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Page 2 www.ecell-iitkgp.org/theentrepreneur The Entrepreneur

Two’s Company
Authored by Shrey Goyal, this article explores the importance of choosing the right co-founder for your dream venture, and
enumerates the various points which you may have to consider before committing to a partnership for your company.

They say choosing your spouse is the most important decision you will
make in your life. Similarly, choosing your co-founder(s) is the most and close friend, had not come to the rescue and worked with him to
important decision you will make while building your startup, since make it what we today know as Google.
one could argue that at least for some period of time, you’ll be
spending more waking hours with your co-founder than your Choose your compliment
significant other. Great partnerships are like marriages, they need a lot A co-founder should be strong in areas you are not. A great compliment
of common ground, strong mutual attraction and a willingness to work to your skills is someone who
hard - especially through the inevitable issues. loves to do things you hate,
someone who makes the
You first need to dispel the delusion that you don't need a co-founder. sum of your parts greater
You do. You may have all the requisite skills, but even then, co-founders than the whole. If Steve
help spread the work and make better decisions. Sure, you can talk to Wozniak had remained the
your brilliant self, but that's not as effective. The selection of co- n e rd w h o wa s s i m p l y
founder(s) is one of the key determinants of long-term success in a sceptical of the idea of selling
startup. But if you have the wrong guy, that's a hard problem to get computers, and had not
over with. been convinced by Steve
Jobs, the born-entrepreneur, to come up with a company so that they
Knowing them beforehand could at least say that to their grandkids, neither would’ve conceived
The idea is that by having gotten to know the person, you’ve already Apple Computers independently.
had a chance to see how they work, how they think and whether you’re
likely to get along. This makes your college or workplace friend circle a Make sure at least one of the founders has the technical expertise. This
very useful hunting ground for a potential business partner. Consider is so you don't have to try and outsource the actual product
Chad Hurley, Steve Chen and Jawed development. Similarly, make sure at least one of you can sell. No great
Karim, for instance. Chen and Karim idea is of any use to a startup that can’t
were classmates at the University of market it properly. Effectively, you need
Illinois, who then met Hurley at to identify your “type”, and look for the
PayPal, where all three were corresponding complementary skill in
employees. They then founded your partner.
YouTube, which received funding from
Sequoia Capital, whose partner Roelof Practice, not just preach
Botha, who also joined the YouTube You need a co-founder who can get
board of directors, was the CFO of things done. If you have a great idea,
PayPal. and you want to bring it to life, find
someone who is passionate about your
You better be good friends with them vision, and who is willing to work for it.
as well, since you're going to spend a Since startups involve lots and lots of
lot of time working together. Also, work (some fun, some not so fun), part
there will be times in the startup lifetime that will test your relationship of the value of your co-founder should be that the work can be
with your co-founder, so make sure you understand the stakes before distributed. If your co-founder is too “strategy” focused too early, you’ll
going in. get buried because there’s too much to do.

Someone you can trust Passion is easy to spot. Years after the two had befriended each other in
Mistrust can be a cancer for your startup. The good news is that you Lakeside School, Seattle, where they used to tweak the school’s
can avoid it by choosing a scheduling program to place themselves in classes with more female
founder you trust, and then work students, and had faced several penalties for other naughty uses of
to foster deeper trust in your their programming skills, one of them dropped out of Washington
relationship over time. Keep in State University and called on the other (in Harvard then) to do the
mind that it’s a never ending same, for starting a venture together. Both understood each others’
process. passion and immediately complied. They were Paul Allen and Bill gates,
and thus we have, Microsoft.
Play fair. You can’t expect others
to care as much about the Talk the talk
business when they don’t see themselves getting a fair share. This goes Have the hard discussions around equity, compensation and
hand-in-hand with trust. responsibilities early. This stuff does not get easier over time – it gets
harder.
Great minds think alike
There should be aligned interest and commitment from your co- How should the division of shares be controlled? Who will make the
founder. You both have to (at some level) be committed to not only decisions? What happens if one of us leaves the company? Can any of
building a company, but the same company. If one of you wants to us be fired? By whom? For what reasons? What are our personal goals
create a company you run forever (and reap profits) and the other for the startup? Will this be the primary activity for each of us? What
wants to take a shot at a high-flying startup that gets sold or goes public part of our plan are we each unwilling to change? Will any of us be
some day, you’ll have a problem. investing cash in the company? If so, how is this treated? What will we
pay ourselves? Who gets to change this in the future?
Of course, co-founders may influence each other’s decisions in this
context. Afterall, Larry Page’s "BackRub" might just have remained a Deferring these conversations is a great way to ensure problems later.
research project on citation backlinks in research papers, with limited
commercial value, unless Sergey Brin, a fellow Stanford Ph.D. student So what are you waiting for? Step out and start looking!
 The Entrepreneur www.ecell-iitkgp.org/theentrepreneur Page 3

Integrity - A Corner Stone of Entrepreneurship

By Mr. R. Ravimohan, MD and Region Head of Standard & Poor’s South and South East Asia division, and also the appointed
chairman of the CRISIL Board of Directors. In wake of the recent Satyam scandal that has caught the entire corporate world in a
flurry of uncertainty, Mr. Ravimohan discusses about the moral issue that every entrepreneur today needs to address.

charges of flouting of excise rules. Azim Premji did not buckle down; let
The recent episode of fraud by the Chairman of Satyam and all the the plant remain shut, while fighting the case legally. It took reportedly 3
several other frauds perpetrated by other entrepreneurs around the years for him to come out victorious, thanks also to the support of the
world is a shame on the name of entrepreneurship. These isolated employees of the plant who were also suffering, and reopen the plant.
episodes have a tendency to make other entrepreneur's life tougher. While it was painful, the episode surely sent a clear message to all that
They bring a bad name to the ilk. They are usually followed by tougher Azim Premji is not to be messed around and I seriously doubt if he has
regulations, which have a tendency to restrict freedom of business ever been harassed on that front ever after. More importantly, it is still
choices for entrepreneurs. They make conduct of business more remembered and recounted as a legend in principle based
expensive. Financiers too increase the risk premium and generally make entrepreneurial behavior. The way I look at it, Mr Premji invested the
entrepreneurs grovel more to get at their money. All because, someone suffering caused by that incident, including massive financial losses in
got greedy and unscrupulous. The price that genuine entrepreneurs pay creating a credibility capital, from which he is still reaping benefits. This
for the fault of these scamsters is so huge that it is early strength in his resume ensured businessmen
worthy of a self disciplined vigil within the and financiers around the world respect Mr Premji
community itself. There is a case for them to as a trusted business partner, aiding him
become active policemen of themselves and blow considerably in his ventures to date.
the whistle when they see one of their cohorts
behaving funny. While there are connotations of ethics and morality
associated with the notion of integrity, I am
In my long experience funding, raising funds and focusing on the competitive advantages of integrity
rating the entrepreneurs over the past thirty years, I as a corner stone of entrepreneurial behavior. Once
have seen two stages when the bug of cheating an entrepreneur earns the credibility as a person of
bites the entrepreneurs hardest for different Mr. R Ravimohan (Left) integrity, doing business becomes that much
reasons - at the initial phase and once success is established. When the easier. Partners will seek to do business with such an entrepreneur who
project is in the initial phase there is a focused pursuit of a limited they can trust, and might be even willing to pay a premium for that
objective – may be a small project- driven by a passion to succeed and feeling of comfort. Financiers will vie with each other to provide funds,
gambling everything to increase the prospects of success. There is not as they know their money is relatively safe with such an entrepreneur.
much care given to forms, rules and norms, perhaps not affordable as Once the entrepreneur sets the limits on acceptable behavior based on
well, as typically entrepreneurs start poor, are up against established principles of integrity, he and his team in the organization know that
players who are much more powerful. Some entrepreneurs mistakenly they can not resort to short cuts and need to be genuinely competitive
believe that their only way to succeed is to pursue some short cuts, to succeed in business. This makes them seek real competitive
which seem to work for sometime. Unfortunately the road that greets advantages and conduct business to succeed against not only other
entrepreneurs in India is often littered with obstacles and tempting routine businesses, but also some that may 'enjoy' advantages due to
chances for wrongdoing and many fall prey to those temptations and practicing business without integrity. This is not easy and I am not asking
compulsions. This it seems has become the norm rather than the the entrepreneur to be a monk.
exception. It is unfortunate because, those entrepreneurs of lesser
competitiveness and objectivity do fall prey to this and compromise so Let us take a live example from the field of road contract business. Let us
much of their business future. They never learn the right way of doing assume there is one contractor (called Mr I) who behaves with
business. They do not understand competition and believe corruption to completely integrity and there are others whose integrity quotient lets
be a legitimate part of business. They do not develop strong work culture say varies from awful to 'godawful'. The challenge that Mr I faces when
and leadership within their organization, filling them instead with he bids for a contract are that he needs to take into account the
incompetent staff that will learn to manipulate rather than work smart possibility that the bidding process is perverted to favor the others
to ensure business success. Most harmful of all they will earn for because they may ply bribes, or for someone in the bidding organization
themselves an ill reputation, which may be tolerated, but never to let these corrupting bidders know the lowest bid amount, so they can
respected and hence will not ever be the choice partners for financiers quote a marginally lower prices and win the contract, etc. Can Mr I can
and businessmen. overcome this challenge while maintaining integrity? Yes. There are
many things he can do, including, finding technological solutions to
The second stage when entrepreneurs go off track is when the flush of render road building less expensive and hence can quote so low that
success many times powers them with a sense of invincibility. There is others without that technology may find it unattractive to bid at those
either a cooling off or a phase of complacency that sets in or a prices. He could resort to the new provisions of Right To Information
megalomania that prods them to play 'god'. In either case, focus shifts (RTI) to shed the required extent of transparency in the bidding process.
away from managing the business with the edge that ensured its initial He could build high quality roads on a pro-bono basis to demonstrate
success, and business falters. Instead of correcting that in the right the longevity and riding comfort, and hence win the support of the
manner, entrepreneurs resort to short cuts that their newly acquired users, who could be used to campaign for him. Incidentally these are
'power status' offer them and set down the path of wrongdoings which ideas I picked up from several good contractors' real life experiences.
often brings them to a collapse. Some of the well known global
philanthropists, such as Rockafellers went through this process of Let us not kid ourselves. It is tough to be straight. But who said being an
metamorphosis, reportedly starting of as bootleggers, but who them entrepreneur is a cake walk? But setting your behavior right from the
redeemed themselves before it was too late and earned a respectful beginning, though might make it tougher, straightens a lot of stuff for
place in society and history by becoming philanthropists! the lifetime of clean, successful business. Giving into pressures or
temptations to cut corners usually sets entrepreneurs on a slippery slide
The initial period of struggle sets the tone for the character and behavior that look so inviting and harmless at the beginning and then keeps
of entrepreneurs through the lifecycle of their ventures. Azim Premji in getting harmful over time to what Ramalinga Raju calls the 'riding the
the early 80s, is reputed to have declined to 'take care' of some corrupt tiger, without knowing how to get out without being eaten'
officials in his hydrogenated oil plant in Karnataka in the early stages of phenomena.
his entrepreneurial life. As a result, the officials closed the plant on false Contd on page #7
 Page 4 www.ecell-iitkgp.org/theentrepreneur
Different models of shares
used by start-ups for its employees
Authored by Shikha Singh, the article explores the various share models used as a compensation by start-ups to attract
employees during the initial stages of its business. A glossary section provided at the end of the article, elaborates on certain
phrases that are marked with an ‘*’ in the article below.
In a start up it’s important to maintain the balance between interests of
operating the company within the fiscal budget and attracting,
developing, retaining, and rewarding high quality staff through wages
and salaries which are competitive with the prevailing rates for similar
employment in the labor markets.
If you have a startup, cash is not something you can afford to squander.
But at the same time you need to hire good employees, who will share
your vision about your startup and work with you to reach there.
In general there are four tools for employee *compensation namely,
1) Base salary
2) Short term incentives and bonuses
3) Long term incentive plans (LTIP)
4) Employee benefits
Start ups need to work on the forms of non cash compensations.
Employee stock options (ESOs) and Employee stock ownership plans
(ESOPs) come under this head. Furthermore you may frequently find it
necessary to borrow money in order to finance corporate growth. One
disadvantage of *debt financing is that repayment of the loan principal
is not a deductible expense. An ESOP can be used to mitigate this
problem by having the company issue newly issued *stock or treasury
stock to an ESOP. The resulting tax savings can then be applied against
the principal payments so that tax-deductible rupees are used to pay
part, or all, of the loan principal.
An ESOP is nothing but an option to buy the company's share at a
certain price. This could either be at the market price (price of the share
currently listed on the stock exchange), or at a preferential price (price
lower than the current market price).If the firm has not yet gone public
(shares are not listed on any stock exchange), it could be at whatever
price the management fixes it at.
The ESOP is particularly advantageous for startups, whose growth
requires the reinvestment of profits, resulting in a shortage of cash
available for employee benefits.
There are many ways in which this can be done. If your company has
already gone public, suppose you buy shares worth Rs100 in the
employees’ name when he joins and keep buying shares worth Rs100.
You can give these shares to him as a bonus after three years of his
employment. Or if your company is not public, you can tell your
employees that they will earn x number of shares for every year they
work and at the end of say 5 years he will get those shares.
There can be many more ways. This is the philosophy of sharing wealth
with the employees. It encourages an ownership feeling among them
and they work accordingly. It is also a tool to motivate employees to
perform better and to retain talented hands.
With employees owning stocks in the companies they work in, their
performance would directly result in better prices for the stock and
dividends, not to mention better capital appreciation for employees
and dealers. Thus the story comes a full circle here.
Your startup can allocate stock options or ESOPs depending upon
The Entrepreneur
various factors such as regular compensation, bonus for better
performance, etc.
Your company can either grant ESOPs to prospective employees at the
time of joining itself or the employees might become eligible on
completion of one or more years of service with the company.
Typically, the maturity period for ESOPs is three to five years - allowing
the company issuing ESOPs to retain talent and keep them motivated.
But ESOPs have also been issued by companies with a provision for
employees to offload a certain percentage of their ESOPs in the very
first year itself. The balance is then spread out over the remaining
period of maturity, with the bulk of the options to be cashed at the end
of three or five years from allotment. This lock-in period is fixed so that
it acts as a deterrent to employees wanting to change jobs. In case an
employee does jump ship, then he can at least cash in on some of his
earnings. Some companies also structure ESOP in such a manner that
no dividend is paid during the tenure of the lock-in.
How the Plan is Designed
An ESOP is an equity-based deferred compensation plan. As such, it is in
the same family as profit sharing plans and stock bonus plans. An ESOP,
however, differs from a profit sharing plan in that an ESOP is required to
invest primarily in employer securities, while a profit sharing plan is
usually prohibited from investing primarily in employer securities.
An ESOP also differs from profit sharing plans and from stock bonus
plans in that an ESOP is permitted and authorized to engage in
leveraged purchases of company stock. Consequently, an ESOP
required different accounting procedures and a different method of
allocating stocks and other investments among the employees than
other types of plans.
The ESOP, like a profit sharing plan, must cover all nonunion employees
who are at least age 21 and have one year of service. However, an ESOP
may either include or exclude union employees.
In practical effect, share ownership under the plan is usually
proportionate to the relative salaries of the participants in the plan.
How the plan works
The Employee Ownership Plans use a host of plans through which they
deliver the goodies. It could be a stock option scheme -- which is the
most commonly used. A stock option gives an employee the right to
purchase a set amount of shares at a fixed price for some years into the
future. It could be a stock purchase or a *restricted stock. Some types of
plans involve actual purchase and holding of stock or a phantom stock,
or could be a cashless exercise.
A phantom stock is a bonus that rewards employees based on the
increase in the value of the company's stock, the dividend performance
of the stock, or both.
Some MNCs offer global stock options for stock listed outside India. The
*vesting period, that is, the period for which the option has to be held,
The Entrepreneur www.ecell-iitkgp.org/theentrepreneur
differs from 2 to 5 years depending upon the industry, company and
management policy. A company could have more than one stock
option plan.
In order to assure marketability of the stock subsequent to
distribution, the employees must be given a *“put” option, which
enables them to require repurchase of their stock at fair *market
value. The plan is administered by a committee established by the
directors of the company. All voting rights are normally exercised by
the committee.
However, employees are allowed to vote on any matters involving
*liquidation, dissolution, recapitalization, merger, or sale of all the
assets of the corporation.
Contrary to common misconception, selling stock to an ESOP need not
result in any loss of control by the current owner. In most cases, the
existing Board of Director members serve as the ESOP Trust fiduciaries.
Thus there is no loss of voting control.
Nothing in the law requires that financial statements be shared with
plan participants. The only financial disclosure that is required is the
requirement that each participant be furnished at least annually with a
benefit statement that shows the number of shares allocated to his or
her account, and the fair market value of those shares.
The other issues that need to be dealt with relate to the determination
of the total compensation cost and the period over which this needs to
be used. Experts contend that as ESOPs are still in a nascent stage in
India, they should be valued using appropriate pricing models, and the
compensation expense should be reflected in the profit & loss
account.
Lately, companies have started to treat the difference between the
option price and the existing market price as an expense to be written-
off over time. This could be the time between the granting of options
and the time when they would be allowed to be sold in the open
market.
For instance, say ABC issues ESOPs to its employees at a price of Rs 10
as against the current market price of Rs 7,000. The difference of Rs
6,990 would be written-off as an expense in the books of ABC over a
period of three years, i.e. Rs 2,330 each year multiplied by the number
of shares allotted via ESOPs.
Eli Lily Ranbaxy is an example of a pharma major which extends its
overseas ESOP to its Indian employees. Infosys, leading Indian
software major, has been credited as having created a large number of
Indian millionaires. The employees who received the stock of the
company have benefitted manifold by the spectacular rise in the share
price.
These are a few examples of the companies which have tried and
succeeded with this concept in India.
As the capital market watchdog on securities transactions and
issuance, the Securities and Exchange Board of India, or SEBI, has
formulated guidelines for the issue and maintenance of ESOPs. They
have been formulated under Section 11 of the SEBI Act, 1992.These
guidelines, called SEBI (Employee Stock Option Scheme and Employee
Stock Purchase Scheme) Guidelines, 1999; apply to any company
whose shares are listed on any of the recognized stock exchanges in
India. This circular and the entire text of SEBI (ESOS & ESPS) Guidelines,
including the amendments made in 2008, are available on SEBI
Page 5
website at www.sebi.gov.in under the categories “Legal Framework”
and “Issues and Listing”.
Glossary
*Employee compensation means the total cost incurred by the company
towards employee compensation, including basic salary, dearness allowance,
other allowances, bonus and commissions.
*Stock, is a share in the ownership of a company. Whether you say shares,
equity or stock, it all means the same.
*Option means a right but not an obligation granted to an employee in
pursuance of ESOS to apply for shares of the company at a pre-determined
price.
* Liquidation, when a business or firm is terminated or bankrupt, its assets are
sold and the proceeds pay creditors. Any leftovers are distributed to
shareholders.
*Vesting means the process by which the employee is given the right to apply
for shares of the company against the option granted to him/her in pursuance of
the ESOS.
*Vesting period means the period during which the vesting of the option
granted to the employee in pursuance of the ESOS takes place.
*Initial public offering (IPO), also referred to simply as a "public offering" or
"flotation," is when a company issues common stock or shares to the public for
the first time. They are often issued by smaller, younger companies seeking
capital to expand, but can also be done by large privately-owned companies
looking to become publicly traded.
*Debt financing is when a firm raises money for working capital or capital
expenditures by selling bonds, bills, or notes to individual and/or institutional
investors. In return for lending the money, the individuals or institutions
become creditors and receive a promise that the principal and interest on the
debt will be repaid.
*Restricted stocks are insider holdings that are under some other kind of sales
restriction. Restricted stock must be traded in compliance with special SEC
regulations.
*Employee stock option scheme (ESOS) means a scheme under which a
company grants option to employees.
*Employee stock purchase scheme (ESPS) means a scheme under which the
company offers shares to employees as part of a public issue or otherwise.
*Market price of a share on a given date means the closing price of the shares
on that date on the stock exchange on which the shares of the company are
listed.
*Treasury stock is the outstanding shares of stock reacquired and held by the
issuing corporation
*Capital Appreciation refers to a rise in the market price of an asset
*Lock-in period refers to the period under which a person cannot sell his shares,
generally with regards to an ESOP. Under this a person who has been granted
some stocks of the company cannot sell them immediately.
*Put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified
price within a specified time
Page 6 www.ecell-iitkgp.org/theentrepreneur The Entrepreneur

SEEKING INTERNSHIPS THIS SUMMER

START-UPS ARE HIRING !

 The Entrepreneur www.ecell-iitkgp.org/theentrepreneur
Knowledge Camp on Youth Initiatives
in Social Entrepreneurship
The discussion was moderated by people who attended the Tata
Jagrity Yatra from IIT Kharagpur. People learnt about the unsung
heroes across the length and breadth of the country.
Lijjat Papad: Lijjat has a one point agenda about empowering women
by employing them in a labour-intensive industry producing papad. It
identified a need and a potential workforce, and brought the two
together to create a successful business. It accepts all its working
members as the owners and an equal partaker in both profit and loss.
Dabbawalas: They are employed in a unique service industry whose
primary business is collecting the freshly cooked food in lunch boxes
from the residences of the office workers (mostly in the suburbs),
delivering it to their respective workplaces and returning back the
empty boxes by using various modes of transport. There is only one
mistake in every 6,000,000 deliveries, statistically equivalent to a Six
Sigma (99.9999) rating, even though they are mostly illiterate. Rule of
success is that employees are shareholders in the business.
Aravind Eye Care System: Its mission is to eliminate needless blindness
from the country. It works on differential pricing, that is, more charge
for rich and less for poor. It operates on economies of scale. They have
introduced innovation for cutting down costs. They involve surgeons
only for surgery and the rest of the work is done by the paramedics. It is
a very efficient and sustainable system. Each doctor does about 2600
surgeries per year in Aravind Eye Hospitals as compared to an all India
average of about 400.
Naandi foundation: It has the largest kitchen (also very modern) in
Asia catering mid-day meal to a large number of schools. The CEO
Integrity (Contd from page #3)
Many times it costs them their entire business and lifetime work. For me,
any day, 'Honesty as the best' policy works well in building sustaining
business. It is indeed an important behavioral aspect that individual
entrepreneurs need to inculcate from the beginning. It is also equally
important that entrepreneurs collectively act to prevent unacceptable
behavior in their own collective self interest to promote good business
practices in their communities. All this certainly calls for a large dose of
bravery and courage on part of entrepreneurs. But isn't that courage what
first made someone an entrepreneur?
Social Entrepreneur of the Year 2008 - Arbind Singh, Executive Director,
Nidan
An initiative of The Nand & Jeet Khemka
Foundation and The Schwab Foundation, these
awards are given on a yearly basis in recognition
of Social Entrepreneurs in the country. The 2008
social entrepreneur of the year award was
conferred upon Arbind Singh, Executive Director
of Nidan, at the World Economic Forum’s India
Economic Summit.
Nidan is developing sustainable
businesses, cooperatives, trade unions and
“people's institutions” led by the most excluded categories of the poor
in Bihar. It has promoted and built 20 independent profit-making
ventures governed and owned by the urban poor including waste
Page 7
(Chief Executive Officer), also an IIT alumnus, takes up only large
projects as they want large volume because margin is very low.
In the discussion it was realized that the business model of a social
enterprise needs to be sustainable. Also, a need was felt for the present
day NGOs (Non Government Organizations) to be sustainable, they
need to create livelihoods for the masses. There are a lot of
opportunities in the social sector and we need to tap them.
Innovation Platform
Innovation Platform is a new initiative by the Entrepreneurship Cell
aimed at nuturing innovation at the grassroot level. Innovation platform
is an organised group of selected first year students getting together to
discuss each other’s ideas. This discussion is now being done on a wiki
page. The discussion helps the students stay motivated to work on their
idea as well as helps build their idea into something feasible.
Student mentorship, 4th and 5th year students in related departments,
is provided to the students to help them further build their idea. The
more developed ideas are being mentored by professors in similar fields.
Funding for developing a prototype of the product is also being provided
by Entrepreneurship Cell as are mentors from the industry.
Therfore a complete package is being offered to the students who are
part of the Innovation Platform- from starting to develop their idea to
student mentors to industry mentors to small seed funding to a
sustainable business.
Students part of the Innovation platform will hopefully start their own
venture in 2 to 3 years.
For more articles visit
www.ecell-iitkgp.org/theentrepreneur/
workers, ragpickers, vegetable vendors,
construction labourers, domestic helpers, micro-
farmers, street traders and other marginalized
occupation groups. As legitimate competitors in
the mainstream economy, the collectives
negotiate with the government for their rights and
entitlements.
Other finalists included Prema Gopalan
from Swayam Shikshan Prayog who co-creates
businesses with rural communities and
corporations, and Brij Kothari from PlanetRead and IIM Ahmedabad
who uses “same language subtitling” on popular television shows to
build literacy across the nation.
 Page 8 www.ecell-iitkgp.org/theentrepreneur
From a Venture Capitalists perspective
Authored by Hridya Ravimohan, the article focuses on analyzing what exactly Venture Capitalists (VC) look for while investing in
a new venture. It comes straight from a VC’s perspective, containing excerpts of a number of VC interviews conducted via online.
Venture Capital. The term catches the attention of every
aspiring entrepreneur like probably no other. It is a form of private
equity funding, that is typically provided by professional outsiders to a
new, growth business. Generally made as cash in exchange for shares in
the invested company, venture capital investments are usually high
risk, but offer the potential for above-average returns. A venture
capitalist (VC) is a person who makes such investments.
Ventures usually prefer VC funding to any other form of
investment, such as loans, as they get the added benefit of the
resources and expertise that a venture capitalist provides. As the
venture capitalist shares a common desire for success with the
company, he no longer plays the role of a passive lender, but more that
of a partner. The VC will want to bring on a managing partner or team to
help run the company. The VC's goal is usually a high (30-40 percent per
year) return on the investment over the period of his involvement in the
company. Thus the VC ensures that the company follows an aggressive
growth strategy He contributes expertise, experience, contacts, and
discipline. The presence of a venture capitalist also lends credibility to
the venture. Also, if the venture fails, the losses are distributed
between the entrepreneur as well as the investors, thus cushioning the
blow to the entrepreneur personally.
But consider the flipside – by foregoing outside investment,
the entrepreneur retains all of the equity, and thus all of the control, in
his venture. When money is accepted from a venture capitalist, the
company is no longer solely the entrepreneur's property, and hence
usually will not run as such. This shift in control alone is a compelling
reason for many entrepreneurs to self-fund.
VCs expect certain qualities in a venture that they are going to
fund in, the two most important being - a good managerial team and a
large market in a fast-growing sector.
Through the eyes of Venture Capitalists:
Q: What do VCs look for in a venture that they might invest their
money in?
A:
Alok Mittal - Canaan Partners:
“At the highest level the question is: can they build a real large
business? All these proposals sitting in front of us - it breaks down into
three main aspects.
Market, Industry structure, and the Team.
One is the size of the market. You cannot build large businesses in small
spaces. So either the market has to be large, or it has to be growing fast
enough so that it will become large in the next 3-4 years.
The second aspect that we look at is how the industry is likely to shape
up. Is this going to be a space where 100 companies each get 1% of the
market share? Or will there be one company with 30% - 40% market
share, a relatively consolidated position?
I think the third part, perhaps the most important part, is the team. Is
this the team that can make it happen? All business plans undergo
change and face crisis. We need to be confident this team has their ears
to the ground; they have the passion; they have the staying power to
see the finish line.
So I think those are really the 3 main factors. There are lots of details to
each one of those but essentially that.”
Balaji Srinivas - Aureos Capital:
“So, first thing, you are taking a call on the sector, saying that this sector
is good and will continue to grow, and India has an advantage in this
sector. You first have to be able to see the big picture.
Then you are saying that this company has the right elements in terms
of business model, customers -- whatever it takes to be a player in this
industry and capture market share.
And thirdly, the most important thing after all this is: do you really like
the promoters, the founders of the company? Do you somewhere think
that these people are compatible?
The Entrepreneur
Fourth, you see the valuation - only after all this valuation comes - and it
has to be acceptable.”
Avnish Bajaj - Matrix Partners:
“I think the frameworks that investors use to evaluate early stage
companies are very simple and very consistent.
Number one: is the market opportunity large enough? When we say
large, we are looking at whether is there a current market of at least 500
million dollars or a billion dollars.
The second thing that is extremely critical is: how good are the
entrepreneur and the team? What is their understanding of the market
opportunity, and what is their track record?
We look for various clues, because it is almost impossible to predict
who will succeed or not. But typically our view is that success and
achievement are not accidents. They are the outcome of a very
methodical process followed in life, though of course there are outliers
to this. You know: what have been they been their academic
achievements, what have been their professional achievements, what
do other people think of them?
Thirdly, we focus on the industry dynamics within that opportunity:
what is the state of competition, how can these guys grow. It is little bit
more about the strategy the company is following in order to be able to
take advantage of that market opportunity.
So you said great market opportunity, great people…now, are they
understanding their environment and how they will have to operate?
And do they have a differentiator by virtue of which they can create a
sustainable business?
So that is really the framework.”
Russell Siegelman (HBS MBA '89) - Partner, Kleiner Perkins Caufield &
Byers :
“The most important requirement is a large market opportunity in a
fast-growing sector. We like a company to have a $100 million to $300
million revenue stream within five years. This means that the market
potential has to be at least $500 million—or more, eventually—and
that the company needs to achieve at least a 25 percent market share.
The second factor involves a competitive edge that is long lasting. It is
usually an engineering challenge that is tough enough to give the
company an edge, resulting in several years lead or longer, if we're
lucky. We look for a tough problem that hasn't been solved before.
The third thing is team. We look for engineering vision and execution,
sales, and entrepreneurship in a team. Entrepreneurs have to have a
clear sense of the opportunity and how to build the business. But the
best ones are willing to re-examine their assumptions and are willing to
veer left or right or pivot all the way around when the data suggests
they're headed in the wrong direction.
So overall it's a funny mix. When we review an investment opportunity,
entrepreneurs have to have a pretty good story to tell about what they
want to do. I think it helps to be cocky, there's no doubt about it, but if
you're not sufficiently confident, you're not going to be successful in
selling your idea.”
Sonja L. Hoel (HBS MBA '93) - Managing Director, Menlo Ventures:
“I always look at the market first. By that I mean a strategic view that
includes evaluating market growth, market size, competition, and
customer adoption rates.
We have a process here called SEMS, or Systematic Emerging Market
Selection. We do a SEMS project for every investment we make. Twice
a year at our planning meeting, we talk about new markets or problems
that need to be solved.
We track four things and relate them to the success of our investments:
market size, the team, unique technology, and whether the product is
developed at the time we invest. We found proprietary technology is
important but doesn't make much of a difference as a unique
differentiator for significant returns. Market size and a developed
The Entrepreneur www.ecell-iitkgp.org/theentrepreneur
product matter most. We have much better luck if the product is in beta
or shipping, although we do invest in start-ups without a developed
product. Often someone has a great new technology, but hasn't looked
at the market the technology is going to serve.
In order to create a barrier, the technology has got to be hard to
execute. Some companies have patents; some don't. We encourage
them to have patents because it's a more litigious environment than it
was ten years ago.
We also look at the management team. If we've got a founder who's in it
for the lifestyle or unwilling to upgrade the team if necessary, we have a
conversation about the willingness to hire new team members.”
Robert Simon - Director, Alta Partners:
“ There are two schools of thought in evaluating new opportunities. In
the first, the venture capitalist invests in only smart people with a keen
sense of opportunity. In the other, the venture capitalist only cares
about markets. If management isn't up to the mark, the venture
capitalist will fix it. The truth is obviously somewhere in between, but I
tend to place more weight on the market opportunity versus the team.
In our experience, markets trump both people and technology.
When analysing the market for a new product or service, we try to
determine whether the product is a replacement for an existing
product or whether the product is offering something new and
previously unseen. The replacement product can be called the better,
cheaper, faster model. With these opportunities you can estimate
market size by looking at the revenues of the existing product
shipments.
Conversely, a product that provides new functionality previously
unseen, we call the brave new world model. Here, the market size and
demand are really unknown. These often are in the consumer sector.
Netscape, Yahoo!, and the Sony Walkman are examples. The brave new
world model certainly has a greater market risk but not necessarily
more technical risk.
Additionally, there are market-timing issues. If we're too early, there's
no market demand, and we have to survive until the demand reaches
us. In that period of time, we have two problems: We have to keep the
doors open and feed everybody, and we may be susceptible to being
leapfrogged by technology. So we don't want to be too early, but we
don't want to be too late.
We also look at the technology to see how proprietary and difficult the
solution to the problem is. The ideal case is four Ph.D.s solving a
problem they've been working on for two years, and somehow they've
struck upon the magic solution. And it's two orders of magnitude better
than whatever else is out there. Finally, we want the team to have
conviction. We get a little concerned when the entrepreneur comes in
and says, "I'm in this to flip it in a year." So if we get the impression
they're not in it for the tough times, then it's definitely a problem.”
Q: Would you back a first-time entrepreneur?
A:
Balaji Srinivas - Aureos Capital
“I would back a first time entrepreneur. But today my first time
entrepreneurs are different: they have substantial experience.
They are not figuring out their businesses; rather whether their
company will succeed, because they know their business.
I'm not willing to live with the other option, which is: I don't know what
I'm doing but I will figure it out. That is not acceptable to me.
Today what is acceptable to me is: I know my business and I have done
this for X number of years, and now I have this idea which is the
extension of this business. I don't know whether it will work or not, but I
know the big picture, and I know that I have all the elements. This is
what I back today.”
Alok Mittal - Canaan Partners:
“40% of our business in the US comes from repeat entrepreneurs. This
implies that the larger part comes from people who are first time
entrepreneurs.
And we're very open to backing first time entrepreneurs in the Indian
context. Here you see more first time entrepreneurs than in the West
simply because the whole model of building a fast-growing enterprise
and then exiting is fairly new.”
Page 9
Avnish Bajaj - Matrix Partners:
“I was a first time entrepreneur when I got funded by ChrysCapital. I
don't think the issue is first time entrepreneurs. In fact, if you look at
some of the world's most successful entrepreneurs, they are all first
time entrepreneurs: Bill Gates, Steve Jobs, Larry Ellison.
Indeed, if you look at the track records of entrepreneurs who have
succeeded in their first venture, they typically don't succeed after that.
But yes, absolutely we would look to back first time entrepreneurs. I
think it comes back to whether they have a track record of achievement
in their lives. It doesn't have to be as an entrepreneur.”
So to encapsulate the views of the above VCs, most of them
are looking for a good technology, backed by an efficient managerial
team to launch the product into a large market at the right time,
irrespective of whether or not the person is a first-time entrepreneur.
Another source of outside investors are 'angel investors'.
These investors differ slightly from VCs. The largely accepted difference
between the two modes of funding is essentially that angel funding is
more of 'emotional money', whereas venture capital is 'logical money'.
Many angel investors are successful entrepreneurs who want to help
other entrepreneurs get their business off the ground and usually
expect a lower rate of return than a VC. Usually they are the link from
the self-funded stage of the business to the point where the business
needs the level of funding that a VC would offer. 'Angels' typically offer
expertise, experience and contacts in addition to money. Not much is
known about angel funding due to the individuality and privacy of their
investments.
Venture Capitalism is one of the most popular forms of
funding available to entrepreneurs today. It is one of the few doors that
one could unlock in order to enter the actual entrepreneurial world.
INTERESTING FACTS
? Etymology of 'venture': "to risk the loss" (of something),
shortened form of aventure, itself a form of adventure. General
sense of "to dare, to presume" is recorded from 1559. Noun sense
of "risky undertaking" first recorded 1566; meaning "enterprise
of a business nature" is recorded from 1584. Venture capital is
attested from 1943.
? ARDC (American Research and Development Corporation)
was the first venture capital firm to be in existence. Its main
purpose was to encourage private sector investments in
businesses run by soldiers, who were returning from World War
II.
.Georges Doriot is known as the 'father of venture capitalism'.
?
He, along with Ralph Flanders and Karl Compton, founded ARDC
in 1946. He is also co-founder of INSEAD Business School (1957).
? In 2007, U.S. venture capitalists invested $1.4 billion in China
and $1.0 billion in India.
? The origin of the Angel Investors occurs at the beginning of
the era of Broadway Productions to define those individuals who
used to fight all odds to put up the high risk and early stage seed
money to launch Broadway shows.
? Angel Investors accept an average of 3 deals for every 10
considered, whereas VCs accept 1 for every 400.
? According to a Wells Fargo survey in 2007, 73% of all ventures
in the USA are self-funded.
Page 10 www.ecell-iitkgp.org/theentrepreneur
Company Registration
Registering a company is an obligation which every entrepreneur has to undergo. This article written by Rahul Kumar, is aimed
at providing complete information about the various nitty-grittys of the procedure involved and the costs incurred in getting your
company registered.
The selection of right business entity is very useful for the
success of an entrepreneur. The choice of entity depends on the
circumstance of each case. A company is a separate legal entity as
compared to its members. In a company, liability of shareholders is
limited to the extent of unpaid share or to the tune of the unpaid amount
guaranteed by the shareholder. On the other hand, a partnership is a sum
total of persons who have come together to share the profits of the
business carried on by them or any of them. It is not a separate legal
entity. The major disadvantage of partnership is the unlimited liability of
partners for the debts and liabilities of the firm. If property of
partnership firm is insufficient to meet liabilities, personal property of
any partner can be attached to pay the debts of the firm. Registration of
partnership firm is not compulsory up to the extent of 20 partners,
though registration has extra advantages.
Registration of companies under the Companies Act 1956 is
under the categories of private and public limited companies. The most
common form is Private Limited Company.
Private Limited Company: It is a company limited by shares in
which there can be maximum 50 shareholders, no invitation can be made
to the public for subscription of shares or debentures, cannot make or
accept deposits from public and there are restrictions on the transfer of
shares. The minimum number of shareholders is 2. It must have at least 2
directors. Minimum share capital is INR 1 lakh.
Public Limited Company: It is a company limited by shares in
which there is no restriction on the maximum number of shareholders,
transfer of shares and acceptance of public deposits. The minimum
number of shareholders is 7.It must have at least 3 directors. Minimum
share capital is INR 5 lakhs.
Recently the concept of Limited Liability Partnership (LLP) has
been introduced in India. LLP is an alternative corporate business entity
that provides the benefits of limited liability of a company but allows its
members the flexibility of organizing their internal management on the
basis of a mutually-arrived agreement, as is the case in a partnership
firm. LLPs are intended as an alternative business organisation for small
scale industries and service sector enterprises, such as lawyers,
chartered accountants etc, which at present, are primarily constituted as
partnership firms in India.
A Sole Proprietorship is the most common type of business (like
the small grocery stores). It is a business entity owned and managed by
one person. It requires almost no legal formalities. For liability purposes,
the individual and the business are one and the same.
Steps of incorporation of a company:
1. Purchase DSC (Digital Signature Certificate) for Directors: It
is used on the documents submitted in electronic form in order to ensure
the security and authenticity of the documents filed electronically.
2. Obtain DIN(Director Identification Number) for proposed
directors: It is obtained by filling eForm DIN-1.
3. Name approval of the company: Availability of names could
be checked at MCA (Ministry of Corporate Affairs) portal. Apply to the
concerned RoC (Registrar of Companies) to ascertain the availability of
name in eForm1A by logging in to the portal. A fee of INR 500 has to be
paid alongside and the digital signature of the applicant proposing the
company has to be attached in the form. Select, in order of preference, at
least one suitable name up to a maximum of six names, indicative of the
main objects of the company. Ensure that the name does not resemble
the name of any other already registered company. The names can be
the coined name from the objects of the proposed company or even the
name of the directors, and of such kind. Whatever be the case, it should
be indicative of the main object of the proposed company. The name
justification is required to be specified along with the application.
Further, the last words in the name are required to be "Private Ltd." in the
case of a private company and "Limited" in the case of a Public Company.
The Entrepreneur
Availability of names requires authorised capital for certain key
words:
Keywords Requierd Authorised
Capital (INR)
(1) Corporation 5 Crores
(2) International, Globe, Universal, 1 Crore
Continental, Inter-Continental, Asiatic,
Asia, being the first word of the name.
(3) If any of the words at (2) above is 50 Lakhs
used within the name (with or without
brackets)
(4) Hindustan, India, Bharat, being the 50 Lakhs
first word of the name.
(5) If any of the words at (4) above is 5 Lakhs
used within the name (with or without
brackets).
(6) Industries/Udyog 1 Crore
(7) Enterprises, Products, Business, 10 Lakhs
Manufacturing.
4. After the name approval file for registration of new
company by filing the required forms (1,18,32) within 60 days of
name approval
Memorandum of Association (MoA): It is a document that sets out the
constitution of the company. It contains, amongst others, the
objectives and the scope of activity of the company besides also
defining the relationship of the company with the outside world. It has:
1) Name clause: The name of the company is mentioned in
the name clause.
2) Situation of registered office.
3) Objects clause: It specifies the activities which a company
can carry on and which activities it cannot carry on. The company
cannot carry on any activity which is not authorised by its MoA.
4) Liability clause: A declaration that the liability of the
members is limited in case of the company limited by the shares or
guarantee must be given. The MoA of a company limited by guarantee
must also state that each member undertakes to contribute to the
assets of the company such amount not exceeding specified amounts
as may be required in the event of the liquidation of the company. The
effect of this clause is that in a company limited by shares, no member
can be called upon to pay more than the uncalled amount on his
shares. If his shares are already fully paid up, he has no liability towards
the company.
5) Capital clause: The amount of share capital with which the
company is to be registered divided into shares must be specified
giving details of the number of shares and types of shares. A company
cannot issue share capital greater than the maximum amount of share
capital mentioned in this clause without altering the memorandum.
Articles of Association (AoA): It contains the rules and regulations of
the company for the management of its internal affairs. While the
Memorandum specifies the objectives and purposes for which the
Company has been formed, the Articles lay down the rules and
regulations for achieving those objectives and purposes. The
important items covered by the AoA include:-
1) Powers, duties, rights and liabilities of Directors
2) Powers, duties, rights and liabilities of members
3) Rules for Meetings of the Company
4) Dividends
5) Borrowing powers of the company
6) Calls on shares
The Entrepreneur www.ecell-iitkgp.org/theentrepreneur Page 11

? Arrange for the drafting of the memorandum and articles of association
by the solicitors, vetting of the same by RoC and printing of the same.
? Arrange for stamping of the memorandum and articles with the
appropriate stamp duty.
? Get the Memorandum and the Articles signed by at least two
subscribers in his/her own hand, his/her father's name, occupation,
address and the number of shares subscribed for and witnessed by at
least one person.
? Login to the portal and fill the following forms and attach the
mandatory documents listed in the eForm
a) Declaration of compliance - Form-1
b) Notice of situation of registered office of the company -
Form-18
c) Particulars of the Director's, Manager or Secretary - Form-32.identification card and number [known as Permanent Account
Submit the above eForms after attaching the digital signature, pay the
requisite filing and registration fees, and send the physical copy of
Memorandum and Article of Association to the RoC of the state where
the registered office of the company is to be located.
? After processing of the Form is complete and Corporate Identity is
generated, obtain Certificate of Incorporation from RoC. Although a
private company can commence business immediately after receiving
the certificate of incorporation, a public company cannot do so until it
obtains a Certificate of Commencement of Business from the RoC.
This process of incorporation is completed in about 20 days. Auditors will ? Apply for IEC (Importer Exporter Code) number if import-export is to
charge around INR 10,000 for their service.
Additional steps to be taken for formation of a Public Limited
Company:
To obtain Commencement of Business Certificate after
incorporation of the company the public company has to make
following compliance:
File a declaration in eForm 20 and attach the statement in lieu of the
prospectus (schedule III)
OR
File a declaration in eForm 19 and attach the prospectus (Schedule II)
to it.
? In addition, businesses liable for income tax must obtain a tax
Number (PAN)] from the Income Tax Department. Processing fee is
INR 66 (certificate of registration by RoC is required). It must be
indicated on all the returns, documents and correspondence filed with
the Income Tax Department.
? We can also get the Common Seal (costs INR 1000 approx.) which is
used to for putting seals on share certificates.
? Register with EPFO(Employee's Provident Fund organisation).
? Open bank account
? Register for value added tax (VAT) before the Sales Tax Officer of the
ward in which the company is located.
be made (PAN is mandatory for obtaining it).
Page 12 www.ecell-iitkgp.org/theentrepreneur The Entrepreneur

Entrepreneurship Cell
ABOUT US
Entrepreneurship Cell [E-Cell] is a non-profit student organization with the
aim of fostering the spirit of entrepreneurship among college students in India and
nurturing young people with bright ideas. With a team of highly motivated group of
Editor: Naveen YS IITians from Kharagpur and the support of encouraging faculty, E-Cell boasts to be
Asst. Editors: Rahul Kumar, Hridya Ravimohan, Shikha one of the most active student bodies in India - with more than 15 start-ups from IIT
Singh Kharagpur itself within its three years of inception.
We, at E-Cell, strive to make all the worthwhile support available to
Write to us at editor.theentrepreneur@gmail.com budding entrepreneurs and also present successful examples by conducting guest
lectures by eminent people. Case study competitions, Knowledge Camps, patent
workshops, and other focused business plan events are conducted throughout the
year to involve students in activities that help them gain an entrepreneurial bent of
mind.
Our annual competitions include:
Concipio: An exclusive in-house business plan competition, aimed at transforming
the raw ideas that are born here into full fledged business models
Pensez: A unique case study competition, with problem statements designed to
inculcate innovative thinking in topics relating to entrepreneurship
Eclairez: A social entrepreneurship challenge aimed at those individuals who have
the gumption to empower those at the bottom of the pyramid
Envision: A product design competition, catering to those visionaries who have it in
them to impact our present, and revolutionize our future
www.ecell-iitkgp.org/theentrepreneur Negocio: A web and mobile services based business plan competition that focuses
on individuals aspiring to startup in this very popular sector of today
Clean Tech Challenge: An event that aims at tapping the immense potential of this
promising sector of the future