Archive for the ‘Entrepreneur’ Category

Talent is hard work alright, but train to deflect judgmental disdain

March 21, 2011

Jonah Lehrer talks about Talent

Woody Allen nails it as he says “80% of success is showing up”… It clearly sums up why Talent is not genetic… One certainly can’t bet on a Test Cricket gene or a Twenty-Twenty gene…It’s all about skill developed by intense, deliberate practice. Going by pure statistics, I guess one can safely say Talent = Hard Work. Period.

The basic trait that is required for hard work is often presumed as grit. But I would take a step back and think what leads you to be gritty. You look at a faculty and feel the excitement. You sense blood surging up your veins and your heart beating faster and beads of sweat bubble up on your leather. You want to do it now, not a second later. You make a few frantic phone calls and are not put off by the conditions they put forth. You say Yes, almost without a thought. You dive right in.

In the process, you’re sub-consciously ready to assume the risks that go with it. It could mean ejecting out of your own zones of comfort developed over the years of regular exposure. It may as well expose you to a new set of circumstances and people about whom you have no clue. They may be talking stuff that sounds near Greek to you. You don’t cower, you persist.

Then comes the big question… How long before you hit the right road to success…? It could take months or even years to be on the same page as those others you revered. The interlude could be cruel, your near and dear ones look down upon you as if asking “what made this guy go so very nuts..?”

That is one harrowing question you may find difficult to deal with because it is never asked. It is implied in their deignful stares and demeaning walk aways or even not so subtle whispers. Suddenly lights around you get turned off and you realize you are dithering in darkness of ignobility and contempt. You are looked at like a loser and it hits you hard even before you know you failed. Surviving this ignominy is so hard unless you have a balanced mind. The ethos to accept failure as well as success on an even keel may have been your asset, but you may not be so ready to accept early judgmental admonitions from all around, express or implied. This is one sphere where practice has to focus on, not just the attribute that you go after to master.


This is real stay put

March 23, 2010

Where else, from The Onion

“In the summer of 1980, MIT graduates Donald Faber and Peter Haberle moved into an empty two-car garage and started work building their first ever personal home computer. Almost 30 years later, what began as a humble two-man operation has since grown into an even more humble, even more cramped computer company, based out of an even smaller single-car garage.”

That’s what you call staying put, really 🙂

The pursuit of dreams

February 23, 2010

David Schwartz, the author of Magic of Thinking Big asserts “Successful people are not supermen. Success does not require a super-intellect. Nor is there anything mystical about success. And success isn’t based on luck … Believe Big.”

I can use a twist to that surmise.

Going after one’s belief ain’t easy. Have no illusions about it. The secret of actualizing belief is endurance. In Economics, they say “markets can remain irrational longer than you can remain solvent”. In essence it means there is a high likelihood of you going broke before your bets begin to pay off. The real deal is acquiring the capability to sustain yourselves while being “in the trenches”. That phase – figuring out how long before you get there – is crucial, when belief-morphing-into-reality is still a grindingly slow work-in-progress. Lasting it out without being crushed will be the real determinant.

Fire yourself. Then see if you are eligible to be re-hired.

January 5, 2010

The bane of some enterprises – startups included – has been their inability to challenge the incumbent management / founding team’s method of working – or sometimes its vision altogether. They had toyed with a great idea and did go quite a distance with it. Somewhere along the way, they had realized they were going down the wrong road. They stop and look around for sign posts. They saw none, no passer-by to enquire. So what do they do?

A normal traveler would just retrace his steps until he locates a sign post or finds some local guy to guide him. But in enterprise adventures, there’s this big difference – of sunk costs. Covering each mile comes with substantial cash burn and losing your way can be costly too. It gets complicated if the team had some early skeptics whose words went unheeded.

That’s exactly when the team needs fresh, unbiased perspective. If the mistake needs to be owned up, it had better be. Have it reviewed by an outsider and get his opinion. Naturally, it’s easier to take a fresh perspective when you really are new and when the assumptions you are questioning are not your own. We’re all more comfortable challenging someone else’s thinking than stepping back and critically assessing our own ideas and behaviors. That’s what Ed Whitacre did when he needed to shake up GM’s management team post crisis — because the incumbents couldn’t get enough distance to challenge the way things had previously been done.

But why wait for your company to get in trouble and for the board of directors to shake up the management team? The turning of the calendar year is a good time for every manager to take stock and think about what you would do if you were starting fresh. So here’s a thought-exercise you can do: First, take a deep breath and fire yourself. That’s right — take yourself out of your job so that you’ll get some distance from it.

And who knows? Maybe you’ll end up re-hiring you.

Valuation during recession

January 14, 2009

 What characterizes a recession? When exacerbated by liquidity crunch and credit crisis, the R word becomes an obsessive national metric, that is two consecutive quarters of negative GDP growth.  We are now staring at one clearly.


In these times, the normal methods of valuation of businesses don’t fit.  Net Asset Value, Sum of Parts, Discounted cashflows, multiples of future revenues – nothing seems acceptable.  That is because business growth depends on resurgence of demand that depends on restoration of economic normalcy that still eludes the horizon.  It is a chain reaction that covers economic well being of your stakeholders one and all.  If your suppliers are well off, they extend good credit terms.  If your customers are doing well, they’ll place large orders and if you are doing well, you’ll get to hire the best in business by paying the top dollar.  But that wholesomeness is what is lacking today and nobody knows when it will get back to normal.  So, you don’t believe projections of target companies in your radar because things are so fluid.


Then why buy in murkier times ?


But then, that’s exactly when assets come cheap and you can bargain hard. With a bit of fine combing, the obscurity can be turned into an enormous opportunity.  Push for a calibrated mechanism where you don’t close valuation in one go, rather you let the target run its business and prove its projections at appropriate timelines.  (In good times, no seller will agree for stretching out deals; it’s often take it or leave it). This is known as `earn-out’ method – a deal financing mechanism where the buyer agrees to make future payments to the seller if certain agreed-upon financial or operating targets are reached after closing. The future payments are usually in addition to amounts paid at closing and can be in the form of cash, stock or bonds or some combination thereof. The performance targets are typically based on the future earnings or sales of the target in the one to five years after the deal.

Earnouts have been widely employed in a variety of industries and can be critical to getting a deal done when the parties’ views on the value of the target business are too divergent to agree on a price up front.


For example, that target company you’ve been eyeballing may be a privately-held start up with a patent portfolio that has promising, yet unproven, commercialization potential. The company’s founder may be more optimistic about its prospects than you but wants to sell today, perhaps because the company needs access to more capital to fund growth. He thinks the company is worth about $100 million. Nonetheless, while you’re intrigued by the company’s technology, you’re not convinced it will achieve broad enough market acceptance to yield a satisfactory return at the seller’s valuation. You would say a more realistic valuation is in the $75 million range.

So you compromise. You agree to an up-front cash payment of $50 million with as much as $50 million more if the target’s performance is consistent with the seller’s projections for the next three years. You call your lawyers and tell them to start working out the details.


The risks and metrics

But that, as the saying goes, is just where the devil is lurking. Failure to get the details right can transform your deal from accretive to ruinous. Post-closing disputes over earnouts are common, with disputes generally center around whether the performance target calculation was done properly and whether each party complied with any covenants that could have impacted the achievement of targets.

Consider what metric you’ll use for performance targets. You have a broad set of options, including revenues, sales (gross or net), gross profit, operating income (EBIT), operating cash flow (EBITDA), net income or the occurrence of specific contingencies, such as receipt of favorable regulatory approvals. The farther down the in-come statement the line items included in the earnout formula appear, the more susceptible the results are to accounting judgments and possible manipulation. On the other hand, the farther down the income statement you go, the better the line items reflect the actual financial benefit to the buyer of the acquired business.

The middle of the road

Limiting the parties’ ability to manipulate future financial results while enabling them to rely on performance measures that reflect real value to the buyer requires agreeing to detailed, well-defined formulas. So, to reduce the risk of earnout disputes, accounting methodologies should be consistent with those historically used by the seller, and, if practicable, audited financial statements should be used. The treatment of certain items should also be specified in the earnout formula, which may include one or more of the following:

a)  amortization of the goodwill resulting from the transaction;

b) the amount of overhead (i.e., accounting, legal, public relations, advertising and other shared expenses) charged to the acquired company;

c) R&D expenses;

d) Interest on the buyer’s capital contributions to the target;

e) capital gains;

f) capitalization of expenses;

g) affiliate transactions;

h) staff costs;

i) fixed asset depreciation;

j) income or charges from extraordinary or non-recurring items;


k) income derived from newly acquired operations financed by the buyer.


In addition, the earnout formula should address the treatment of contingencies, which could include a force majeure event, the buyer’s decision to sell the business before expiration of the earnout period, the target company’s failure to receive anticipated regulatory approvals, the departure of key personnel and so on.


Grey areas and complexities

Agreeing on the formula for calculating performance targets, however, mitigates only some of the risks inherent in using earnouts. Because the ultimate price payable through an earnout depends on future performance, the parties must enter into the transaction knowing how the business will be operated going forward.


Ordinarily, buyers manage the business post-closing, but sellers will expect the business to be operated in the ordinary course consistent with past practice or otherwise be compensated for losses attributed to deviations. Sellers may also request approval rights or other involvement in major business decisions, such as expansion plans, hiring or firing key personnel, capitalization, dividend policy or combining the business with other businesses. Although buyers will of course resist perceived encroachments on their ability to manage acquired companies, it is pru-dent to agree upon reasonable, objective parameters for operations during the earnout period to avoid grounds for later disputes.
These and other complexities associated with earnouts must be managed carefully and with due regard for their susceptibility to dispute. Learning to do so can make the earnout a useful tool in your implementation of successful M&A transactions in uncertain times.  
PS – This article does not constitute legal advice. If further explanation of the subject matter is required, please contact the author.




It’s the creative break that matters

December 31, 2008


Workaholism — joining the frenetic rat race in which we chase our own tails in the mistaken concept that we are making progress — is the curse of the thinking classes. This is the open secret known to all great artists, scientists and spiritualists. Meditation — the fount of spiritualism — is the purest form of creative leisure.


In his essay ‘In Praise of Idleness’, Bertrand Russell tells the story of a rich man who offered a gold coin to the laziest of 12 lounging beggars. Eleven of them jumped up to claim the prize — which went to the 12th who’d been too lazy to get up. Russell’s point? Idleness pays. Russell’s critique of the work ethic propagated by industrial civilization is that it is exploitative of labour and increases, rather than reduces, economic disparities.


By constantly working harder (i.e. producing more) we have created a vicious spiral of ever-increasing and inequitable consumption, which is rapidly depleting our planet of non-renewable resources, resulting in degradation of the environment and of life itself. Apart from its adverse physical consequences, busy-ness for the sake of busy-ness (running hard to stay in the same place, or even go backwards) has larger, philosophical implications. All the great inventions and breakthroughs in thought have been a result of leisure. With your nose stuck to the grindstone of mindless everyday drudgery, you can’t see the horizon, leave alone aspire to go beyond it.
The story of civilization — be its narrative set in ancient India or Attic Greece — has been the story of creative leisure. Leisurely contemplation unfettered from routine preoccupations has always been the fulcrum that moved the world. Archimedes figured out his theory of water displacement while soaking in a bathtub. James Watt conceptualized steam locomotion while daydreaming and watching a kettle boil. Kekule was asleep when he literally dreamt up the composition of the carbon molecule.


I get amused when I get to puncture idioms and conventional wisdom. So here I go. Not every idle mind need be a devil’s workshop. It’s alright if it’s a creative break; because you could be getting up close with your Eureka moment. Would the Buddha have attained enlightenment, sitting in perfect repose under the Bodhi tree, had there been clocks to punch in Nirvana?


Bashing (capex) myths

November 20, 2008

Just got out of a client engagement in logistics vertical.  Had to bash up a lot of myths the founders were living with that brutally shaved off 20% of their Cap-Ex budget (pricked some vendor egos in the process!).  Now that I am 3 years into the business, there is lot less guilt after puncturing egos.  Gotten so much used to it now.  After all, reality often is daunting and folks recognize it eventually.  That’s where I get the guts to blog about it.  Future clients will know I mean business and nothing but business. I could share some of my observations here.


1. Value your capital – There’s bad news on liquidity. But it’s a fact. The world has 5 + billion of us now and there is not enough capital to go around.  Buy just what you need and stretch the buck. 


2. No spray paint, duct tape innovation – Use the recession to bring about low cost, radical innovation than the incremental ones.  When even the leaders in your industry screech to a halt, you’ve got to close in and catch up.  Be up to speed.  Learn how to drive straight with little gas.  Nobody has the luxury of losing way that yields a detour.


3. Don’t buy to build, just fill a gap – Look for functionality gaps in the products offered by the established big vendors (bulk cargo handlers here).  Make out a simple, straight forward solution at an affordable price that fixes 70% of the client problem, if not all of it.  In lean times, people stretch the buck and make do.  That’s the stuff the big vendors fear.  (It’s also likely that they will soon come around to buy you out!  So now you know what to build 🙂


4. Buy the core ecosystem – Remember this when you go shopping for solutions. Big vendors often standardize their product and buy customized applications from partner ecosystems and add it in.  Worse, they charge a premium for that hybrid. Recently a bird from Oracle tried to push her ERP cookie cutter Accounting and HR application to my client minus their core industry (logistics) application.  Being a capex item, I got called into the negotiations (I got them the series A and B investor!). Upon asking why would they not provide the core, the bird pointed to their partner ecosystem.  Now why would I buy the cookie cutter from her and then go integrate my core app with it, incurring further cost of system integration? I would rather do it other way round and ask the core system vendor to give us the bells and whistles. The bird said their customer list is so diverse that it is difficult to build separate vertical for such a disparate set.  I had a look at the cost, sat down with her to piece it out.  She knew she had lost us.


Life is a lot easy if you drill everything deep.  Never settle for what looks easy or what shows up first.  Badger everything and everybody down. The times are so bad and if they act up, just let go off them.  Be merciless.  When they recover their sanity, they’ll come back.  And if they don’t, you’ll soon be staring at their obituary (bankruptcy). 


[Just called the client up to check if everything works alright before signing off this post.  Amen, all’s well 😉 ]


“The goal is to go out of business”

November 11, 2008


Startup founders that despair over their ventures going nowhere after several rounds of funding it seems can take a leaf out of activist disease foundations.  These are foundations that operate with speed and urgency and a business model completely unlike the traditional foundation model, where funds that get raised often become the ends instead of the means.


Of all this valiant initiatives, the outcome has been disparagingly insignificant.  To cite an obvious hurdle, it takes years to discover what is to be discovered.  That explains why disruptive innovations that most startup founders go after still elude them. They set a goal and then wend their way into it; something that is not as it should be, going by the experience of these enormously funded foundations.


The “spray and pray” model will have to be replaced by more targeted model. What could be that? Lay down a goal and find a team that can get past it.  Why can’t VCs be ideators?  Would it not save them the wasteful exercise of screening?  One look at these foundations reveal that self-interest is a great starting point – in that some celebrity or her close relative suffers from a disease – if not the raison detre. Michael J Fox, Actor and Chairman, Parkinson’s Disease foundation says “the goal is to go out of business”. The foundations don’t want to exist forever, they would love to move on, go out of business as soon as the cure is found.  The startups can certainly stay in business, but the fierce commitment in pursuit of the goal can certainly be loaned from the foundations.


Random flotsam

September 29, 2008


Bitter times make way for wry humor.  I can’t spend the rest of my life griping about deals that have slowed down, decision makers dragging feet.  It just is part of life. The other extreme is despair, clearly not an option for one with my supersized ego.  I have already taken three fortnightly vacations (to shake off the blues and to get some creative distraction) and the fourth is commencing by mid Oct and will last thro to its end.


Getting a lot of time to read and reflect.  Stock market, across sectors is going one way, that is down.  S&P Nifty closed 5% down today. Natural gas is puffing up, Steel is slimy. Paper is stationary. Retail is just left with a  tail. Pencils lost a few points. Power equipment is weak. Infrastructure is fluid, while refrigerators freeze. Light switches were off.  Iron ore mines turn empty craters. Diapers remained unchanged. Shipping lines stayed at an even keel. Consumer goods are bad because soaps don’t wash. And batteries exploded in an attempt to recharge the market.


I could focus a lot more on what’s happening around. Parents play a lot lesser role in bringing up kids. I see them bringing kids up only in elevators at the supermarket. In real life kids get what they want (unlike our times) and do what they like.  In effect, they raise themselves.  My daughter just got herself admitted to a keyboard class and asks me to finish the other formalities – to pay up !


So I settle down to talk to her about the importance of saving money early.  (No, she hasn’t shot back “Did you?”)  But how can I tell her to put her money in that big Bank because piggy banks don’t pay interest?  She reads newspapers and is already asking why big Banks go the Big Bang way?  Silly me, talking of trusting banks to the 13 year old that reads papers and watches TV.  She just told me her piggy bank will never go down with her money nor would she let Wall Street `uncles’ raid her nest.  I am buying her another piggy bank – capital protection comes first!


“Who will take the risks?”

August 31, 2008


Lately I got to read quite some stuff on credentialism.  I haven’t analyzed it enough to form an opinion though I firmly believe in my ability to influence, if not control, outcomes. Odds might be long, but they are rarely insuperable. The folklore of individual successes in business already confirms my thesis.  But I do have a great respect for meritocracy – that advocates crowning anyone that truly deserves – than credentialism.


Way back in 2005, David W Boles referred it as phony-on-the-surface and irresistible-in-the-depths separation of people by paper (degrees).


How about validation by the market place? Something like a true blue hands-on guy that boxed every norm and broke every tradition that beat all others to the top on just raw nerve and imagination; I would love those types.  They are so seeped in and when they start to tell, it hits you hard and shakes you up. You get your comeuppance.


But the system always demands more to keep out those it wishes to not welcome. As more and more people challenge the ivory tower power base with higher base degrees, the bar of perceived excellence gets higher and higher, just to keep the self-proclaimed majority elite in power; and that is accomplished by requiring more and more layers of bullshit to protect a process that is already overrun by pomposity and downward-nose-looking.


I see a lot of that in Investment banks and Private Equity funds. They recruit people that have expensive foreign degrees or MBAs with an added engineering background thrown in.  A few years with Wall Street I-Banks, you are THE guy.  Your level of awareness of local market systems, business laws, entrepreneurial culture and traditions hardly matter. You don’t need go far to seek why there are fewer multi-bagger exits in proportion to the sums invested. These are the guys that manufacture subprime crisis, invent alphabet soup like ABS, CDO, CLO that eventually screw up a vibrant market, bring out IPOs and later pressurize the issuer to withdraw when the sentiment thaws. When the market is at its peak, they open their treasure chests, buy minority stakes at mind boggling valuations.  Later when it slumps and valuations look realistic, they shirk even from their underwriting obligations and do fewer deals.  Small businesses like mine are beginning to feel the chill because of their frostiness.  We drive deals to these icemen and they sleep over it for weeks leaving us to face clients with no firm answers.


Soon they too will get their comeuppance. As James Fallows asked, “If everyone has the tenure and security that come with professional status, who will take the risks?”