Entrepreneurship: Taking the first step

Entrepreneurship: Taking the first step

Ritu Kant Ojha After his engineering from IIT Delhi, Yahish Dahiya did his management program from IIM Ahmedabad and then an MBA from Insead and was set for his innings in the corporate world – as a management consultant in Bain & Company. He later worked as a chief executive of First Europa and then as a managing director of ebookers –a travel company that employed 2,000 people across 13 countries in Europe. It could have been a dream run for any pass out from ivy league management institute, but luck had something else in store for Yashish. In 2005 ebookers got sold off to some other company. “While the promoters made 2 million pounds, I could only manage 16,000 pounds. This was because I never thought about equity in the company; I was happy getting a good salary. It was after this shock that I started planning for a venture,” says Dahiya. Despite having such a good educational background and having worked at the top level, Dahiya had to go through his share of pain like any other entrepreneur while establishing Policy Bazaar (in 2008), a website that provides comparative analysis of various insurance products. “I went through immense frustrations for several months after starting up. There was no money to pay salaries including my own and there were about 20 of us. Motivating and keeping the team intact was the toughest task,” he explained. “We started paying the salaries only after getting funding from Info Edge,” he added. After Info Edge, Policy Bazaar was able to raise money from Intel Capital and is now one of the top ten companies in the e-commerce space in India in terms of revenue. What his story tells us is that there are no short cuts and anyone who wants to start a business has to go through some pain. However, it all starts with taking the first step. TAKING THE FIRST STEP Overcoming the anxiety of leaving the cushion of a job, working all seven days, worries about initial capital, will the idea succeed, will I be able to make money are some of the questions every first time entrepreneur faces. The process towards establishing a business starts with an idea. “The idea must identify a problem and devise a way to fix it. It must be a genuine problem and not artificial. Then s/ he must assess how big is it, find the least cost model to solve that problem and create a business around it,” suggests Shekhar Kirani, Partner, Accel Partners. Most budding entrepreneurs fail to assess whether they need funding first or they need to start first. A large number planning a start-up look for funding first. This is like putting the cart before the horse. The successful entrepreneurs suggest that it is important to create ‘something’ before one approaches any investor. Experts in the business of providing risk capital advise that an entrepreneur must tap personal savings, some help from family and friends to start a business and run it for at least 12 months before looking for any kind of funding. FUNDING STAGES Once you have run your start-up for some time and have clarity about the competition, growth prospects, revenue model, and challenges etc, and you feel capital is needed to reach the next stage, it is time to look for funding. The first step is to understand how angel investors, venture capitalists, and private equity firms work. You must have a clear idea about factors such as risks involved and exit options. “People looking to start a business are so much in love with the idea itself that they ignore many other factors which are important to find out whether it is a viable business or not. No investor will invest blindly. An entrepreneur must be ready with lots of research and data points before thinking about raising capital,” suggests Pradeep Tagare, investment director, Intel Capital. There are various stages of funding which must be properly understood: Angel Investing: This stage carries highest risk for the investors since there is no existing project to evaluate for funding and while you could be convinced about your future revenue projections, the investor might not. This is the most important stage as many start-ups die in the initial 12-24 months. This level of funding could range from R 5 lakh to R 25 lakh. The team and how strong is the idea are the key determinants of getting funding at this stage. Seed funding: This traditionally constitutes a range of R 50 lakh to R 5 crore of funding. Seed funding enables founders to hire better team and create bigger infrastructure. Venture Capital (VC) funding: This is typically done for high potential, high risk, growth start-ups and involves amounts ranging from R 5 crore and above. This is a much complex model than seed funding as it involves detailed paperwork and contracts. It is an attractive option for the early stage companies that are too small to raise public money. In exchange for the high risk that venture capitalists take by investing in such companies, they get significant control over company decisions in addition to significant chunk of the company's ownership. There are various series involved in VC investing depending on the stages. Private equity (PE) funding: The PE firms normally invest R 50 crore and above and the process is a little complex than the venture capital funding. Most of the PE firms consist of institutional investors who can commit large amounts of money for long periods. Before investing, they evaluate a proper exit option such as an initial public offer or sale to another company. According to Kirani, only 10 out of 1,000 pitches made for funding are finally selected by his team. This means that before you plan to make a pitch to an investor, the homework has to be solid as there is tough competition. Before you take the first step towards becoming an entrepreneur here is Dahiya's advice for you – “get into a business only if you are passionate about it and are ready to invest at least 10 years in it. Otherwise you would end up wasting your time and investor's money.” For people who have some exposure of sales and marketing, the process becomes easier. Those who have never sold anything may consider going through some good books on marketing and try and understand the various processes involved in running a business, experts advise. Most businesses which become successful in the long term were able to create maximum value for their target group and in the process created money for themselves as well as the investors. So make a firm business plan and give wings to your dreams. —ritukant.ojha@expressindia.com Key takeaways * Establish how much and for what * Have answer to how much the team has put * Plan for 12-18 months' need at early stage * Typically takes 6 months to raise funds * Plan for cash flows and not profit and loss * Presentation may need multiple rounds