Dear startups, meet the real world

India's startup entrepreneurs, who dream of disrupting the existing order with tech, sometimes forget that they need to do business in the 'real world'. They shouldn't.

When a leading newspaper publishes a big article on your company, the last thing you expect is a summons from the Enforcement Directorate. Yet, that is exactly what happened to the founder-CEO of an e-commerce company.

This incident took place a couple of years ago. The company had just raised a large round of funding, business was good, and the newspaper article was the proverbial icing on the cake for the founder, who requested not to be named. But the day after the article appeared he got a call from the Enforcement Directorate’s Zonal Office asking him to meet the senior officer there. Worried, he went to the office and spent a few hours answering questions, showing all the company- and funding-related documents. “They had a folder with newspaper clippings of funding raised by companies. Supposedly if a few articles appeared about one company then the founder would be called. Our papers were all in order, so we were fine. But if a company’s papers are not in order then they are in big trouble,” says the founder, who has since raised many more rounds of risk capital.

The point to this anecdote is that startup founders need to be prepared for the unexpected. While this story had a happy ending, not every incident has a positive conclusion. The much written about Stayzilla case is an example. At the time of publishing, Stayzilla Founder Yogendra Vasupal had been in jail for a week. The Stayzilla incident is not the only one where the startup world and the ‘real world’ collided with disastrous consequences. TinyOwl’s founders would not have expected to be locked up in their own office by their own employees, but that did happen. Slogans were raised by laid off employees outside Snapdeal’s office. Roadrunnr’s office was vandalised.

Traditional Indian businesses have had to deal with all sorts of issues, from government corruption to union trouble. But many startup founders, who spend their days dreaming of disrupting the existing world order with tech, forget that they need to do business in the real world with all its messy complications. Many entrepreneurs, when they think of starting up, worry about building the product, raising funds, and hiring the right talent. Not many think of or are prepared for the practical issues that could crop up.

Operational blind spots

You would think that BigBasket’s Founder and CEO Hari Menon’s chief worry would be Amazon’s grocery moves, but you would be wrong. Hari, who co-founded BigBasket in 2011, says:

Every day I wake up with one prayer — that the delivery and warehouse staff are available as per the roster and not many are on leave. If they are not there then our delivery schedules go for a toss."

About 75 percent of BigBasket’s 13,000-strong workforce falls in the blue-collar category. “They have a hard life. They come in at 6 am, start deliveries at around 7 am. They are our interface with our customers. How do we keep them happy and motivated? That is our single biggest challenge,” says Hari. They have solved the problem to a certain extent with a strong rewards and recognition programme. They also run a trust that takes care of the education of family members of staff who have stayed with the company for a certain period.

Anisha Singh, Founder and CEO of deals site mydala, recalls how she had to pay a higher deposit for her rented office premises when she was starting out and suppliers of hardware were not willing to extend credit. Anisha says:

Everything is going to cost money. I see entrepreneurs coming up with projections that are not anchored in reality. You will build an app, but how will it be discovered? That will also cost money.”

Many might not take into account external factors. A Kochi-based tech entrepreneur opted to start up in Kerala as he wanted to build a business in his home state. The talent was cheaper too. But he had not considered the state’s business-stopping hartals. Sure his team of around 10 techies were not part of any union, but Kerala’s bandhs are so total that none of the employees could turn up for work. The entrepreneur had to now account salaries paid on these days when no work was done as wasted money.

Shady dealings

“The business environment in India is corrupt. That’s the reality,” says Sanjay Anandaram, startup advisor. An entrepreneur who runs a Bengaluru-based food startup spoke about how there are ‘rate cards’ or levels of bribe to be paid to get the necessary permits. Another food startup founder who tried supplying to large tech companies stopped trying after a senior executive demanded kickbacks. Sanjay says:

There will be pressures but an entrepreneur can take a decision not to succumb to them. It might mean losing a deal. An official might say you are not compliant. But if you are compliant then you have nothing to worry about."

It is not that entrepreneurs are always in the right. There are numerous instances of founders and senior management giving contracts for many services to friends and relatives. “Hire from a friend who runs a recruitment firm, get a relative to build the website, and there is no documentation for any of these dealings. So no one knows how much has actually been paid and how much has gone into the entrepreneur’s pockets. So many purchases are done for an office, so there are lots of opportunities for corruption,” says a person who has worked as an advisor to many startups.

Compliance issues

However, the most common mistake startup founders make is to ignore compliance requirements. Says Sanjay:

In India, an overwhelming majority of founders are first-time entrepreneurs. They know how to code and design a product but don't know what a company is, what a board is, what compliance is, that they have to pay taxes, create a provident fund, etc. There is a certain coolness attached to not knowing and to disregarding these (requirements). They have convinced themselves that since they are building something disruptive they can disregard process and compliance. This is dangerous. Lots and lots of startups are not compliant.”

Anish Basu Roy, Co-founder of on-cloud marketplace Shotang, said he and his co-founders had corporate experience and the support of good advisors to fall back on. He says:

Even then I used to wonder whether all this paperwork (for compliance) and all the processes were really needed. If you do not take care of certain filings you could face fines that run into crores and even imprisonment. A lot of entrepreneurs do not know of these requirements and do not have access to good legal experts.”

He says every stage in a startup’s journey, from starting up to becoming a large company with hundreds of employees, has its own set of challenges especially from compliance and regulatory points of view. “You need to plan, get the right subject matter experts. There is no point cutting corners in lawyer fees as later damage will be in crores,” he says.

Legal compliance is just one part. Setting up processes for day-to-day operations, like what documentation is needed before choosing a vendor or when he is paid, is also important.

Sanjay says ignorance is not an excuse. “If you are setting up a company, you need to know how it has to be done. If you don’t know, learn, get the right experts. Ignorance is not an excuse,” he says.

Anisha of mydala says that so much hope is placed in fundraising that companies do not plan for what will happen if funding doesn’t come through. How will the startup operate without funding? Where will the money come from? “The goal of any business, be it a kirana store or Facebook, should be to make profit. For that you have to focus on running a real, self-reliant business with the proper processes,” she says.

The idea is to prepare for scenarios — what will you as a founder do if funding does not come in, how will you communicate to vendors if there is money trouble and even, God forbid, what will happen if you get arrested. Have India’s startup founders thought of these questions?