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Tag Archive : founders

How to deliver bad news to investors

Hey founders, today I’m going to address a crucial topic: When to update your investors with bad news. If you’re an entrepreneur and running a business, you will have to give bad news at some point.

There are many ways to give bad news. One of them is not to give any news at all, let everything go down, and then explain why you have only ruins and not a building on fire. This method isn’t recommended, but some people choose it – I don’t.

There are minor issues or bad news that can be managed in your monthly and quarterly updates. Like missing your quarterly numbers by 3-4%, or if you’re having a tough time recruiting people, or if a particular distributor who was contributing a large part of the business dropped you for reasons unknown or customer complaints. These are the kinds of things you can manage in your monthly and quarterly updates.

However, certain kinds of news shouldn’t be neglected. These should be communicated to the investors immediately. If a co-founder has left, or one of the co-founders has been diagnosed with severe disease and will not be available for the next 6-8 months, or your fundraising efforts are falling through, or a significant client that contributes a substantial chunk of the profit has left. These are the kinds of situations that need to be communicated to the investors immediately, preferably not on e-mail.

What I recommend is organizing a conference call or an in-person meeting. Explain what is going on to the investors face to face, in a way that is direct with no sugar coating. Be humble about the fact that things have gone wrong. Don’t try to play up things to avoid the investors being angry at you. If the situation is terrible, investors have a right to be irritated and will point out things that could have gone better. You should take criticism in your stride as you’re expected to execute successfully. Take responsibility, be direct, and you’ll find that investors will probably come back with solutions for you to manage the mess.

In adverse situations, you should have a turnaround plan. I would recommend having one if you’re going to have a face to face meeting. If you don’t have one, let the investors know and get back to them in a few days or a few weeks. There may be some questions the investors have, for which you may not have the answers. I would recommend not making up turnaround plans on the spot. If you don’t have the answers, tell them. Mention that you’re going to get back to them in 5, 7 or 10 days (or whatever number of days you believe you need) but ensure that you keep those promises.

Delivering bad news should not be difficult. It’s only tricky when you don’t want to give bad news, and you feel hiding is the best way forward. But it doesn’t solve anything. In fact, it only leads to the problem of getting bigger. If hypothetically, the company shuts down, and investors find out that you knew in advance, you could find yourself in a hot legal soup.

I’ll leave you with that, and I would love to know how some of you guys have shared bad news in the past. Also, if you have tips for other entrepreneurs, do share them in the comments.

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My atrocious car buying experience is a lesson in after sales treatment for all founders!

I am re-reading How to Sell Anything to Anybody by Joe Girard (book review coming soon).

Earlier today, I finished his chapter on Winning After the Close wherein Joe talks about the importance of ensuring customer satisfaction AFTER completing a sale. He gives examples of how he goes out of his way to ensure that his customers sing his praises to their friends and family. He links the importance of satisfying his customer to the Girard’s Law of 250, i.e., each person has a direct connect to 250 people; therefore, an unhappy customer can directly influence 250 people. Consequently a salesperson or a business that disappoints two customers a week will have 26,000 negative influence every year!

Why is it important to follow what Joe Girard says? For starters, the man still holds the Guinness Book of World Records for being the most successful car salesman in history. This man was selling six cars a day (on average) while the average salesman struggled to sell one. He was out making $500,000 a year selling cars in the 1970s, i.e., eight times the per capita income in the US of A – TODAY!

So yes, when that man says something – it is worth our time and attention.

I am coming back to my point for the post today.

I just bought my first car in India. It was an important moment for my team and me. We were ecstatic on getting the car delivered on Tuesday evening. However, instead of reveling that moment and remembering it for the years to come, all we cannot forget is how the salespeople delivered the car with just enough fuel to get the vehicle to the closest petrol pump!

The saleswoman blamed the empty fuel tank on some dealership policy of ensuring that customers get a bone dry fuel tank. I could not disagree more with her firm, her firm’s strategy, and finally with the saleswoman herself. If she was so embarrassed about her firm’s stingy policy, she could have ensured a happy customer by filling up the tank herself – she would make more than the Rs. 2200 it cost me to fill the tank.

Buying a car is one of the most important purchases in one’s life. I can still remember, like yesterday, the first car I bought with the money I earned by working during the first summer semester in college – a 1996 Mercury Sable with a v6 engine. I was so proud of the car even though it was six years old at the time of purchase. The moment gives me goosebumps even today.

Then 17 years later I buy my first car in India, a Honda Civic, and it is an expensive car (for my standards), but it was delivered as though the dealership was running out of money. It left a sour taste and you won’t have to think hard whether this dealership (Arya Honda) will be recommended by me to anyone. The answer is no.

I must re-emphasize that a happy customer is the best salesperson. He/she will boast about his/her positive experiences to their closest network. On the other hand, an unhappy customer will tell anyone that would like to hear him/her of their negative experiences and feeling cheated by a car dealership. Unfortunately, these car dealerships operate under old maxims therefore continue to misread their customers. Any start-up founder that is reading this post should not.

Your customer whether they are B2C, B2B, B2B2C or B2B2B or B2B2B2C (and so on) must be happy with their purchase of your goods or services. To hide behind the veil of corporate policies is the old way of doing business, and you must ensure that your salespeople are sufficiently empowered to ensure post-sales customer satisfaction, at all costs! It is just as important that those negative experiences are corrected by changing policies and processes.

The process in which the company acquires a customer, gives them lousy experience, and allows the salespeople to blame an insane corporate policy is a sure indication of a deeper rot settled in that organisation.

A rot that every entrepreneur should guard their companies against the cost of all their corporate policies.

My PR Experiment

Yesterday was an interesting day. I started off by tasting different blends of single shot coffee made by a start-up that we have been eyeing for a while now. They have been some gaining significant traction and the tasting culminated in the issuance of a term-sheet. In my next appointment, I visited several branches of a food aggregator that provides home cooked meals in an IoT enabled device. The heavy dose of caffeine from the morning helped me stay awake after an extraordinarily heavy lunch, but I really liked what the company was doing, and so we issued them a term-sheet too. In the last meeting of the day, I was with two entrepreneurs who are looking to fill the niche left open by Bira in the beer industry, and so I ended up tasting their different beers. Their product, taste, packaging and brand positioning are all unique and I’ll be honest, we are contemplating issuing them a term-sheet too. But no, this blog isn’t about tasting and issuing term-sheets, it’s about the commonality I observed in all three funding outlays, which I asked the founders to rectify i.e. instead of outsourcing it to an external agency, build an in-house marketing team to manage social media channels, PR and internal-external communication.

I used to erroneously advocate outsourcing PR and media management, but that viewpoint was permanently altered. I conducted a yearlong experiment in which I discontinued the services of our external PR agency and brought those functions in-house. Not only did I gain more control on what Artha (and I) wanted to communicate, but we also got more media mentions, got covered by the top journalists and were invited to renowned events around the globe. We also started publishing separate monthly and quarterly newsletters for our LPs and well-wishers.  All this effort has paid off through a marked increase in business for all the Artha entities, but most importantly, we achieved all these objective at 60% off our previous costs.

All of our PR (yes, all of it) was organic and genuine i.e. unpaid for. We did not sponsor events, pay for advertising in publications or authored articles. Things are moving so well that this year we are expanding the internal team by bringing in a Social Media Head that can move us from prose to video. Since we understand that the entire process isn’t a one-man job, we are allocating him/her a budget to recruit a team to facilitate this transition.

This massive cost saving got me questioning the PR/Media management agency model and whether it really works for an early-stage startup. I am afraid it does not. It takes many months and a lot of effort to get a brand new startup relevant and unpaid media attention. Unfortunately, early stage start-ups do not have the budget to compensate top-level agencies for their effort or even tier 2 or tier 3 players (unless they can secure a strong referral). Therefore, start-ups end up working with PR firms that themselves are starting up.  These PR firms overload their staff with multiple projects, to make ends meet, distributing the employee cost over the projects to make operations profitable. However, that divided cost also means divided time and focus on each project – a situation that does not bode well for start-ups trying to make a dollar for every penny invested in marketing. In fact, I have seen PR agents pitch 4-5 ideas to the same journalist in a single bid hoping to get any of them published. Is that really how you want your start-up to be pitched?

Another issue that works against the interest of the start-up is when a PR agency works hard to meet the KPIs they have promised and manages to do so in the first 15 days of the month. Having met their KPIs, they go radio silent for the rest of the month. This essentially means that their promised KPIs are the limit and not the base on which the agency works – completely opposite to how founders set KPIs for their internal team. After all, you can only create value for your company when you get more value than you pay for, isn’t it?

Therefore, I have come to a conclusion that PR agencies are useful for short sprints or Big Bang announcements, but the marathon work of building an image and brand for your startup should be done by an in-house team. In fact, even the 22 Immutable Laws of Marketing recommends the same!

37/2019

281 and Beyond

Vangipurapu Venkata Sai Laxman aka VVS Laxman played cricket for India for 16 years (at the international level). When his cricket career came to an end, only 12 other people had played more cricket than him, 2 of whom were his teammates (Sachin Tendulkar and Rahul Dravid). He was a vital cog in the Indian batting line up and one of the fab four of Indian batsmen in the 2000-2010 decade. Except at the time of retirement, he wasn’t involved in too many controversies. On the outside, it seemed as though Laxman had it all, but his autobiography reveals how many trials and tribulations his beautiful career faced beneath what looked like a shiny surface. In that sense, 281 and Beyond is like the behind the scenes video of a top-grossing movie.

In my opinion, 281 and Beyond is not a book about cricket. It is a book about a child’s journey to fulfill his childhood dream- to play cricket for his country. He describes how he went on to achieve his goal through discipline, performance, and hard work, only to realize that the toughest part wasn’t getting there but consistently performing to remain at the top.

The child is forced to grow up quickly by the constant scrutiny of a billion Indians, that hero worship their national cricketers, following their every move, carrying them high during the victory, but each believing that they could do a better job when their heroes fail. The anxiety of consistently performing at the top under different coaches, captains, the backdrop of match-fixing, and an inconsistent and poorly-managed selection policy and how Laxman overcomes each of these with runs made from the blade of his willow is the crux of this book.

What does it take for someone to continuously play to such a fickle gallery? How does one come back after a string of failures? How does one keep themselves sane against an insane backdrop? Laxman answers all of that, and beyond.

Why did I like this book?

I love autobiographies that are written from the perspective of the protagonist, in this case, VVS Laxman. I like to visualize the autobiographies that I read. So, when the author delves deep into the inner turmoil and emotions that they were feeling during certain key moments in their lives, it provides a greater level of understanding that makes them more real, relatable.

In this book, I appreciate the frankness with which Laxman has discussed why he believes he was wronged several times during his career, his opinion about teammates, captains, coaches and how much they contributed to his journey as a cricketer.

As a keen cricket follower, I could remember most of the performances and events that Laxman was referring to. So, not only did the book take me over my frustrations (on the defeats) and jubilations (on the victories) of those matches but also provided the context to what was happening behind the curtain i.e. in the locker rooms, the training sessions, the team bus, and even the hotel rooms. It helped me forgive the Indian cricket team (and Laxman) for several frustrations, except the humiliation at Barbados in 1997, a defeat whose aftermath he talks about on himself, his captain (Sachin) and the team – riveting stuff.

What I learnt from this book?

There is a lot of commonality between the lives of entrepreneurs and performers i.e. actors, sportsmen, musicians, etc. Both groups must innovate to stay ahead of the competition while consistently giving good performances to retain their target audiences. Both groups wish to leave behind a body of work that will be remembered for eons after they are gone. In both groups, competition is challenging and only a few make it big enough to be remembered, and even then, their moment in the sun could be eclipsed faster than it took to get there.

The ability to perform at the top and stay relevant in a rapidly evolving world is something that only a few have managed to do and yet people continue to sign up for these jobs. What is their motivation? Why do they keep coming back? Do they not fear failure? 281 and Beyond answers all these questions and more.

When I wrote the post on Things Not To Do If You’re In The Entrepreneur’s Inner Circle, I was only 40% of my way through this book. Completing it only vindicated my thoughts on how important the role of your inner circle is in your success. Throughout the book, Laxman credits his wife, parents, uncle, coaches etc. (i.e. his inner circle) for the roles they’ve played in his success – which at times was not to interfere at all.

Who is this book for?

This book is for anyone who wants to fulfill their dream but fears the negative consequences of failure. The toughest part (as you will learn from this book and real life) isn’t the quest to achieve your dream but to continue to live it.

34/2019

Things Not To Do if You’re in the Entrepreneur’s Inner Circle

I have to admit that after my interaction with Dr Marcel, I have been a little obsessed with researching about entrepreneurial stress. So, over the last weekend, I read the treasure trove of links I had been collecting on Pocket and what I learnt was eye-opening.

Some of the most hard-hitting articles I found were The Psychological Price of Entrepreneurship written by Jessica Bruder, The Quiet Price of Entrepreneurship by Chris Cancialosi and 7 Reasons Entrepreneurs Are Particularly Vulnerable to Mental Health Challenges by The Failure Factor podcaster, Megan Bruneau. All the articles were written from a personal point of view and I could relate to them because not only have I been through what they were talking about (as an entrepreneur) but have also witnessed (and continue to) the emotional turmoil that foundership entails as an investor/mentor/board member. Let me assure you, it’s not all rainbows and butterflies.  I should also admit that the strong urge to write these two posts came from a personal episode, I recently faced.

The last 12 months have been nothing short of roller coaster ride in both my professional and personal life. The stress of operating a new business (read: launching a fund) while handing over the reins of businesses that I was previously managing to other partners was exponentially increased due to the diagnosis of a serious and life-threatening illness to an extremely close confidant and family member. This episode took place when things were just starting to look brighter after another close family member’s life-threatening illness was successfully cured. Just when it looked like there was a light at the end of the tunnel, I realized that it was a freight train coming towards me at full speed.

It helped that things at Artha were on a roll. Everything we were doing, we were doing well, and the recognition of our efforts wasn’t happening only in India, but on a global level. However, my stress levels were increasing unchecked and I was working myself down to the bone. However, I did keep up a strong image that everything was okay, that I could handle all that was being thrown my way, until the day my 25th flight of the year (yes, its been that sort of year!) was about to take off.  

Just as my flight was taxiing out, I got some shocking advice from one of my closest advisors which went completely against Vision 2022 for Artha. Normally, I would have reinforced the vision to my stakeholder, and I have done that several times in the past (and at times, even to myself) but somehow this particular advice upset deeply me, and I couldn’t put a finger on why.

The advisor, who was a part of my inner circle had acted on the advice of a third person who did not have a complete understanding of all the things that were happening at Artha.  Therefore, the advice was an opinion stated as a fact and did not hold up to any scrutiny. It was advice that was both, dangerous to provide and to hear.

That I went through this episode at a time when I was researching the importance of mental health for entrepreneurs made me realise the importance of sensitising the founder’s inner circle and the role they play in deriving peak performance from the founder.

As I had mentioned in my last post, most top creators/performers/founders have tight inner circles which provide a cushion from the noise of the outside world, as though it were a sanitised bubble. This inner circle acts as a sounding board that at most times aids a founder to discover answers for themselves. The members of the inner circle could exist in the background, but they have a vital role to play and their importance can be gauged from examples of people like MS Dhoni, Sachin Tendulkar, Warren Buffet, Virat Kohli, VVS Laxman, Michael Jordan, and many more who have openly spoken about the important roles their inner circle has played.

Therefore, while it is as important for the inner circle to keep a check on who they give access to in order to maintain the cleanliness of this sanitised space, it is also important for them to keep a check on the advice that they provide. I have personally witnessed the destructive power of polluting this sanitised space in the case of the swift destruction of my ex-boss’ legacy and have read about it in the case of Vijay Mallya, Anil Ambani, Vinod Kambli, Amanda Byrnes and several others.

I am quite sure that there need to be some clear guidelines for the inner circle to follow, on the things they should “not do”. Essentially, what I have realized is that just like it takes a village to make a man, and an ecosystem to build a start-up, it takes a strong inner circle to build an entrepreneur. So, if you are a friend, an advisor, a mentor, parent, sibling or a family member to an entrepreneur, this is a list of things you have to stop doing (seldom against your best intentions) because it is causing us ‘entrepreneurial- stress’.

  • Projecting your own doubts onto us

By nature, every successful founder has ton of self-doubt. We doubt the assumptions we’ve made on our business plans, whether we will achieve all the goals we’ve set, whether we will have enough time or money to achieve those goals, whether the market is changing against our expectation or whether our competition is pulling a fast one on us. I could go on for days on these self-doubts, but you get the idea.

We do not need any more doubts added to this list (unless it comes from someone working with us). In fact, we need space to clear our own doubts, therefore, adding additional ones (which sometimes aren’t even well researched) is detrimental, period.

  • Making us focus our attention on results v/s the process

The media judges a company by how fast they achieve results, but it is important to remember that the best businesses are (and will be) the ones that spend time developing the right processes which in turn, deliver consistent results, even if it might take a bit longer. Just like instilling good habits in a child, building the right processes take time and patience.

When our closest network lets outside influences cloud their best judgement and then (they) attempt to colour our lenses, it is going to lead to a long term disappointment. Instead, it is imperative for our support system not to judge us based on results – good or bad.

  • Constantly chirping in our ears about our mistakes

We often make mistakes, tons of them, and we will make tons more. Our failures are scars in our memory and I rarely come across a founder who hasn’t learnt from his/her mistakes. What is important is that we understand the reason for the mistake, learn from it and avoid repeating it. Our inner circle can help by ensuring we do not drown in failures. But it is fatal to consistently chirp in our ears about where we’ve gone wrong causing us to relive that stress yet again.

  • Publicly sharing our failures and privately praising our successes

I have learned that the best way to protect a close relationship with anyone is to praise them publicly and criticize them privately. However, I see many inner circlers doing the exact opposite. This creates an excruciatingly difficult social & personal situation for us.

I simply do not advocate false or effusive praises.  In that case, you can avoid praise altogether. But criticizing us openly (or behind our backs) and putting us in a defenseless position is honestly as good as shoving a knife in our back, and I’d request that you avoid it at all costs. Just speak to us directly in private if you have any criticism whatsoever.  

  • Drawing comparisons

Like there’s an Afridi for every Sachin, a Djokovic for every Federer or a Suarez for every Messi, every business has a competitor or peer that could be performing better or worse than them (at some point in time).

While I agree that it is important to be aware and informed about what our competitors (or compatriots) are doing, our business model and path to success do not need to be the same. I believe in emulating versus imitating, but the choice of whether we should change (or not) should be left to us.

  • Forcing on us the opinions of advisors we have not chosen (most important!)

Maybe you’re at a party or a social gathering and you meet someone who gives you their opinion on our venture (with whatever titbits of information they have). You find their opinion/ judgement to be awesome and it completely changes your outlook towards our business. Now, instead of challenging your newly acquired opinion by first researching the advice you’ve been given or checking the credentials and the experience of your advisor, you blatantly pass that advice on to us and present your acquired opinion as fact.

Our entire business plan that could be moments away from validation, is now asked to be altered because you believed this ‘new advisor’ knows more about our business than us. This causes major stress and can affect our relationship in the long run.

If you have been doing this to the entrepreneur who counts you as their inner circle, please stop. Instead of meaninglessly passing on one person’s opinion, you should either put in time and effort and do some research or discuss it with us with full disclosure on who provided the advice so that both you and I can collectively come up with the right way forward.

Just remember that not all inner circle members are needed for advice on the business and each person plays an important role but as long as they do not try to become what they are not. So just like an expensive car should only be tinkered with by a well-trained technician, business models should only be tinkered with, by people who are or have been deeply involved in the business and have an experience in doing so.

You should adequately challenge any ‘random’ opinion you hear, before uttering it to the entrepreneur. Even then, that suggestion should only be followed if (and only if) the entrepreneur is convinced to take action. After all, it is the founders who have to run the business and not the person whose half-baked advice you have been listening to.  

32/2019

Can a Good Leader be a Good Friend?

I wanted to write a follow-on to my article on the interview of Confirmtkt founders, but the events of Feb 14th  were too much to stay quiet about and I couldn’t stop myself from writing an open letter to the PM. Post that, my travel plans stole my focus for a couple of days, so here is the follow-on article as promised.

In their interview, Dinesh and Sripad recount how difficult it was to fire underperformers or team members that did not suit the role they were in. Their personal equations interfered with professional judgement and the venture faced the consequences. I believe that this is a key lesson in every founder’s journey to become a leader i.e. a moment where he/she has to reflect and ask themselves ‘can I be a good leader & a good friend to the same person?’

Discovering the answer to this question could be one of the most difficult experiences a leader might endure.

I have seen several leaders (read: founders) get too close to their followers (read: team members) and lose all objectivity (due to the close nature of the relationship). In all the examples, (including my own experiences), this is a disservice to their role as leader, the team and most importantly, the venture. In many cases it has led to the termination or a permanent alteration in a friendship.

This reminds me of a scene from the superhit movie Dangal wherein Aamir Khan plays the role of a strict wrestling coach (Mahavir Singh Phogat) to his daughters. In the scene, he is massaging his tired and sleeping daughters’ feet. His wife exhorts him that he is too tough on their daughters when they are awake but massages their worn-out feet while they’re asleep. He explains that he can either be a good father to his daughters or a good guru (read: coach), not both.  

Similarly, I believe that a person can either be a good leader or a good friend, not both. A leader has to utilize many tools to get the best out of his/her people, but those tools could fail at the altar of friendship. Therefore, before hiring a friend I always make it clear that our friendship would be over until the time we become partners because until then I would be doing a grave disservice to my friend.

26/2019

Video Of The Week: Vishal Krishna Interviews Confirmtkt Founders

A few days ago, I saw a Facebook live interview of Confirmtkt’s founders, Dinesh & Sripad. Early on, I had led a round of investment into Confirmtkt and also sat on their board for a few years along with Pravin Agarwalla.

Back then, we both went through a very tough phase with the founders (and the venture), which the founders recount as something that gave them “sleepless nights” in this interview. While I quit the board last year, my eyes were full while watching the two of them. I’d credit the interviewer, Vishal Krishna for bringing out this story so well.

Vishal’s interviewing style is awesome. He is extremely well read and well-prepared with questions for the people whose venture he is interviewing. This thorough preparation helps him delve into the deeper delicate, intricate details with the interviewee that would otherwise have been missed out. I can vouch for this because he has interviewed me before and dug out some details that even I had long forgotten.

The video focuses on Dinesh and Sripad’s journey of becoming responsible and established leaders who grew Confirmtkt into a category leader and a sustainable enterprise. This is what makes it my video of the week as well as the inspiration for my blog post tomorrow.

24/2019

Video Of The Week: Fyre- The Greatest Party that Never Happened

This week’s video was recommended by Karishma so a big thank you to her!

Fyre is the ultimate tool for entrepreneurs to learn that scaling before having a miniaturized working model is akin to gambling with the business. It should open the eyes of investors, entrepreneurs, managers and employees that scaling is the easiest part of building a venture. The billion-dollar question that needs to be answered is – can your business deliver consistently and profitability at scale?

Fyre also answers the question of how doing too many things can eventually lead to doing nothing or (in this case) land you and your business in legal hot water. I believe that Fyre’s founder, William “Billy” McFarland may not have intended to defraud his customers (unlike his investors, who he definitely did). It seemed as though he wanted to do everything that his marketing campaigns had promised but just could not control the monster that he built. Eventually, he went against the advice of his key team members and kept up a charade that transformed him from a boy genius to Mr. Evil.

This brilliant, moving and shocking documentary is available on Netflix.

21/2019

Should VCs blindly be founder friendly?

Last night, I went for dinner with Mikhil where we got into the debate on whether VCs should be “founder friendly” or “venture friendly”. He was for the former and I the latter. I argued that at the end of the day, it is the combined responsibility of both the venture capitalist and the founders to ensure that their investors make money.

Then, this morning, Dr Malpani’s post added to that debate:

I believe that at the end of the day all stakeholders i.e. the founders, investors, employees, ESOP holders, customers, suppliers, vendors, etc. will do well only if the venture continues to grow and generate profits. Therefore, the primary dharma of all stakeholders should be to make sure that they do their part in growing the venture. It also means that sometimes investors are required to take actions that put the venture’s interest above that of the founder and therefore get termed as “founder unfriendly”.

Venture capital can be quite a tricky game to play…

12/2019

Modern retail will choke the life out of (young) consumer brands

A speaker at a recent closed-door conference that I attended, made a presentation on the different kinds of business models and what makes them successful. One very important observation that he pointed out, and that stuck with me was:  

If the key to the success of a restaurant start-up is location, location, location,
Then the key to the success of a consumer goods start-up is distribution, distribution, distribution.”  

Expressing my investment focus on consumer brands in a blog post earlier this year and in the interview with Sudhir Chowdhary of Financial Express, propelled some excellent deals into our pipeline, many of which are in the advanced stages of evaluation. Most of the start-ups that came to us however, were utilising modern retail as a part of their distribution strategy, an expensive approach, that I have some serious doubts about.  

Most modern retailers take 30-35% of the sales price of product as their “cut”. For 90% of start-ups, this massive pay-out is equivalent to the cost price of the product. Over and above this cut, start-ups must shell out money for ATL/BTL marketing, PR, etc which makes the total marketing cost well over 50% of the sales price.  

Although such a large pay-out of the sales price is required at early stages, marketing costs are meant to reduce over time and become a smaller percentage of revenues with scale. Retailers however, continue to ask for a standard 30-35%, causing a massive drag on financials.  

Furthermore, most modern retail stores have terrible payment terms (barring a few) and withhold payments for 45-60 days causing expensive start-up capital to be stuck in working capital. Most retailers also have clauses that force their vendors to take back items that have not been sold and are approaching their expiry date, which could be a function of the store not performing well due to certain issues that the vendor has no control over.  

For the expensive money paid out to modern retailers, they provide very little data on the consumers that are buying a start-ups’ wares, making it difficult for start-ups to get accurate customer insights and improve their offerings or develop new lines of products.  

I have been heavily influenced by a case study that I did in college on how Walmart destroyed Vlasic pickles in the early 2000s by becoming its biggest customer and the reason for the drop in its margins. Vlasic eventually filed for bankruptcy protection.   

In my opinion, selling directly via an online e-commerce platform or through their own website is the way to go. Although this may lead to copious amounts of money spent on marketing and logistics, it pales in comparison to the amount start-ups shell out to modern retail chains. Additionally, direct selling gives the start-up access to direct customer feedback (which is invaluable) which will significantly improve the product & research team’s understanding of the target audience and allow customer service to quickly respond to consumer grievances, suggestions and behavioural changes. Another upside is that the products can be shipped nationwide beyond the geographical boundaries of modern retail stores. This is something that has the necessary “escape velocity” to quickly scale revenues – I cannot impress enough upon the importance of this feature for the investment attractiveness of a venture.  

The point that drives the proverbial final nail in my argument to avoid a massive reliance on modern retail is the emergence of several private label brands. Many retailers (Amazon included) use the sales data of top performing categories and brands and start looking for options to private label them. This means that not only is a new brand paying these modern retail stores 30-35% of their revenues, but they are also acting as the guinea pig to augment the retailer’s private label portfolio and increase its profitability.  

Therefore, I strongly advocate that founders should avoid the modern retail route until they have reached a commanding size or just avoid them (if they can) altogether.  

99/2018