Ok, people. Place your bets.

“I’d take all the youngsters to the horse track and make them bet!” exclaimed the well-known entertainment entrepreneur. This was his proposal for acclimating people to entrepreneurship. I was speechless; probably a good thing.

But we hear variations of this theme all the time: entrepreneurs are gamblers. Entrepreneurs are risk-takers. I hear that that one key thing holding people back from becoming entrepreneurs is their unwillingness to take a risk.

I challenge that premise.

Most Indian graduates long for placements in multi-national corporations (MNCs), or large Indian companies. Indeed, an Infosys placement commands a premium in the marriage market.

I contend that these youngsters are the real gamblers. I contend that the young people signing up for jobs in large corporates are assuming more risk than many of their counterparts headed to start-ups, or starting their own ventures.

Consider the placement scenario over the past few months – I know of young people who received offers from highly regarded MNC’s, but then never received their appointment letters.

As in most large companies, the decision to terminate the jobs was taken by people far removed, who were looking at the overall picture of the company. Perhaps the conversation went like this, “We need to trim the bench from 10% to 2%.” “Ok, we’ll cut the new hires in Bangalore.”

And these would-be-new hires couldn’t do a single thing to change their fate. They couldn’t prove their worth by working harder; or improve circumstances by identifying a new opportunity for the company or by changing strategy or pricing. Nothing. It was as if they had placed their chips at the roulette wheel, and then watched the ball land another number.

Contrast that with what might have happened in a start-up, or in their own venture. Everyone faces tough times. But in a start-up, perhaps they could have found another customer. They might have volunteered for extra work to speed up product development. Or negotiated a better deal with suppliers to save some money.

It may not have worked. But the point is that they could have tried something; they had a measure of control.

And in the course of trying, they would have learned something, improved their skills, or met people for the next opportunity. What can you learn, sitting at home, waiting for an appointment letter? Or shoe-horned into a cube, working on a piece of code?

So, who is better off, even in the worst case scenario? Who took more risk?

Everything in life carries some risk. Perhaps it’s about where one wants to place a bet. Do you want to bet on someone you don’t even know? Or do you want to bet on yourself?

Fail early. Fail fast.

A team of Stanford students was told: create value using rubber bands. Yes, rubber bands.

So, they had a brilliant idea. They thought: “Let’s create a Wishing Tree, a tree from which students can hang their wish-notes using rubber bands. We’ll catalyze love and peace. People will group together under the tree, linking arms, and singing in three part harmony.” (Ok, maybe their vision didn’t extend quite that far.)

It didn’t work.

But, rather than roll over and play dead on their assignment, the team put together a video demonstrating the value they gained from their failure. Their key lesson? Fail early. Fail fast.

It sums up so much: that failure is part of the entrepreneurial process; that it’s better to let go of an approach that is not working ; that you should take what you have learned, take your time and your energy, and apply yourself to a new strategy. Or the next venture.

Why is failing the end of the world?

I used to rollerblade. (I was living in Southern California, where you have to rollerblade to obtain residency status. Really. Check the laws.) Straight lines didn’t interest me much; I used to love to crank up my Sony walkman and whip around parking lots at midnight, tackling jumps best left to fourteen-year-old boys. And I fell. A lot.

But you know, I expected to fall, and prepared for it – huge kneepads, elbow pads, wrist guards, helmet. I looked a bit like a short Terminator. But that didn’t bother me. In fact, over time I developed a subtle contempt for the roller-beauties, tottering around in their bikinis and micro-shorts, not a pad to be found on them. My motto became, “If you’re not falling, you’re not trying.”

It’s weird, isn’t it, how we’re perfectly willing to accept that learning to do a double-twist over a park bench might take a bit of falling; but we expect that rolling out a new product, by a new team, in a new market, should work according to plan. And that if it doesn’t work…well, it’s a failure that damns.

What is failure, anyway?

“Entrepreneurship is the art of surviving until you succeed.” Manish Sabharwal, one of the founders and Chairman of TeamLease, India’s largest temporary staffing company, gave me that definition.

We were chatting about failure. Now, I don’t know how many of you know Manish, but anyone who does would probably vote him “Least Likely To Be Associated With Failure.” Seriously, this is one sharp guy.

But Manish told me the story of his first company – how they had to completely change the business three times before getting something that worked. Luckily they were able to raise funds and keep the ball rolling. If they hadn’t, Manish said, they would have taken what they had learned and started fresh. But, he said, he didn’t consider even that alternative to be a failure.

“So,” I asked him, “if that would not constitute failure, then what would?”

“Failure,” Manish replied, “Is when you don’t keep the faith.”

Yes, it sucks. But it doesn’t kill you.

I know. I’ve been there. I had to close down one of my companies. It was a horrible experience. I learned things like: don’t expect your venture capitalists to remain sane. And, no, you really don’t have 3 months of cash left, in fact, you are already out of cash – because closing a company costs money. And I learned that your team will work for free, and even bring in blueberry muffins.

There were other lessons as well, about having a proper business model before taking venture capital (which I knew, but ignored). And about who I am.

A lot of entrepreneurs are used to success – entries to good schools, top positions in clubs, classes or companies. We think of ourselves as those who beat the odds. It was difficult to incorporate the failure into my view of myself. It was hard to put together my resume with the company failure at the top. (I briefly considered arranging work experience alphabetically rather than chronologically.)

But it does get better. I did crawl out from under my desk. I have been able to put the experience into perspective. And yes, the lessons have indeed stood me in very good stead.

Last week I ran into a young entrepreneur who recently closed his startup. Since then, I’ve been thinking about the special relationship between entrepreneurs and failure.

What Indian Entrepreneurs Need. Really.

What do entrepreneurs really need to succeed?

Passion. Drive. A  good idea. A network. Passion. Funding. Passion. Customers. Yeah, yeah, yeah.

But what about power? And I’m not speaking metaphysically here. I’m talking the real thing: electricity running through wires to reach a lab, an office, or a factory, with consistency and predictability. Power.

Journalists occasionally ask me what the government can or should do to improve the conditions for entrepreneurs in India. And every time I answer, I feel that I am somehow disappointing them.  “Changing the laws to encourage angel funding?” some prompt hopefully.  “Sure,” I respond. After all, some entrepreneurs need angel funding.

But generally I focus on the basics: power, roads and water would be a good place for the government to start. All entrepreneurs need power. Not all entrepreneurs need venture capital.

And the cost of building what they should be able to purchase disproportionately affects the new entrepreneur. It doesn’t hurt Infosys too much, these days, to run their own buses, generators, water purifiers and university. In fact, for them it’s an advantage to have these resources, when new entrepreneurs do not.

But it does hurt a new entrepreneur to shell out 2.5 lakhs (~ $5300) on a 25KVA diesel generator. Or 1.16 lakhs for 10 tubular batteries plus a UPS, like we did (~ $2500). Let me put this in context: the cost of backup power equals anywhere from 4 months to 8 months of salary for a junior programmer. That’s a lifetime in a startup. Do you think Silicon Valley startups are trading manpower for lights?

Ok, full disclosure: I’m writing this in the middle of a power shortage. Bangalore is badly crunched right now, though certainly not as badly as some.

To preserve our batteries, we don’t use the printers, and we unplug all the laptops.  There are no AC’s, fridge, or water (when we forget to turn on the pump during the moments with power). The only good thing is that no power means no power point presentations.

And we’re the lucky ones. I was talking to a young entrepreneur from Hubli the other day. His company serves clients in the manufacturing sector of northern Karnataka. His clients suffer power cuts (euphemistically called “load-shedding”) for over 8 hours per day. How do they manage? Some drive their teams to perform 8 hours of work in 4 hours. They have no choice. But is this the way to achieve 6 – 8 % GDP growth?

Building the entrepreneurial ecosystem means investing in the basics, and perhaps the entrepreneurial community should help highlight this priority.

Don’t even get me started on the roads.

TV show: Business Model Makeovers

I want to launch a new reality TV show: Business Model Makeovers. I actually pitched the idea to Sudhir Syal at ET Now – he listened politely. But really, I can’t let this die. It’s too good.

Imagine: a bedraggled entrepreneur, bags under eyes, opens the door to a group of Startup Angels, with light streaming all around them. Perhaps they’re all dressed in white. Perhaps wearing stylish little wings.  

The Angels swoop down upon the business, and miraculously, within 2 days, the entrepreneur looks well-rested, her customers are full of compliments and referrals, and banks have competed to provide low-interest loans.

Voila: A Business Model Makeover.

Yeah, I confess: I stole the idea from all those Nanny-Makeover and Disaster-Home-Makeover shows. Have you ever seen them? They’re awesome.

I especially loved one episode where a Miracle Nanny, in crisp uniform, shows up at a house to find one kid stuffing a shoe in the dog’s mouth, another wrestling his Mom for the car keys, and the teenager in the backyard doing drugs. Within 24 hours, she has the kids in matching outfits, singing the score to Sound of Music, while vacuuming and dusting the house. I exaggerate only slightly.

So, who would get a Business Model Makeover? Well, we’d have to be very strict about what type of business could participate. Criteria would include:

• Has customers.
• Has great service or product.
• Has more people who want to be customers.
• Every time they add a customer, it’s bad news: either they lose more money, or they get closer to having a nervous breakdown.

There’s a company like this in my neighbourhood. Fabulous croissants. Amazing brioche. And every time she adds a customer, the entrepreneur’s stress level increases, and the mistakes in the services increase as well. It’s gotten to the point where we, her existing customers, ration our word-of-mouth referrals. “Yum!” a friends munches, “where did you get this bread?” “Sorry, I can’t tell you.” I’m not kidding!

Clearly, this bakery needs a Business Model Makeover: some help understanding what needs to change in the operations in order to allow for good service, reasonable scale, and a (relatively) stress-free life for the entrepreneur.

It might require a change in the way she accepts orders, or prices her goods, or mans the baking, procures supplies, or in the way they make their deliveries – I don’t know. She’s given some hints to me about her business. But every time I stand outside her bakery, starting to quiz her, she seems to get a bit nervous. Maybe I shouldn’t have waved the baguette with such vigour.

But see? If there were a TV show, we could get the Startup Angels to help her out – officially. And we would ensure ourselves an endless supply of absolutely fabulous chocolate croissants.

Venture Capital: Money down the drain?

It was a glorious May day, her diamonds were sparkling, and we were at the Ritz, so it was hard to take her seriously. “I need to figure out how to make some money!” my very smart VC friend moaned. Huh. She’s one of the few women partners in a Silicon Valley VC firm; plenty of money there, right?

Well, yes, in a way. Plenty of VCs, plenty of money. But it turns out that my friend is right: not plenty of people making money.

Yes, folks, it’s true. VCs are not making money. The dirty little secret is out, and highlighted in lovely bar and line graphs throughout a recent report put out by the Kauffman Foundation. Indeed, over the past 10 years in the US, the returns on publicly traded small cap stocks, as measured by the Russell 2000 index, have beaten the VC returns. And the more recent VC returns are actually negative.

The venture capital industry has not always been a loser, of course. In fact, until about 5 years ago, the returns were healthy to very healthy. In fact, according the Kauffman report, in 2003 the trailing 5 year return was over 20%. Which is part of the problem. The high returns, combined with the period of incredibly good performance during the boom, attracted a huge amount of capital into the sector:  the total committed amount going up more than five times, in the space of one year.

Imagine: 5 times the capital. From less than $50 billion under management to over $250 billion.

Did the number of savvy teams and great opportunities increase by 5 times in the same span? Apparently not, if you go by the returns. Combine that with the fact that the VC’s favourite industry sector has gotten much less capital intensive over the past decade (it now takes about 30 seconds and $30 to launch an IT company) and the fact that the public, which happily gobbled up the shares of young, un-profitable companies in the past, now has a stomach ache, and the outlook for improved returns with this much money in the market is…how we say….pretty bad.

No doubt, venture capital has been very important to fuel the growth of some of the most important companies in the world – we know the names. Absolutely, it’s a vital asset class, and we welcome the growth of this industry in India.

But let’s also learn from the US….more is not always necessarily better.