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TIMES PERSONAL FINANCE

20

THE TIMES OF INDIA, BANGALORE
MONDAY, MARCH 3, 2014

6 start-up mistakes to avoid
A wrong step can be disastrous for a small business. Here are six mistakes that can kill a start-up and how you can avoid them

tarting your own business venture is
a tempting thought. You can be your
own boss instead of being hectored
around. Yet, being your own boss is no
easy task. To begin with, one of the
biggest challenges that new entrepreneurs face
is to convert the idea into a profitable business
model. Have you done sufficient research?
Should you approach a venture capitalist or a
bank to fund your business? How much time
should you give to your business to start churning profits? Is it a time to start a business or
wait till you gain the required experience?
Experts say that the first year of a venture
is the most crucial. It can make or break the
business. You make one mistake and it will run
over the business. We look at some of the common mistakes that fresh entrepreneurs make
in their first year of starting a business. Find
out how you can avoid doing so.

S

Moving ahead on flawed
assumptions
Even thorough research can’t guarantee success. There could still be a few bugs in your
business model, often in the initial financial
projections and the whole business math around
it. For Rutvik Doshi, former CEO of Taggle.com,

Underestimating
manpower needs
The golden rule of entrepreneurship is not to
waste time on something that can be done by
someone in a faster, better and, perhaps, cheaper manner. To run the business, you need a team
that can take care of various peripheral aspects
and leave you with the core functions.
You can also tap your professional network
for expertise. Bijaei Jayaraj, founder of Loyalty
Rewardz Management, a company that manages the loyalty programmes of debit and credit cards, exploited his alumnus and friend list
to set up an ‘advisory board’ to help him sail
through his first-year. “These were people who
had around 15 years of experience, were in important positions, and had large networks. It
was very useful for a group with such people to
come together and help set up and grow the business,” says Jayaraj. Whether you hire full-time
employees or work with consultants depends
on the kind of industry you operate in. Chawla
of Koolkart believes that in an e-commerce industry, hiring full-time workers always makes
sense if the finances allow it. “Although you do
not see your customer, there must always be
people who can handle their grievances quickly. Nothing will kill an e-commerce faster than
bad customer feedback,” he says. But if you are
short on cash, or your monthly operations are
not generating enough cash to sustain employees, it is advisable to start with consultants.

Scaling up too early
After the business has been launched, the entrepreneur starts looking for growth. Even if
you are able to generate a lot of consumer interest, you ultimately have to scale up the business
to make it grow. When you test a prototype or
launch a product in a small market, the results
are based on a limited experience. However, this
changes dramatically when you actually begin
operations or reach out to a wider market. In
hindsight, Doshi realises that their decision to
go pan-India was premature and a reason that
led to its failure. “Even though the data was
pointing that there was something wrong with
our business assumptions, we went ahead and
scaled up without fixing the problem,” he says.
Moreover, scaling up requires deep pockets.
You have to hire people, lease office space in a
few cities, tie up with other businesses and market your product. If you don’t have the necessary
funding required for this, the business will fizzle out in no time. Experts, therefore, advise to
nail it first and then scale it up—start small,
have short-term goals, perfect the product and
the revenue model, and then scale up.

Not doing adequate
research
There is no dearth of ideas and types of ventures that you can pursue. However, the tough
part is testing the hypothesis—converting your
idea into a viable business model, which is not
possible unless you have done sufficient market
research. Whether you decide to do it formally
or informally, you will need data on the size of
the potential customer base, competition and
external business environment, to be able to
clearly define your revenue channels.
Even though the idea may sound novel, it is
possible that the market is not ready for it. A
thorough research will not only reveal the potential, but also point out the limitations of the
idea. Ignoring the results can be disastrous.
Take the case of the college start-up of Arun
Balakrishnan and his batchmate, which clearly
suffered from a confirmatory bias. Balakrishnan
started working on the idea of an e-commerce
site when they were in the second year of MBA
at IIM Ahmedabad. Two angles emerged from
their basic market research—one, that the business was scalable, and two, that the market was
not ready for the product. They graduated in
April 2008, and started LootStreet.com, an online platform for shoppers with the option of
bargaining over the listed price, in June 2008.
However, 2008 was probably the worst time to
launch a business: e-commerce was still very
new in India and the economy was in a turmoil.
Credit card usage had gone down, defaults were
at a peak, and banks had stopped issuing cards.
It was clear that the market conditions were
unfavourable. Yet, the duo banked on the fact
that things would improve and the business
would grow. “You tend to think that what you
are doing is the best, look at every roadblock as
a challenge and want to take every problem
head-on without realising that sometimes you
need to step back and analyse if it is viable to
push an idea when the external environment is
not favourable,” says Balakrishnan, who had to
eventually join the corporate world.

able, he had to depend on his contingency fund,
so he cut off every possible discretionary expense from his budget. Smita Rajgopal, who
runs a creative design studio, Smitten, kept
costs down by working with consultants. “In the
early days, it makes more sense to hire consultants as you can pay them on a project-to-project
basis. This also saves you the trouble of paying
salaries every month,” she says.

ment caused the business to come to a standstill.
A simple solution is to beta test your prototype to find and fix the faults before the product
is launched. This is also a great way to get feedback from users. It always pays to go back to the
drawing board if the feedback is negative. Gaurav Jain, who owns Mast Kalandar, a popular
chain of restaurants, had hired food consultants
and taken advice from various people to zero in
on the menu. “When we started, we had some
Mexican vegetarian items with an Indian twist
and we thought it would be a great addition to
the menu. However, we soon realised that the
customer feedback was not good and, within
four months, these items were withdrawn,” he
says. Jain went on to change the menu twice
over the first year of operations, incorporating
the customers’ recommendations.

AMIT KUMAR AND CHANDRALEKHA MUKERJI

Not maintaining a
financial buffer

Not keeping tabs on
expenses

business. Later, we found that it was more a
systemic problem. We had blind faith in the
growth projections and that brought us down,”
says Doshi, who himself is a venture capitalist
now at Inventus Capital Partners.
Suneil Chawla, the co-founder of Koolkart.
com, went wrong in assuming other aspects of
the business. The company is in a limbo today
because Chawla had not expected that his partner would quit. When his partner decided to
part ways because of personal reasons, the absense of an exit clause in the shareholder agree-

a group buying site, it was a combination of
incorrect estimates of the marketing expenses,
sale projections and a gross underestimation of
the competition. The money required to spend
on acquiring a consumer was 10 times more
than that he realised from a sale. “The quantum
of business we were generating was not sufficient to cover the marketing cost. However, instead of objectively analysing the situation, we
were continuously trying to find fault with our
team, sales team and employees, putting pressure on them to fix problems and bring more

Many people hesitate to start a venture because
they are the sole breadwinners for their families
and the loss of a regular monthly income can
pose problems. A working spouse can ease the
pressure. Ask Bhaskar Chattopadhyay, who
started Art Square in November 2012 with a seed
capital of `3 lakh. “My wife’s income took care
of the daily expenses, which was a big help and
allowed me to focus on the business,” he says.
The gestation period of a business venture can
be long. Jain had to wait for three years before
he could pay himself the first salary.
This is why you must estimate how long it
will it be before the business can earn money.
Experts say you should have a contingency fund
to take care of 6-8 months of expenses. If possible, prepay any outstanding loans. If prepaying isn’t an option, make sure you at least have
the liability insured. Being debt-free will also
help you in case you need funding for your venture. The overall portfolio mix will also need a
rejig when you start a business. Try to reduce
the risk in your portfolio and stick to a conservative mix. Remember, you have already
invested in your own business, so there is
enough equity in the overall portfolio. Shift the
focus of your investment portfolio from equity
to debt. You can shift back to equity once the
business pick up. Since we are playing defensive,
it is good to have some cash reserve in your PPF
account, as it is the only investment that will
not be attached even if you go bankrupt.

Keeping the overhead costs low is essential for
a start-up. Whether it is on furnishing the office
or buying machinery, you have to be as frugal
as you can be. If you are smart like Pritam Hans,
you can find a cheaper option that is actually
better. Instead of settling for a small office for
his fledgling real estate consultancy business
on the outskirts of the city, he has rented a plush
shared office at an upscale location in south
Delhi. “A small office space would have cost me
`12,000 a month, but in the shared accommodation, I am paying only `6,000 a month for a fullyfunctional office with all amenities,” he says.
Another area where you can cut costs is
while building your website. If you are low on
budget or just need a basic website, you can use
various platforms available on the Net to create
it. Also, while there is the constant need to meet
clients, do not spend heavily on it. Talk to them
through video conferencing or meet them in
their office. Then, there is the challenge of sticking to your seed capital and reining in every
expense to ensure that you do not go overboard.
Jain of Mast Kalandar decided that no matter
what, he would not exceed his seed capital of
`18 lakh. This meant that he had to compromise
on the interiors of his first outlet. However, Jain
does not regret this one bit. “It was more about
discipline, the fact that under no circumstance
I will cross my budget,” he says. In fact, he also
points out that while his business turned profit-

Need to empower mutual funds for investors
Sebi should use its clout to position mutual funds as a professional manager of portfolios, linking investors and securities markets, says Uma Shashikant
he Sebi board recently approved a longterm policy for mutual funds in India.
The objectives were to ensure sustainable growth of the mutual fund industry
and mobilisation of household savings for
the growth of the economy. Why do these
objectives remain unfulfilled even as the
oldest mutual fund celebrates its 50 years?
Mutual funds are financial intermediaries that took over development from where
financial institutions left off. The growth of
the economy in those days was funded by
the Union budget and the balance sheets of
these institutions, whose officers evaluated

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two thiwngs. First, mutual funds should
have been allowed to manage all portfolios
of securities—pension funds, insurance
portfolios, and every portfolio that holds
securities and, hence, needs a manager. Second, the need to channelise household savings to fund the economy’s long-term needs
should have been backed by tax incentives
for investing via mutual funds.
What do we have instead? After 25 years
of being named the apex regulator of securities markets, Sebi has not been able to
convince the EPFO that investing in debt
and earning a yearly interest income is not

investors to evaluate their merits, choose
from competing businesses, monitor how
they are doing and rework their investments
as needed. The investors whose saving could
be channelised for the lofty objective of
building the economy could find it difficult
to incur costs, develop expertise and follow
the processes required to build portfolios
of securities. Hence, mutual funds.
With the shift in financing pattern from
centrally funded institutions to securities
markets, the government should have acknowledged Sebi’s construct of mutual
funds as an efficient intermediary, and done

proposals and made long-term loans to companies that needed capital. But the modern
economy understands that funding has to
come from the market place, where seekers
of capital have to access investors’ savings
based on the information they disclose
about themselves. They issue securities that
are listed and traded in secondary markets,
where an evaluation of their prospects is
made on the basis of publicly available information.
In a democratic set-up of the securities
markets, not all companies that seek capital
live up to their promise. It may be tough for

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going to help the retirement of the working population.
Corporate treasuries, on the other hand, have emerged as
the single largest beneficiaries of the mutual fund system.
They provide the largest chunk of money, enjoy low costs
and highly efficient service, but have no long-term money to
deploy. Large amounts of potential long-term assets lie outside the mutual fund industry. Sebi should persuade the government to acknowledge the efficiency of the mutual fund
structure to manage all institutional portfolios, across the
board. Second, investors have not made the switch from the
era of government-driven financing to the securities market
model of financing the economy. They live with the mindset
of entitlement, where a superior structure can be created to
assure returns. Worse, for most, an expert is one who can
forecast the markets and deliver positive returns. Therefore,
the diversified portfolio of a mutual fund, delivering a relative return compared with the market, remains an inferior
product in their minds.
That is why Sebi should persuade the government to make
mutual funds attractive through tax incentives. Sebi is proposing a new retirement-linked product and an additional
tax deduction under Section 80C. The amount allowed in taxsaving equity mutual funds has gone up from `10,000 in 1991
to `1 lakh. Equity assets of mutual funds haven’t moved up
in the same proportion. Sebi should seek all household financial savings beyond bank deposits to be channelised through
mutual funds, with tax concessions for long-term savings.
The lack of mandatory assets to manage and the indifference of the retail segment have left the mutual fund industry
stunted and scrambling for assets to manage. The industry
is guilty of throwing money around to snatch assets from
one another or from a group of investors wide-eyed about
fantastic returns. The core problem is not having enough
funds to manage. It needs a full stomach and promise of a
regular meal.
The regulator has been trying to discipline the industry.
The incentive structures are altered, disclosure norms are
tinkered with, and capital adequacy is modified. Many of
these modifications have remained unchallenged. This is,
perhaps, because Sebi is the only ‘Delhi connection’ for an
industry dominated by private sector and foreign players,
based mostly in Mumbai. The policymakers may remain
suspicious about private players making unfair profits after
lobbying for changes, without bailing the government, its
institutions or banks, during times of need. Sebi should use
its clout to position mutual funds as professional manager
of portfolios, linking the investor and securities markets in
an efficient, low-cost and transparent manner.

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