Vijay Anand | The Startup Guy.

Making That Halo Glow – Part I

Posted on: March 28, 2009

Even as the current economic situation hasnt seem to have harmed the Early Stage Investment scene by much, there is some major misunderstanding by First Time Entrepreneurs, starting off in India, who are looking to raise funds. This series hopes to shine some light on some of them

LESSON: MAKE THAT SACRIFICE. GROW WITH THE ORGANIZATION

Scenario: In the last three business plans that I have had the priviledge to look at and to give feedbacks on, it seems that the average entrepreneur wants a salary of around 2 Lakhs a month, seems to be hiring an office attendant or a secretary in the first year, is travelling extensively, starts a marketing budget even before the product is ready, claims a steady income stream, is absolutely immune to market changes, and can solidly break even in 3 years. And oh, they give a 4x return in the fourth year.

You cannot demand a salary that runs in the lakhs. You cant because If I were investing, I wouldn’t know if there is even an incentive for the entrepreneur to slog to make this company succeed anymore. Given the current employment situation, I would even have a slight doubt as to whether the guy lost his job and is getting self-employed with a raise. But I do understand if you would want to live comfortably. This is what I would suggest.

Take a pay cut in the first two years – till your product development is ready. Just so you get a number, You get paid at the same level as your Indian Lead Software Engineer (I have to specific about the indian part, since some folks also have high paid outsourced engineers). That should put you at around 40K a month. Once that is set, and once your product development is done, and your marketing and sales efforts start, align your salary so that a base of 40K and a incentive component from the sales defines what your take home package is. That will assure me as an investor that you are willing to take a paycut to keep costs low and burn things slowly to get through the initial phases and even as the company makes money you arent raising costs, but defining your salary from what is coming in. If you are a company that sells products that sells in the millions, or have several product packages, it would be wise to even define slabs, that define the percentage.

You do that, and all of a sudden I see a real entrepreneur, who could really use with some financial support, and the halo over the head glows and a lot more people just might be willing to seriously consider your financial proposition.

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4 Responses to "Making That Halo Glow – Part I"

I once had a discussion with an investor (~$1M range type) who, when he saw my income projections and balance sheet, made the comment “You’re breaking even in 3-4 years but your revenue is still only $1M. If I was investing in your business 250-500K$ today, I would expect to see at least $5-8M in revenue in the next five years.”
My reply on hearing this was “The projections you see are very near to what actually is going to happen. I could pump the numbers up and show you inflated projections, but that would just be as plain as lying on your face”. To which he replied, ” Every VC is going to cut your numbers in half(best case) or 2/3rds to 1/4ths (worst case), and if you put the real numbers out, no one is going to invest in you. The VC’s know you’re inflating your numbers, so why not just play the game as per the rules and act your part?”

I was quite taken aback by frank advice, but it all made sense. Pitching to a VC is no different than acting out a drama and playing your part to perfection. Showing marketing budgets and potential hires along the line is necessary or else they say your projections do not incorporate team expansion and other expenses.

I would love to hear as to how to project ROI while pitching to a VC, and what numbers to take as basis for that.

Great one ! Absolutely right. Taking a paycut filters real entrepreneurs. Specially when we are bootstrapping, it’s absolute fun and if we are so confident about our company, it’s better to get paid in equities.

Vijay:

What’s you opinion on a startup team bootstrapping its product business through the revenue from the services business (related to the product idea or removed from that idea completely)?

One of the first gen entreprenuers in Chennai who I respect the most says that its only those who do not have faith in their idea get distracted and do these. I’d rather put the same time in getting the product out fast.

If I am of the type that does not want to go to a VC, the “Bootstrap through other revenue means” seems okay to me. Do you see any reason why one should not?

Vijay,

I believe if an entrepreneur wants 2lakhs in salary before the product is making any real profit, shows he isn’t much confident about his product…and just want to make quick money out of it.

I believe that an entrepreneur shouldn’t ask for any salary until his product has grown to a stage of being “Ramen Profitable”.

Sure this adds a lot of pressure, but not taking salary brings a lot of benefits too.
-They will have really believe in their product.
(guess this is most important)
-They will have to launch their product really soon(soon doesn’t mean a broken product, but providing “Just Enough” version of it) to achieve the state of being Ramen Profitable. Which can help introducing the feedback loop inside their product development, and help them to build what the customers really want rather than doing the guess work and adding a lot of features into the product which people really don’t want.

I would really like if you can share your experiences with other startups for the above points.

/Vib.

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