Category: Entrepreneurship

Stock Options

25% of Netcore is owned by past and present employees – some as shareholders, and others as option holders. This is perhaps one of the most liberal ESOP programs any company has. It is a choice I made about 12 years ago.

Stock options have always been a good way to attract talent. In India, the rules governing options are not as simple, transparent and employee-friendly as they are in the US. But companies can still use stock options as a magnet for talent.

While Netcore has had an ESOP program for a long time, one of the challenges was that employees did not see any liquidity. We did not raise any external capital so a secondary offering of shares was not possible. We have also not sold or listed Netcore. So stock options have been illiquid for employees. And over time, they became a piece of paper that was not valued by recipients.

So, last year we decided to do partial buyback which provided liquidity to many past and present employees. We used the profits of the company to do the buyback. (I complemented that with some direct purchase from my family company.) Early employees saw extraordinary returns, and this reinforced the feeling among present employees that stock options did indeed have value.

Stock options are a very good way to align interests. They can be a good reward and motivation mechanism for employees. Each year, I set the price – based on what I think the business is worth, which in turn is driven by inputs I have had from conversations with potential external investors and market inputs. It may not be the most scientific way to do it, but it is still a good way to show people the value of what they have.

I have said it in company meetings that over the long-term, it is the stock options that will deliver huge financial gains for every one of the holders. I do hope I can do that in the years to come.

Will be continued soon.

Hiring a CEO

It was mid-2007. Netcore had been in business for almost 10 years. And all we had to show was a small business in mail servers, and a long list of failed efforts to the product mix. My passion lay in tinkering and coming up with new ideas. But we could not pass the ultimate test – converting ideas into sustainable businesses with paying customers.

I started thinking that the problem lay with me. I could create, but not sell. Which of course also meant that I was creating the wrong things. I had become Netcore’s biggest bottleneck. I began to think about the possibility of replacing myself as CEO. Till then, for 15 years, I had always led from the front. I had a big success in IndiaWorld, so at times I thought of myself as invincible. But the reality was stark. Netcore was flailing. Unless I did something different, we were headed to becoming a zombie company.

I spoke to a friend, Rajjat, about my dilemma. He suggested I meet a few people and explore the possibility of bringing in someone from the outside to lead Netcore. I decided to keep an open mind. He introduced me to Abhijit, who was leading the digital business for a large media company. Abhijit and I were as different as chalk and cheese – and that was perhaps what clicked. We met a few times and I grew comfortable with him. He had led businesses in the past and came with a strong sales and numbers mindset. That was what was missing at Netcore.

As we spoke, I became comfortable with him and the idea of a new leader for Netcore. It was not an easy decision, but I also knew that if Netcore had to grow, I had to get out of the way. And that is exactly what I did. Abhijit joined as Netcore CEO in July 2007.

The one decision I made then was that in a company there should only be one leader. So, I stepped back. Abhijit was the CEO and I did not want to create a second power centre. If I disagreed with anything, I would tell him in private. This strategy of letting the CEO lead has worked very well for Netcore through the years. Abhijit, followed by Girish, and now Kalpit – they have all led the company to 13 years of growth.

As I look back, the decision to bring in an external CEO and replace myself was perhaps the most important decision in Netcore’s history – and one that laid the foundation for us to become a proficorn.

Tomorrow: Part 55

Pivots

I had spoken about pivots briefly in “The Sub-broker Moment.” The idea of a pivot in a business needs a fuller explanation.

Here is an article from Founder Institute:

While pivoting in the startup world means to shift to a new strategy, it is often believed to entail drastically changing the whole company. But this is not always the case. Oftentimes, a company only has one important problem that needs to be addressed, and only requires one aspect of the company to change. Below are some examples of pivoting that you might not have guessed are considered a “pivot”:

• Turning one feature of a product into the product itself, resulting in a simpler, more streamlined offering.

• The opposite of the previous point is also considered a pivot, in which one product is turned into a feature of a larger suite of features as part of another product.

• Focusing on a different set of customers by positioning a company into a new market or vertical.

• Changing a platform, say, from an app to software or vice versa.

• Employing a new revenue model to increase monetization. For example, a company might find that an ad-based revenue model may be more profitable than freemium.

• Using different technology to build a product, often to cut down on manufacturing costs or create a more reliable product.

Forbes writes about 14 famous business pivots. They write about Twitter and Flickr, among others.

Twitter: “The most legendary pivot in social media history is the transformation of Odeo into Twitter.  Odeo began as a network where people could find and subscribe to podcasts, but the founders feared the company’s demise when iTunes began taking over the podcast niche.  After giving the employees two weeks to come up with new ideas, the company decided to make a drastic change and run with the idea of a status-updating micro-blogging platform conceived by Jack Dorsey and Biz Stone.”

Flickr: “Flickr actually began as an online role-playing game called Game Neverending, where users would travel around a digital map, interact with other users and buy, sell and build items. The game also included a photo-sharing tool, which turned out to be one of the most popular aspects of the game. The company decided to leverage this photo popularity and pivot to Flickr, which was acquired by Yahoo! in 2005, and became one of its most beloved and successful acquisitions.”

Netcore began its life as a Linux-based mail server company. We stayed that way for almost 10 years (with many failed attempts at new ideas along the way). When SMS started growing in India, we made a pivot to offering enterprise SMS services. Over time, we added email to the mix, and then moved up to the stack to offering a full stack marketing automation platform. These were all shifts. If we had stayed in email servers, we would have been irrelevant by now.

Pivot links to strategy. As you think about the future opportunities, you have to make a choice – stay or shift. In the world of tech where collaborators can become competitors and every large company is working to expand its share of the customer wallet, deciding if and when to pivot is an important pillar of strategy.

Tomorrow: Part 54

Strategy as Choices

In a recent hippoBrain conversation, Ramesh Mangaleswaran explained strategy very well. He described it as a set of choices that a business needs to make, and then decide on the resources (human, capital). Strategy needs a combination of big bets and not so big bets (options). The big bets need to be counterbalanced with a safety net if things go wrong. Strategy also needs to be thought at two levels – like looking through a telescopic (long-term, directional) and microscope (near-term, specific actions).

One exercise that Ramesh had suggested for Netcore was the following: start with a From-To (where we are today, and what do we want to become), list out 3-4 Must-Dos and 6-8 Choices. For the Choices, if the decision is to be made now, then they need to be backed up with resources; if the decision is to be made later, then a date needs to be set by when the decision will be made.

Too often, we do not understand what strategy is, and apply the term to any forward-looking thinking that we do.

Business World had an interview with Michael Porter where he builds on the “Strategy as Choices” thinking:

Porter also warned about the overuse of the word strategy. He simplified the definition in business as a set of choices that are long term and articulate the competitive advantage that companies will seek to create, in order to win.

The strategy also should not be confused for goal and aspirations. It is more than just particular actions – it is holistic. At the same time, it is not a mission statement or values. It is not vague, it is specific.

…“Strategy cannot be a popularity contest where everyone gets a vote because the essence of strategy is about choices,” he concluded.

Farnam Street had this to add: “Really, strategy is about making specific choices to win in the marketplace. According to Mike Porter, author of Competitive Strategy, perhaps the most widely respected book on strategy ever written, a firm creates a sustainable competitive advantage over its rivals by “deliberately choosing a different set of activities to deliver unique value.” Strategy therefore requires making explicit choices— to do some things and not others— and building a business around those choices. In short, strategy is choice. More specifically, strategy is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and superior value relative to the competition.”

So, going back to what Ramesh said, here are three questions to answer: what is your From-To, what are your 3-4 Must-Dos, and what are the 6-8 Choices that you need to make. Take some time with your senior management colleagues and answer them, and you will hopefully have a better view of your own business and its future.

Tomorrow: Part 53

Failures

1. Pre-IndiaWorld (1992-1994)
   • Multimedia Database
   • Electronic Parts Catalogue software
   • Image WorkBench – image processing
2. IndiaWorld (1997-1999; all these were portals)
   • Dhan – India Investments
   • Indialine – The Internet in India
   • Nagar – Build your home (page)
   • Man Pasand – Indian Favourites
   • India Travelog – Destinations in India
   • IndiaVotes – Opinion Polls
   • Itihaas – 5,000 years of Indian History
   • News Asia – Asian News
3. Netcore early years (2001-2005)
   • Blogstreet – blog search engine (one of the world’s first)
   • RSS IMAP Aggregator – mailbox for RSS feeds
   • Pragatee – one-stop software for small businesses
   • Visual Biz-ic – enterprise software
   • Digital Dashboard
   • Emergic Freedom – Thin Client, Thick Server
4. Netcore B2C (2005-2010)
   • MyToday SMS – free subscriptions
   • MyToday Mobs – SMS groups
   • MyToday mobile portal
   • NayaNaya – latest news
   • MyToday Store – paid SMS subscriptions
   • Phone.cc – dedicated portal for every mobile
5. Politics (2009)
   • Friends of BJP
6. Free A Billion (2015-2018)
   • New Constitution for India
   • Swatantra Mumbai
   • Nayi Disha and Dhan Vapasi
7. Investing in Startups (2007-10)
   • Seraja – Event Web
   • Novatium – $100 Computer
   • About 10 other companies

28 years. 30 failures. And 3 big successes.

• IndiaWorld (1995-99): sold for $115 million in 1999
• Niti Digital (2012-14): helped Narendra Modi get a majority in 2014 Lok Sabha
• Netcore (1998-): going strong; a “proficorn”

None of the successes were guaranteed. Success is inevitably built on top of failures. We forget our failures. But the failures are the stepping stones – the pathways that lead to the ultimate destination. If I had not had the courage to experiment as an entrepreneur (and accept repeated failures), there probably would have been no success.

There were long periods of serial failures. But I did not give up. I kept trying new things. That is how I live life even today. In every new idea that I am working on, I wake up every morning to work hard to reduce the risk of failure.

Tomorrow: Part 52

Ajay Row speaks to me in a 2-part MartechBrain series on my entrepreneurial learnings. Great questions from Ajay which brought out the best in me!

Inflection Points

What a year 2020 is turning out to be! Coronavirus crept up on us and took over our lives in a way none could have imagined. Businesses have been upended – some have flourished while others have floundered. The health scare has changed buying behaviour of consumers. The switch to online has done in a few months what would otherwise have taken many years. In India, the banning of Chinese apps by the government transformed the fortunes of some overnight. 2020 will be seen as a year of inflection points.

Investopedia defines an inflection point thus: “[It] is an event that results in a significant change in the progress of a company, industry, sector, economy, or geopolitical situation and can be considered a turning point after which a dramatic change, with either positive or negative results, is expected to result. Companies, industries, sectors, and economies are dynamic and constantly evolving. Inflection points are more significant than the small day-to-day progress typically made, and the effects of the change are often well known and widespread.”

Rita McGrath, writing in Fortune in January 2020, says:

Strategic inflection points—changes that alter the taken-for-granted assumptions underlying a business model—can feel sudden. In reality, however, they tend to build up slowly, gathering momentum until a transformative shift becomes clear. Andy Grove, who coined the term, said it referred to change that was 10 times more significant than a typical change encountered by a business.

When these shifts occur, companies tend to fall into three categories. The first are those that have missed the inflection point entirely. These firms often shrink or disappear…The second group comprises those that realize an inflection point is underway and place a huge, last-minute bet on catching the wave…The third set of companies are ones that have placed a number of small bets over time to position themselves to take advantage of shifts when they happen. These investments are in effect options companies can exercise once the new landscape is more clearly in view.

The challenge for senior leaders is: How do they prepare to see an inflection point coming—so they don’t need to make a last-second turn? And how do they bring the organization along into the post-inflection point world?

The Internet in 1995, Apple’s iPhone in 2007, the launch of Jio in 2016 can all be seen as inflection points which led to a 10X change in our lives. And 2020 perhaps upends them all. As entrepreneurs, these are moments of great disruption and opportunity. The impact of inflection points plays out over time, but entrepreneurs who have made the small bets, created options and invested in tomorrow will have a disproportionate advantage over others.

Will be continued soon.

The One Number

I was recommended William Thorndike’s book, “The Outsiders”, by a friend about 18 months ago. It is one book that I wish I had come across much earlier in my life. The book answers a simple question: “What makes a successful CEO?” Thorndike’s answer: “it is the returns for the shareholders of that company over the long term.”

Explains Thorndike: “The metric that the press usually focuses on is growth in revenues and profits. It’s the increase in a company’s per share value, however, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO’s greatness. It’s as if Sports Illustrated put only the tallest pitchers and widest goalies on its cover…In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).”

The book discusses why this is the most important metric of a CEO’s performance and tells the stories of eight of the greatest CEOs as measured by this number. And key to long-term success is to understand capital allocation. More from Thorndike:

CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations. Most CEOs (and the management books they write or read) focus on managing operations, which is undeniably important.

Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options. Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders.

Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools.

What I like about Thorndike’s idea is that it distils success down to a single, measurable number – with a focus around capital allocation. This is something I have been thinking a lot about in recent months. It is not something I did earlier – because we never had enough capital to invest. Profits made through the years have now given us money beyond the margin of safety which we can consider deploying for growth.

So, spend a day reading Thorndike’s book – even for early-stage entrepreneurs there are many good ideas to learn as they seek to build their business.

Tomorrow: Part 50

Today and Tomorrow

As a business leader, we have to take care of the present – revenues, customers, cashflows. And yet, if we don’t look ahead to the future, we risk losing out on the turns that the road can bring. We do this reflexively when driving a car. We are watching the car in front, the ones at the side, glancing at the rear view mirror to track movements behind us, and also observing the traffic movements much further ahead. This is what we need to do when running a business – focus on today and also build for tomorrow. As the business matures, the time horizon for the future will also become longer. Initially, you will look ahead a few months, then a few quarters and finally, a few years.

A new book by David Cote, “Winning Now, Winning Later” discusses exactly this. From the introduction:

If you run a team or an organization of any size, you face a seemingly intractable dilemma each day: Should you focus on making the numbers, often at the expense of the company’s future health, or should you prioritize longer-term strategies, your quarterly or annual performance be damned?

Most corporate managers and executives choose the first option, running businesses quarter-to-quarter to the detriment of long-term performance. Leaders might value broader objectives like sustainability, competitiveness, and growth, and wax eloquent about their commitment to these long-term goals, but when called upon to allocate scarce resources, they focus on the current year’s plan and do what it takes to meet their numbers. In their view, they have no choice: their job depends on pleasing bosses and shareholders today, not tomorrow.

The notion that there is no way to pursue long- and short-term goals at the same time, and therefore leaders have no choice but to embrace short-termism, is one of the most pernicious beliefs circulating in business today… Short-termism has become so rampant that influential leaders are speaking out against it, with some advocating that we relax the reporting requirements on public firms so that leaders don’t feel such intense and constant pressure to make their numbers.

We can’t regulate our way to long-termism—the problem is too complex and deeply entrenched. Instead, we need a comprehensive mind-set shift on the part of leaders and managers at every level. Somehow, we’ve convinced ourselves that we can only invest in the future if we let short-term performance tank. But that’s not true. Strong short- and long-term performance only seem mutually exclusive. As a leader, you can and must pursue both at the same time. Unless you do, you and your team or organization will never reach your full potential.

He then outlines three principles of short- and long-term performance: scrub accounting and business practices down to what is real, invest in the future, but not excessively, and grow while keeping fixed costs constant.

This is sound advice – and even more so for entrepreneurs. Think of the cars around as competitors, and the mountains ahead as the landscape. Even as you keep an eye on competition, make sure you are watching the changing scenery. In internal reviews, set aside time to discuss the long future. Some bets will not pay off immediately but need to be started now to make sure you are not caught unawares when the future arrives.

Tomorrow: Part 49

Creating Options

I was talking to a colleague recently. We were discussing a particularly knotty business problem. I said, “We need to create more options. There has to be a different approach to problem. What are the different ways we can achieve the same end – ones that are not obvious and that we have not considered?” I told him a story from my past.

When building content portals during IndiaWorld (1995-1999), I did not know which verticals would work – I had a general sense, but wasn’t sure. During those years, I launched 13 properties – samachar, khoj, khel, bawarchi, indialine, dhan, itihaas, manoranjan, and so on. They covered many different verticals. 4 of them worked, 9 did not. I would never have known for sure had I not experimented and tried out the different themes. In a sense, I created “options” – the cost of doing each was low, while the upside of success was very high.

I have seen many leaders box themselves with pre-conceived notions of what will work and what will not. As a result, they constrain themselves at the early stage. This could be because they don’t want to waste resources. More often that not, they are worried about the consequences of the initiative not working. So, they take a defensive approach from the beginning itself.

An entrepreneur needs to do the opposite. Early life is all about experimentation in search for what is now called “product-market fit.” It is about trying a few different approaches to see what will work. Even now, I constantly think of how one can expand the options that are available. These can come through conversations with people outside our domain – people we would typically not speak to and whose worldview is very different from ours. So, keep the mind open to new ideas. It is this continuous search through creating options that creates the new openings and the big opportunities – but you will only know it when you actually do it.

Tomorrow: Part 48