Sensible entrepreneurs put money after getting business traction and are measured while recruiting people
Then, as one newly minted Private Equity guy, with decades of business experience once told me – “Money should follow business traction, rather than other way round!” – He meant it is prudent to first test returns and proof of concept for each part of the business plan and then only go investing money on creating resources to let the plan play out fully. We have seen how, many times, promoters, backed by growth-hungry VC/ PE guys, let loose the money taps only to find out that things didn’t pan out the way they were laid in the Business plan. Each step, should be thought, commensurate with the risk-reward ratio.
I have seen many Startup Management’s deliberating extensively on which parts of the business to outsource and which to conduct in-house. My experience says there are two fundamental choices here, which can prove critical as the cash burn starts. First, instead of getting employees on your books and hence putting salary load, simply outsource with properly laid and regularly monitored business goals. The problem with this strategy is that you run the risk of transferring profits to the Outsourcing Company and also running the risk of timelines not getting met, should the Outsourcing Company fail to deliver.
The second strategy is to recruit people for each task of the company, albeit after seeing traction in the business. Though it allows for greater control and cost saving, but then seeing the case of Snapdeal makes this look like a poor strategy. Snapdeal recruited 8000 employees when the going was good and Private Equity was coming in freely. As soon as the tap turned off, it promptly retrenched 50% of its workforce!
The crux of the right solution is to recruit when you have a finite plan of achieving profits, not merely growth driven by topline or fancy buzzwords like GMV (Gross Merchandise Value). Proponents of the Outsourcing model cite example of Airtel, which has been a pioneer in managing Outsourcing partners, leaving them to do all the work. But then, Airtel first achieved blockbuster success and then went on to this route.
Startups should be wary of relying on outsourcing and would do better by in-house talent – to attract such a talent, there are ways like giving ESOP’s and higher variable but lower fixed component of salaries. In-house talent is especially must in case of Technology companies – Technology Pricing is fluid and the industry is prone to IP issues.
Many Incubators have mushroomed all over India – their aim is to aid Startups, right from getting new entrepreneurs to meet successful Promoters, conducting workshops on core issues, providing access to shared spaces and other infrastructure, sharing contacts for low-cost solutions across legal, accounting, marketing and so on. Their Business model is simple – mentor aspiring Startups which need funding, form relationships with the Investing community and when an investment fructifies, take 3% equity at the time of funding in the Startup in lieu of services provided. While such Incubators are good for recent grads, who lack resources and knowhow, but my advice is best avoid them in case you have experience behind you.
I have seen Startups, especially Indian one’s, getting crushed from the intensity of control its Promoters continue to exert, thereby not letting the foundations of the business to be built, with empowered teams. My belief is that it is never too early to create Policy driven processes for each and every aspect of the business. While many Founders tend to think of policies as restrictive and their own word as final, but there are umpteen instances of breakdown in the organization while it is trying to rake up growth, within ambit of a one-man show.
Some of my articles explained these issues in greater detail, see below:
This is the final part of the series.