Building A Sustainable Business
By Team Artha
In the last few months, there has been a spate of governance issues at startups centered on ‘related party’ transactions, creative accounting, incomplete disclosures, and knowingly violating the law. Layoffs have also attracted attention from time to time.
Every time there has been an incident like this, the founder is disparaged and vilified. Until then, the same founder was probably adored and worshipped. In a sequence that plays to a pattern, such incidents trigger some well-intended but probably sweeping judgement around the culture at start-ups. The broader underlying question is how do you build and scale a start-up sustainably without compromising agility, entrepreneurial energy, and innovation.
To begin with: Are we judging startups with a different yardstick?
The rapidity with which the startup ecosystem in India has grown, and the extent to which many of the new-age companies have transformed our lives, has placed them in the spotlight. Therefore, every misdemeanor and governance lapse tends to get blown out of proportion. Just to illustrate what’s been happening on the other side of the fence, in the last three years SEBI initiated on an average 150 new cases every year for investigation in listed companies. These cases were around insider trading, price rigging, market manipulation and other violations of securities laws. And these are in addition to nearly 4000 disclosed whistleblower complaints at half the Nifty 50 companies in FY21. And the number of listed companies in India (less than 7500) is a miniscule of the number of registered start-ups (+65000).
This is not to justify or condone any of the cavalier attitude to governance that some start-ups may have displayed, but to merely illustrate the fact that governance foul ups are not unique to start-ups.
The Nature of the Start-up Beast
The core purpose of a start-up, and the very reason for its existence, is to disrupt the way a particular problem is being currently solved. The failure rate is so high that it calls for a strange mix of audacity, impudence, and risk taking to even venture down the path of entrepreneurship. While the risk and competitive pressure is intense, the rewards of success are also immense. And, therefore speed is of essence. Being thoughtful about every action and paying equal attention to everything is not as easy in a rough sea as it is in calm waters.
An obvious question is whether disruption and sustainability are fundamentally at odds. Sustainability at one level is about bottomline focus whereas disruption is often growth centric, and could involve long periods of capital burn. And no one can be absolutely sure if the endless burn would result in the company raking in super- profit at some point of time. This phase of capital burn is probably the most vulnerable phase for startups simply because the stakes are very high for everyone. The temptation to cross the line on ethics and governance is the highest when the stakes are high.
A founder has a lot at stake. She would have probably made a lot of sacrifices, and when she sees everything slipping away, the urge to take that one little step in the wrong direction is huge. And that is one reason why it is so important for a founder to have a few mentors they could completely trust and go to when faced with these founder dilemmas.
It is not right to brand every founder who runs a start-up where there has been a governance failure as unethical. Most founders start with the right intent, but along the way they can become victims of their own stories. A great storyteller has an unfair advantage and the ascent to fame can be quick, but the tragedy and irony of great storytelling is that when things go bad and the narrative begins to fade, the fall can be equally sharp. It’s not easy to acknowledge that your story was wrong because now it is no longer only your story but is a vision shared by many others. So you want to hide it a little longer hoping things would change. You would succumb to that one violation of the law hoping you could course correct when you get past this one obstacle. Soon you are riding on the back of a tiger from where you cannot get off. Until one fine morning an innocent child screams out that the ‘emperor has no clothes’.
The automatic question is, if start-ups are by their very nature such crazy entities, is everything justified?
Risk is inherent in many activities but risk management itself is now an evolved science. And the very nature of risk is that even if one follows a set of sound principles for building and scaling a start-up in a sustainable manner, there is no guarantee that things can’t go wrong.
I would argue that there are four building blocks of a sustainable business, namely, ‘Nature of Founder Ambition’, ‘Ethics and Governance’, ‘Strategic Clarity’, and ‘Operational Excellence’.
Each of the four is on a continuum and not black and white. And none of these can be created with the flip of a switch.
Let us start with Founder Ambition. Ambition is an essential ingredient for accomplishing any worthy goal or cause; even in the social sector. At the same time, unbridled ambition has been the reason for the downfall of many a founder and her business. There is also the yin and the yang at play. The same traits in founders that have helped create iconic products and start-ups have also resulted in the downfall of start-ups and their founders. Any downfall is attributed to these traits, but when the same traits result in success, they are given a different color and called out as traits of great leadership. Steve Jobs continued to be a jerk for the whole of his life, but there is probably no company more admired than Apple. If Apple hadn’t succeeded like it has or if the iPod had failed, probably many would have written about Jobs’ toxic behavior at work. The culture at Amazon is considered to be aggressive, and much has been written about it. Half of anyone who has ever worked at Amazon is likely to believe that the aggression is essential to the kind of disruption it is creating. Half the others might find it unhealthy. There has been much discussion about the aggressive culture at some of the Indian start-ups too. The aggression is a necessary, but not a sufficient, requirement for winning in a high stakes game.
Therefore, the question is, can one even separate good ambition from the bad ambition? Or good aggression from bad aggression? How real is it to expect a founder to display the ambition needed to take a start-up to the heights of success, and at the same time expect the founder to magically not break any eggs along the way?
Despite everything that optimists might say, it is not easy for founders or anyone else for that matter to change their nature. However, a combination of self-awareness and access to mentors could help. But this doesn’t always work and some founders may be closed to feedback and advice. Therefore, if there is a need to change horses midstream, it needs to be done. We have seen some recent cases of this both in India and outside.
So, finally, is there anything like ‘good ambition’ and ‘bad ambition’ at all, or does this differentiation exist only in imagination? I think there is. Jim Collins has written about this in his bestselling book, ‘From Good to Great’, where he calls leaders with positive ambition as ‘Level 5 Leaders’. Sure shot indicators of positive founder ambition are ‘intent listening’ coupled with a disarming ability to say, ‘I think I’m wrong’. If you spot these in a founder, everything else falls in place after that. A founder who has these characteristics will also often place the interests of the company above her own interests, will in most situations be committed to doing the right thing, will communicate more transparently, and make the correct trade-offs in difficult situations. Positive ambition in turn creates a positive climate at the work place.
Ethics and Governance
The next bedrock of a sustainable business is commitment to ethics and governance. And since many of the consequences of inadequate attention to governance often show up much later, the temptation to ignore them is quite strong. Commitment to good governance often starts with a deep realization that this is as much a question of business risk as it is about values.
And therefore, there are two elements to governance, namely, a) a belief it is important and b) putting the plumbing in place as you progress through the journey. And, if a founder inherently believes in good governance (not just saying she believes in it to sound politically correct), then the plumbing invariably falls into place, especially if the founder has access to good advice. And even if there are a few hiccups and missteps along the way, there is unlikely to be a blowup. With founder commitment, even elementary checks and balances can be made to work. In contrast, if the founder/s is not deeply committed to running the company ethically, even the most sophisticated mechanisms or checks and balances don’t seem to work. And, we have seen this at so many start-ups as well as public companies. Enron and Satyam had some of the most illustrious professionals on their Boards and Board Committees. Both imploded spectacularly. And cases like these are not rare. The reality is that even when independent directors are appointed, most founders tend to nominate people like themselves. One would be shocked to see how much muck can accumulate under the noses of some of the smartest board members before it is discovered. This is not to say that having the right mechanisms isn’t important. It becomes even more important.
As a start-up prepares to list and seek public money, the consequences of poor governance can be very damaging for the investors as well as the founders. However, governance matters at every stage and not just when the company starts attracting attention. A start-up’s attitude to governance does not fundamentally change as it prepares to go public. The thinking that governance can be fixed as the start-up prepares to go public is fundamentally flawed.
Strategic Clarity and Operational Efficiency
Both wild swings in strategy as well as strategic drift are signs of confusion. Strategic clarity is as much about character as it is about intellect. Being able to hold your ground and sticking to what you deeply believe is right, when everyone that matters is saying something different, is a sign of strength of character. It’s not easy to do that. A few wrong pivots can suck up a lot of capital, energy, and focus. But not making the right pivot is equally harmful. Just as founder ambition has two sides, so does sticking to your conviction. But look around you and you will figure out that many of the strategic shifts and pivots that some start-ups made in recent times appear quite obviously faulty to anyone who is unbiased. Often the pivots were made under one of the two conditions, namely, ambition gone overboard or a desperate attempt to get out of a hard place that itself was a result of pursuing the wrong kind of growth.
Reckless M&A is another indication of strategic confusion. Market and category expansion, without a strong proof of concept in an existing market or category, is a strategic risk that start-ups in their quest for raid scale can expose themselves to.
The last leg of sustainability is operational efficiencies. Traditionally a company’s revenue has to cover at least the variable cost. The fixed cost is expected to be covered as the business scales. However, some new age consumer internet businesses have relied on changing consumer behaviors through rewards and incentives, resulting in variable costs exceeding revenue by a huge margin. This is seen as an ‘investment’ that will result in huge profits when customers are hooked to the service or product, and willingly pay a higher price subsequently. In some contexts, expectations of a permanent change in consumer behaviour are realistic and in some others it is a hallucination. Getting real about this and understanding this equation quickly is key to sustainability.
In conclusion, building a sustainable business is not about toning down ambition or entrepreneurial energy. It is not about creating a placid and tranquil work place where everyone loves everyone else. It is not about giving up thinking on how to outmaneuver competition. Both ambition and entrepreneurial energy are critical for bringing about positive change on scale. The same ambition that created Apple also created Amul and Aadhaar; and helped eradicate smallpox and polio. The principles of building a sustainable business should be seen as risk mitigation that enhances the probability of long-term success.