01 Ordinary shares. If each share had the right to one vote (and assuming the shares were issued at their nominal value), then the £0.01 Ordinary shareholders would get 100 votes per £1 paid while the £1 Ordinary shareholders would get 1 vote for paying the same amount.

Deferred ordinary shares

A company can issue shares which will not pay a dividend until all other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating.  On a winding up they will only receive something once every other entitlement has been met.

Non-voting ordinary shares

Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if certain conditions are met. Alternatively, they may carry no voting rights at all.  They may also preclude the shareholder even attending a General Meeting. In all other respects they will have the same rights as ordinary shares.

Redeemable shares

The terms of redeemable shares give the company the option to buy them back in the future; occasionally, the shareholder may (also) have the option to sell them back to the company, although that’s much less common.
The option may arise at or after a specific date, between two dates or be effective at any time the shares are in issue. The redemption price is usually the same as the issue price, but can be set differently. A company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict its ability to redeem shares even if the directors would like to exercise the option.
If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can all of its share capital be made up of redeemable shares.

Preference shares

These shares are called preference or preferred since they have a right to receive a fixed amount of dividend every year.  This is received ahead of ordinary shareholders.  The amount of the dividend is usually expressed as a percentage of the nominal value.  So, a £1, 5% preference share will pay an annual dividend of 5p. The full entitlement will be paid every year unless the distributable reserves are insufficient to pay all or even some of it.  On a winding up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders.  Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).

Cumulative preference shares

If the dividend is missed or not paid in full then the shortfall will be made good when the company next has sufficient distributable reserves.  It follows that ordinary shareholders will not receive any dividends until all the arrears on cumulative preference shares have been paid.
By default, preference shares are cumulative but many companies also issue non-cumulative preference shares.

Redeemable preference shares 

Redeemable preference shares combine the features of preference shares and redeemable shares. The shareholder therefore benefits from the preferential right to dividends (which may be cumulative or non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the future.

Founder Shares

These are sometimes issued to the founders of a company and usually carry enhanced rights over other classes of shares, such as increased voting rights or an entitlement to surplus profits over a specified period. However, in practice, the issue of such shares is extremely rare.

How Startup Funding Works

A hypothetical startup will get about $15,000 from family and friends, about $200,000 from an angel investor three months later, and about $2 Million from a VC another six months later. If all goes well. See how funding works in this infographic:

First, let’s figure out why we are talking about funding as something you need to do. This is not a given. The opposite of funding is “bootstrapping,” the process of funding a startup through your own savings. There are a few companies that bootstrapped for a while until taking investment, like MailChimp and AirBnB.

If you know the basics of how funding works, skim to the end. In this article I am giving the easiest to understand explanation of the process. Let’s start with the basics.

Every time you get funding, you give up a piece of your company. The more funding you get, the more company you give up. That ‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of your company.

Splitting the Pie

The basic idea behind equity is the splitting of a pie. When you start something, your pie is really small. You have a 100% of a really small, bite-size pie. When you take outside investment and your company grows, your pie becomes bigger. Your slice of the bigger pie will be bigger than your initial bite-size pie.

When Google went public, Larry and Sergey had about 15% of the pie, each. But that 15% was a small slice of a really big pie.

Funding Stages

Let’s look at how a hypothetical startup would get funding.

Idea stage

At first it is just you. You are pretty brilliant, and out of the many ideas you have had, you finally decide that this is the one. You start working on it. The moment you started working, you started creating value. That value will translate into equity later, but since you own 100% of it now, and you are the only person in your still unregistered company, you are not even thinking about equity yet.

Co-Founder Stage

 As you start to transform your idea into a physical prototype you realize that it is taking you longer (it almost always does.) You know you could really use another person’s skills. So you look for a co-founder. You find someone who is both enthusiastic and smart. You work together for a couple of days on your idea, and you see that she is adding a lot of value. So you offer them to become a co-founder. But you can’t pay her any money (and if you could, she would become an employee, not a co-founder), so you offer equity in exchange for work (sweat equity.)

But how much should you give? 20% – too little? 40%? After all it is YOUR idea that even made this startup happen. But then you realize that your startup is worth practically nothing at this point, and your co-founder is taking a huge risk on it. You also realize that since she will do half of the work, she should get the same as you – 50%. Otherwise, she might be less motivated than you. A true partnership is based on respect. Respect is based on fairness. Anything less than fairness will fall apart eventually. And you want this thing to last. So you give your co-founder 50%.

Soon you realize that the two of you have been eating Ramen noodles three times a day. You need funding. You would prefer to go straight to a VC, but so far you don’t think you have enough of a working product to show, so you start looking at other options.

The Family and Friends Round: You think of putting an ad in the newspaper saying, “Startup investment opportunity.” But your lawyer friend tells you that would violate securities laws. Now you are a “private company,” and asking for money from “the public,” that is people you don’t know would be a “public solicitation,” which is illegal for private companies. So who can you take money from?

1. Accredited investors – People who either have $1 Million in the bank or make $200,000 annually. They are the “sophisticated investors” – that is people who the government thinks are smart enough to decide whether to invest in an ultra-risky company, like yours. What if you don’t know anyone with $1 Million? You are in luck, because there is an exception – friends and family.
2. Family and Friends – Even if your family and friends are not as rich as an investor,  you can still accept their cash. That is what you decide to do, since your co-founder has a rich uncle. You give him 5% of the company in exchange for $15,000 cash. Now you can afford room and ramen for another 6 months while building your prototype.

Registering the Company

To give uncle the 5%, you registered the company, either though an online service like LegalZoom ($400), or through a lawyer friend (0$-$2,000). You issued some common stock, gave 5% to uncle and set aside 20% for your future employees – that is the ‘option pool.’ (You did this because 1. Future investors will want an option pool;, 2. That stock is safe from you and your co-founders doing anything with it.)

The Angel Round

With uncle’s cash in pocket and 6 months before it runs out, you realize that you need to start looking for your next funding source right now. If you run out of money, your startup dies. So you look at the options:

1. Incubators, accelerators, and “excubators” – these places often provide cash, working space, and advisors. The cash is tight – about $25,000 (for 5 to 10% of the company.) Some advisors are better than cash, like Paul Graham at Y Combinator.
2. Angels – in 2013 (Q1) the average angel round was $600,000 (from the HALO report). That’s the good news. The bad news is that angels were giving that money to companies that they valued at $2.5 million. So, now you have to ask if you are worth $2.5 million. How do you know? Make your best case.  Let’s say it is still early days for you, and your working prototype is not that far along. You find an angel who looks at what you have and thinks that it is worth $1 million. He agrees to invest $200,000.

Now let’s count what percentage of the company you will give to the angel. Not 20%. We have to add the ‘pre-money valuation’ (how much the company is worth before new money comes in) and the investment
$1,000,000 + $200,000=              $1,200,000  post-money valuation
(Think of it like this, first you take the money, then you give the shares. If you gave the shares before you added the angel’s investment, you would be dividing what was there before the angel joined. )

Now divide the investment by the post-money valuation $200,000/$1,200,000=1/6= 16.7%
The angel gets 16.7% of the company, or 1/6.

How Funding Works – Cutting the Pie

What about you, your co-founder and uncle? How much do you have left? All of your stakes will be diluted by 1/6. (See the infographic.)

Is dilution bad? No, because your pie is getting bigger with each investment. But, yes, dilution is bad, because you are losing control of your company. So what should you do? Take investment only when it is necessary. Only take money from people you respect. (There are other ways, like buying shares back from employees or the public, but that is further down the road.)

Venture Capital Round

Finally, you have built your first version and you have traction with users. You approach VCs. How much can VCs give you?   They invest north of $500,000. Let’s say the VC values what you have now at $4 million. Again, that is your pre-money valuation. He says he wants to invest $2 Million. The math is the same as in the angel round. The VC gets 33.3% of your company. Now it’s his company, too, though.

Your first VC round is your series A. Now you can go on to have series B,C – at some point either of the three things will happen to you. Either you will run out of funding and no one will want to invest, so you die. Or, you get enough funding to build something a bigger company wants to buy, and they acquire you. Or, you do so well that, after many rounds of funding, you decide to go public.

Why Companies Go Public?

There are two basic reasons. Technically an IPO is just another way to raise money, but this time from millions of regular people. Through an IPO a company can sell stocks on the stock market and anyone can buy them. Since anyone can buy you can likely sell a lot of stock right away rather than go to individual investors and ask them to invest. So it sounds like an easier way to get money.
There is another reason to IPO. All those people who have invested in your company so far, including you, are holding the so-called ‘restricted stock’ – basically this is stock that you can’t simply go and sell for cash. Why? Because this is stock of a company that has not been so-to-say “verified by the government,” which is what the IPO process does. Unless the government sees your IPO paperwork, you might as well be selling snake oil, for all people know.

So, the government thinks it is not safe to let regular people to invest in such companies. (Of course, that automatically precludes the poor from making high-return investments. But that is another story.) The people who have invested so far want to finally convert or sell their restricted stock and get cash or unrestricted stock, which is almost as good as cash. This is a liquidity event – when what you have becomes easily convertible into cash.

There is another group of people that really want you to IPO. The investment bankers, like Goldman Sachs and Morgan Stanley, to name the most famous ones. They will give you a call and ask to be your lead underwriter – the bank that prepares your IPO paperwork and calls up wealthy clients to sell them your stock.  Why are the bankers so eager? Because they get 7% of all the money you raise in the IPO. In this infographic your startup raised $235,000,000 in the IPO – 7% of that is about $16.5 million (for two or three weeks of work for a team of 12 bankers). As you see, it is a win-win for all.

Being an Early Employee at a Startup

Last but not least, some of your “sweat equity” investors were the early employees who took stock in exchange for working at low salaries and living with the risk that your startup might fold. At the IPO it is their cash-out day.

The Story of Inspiration - Varun agarwal

Four years back, set up on two tables near the basketball court, two boys stood with sweatshirts and t-shirts spread out all around them in the Bishop Cotton Girls’ School campus. They looked around awkwardly, answered questions and watched a giggling, eyelashes battering bunch of girls add to their profits!

Of course, in an all girls school, the mere presence of boys is enough to stir a flurry but to add to it, two good-looking, sweatshirt-wielding boys is a matter best left to the imagination.

Today, one glance is enough to recognize the signature Alma Mater products and to immediately connect them to that one name - Varun Agarwal!

Varun’s million dollar journey began with an idea that was simply a ‘cool idea’ as he puts it, without any thoughts of business or accounts or the heavy-handed yet almost fad like term ‘entrepreneurship’.

They began modestly with their Alma Mater- Bishop Cotton Boys’ School and now hold in their hands 2500 school and colleges and over 3,00,000 consumers; extraordinary numbers for young men who began with no clear destination, but simply an idea and a thirst to see it through.

After the initial grand success at Cottons, he thought it would pan out like a fairy tale. In a month’s time, every college and school would possess an Alma Mater produced sweatshirt and their job would be done. But as Varun says he was quite naïve to the humongous task ahead of them. From accounts to finance, to operations and processing, and to hiring people and handling a meticulous organization, the word ‘easy’ had no space in this brainwave! Of course, he does say that the task would have been slightly easier if he knew how to use Microsoft Excel, his greatest nemesis! The only task, he says that was harder than explaining the concept of Alma Mater to people, was learning how to use excel! I wonder if he did conquer that enemy after all…

Moving beyond Alma Mater, Varun also founded and currently runs 2 more companies; Last Minute Films and Reticular.

The entrepreneurial bug bit him very early in the fourth standard when he sold his mother’s homemade brownies for the impressive sum of 25 rupees and definitely hasn’t left him since!

While Last Minute Films is the direct extension of his passion for film making and his desire to provide a platform for young film makers who he feels need to be encouraged and more importantly, provided a financial backing to pursue their dreams, Reticular is a social media management firm that works on brand building using innovative technology.

Both vastly different areas yet united by the creative excellence that Varun possesses.

Varun Agarwal holds to his credit many facets –an entrepreneur, a filmmaker, the author of bestseller ‘How I Braved Anu Aunty and Co-Founded a Million Dollar Company’, an engineer, the list is endless. But to move beyond his achievements and find the simple guy who loves to sleep and read is quite remarkable. He has an incredible passion for Indian history. He says if he could have a day off with absolutely nothing to do he would simply sleep and read an entire book on history in a day. The British and the East India Company never cease to amaze him. With their business sense, their infrastructural accomplishments, and most importantly, their technological innovations, they have produced marvels, he believes. He even has a list ready with all the places, old English buildings and sites with technological revolutions he wants to visit when he gets the time! Their innovations are all around us as he says and their futuristic thinking and modernity from so many years back is inconceivable!

Despite his strong dislike for engineering through the 4 years, he is quite the technology enthusiast!

Varun’s schedule however, doesn’t give him much time for a vacation or a day off. Being an entrepreneur comes with the pre-requisite of being on the job 24/7 and problems appear every hour. When asked how he deals with so many things at once? He said that it has simply become a part of his lifestyle and he just handles it as it comes! Occasionally frustrating, sometimes not, it’s all a part of his regular day now.

Varun has grown to become an inspiration to many. He says he feels like he has done something substantial when people come up to him and say that they started their own company after reading his book! However, Varun’s inspiration comes from people like Mr. Narayanan Krishnan, the founder of Akshaya foundation in Madurai, Tamil Nadu. When he heard him talk about the work that he has done with the poor, aged and homeless people in Madurai, - from feeding them to personally cutting their hair and nails; he says he realized how much more he could do for the people. He wishes to find that responsibility and selflessness in himself which for him would be a greater achievement.

Before I finished talking to him I asked him how it feels to now be recognized on the streets! He says that in the beginning he thought it would be great! But when it actually happened it wasn’t as exciting as he thought it would be. However, he says it does inspire him to achieve more and reach greater height where he can be worthy of that recognition.

Varun in all his forms, be it an author, entrepreneur or filmmaker is proving to be a force to reckon with. Constantly sprouting new ideas and showcasing creative brilliance, every step of the way, his achievements have been an inspiration beyond measure.

I sure do hope Anu aunty calls him soon asking for help to start up her own business!