Risk culture and your startup

This article is the tenth in the Startup Series on FirstPost’s Tech2 section and first appeared on January the 23rd, 2017.

A healthcare startup founder I know was in a dilemma. For a pretty sizeable chunk of the equity pie, she had agreed to take on as cofounder a tech development guy. He would in turn build the platform which would enable her business model. As delivered, the platform however was far from adequate. The tech cofounder however was not amenable to taking feedback. Lately he had gone completely quiet and was not responding to emails or picking up calls. Our healthcare founder was left with a platform that did not work as expected, with no access to the source code, and now a growing dread that the company was slipping away from her even before it was built. She had no more money left to bootstrap or to pay for legal advice to buy out his share so she could get the code and find another solution.

When I heard about it, I asked her if the equity was his outright or had a vesting schedule, whether there were ways of clawing back some of the equity as a BATNA, what checks and balances had been built into the agreement between them. What I found was not encouraging.

Through some wrangling, this particular situation somehow found a cobbled-up solution. It is, however, illustrative of why your company’s risk culture needs to be thought of right at the time of creating the startup.

Whenever I bring this up with founders, they ask if entrepreneurship is nothing but risk taking by any other name. It sure is! It is about taking those risks that advance your goals, not risks that destroy your dream. It helps to develop the ability to tell the two kinds of risks apart.

I am not recommending that instead of building your product and your customer base, you spend your time writing huge formal manuals or official policies. I am, however, strongly recommending that you give some thought to the values, beliefs, knowledge, attitudes and understanding about risk shared by a group of people with a common purpose, collectively the risk culture.

How to shape your risk culture in early days? Here are some tips to clarify your thinking.

First, ask if the risk advances your objectives, your dream. At what cost?

In early days of developing a product, building user communities for early testing of features and pricing, capturing feedback and using it to improve the product, all cofounders may use their own devices to write code, collect information and user feedback, keep essential documentation. This is a good move to avoid spending a lot of cash on buying hardware that belongs to the company, if indeed the company as a legal entity exists at all in the early days. There are of course several possible existential risks at this stage. How is the repository for what the cofounders are learning being built and accessed? Where is the essential information — source code, names of suppliers, passwords for services to name a few — kept? Can all cofounders access it? Can it be lost or tampered with easily? What is the backup plan?

Second, think of mitigation plans required, should the undesirable event you anticipated comes to pass.

What if cofounders fall out, someone wants to leave, or someone dies? Can one cofounder hold the entire venture to ransom? What if your only supplier decides not to work with you, and they have copies of your sketches which they could as easily manufacture and start selling? It goes without saying that this mitigation planning needs to happen when you are making key decisions about cofounder relationships, product development, suppliers etc. One can, of course, deal with undesirables as they arise but it is likely to cost more money and time to fix than to prevent or have other recourse.

Last but not the least, by thinking through, however uncomfortable it may be, what happens if it all goes to the wall.

This is the tricky bit. Our healthcare founder was on the verge of incurring a heavy cost for not thinking through the apocalypse scenarios regarding her cofounder. His contribution was essential to her startup but his temperament and working style could not be mitigated by writing tough contractual terms. We don’t like to imagine doomsday situations, sometimes rightly so as they can be paralysing and demotivating. But it is important to know at some level what you would do to salvage your startup if the worst things you had not planned for happened.

Our risk propensity is about that we are willing to accept for just returns. A clear framework for the risk culture makes it easier to identify, preempt, accept or reject those risks. It is wise to start early.

Governance is no “Indian wedding”

When India hosted the Commonwealth Games in 2010, the then-sports minister compared the event to an Indian wedding, saying that while preparations go on until the last minute, everything comes together on the day. I am reminded of that as I watch the stories coming out of India since the sudden demonetisation of two major currency notes on November the 8th, 2016.

The reasons why the move was made were unclear, and what one could and could not withdraw or deposit changed often. The Reserve Bank of India (RBI) refused an RTI (right to information) request asking about the reasons, and with its response to another RTI request, managed to create an impression that the RBI had no idea how many Rs 2000 bank notes it had printed. RBI is the Indian analogue of the Bank of England in the UK or the Federal Reserve (“the Fed”) in the US. These are not confidence enhancing moves, for citizens or for investors. To cite economist John Maynard Keynes: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

That is not the point of this monograph.

With my governance hat on, it is clear that no regulatory impact assessment was carried out before the demonetisation was announced. After all, the lives of so many publics – citizens, small and big businesses, state owned banks, private and multinational banks – were to be upended. If there had been such an exercise, RBI would have been more prepared rather than the ominous silence to which it treated the citizens before the Governor finally spoke nearly 2.5 weeks after demonetisation. (An alternative possibility, simultaneously more benign and more sinister, is that such an assessment was carried out but summarily ignored in favour of an “Indian wedding” type approach, and reliance on calls to nationalism and patriotism.)

Save for a top-down diktat, where was the country’s preparedness for such a massive transformation?

Does the “leadership” have experience of massive transformations involving both businesses and citizens? The committee to oversee it was announced nearly three weeks after the demonetisation. Other than Chandrababu Naidu, and possibly BCG’s Janmejaya Sinha, it is difficult to feel confident about the execution experience of the rest. Not least because the expensive failures presided over by some on the committee  are not easy to ignore.

What is the objective for this transformation? No, not the ones that changed daily, one increasingly jingoistic than the next! Minimising the black money in circulation? Reducing corruption? Making India a digital, cashless society?

For the sake of this argument, let’s assume a “digital, cashless India” was the goal.

Did anyone ask who will pay for the infrastructural investments needed? The National Payments Council of India’s (NPCI) Unified Payments Interface (UPI) is in the news but there is understandable confusion especially as different banks put out their own branded apps and the government adds to the confusion by launching its own app BHIM. The consumer-side apps are not the only solution needed. The government has asked banks to roll out 1 million POS terminals. No, nobody yet asking who will pay and how it will dent their profitability. Meanwhile, surcharges on the use of card payments have been introduced and withdrawn hastily.

(I am reminded of a friend’s wedding where a last minute Pashmina shawl purchase was made for over Rs 35,000 in 1996 money. Her mother told me, at weddings, expenses aren’t questioned. The “Indian wedding” analogy is still holding.)

Who thought ahead about the hundreds of millions of illiterate users who now not only need smart phones but also the magical ability to work their way through these apps to access and spend their own money? Apps to serve an illiterate user base will need inclusive design thinking, which is absent in the Indian public discourse, as I have written elsewhere.

What is the short and medium term impact on quality of life of citizens? Where is the mitigation for their loss of income or business? I am struggling to find any proof these questions were even asked.

There is no discussion whatsoever of who is benefiting the most at whose cost. My brief monograph on that question has remained on fire since it was published, suggesting I touched a nerve.

There is no evidence that the demonetisation was a considered policy move. There is plenty evidence that this is a case study for poor governance no matter how one looks at it. There was no clear goal, no plan. The leadership has no experience of delivering large transformations. Nobody has done any cost analysis or indeed asked who will pay. Citizens’ docility is assumed.

Governance is joined-up thinking. Absent that, it is just another “Indian wedding”.

[PS: About that Brexit thing ahead of us here in the UK, I am still looking for a culturally apt metaphor. Meanwhile, let’s go with “a giant omnishambles”.]

Building your startup’s culture

This article is the ninth in the Startup Series on FirstPost’s Tech2 section and first appeared on January the 9th, 2017.

To be fair, building organisational culture is usually not on many founders’ radars in the early days, when much must be done in very little time. However as I have written in earlier columns, it is wise to consider building the scaffold of your startup for blazing success. Because while failure gives time to ponder, success rarely spares the time to do things over.

How can one go about laying the right foundations for a startup’s culture?

Culture is a catch-all term applied to business practices, processes, interactions and behaviours that make up the work environment in an organisation. Culture in a startup is how founders’ values manifest in practice. Particular business practices and behaviours may also be shaped by the founders’ personal pain points that they may be addressing with their startup.

As ever, starting with the basics is a good first step. If you are lucky, you and your cofounders are on the same page as to the values that matter to you and that set the tone — both for the organisation you wish to build with your cofounders and for your cofounder relationship.

The cofounder duo behind PostFold, whom I advise, created their fashion startup after noting that affordable fashion was often poor quality in materials and craftsmanship, or failed to understand the structure of modern life where one can seamlessly go from one’s desk at work to an evening do without an opportunity to change clothes. Their research also showed that regardless of poor quality, the markups on fashion labels were high but this did not necessarily mean that the master tailor and the machinists got paid decent wages. This, they noted, was a significant factor in poor retention of tailoring talent, which is crucial to the survival and success of a fashion business.

Their shared values were quite simple but firm. They set out to deliver a high quality of materials and craftsmanship affordably to their customers, while delivering a superior customer experience. This was the idea at the centre of their business design. They also wanted to create an atmosphere of trust and respect in the workplace, which shaped how people interact with one another in the business. This idea is in line with their belief that happy employees ensure that customers are served well. Remarkably — and this may not be feasible for all startups — the organisational values are also their core brand values.

In turn, these values shaped how they designed their business processes e.g. how customer complaints and returns are to be handled, how employees may be able to purchase the company’s products at a discount or borrow samples for occasional use, or how employees could choose work-from-home while delivering on deadlines and ensuring their collaborative projects did not get derailed.

Further, the clearly articulated brand values have shaped their brand communication strategy. If something does not increase their brand’s prominence or does not better the customer experience they aim to deliver, they choose simply not to do it. Avoiding bandwagons allows them to focus on building the excellence in serving their customers and keeping their employees motivated and engaged.

To recap, values guide our sense of what is important and what is right. Culture is how our values manifest in practice. Our daily decisions and behaviours align to our values. Processes and incentives can create reinforcement of the values on a day to day basis.

A media entrepreneur I advise has found a creative way of reinforcing the organisational values and culture within the team. He has created rituals and shared experiences to enhance the sense of belonging and the belief in their shared values. These shared rituals and experiences allow the team to speak freely, raise concerns, thrash out things and return to work with a renewed sense of commitment to their work and its purpose.

Like much else involving people and their interactions, the culture of an organisation evolves too, especially with growth and scaling. For instance, while the entire, currently small, team at the media startup I mentioned earlier can go on a shared experience, it will become harder even at twice the size.

Similarly, nearly all startups learn quickly that the formality of communications and the accessibility of the founders both change as the team size grows. This subtle change in culture can upset early employees and founders alike. At least as founders, you may find it helpful to make peace with that possibility early on.

In the next column, we shall talk about a specific aspect of building culture crucial to building a sustainable and well-run organisation.

The governance we need: a reflection

I have had both shared and personal reasons to have spent much of the last year reflecting on the nature of governance around us.

It was a year marked by sharp separation between opposing factions. This cleavage had long been in the making. The divide between the haves and the have-nots was growing with an empathy deficit. The difference between correct and manufactured reportage was lost. The political outcomes of both the EU referendum and the US presidential elections are being seen as a revolt against the soi disant elites, disconnected from the reality of the lives of many.

This is however not just an issue of national politics. A friend of mine informed me that today, January the 4th, the second working day of 2017, is “Fat Cat Wednesday.” Today the FTSE 100 CEO has apparently already earned the average annual salary of an average UK worker, a sum of £28,200.  The UK is one of the most unequal countries in the developed world. Even though the link between CEO pay and performance is “negligible” according to research, with 80% rise in pay delivering only 1% improvement in performance, the pay gap persists and is demotivating to over half the workforce. If we have learnt anything from the political seismic shocks of the year that just turned, we know this is an unsustainable state of affairs.

We are at an historical inflection point whichever way we look.

If governance is all about building stable organisations – whether national entities, for-profit businesses or non-profits, educational institutions or anything else – it is self-evident that we need a different kind of governance.

We need governance that reaches across the aisles and engages, to heal and possibly to collaborate – whether it is Hillary Clinton gracefully attending Donald Trump’s inauguration despite the bitter and personal campaign both fought, or business people such as PepsiCo CEO Indra Nooyi agreeing to serve on the economic advisory council in the Trump administration despite her criticism of the language used for women and minorities.

We need governance to listen and to understand one another’s concerns, which may necessitate learning how the other side uses the same words in the same language to mean different things.

We need governance that may seek efficiency but not at the cost of efficacy, because organisations are not dumb legal entities but living breathing ones, working within the ambit of their wider societal contracts.

We need governance to be anti-fragile, both in its intentions and its recognition of consequentiality of various choices, over time and not just in the immediate quarter that follows.

We need governance that is true, inclusive, collaborative stewardship for all.

If the last line reminds you of Edmund Burke’s view of social contracts, let’s not forget his words which may as well be about the governance we now need: “All that is necessary for evil to succeed is that good men do nothing.”

(Disclaimer: These are my own views and do not reflect the views of the boards of either JP Morgan US Smaller Co.s Investment Trust or BeyondMe, where I serve as a non-exec director.)

Pay for a good startup lawyer

This article is the eighth in the Startup Series on FirstPost’s Tech2 section and first appeared on Dec the 23rd, 2016.

I am aware this is controversial advice.

Especially since the last column said: “You pay for some things, you do not pay for some things; you should take your time to understand which is which.”

Especially since we all know free legal templates are available online, or a friend can send you their stuff, and you can take them and tweak them, and you are done. This is where I mention that I have seen startups in India working with documents that state their jurisdiction as England and Wales. They certainly found a template for free! But is it serving them and their purposes?

The ability to make sense of legal documents is not for everybody. The inability to make sense of legal documents could however be quite expensive. The advice of a competent, experienced startup lawyer is something founders would do well to pay for.

Here is why.

A good lawyer will not just write you legalese and lots of documentation but she will build you the scaffold for a future of success and high growth. It is something to plan for now, because let’s face it, when you are blazingly successful, you won’t have time to come back and re-do the paperwork assembled from a random assortment of templates.

One of the first decisions in a startup is about location and structure. A competent lawyer, equipped with adequate tax advice if necessary, will help set up the most optimal structure for future growth and in a location that works for you. “But I am incorporating in India,” you may say. Fair point, but a good lawyer, who understands the competing jurisdictions you could incorporate in, such as Singapore, will explain the options to you, thus helping you think more broadly and globally about your business right from the start. Tax is not the only consideration, of course. A location can often beat your default location on the entrepreneurial ecosystem, the ease of finding and hiring talent including from other countries, and most crucially, the ease of doing business.

With cofounders on board, you will need a watertight shareholding rights agreement everyone agrees to sign. A shareholding rights agreement outlines founder shares of equity, but more importantly, outlines important issues that may come up including cofounders wanting to leave, resolving matters in a going concern, potential conflicts arising and so on. I have lost count of how many founder conflicts could have just been avoided or resolved more easily, had someone thought of writing a sensible shareholding rights agreement up front.

As you build the business, you will need to think about several other contracts e.g. with service providers and partners. Service providers may send you their own contracts on which it would be wise to get legal eyes so you know what you are signing up to and what recourse is available to you if things don’t pan out as expected. Next come employees and their employment contracts, which for startups may be different from those offered by BigCo employers. A major difference, for instance, may be the inclusion of stock options in the employment contract, as well as termination clauses and what happens to unvested or unexercised options in different scenarios. Especially if your startup is a success, this is an important matter to not deal with in an amateurish manner.

Whether your website is transactional or not, it is an essential for business and brings responsibility. A good startup lawyer will help write the right policies governing the use of your website for the visitors, and policies disclosing how you will treat data you may collect on their visit, their interaction and their transactions with your business.

These considerations are common across startups. Some specific startups may need specialist advice.

For instance, if you are creating a startup in a regulated industry, such as FinTech, in which none of the founders has adequate deep experience, the importance of a lawyer with industry specialisation cannot be overstated. A competent lawyer can advise you on compliance and regulatory challenges arising from, say, your business model.

In case, you are creating a social enterprise or a non-profit, correct legal advice would save you much heartache. Can you set up a trading arm? Who can and cannot donate to your organisation? What tax benefits are and are not allowable? How do you ensure adequate transparency, disclosure and compliance?

And of course, if you are creating a startup with a patented product, you will have already dealt with a lawyer specialising in intellectual property, and the advice here would dovetail with your experience.

Ignorance of the law, in no jurisdiction, is an admissible excuse for violations or non-compliance. Ignorance is definitely an expensive indulgence should anyone, from your cofounders to your customers, bring about a lawsuit against your startup.

Be smart.