“It is a lonely job at the top” is a statement that has been spoken for a very long time over the past few decades and we saw one more example of a distressed entrepreneur (Mr VG Siddhartha) taking the extreme step.
Café Coffee Day is a classic example of a successful business model with a high profile and celebrated promoter who was possibly a very lonely human being with no one to share his innermost feelings of distress, loneliness and possibly depression.
The challenges being faced by the group of companies are not over – by exiting from the scene, Mr Siddhartha has shifted the onus of resolving his challenges to his family and the board of directors of his multiple businesses. He built a very strong brand and created job opportunities for thousands of people. More importantly, he will be remembered by the millions of customers who discovered friendships, relationships, startups, business ventures and the social relationships over a cup of coffee at his stores.
A lot has been spoken and written about the financial liabilities of the group and the asset base of the business. Allegations have been traded between political parties trying to gain some political advantage out of this tragedy.
A few businessmen, possibly facing financial pressures in their own businesses, have started making allegations against the government because of the alleged undue pressures of the government agencies. Have these individuals thought of their retraction if actual financial irregularities are found?
Audits and forensic audits will be undertaken. Investigative agencies will have to do their job. The Board of Directors of the various group companies will need to do a lot of introspection and seek answers. The Private Equity investors who have supported these businesses will have their own perspectives to offer. The answers will emerge in the next few months and it is only after that should our political and business pundits start their pontification and give their opinions.
It is important at this time to sit back and think of a much wider malaise that is affecting the entrepreneurial community. Why is it that 9 out of 10 startups fail? How much money do these failed businesses lose? All this money comes from the promoters’ own hard-earned earnings, from friends and family and from Angel investors. A few startups manage to raise money from private equity investors. When businesses fail, all these investors lose their money.
For the entrepreneurs, failure of their business is a quadruple whammy.
- First is the loss of confidence since they have not been able to deliver on their dreams.
- Second is the loss of all the investment made by each stakeholder.
- Third is the pressure from creditors, employees, government agencies and financial institutions who start to demand their money.
- Fourth is the negative coverage of a failure by our revered Fourth Estate.
Where does the entrepreneur go? Bankruptcy, though now available for companies, is a very cumbersome process. Personal bankruptcy commonly accepted in the developed economies is not an option to Indian businessmen. This law needs to be made more friendly for entrepreneurs in distress. Individuals need to feel comfortable to reach out for protection under this law rather than “fear the consequences”.
Entrepreneurial depression is a serious issue that confronts every Startup Promoter. Let us look at some of the reasons why Entrepreneurs reach such a challenging situation.
- Business idea is flawed: Ideas could be well ahead of their time in a market not ready to accept it or ideas could be significantly behind the stage the market is in. If the business itself is suspect, there is really no hope for the startup. If the customer does not buy your idea, no matter how smart or good it may be, the startup is doomed from the very start.
- Funding is Insufficient: Most startups bootstrap their early months / years till they are able to raise funding. The moment funds are received, it has generally been seen that the expenses of the organisation increase in a ratio completely out of proportion of the business of the company. Once overheads are built up, it is very difficult to pull back. A lot of time is spent trying to keep raising funding to keep the business going. When funding starts to dry up, the business starts to flounder. A common reason given for pulling down shutters is “we never had enough money in the bank!”
- Diversion of Funds into areas not intended: This is a very common reason for businesses running out of money. No one is questioning promoters where all the funds taken from banks as loans have been used. If loans are taken and they are meant for growth of the business, why do businesses reach a situation where they cannot even pay the interest? If there is strong evidence to establish that an entrepreneur has misused, diverted or embezzled funds, the strongest possible action must be taken against such individuals.
- Burn Rate is too high: Most founders underestimate their “burn” rate. Burn, very simply put, is the amount of cash you are spending every month. Once the company starts to earn from its business, burn can be classified as spend minus the earnings. Therefore, if there is a constant burn in the startup, funds need to come from equity to meet cash flow requirements. The longer the period of the burn, the more difficult it is to raise new funding.
- High cost of Acquiring a Customer: Remember that the Cost of Acquiring a Customer must never be greater than the Lifetime Value of the Customer. Most startups believe that this equation will gradually change in their favour. They also wrongly believe that Lifetime Value of a Customer is the top line earned and not the profit from the revenue.
- Weak Management Teams: Many promoters start with friends as their team members instead of bringing in strong management teams. Weak or in-disciplined management teams have weak execution and their insecurity perpetuates the challenge faced by the startup when they bring in even weaker team members down the line. This leads to a domino effect and does insurmountable harm to the young startup.
- Scaling Up: A big reason for losses is when a startup scales up before it has established its business plan in a smaller and more controllable environment. Conversely, startups have failed because they have not scaled up fast enough. There is really no right or wrong answer when it comes to building a startup.
- Getting a Coach or a Mentor: Most entrepreneurs are lonely people and while they have the ability to hire a business coach who could function as a friend, philosopher and guide without any agendas, they are either not aware of this input they can seek or have a sense of “know it all” bravado. The young and abrasive energy of a startup founder needs tempering with the wisdom of an older manager. Bringing together the vision of the Startup Entrepreneur and the experience of an older manager in an unobtrusive and non-threatening manner will prove to be very helpful. In addition to watching the back of the startup entrepreneur and guiding him when the ship hits troubled waters, such individuals will also bring in strong subject matter knowledge, from their respective domains.
There is a hot new startup that is being seeded by its founder and breaking out of its incubator every so often each day and yet there is another startup that has had its place in the sun and basked in its glory and is quietly riding off into the sunset.
We need to create an environment that certainly applauds successes but does not punish failures. Otherwise, people will stop nurturing entrepreneurial dreams and this can be a serious challenge for any economy.
Unless there is a support system for entrepreneurs to handle failure, entrepreneurs will continue to take steps to mitigate their losses and save their businesses. When nothing works, we need to prevent them from taking any extreme steps.