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”.]

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.)

The real story in India’s demonetisation saga

“Who benefits if we all go cashless?”,  asked a friend* of mine. This is indeed the money question in India’s demonetisation saga with its moving goal posts. “I am not here for the enrichment of Visa, MasterCard etc.,” she added.

Apart from convenience and fraud protection, the economic case for an individual consumer is near impossible to make. Many problems solved by card issuers are those related to card usage, not arising from the transaction or commerce itself.

The benefits of consumers going cashless accrue variously to businesses, who can reduce the cost of cash handling; to various players in the payments ecosystem — card makers, technology providers, POS terminal makers, card issuers and acquirers, wallets, and schemes such as Visa, MasterCard and RuPay — who make a fraction of a basis point on each transaction; and to society at large, in aggregate and in the long run.

My friend* remains suspicious of ideas where consumers were required to participate without having any agency, since, she argues, we do have agency in using cash e.g. when hoarding cash as vulnerable women do.

This is a fair concern. But consumers accept the notion of a state-sanctioned currency as a widely accepted means of value exchange within a territory. Consumers make trade-offs to get things they desire while accepting certain loss of agency even if they do so holding their noses.

As it stands, the state has unfair power in determining whether the currency has the value it is supposed to have. It is a power imbalance where the consumer’s agency is considerably less than the state’s. Consumers begin first and foremost with the belief that the state won’t mess with them and their stash of wealth. This trust is essential to exercising the consumer’s agency in stashing away hoards of cash. Acts such as the overnight demonetisation and the cack-handed execution of it destroy trust. The cash hoards of those vulnerable women have been destroyed in value overnight. Their agency is hugely reliant on the state’s benevolence in this instance.

What happens when the state does mess with consumer trust such as by demonetisation or overnight devaluation of the currency?

This is where the conversation veers into virtual currencies such as Bitcoin that remove state as the holder of power and distribute power to the two or more parties transacting. It would be the subject of an altogether different essay on why we are happier trusting an algorithm than we are trusting elected representatives whom we can bring to account.

The chatter about the demonetisation of certain currency notes and going cashless — the latter being some ways off in India, given the lack of infrastructure needed to make cashless work — is just a sideshow.

The main game is data.

When the economy goes cashless, a lot of data will be generated and the aggregate economic case for society will begin to emerge. At the very least, there will be new money brought into the system with convenience reducing the friction in commercial transactions and money.

Professional — and armchair pro-am — economists have wondered a while how India’s GDP would change if the unorganised sector, including the vast cash economy of domestic and unskilled workers, quotidian daily purchases like cigarettes and paan etc were to be recorded formally. The probability of such aggregation will increase with more data collection, though it remains to be seen whether this newly counted GDP growth will weather, balance or exceed the drop in GDP predicted by many due to the demonetisation.

“Who benefits if we all go cashless?”.

The key beneficiary of India going cashless will be whoever can make sense of the gazillions of exabytes of data that these transactions will generate, and that will enable the study of deviation from patterns to identify funds that may fail ATL/AML scrutiny. In an ideal scenario, the money that otherwise goes unnoticed while transacting in cash will be noticed and people in possession of it brought into the tax net, netting more money into the state’s coffers.

Money in all this is still the distraction. The real story is data.

As consumers, this real story should worry Indians because Indian citizens have no guaranteed right to privacy and India has no data protection laws to speak of. Despite a massive universal ID programme, named Aadhar, the government appears to have very little appetite for change in this regard. The Government of India’s open government data platform was launched in 2012 but is rightly criticised for incomplete thinking. A consultation on it  was opened to the public in July 2016.

My advice to my friend and to those watching the demonetisation story in India is quite simple:

If you want agency, watch the main game of data — and what unfettered, unregulated  access to data might enable — not the sideshow — of moves towards cashless society.

If this be the only lesson of 2016, so be it.

Here’s to not fearing the anomie of 2016 and to rebuilding in 2017!

*(Thanks are due to my friend, whom I do not name, for asking the vital question that sparked the conversation on November the 27th and 28th, 2016, and for permitting me to use her words in this post.)

Cofounders and the dating analogy

This article is the third in the Startup Series on FirstPost’s Tech2 section and first appeared on Oct the 3rd, 2016.

The search for a cofounder is analogous to dating. There is an ideal checklist of attributes — skills, qualities and more as you will see — and then there is the ineffable chemistry check.

Since no two people are alike, we will naturally encounter both similarities and differences. Over the years of working with startups, I have developed a framework which can help you think through the dilemma.

Values of cofounders should ideally be the same or similar. A key value to consider is the importance of control. Extensive research by Noam Wasserman of Stanford finds that there are people, who want complete control and ownership, and there are people, who understand that some control may need to be given up to build and grow the venture’s reach and value. This understanding is pretty fundamental to building a venture, especially if you plan to raise external investment to do so. A fundamental disagreement here would not make for a a good cofounder relationship.

Goals, needless to say, have to be similar not different, although one can work with  the possibility of changing mind later. For instance, a cofounder may commit today to work on the venture till an exit event but a few years down, agree to give up an active role in running the venture. Such possibilities are hard to predict but if all else is working, they are negotiable.

Skills are best if different or complementary. It helps if the cofounders bring different domain expertise to building the startup. If you are a techie who does not have experience in speaking to early adopters and customers, and your cofounder is the customer facing person essential to driving adoption and bringing customer feedback on board, you have brought together two essential skill sets.

Work ethic is best if similar. Some people emphasise hard work, others outcomes. A startup needs both but it needs outcomes and growth milestones more than anything else. If a founder thinks hard work is substitute for results, it is not going to work. It is therefore best if cofounders are on the same page as to the purposiveness of the work ethic. It is worth noting that work hours are not the same thing as work ethic. Work hours are often negotiated with the needs of the start-up in mind. While a developer can work late into the night coding, a customer facing cofounder has to work the hours when she can meet customers and partners.

Networks serve a startup best if different, or complementary. This would help the start-up maximise reach into customers as well as investors. The eagle-eyed among you may note this may not work when your cofounder is your former classmate from University, as mentioned in an earlier column. In such a case, look for the contacts you need in another cofounder or an advisor. Ask yourself “what things are you definitely not good at?” and go from there.

If this framework is lulling you into a false sense of security, don’t let it. Being able to judge these essential qualities is not simple or quick. Don’t rush the decision. Spend time talking through things and listening carefully, how they see failure and success, how they talk about disappointment, how they treat people over whom they have any kind of power, how they talk about people they have relationships with.

Occasionally someone may tick all the boxes and yet make you uncomfortable. Judging someone’s character is hard, and a lot more personal than judging their skills and experience. In such moments, listen to yourself, I say. Do not dismiss your instincts and do not dismiss your gut.

However as any person in a long term commitment or relationship will tell you, the marriage begins once the wedding is over. Committing to the relationship requires the commitment to work with all that comes with it. It helps to lay down early ground rules for all to adhere. That is the scaffold of your organisation’s culture, more on which a little later in this column series.

It is worth remembering that the advertised product may be quite different from what is delivered. In other words, people may disappoint you. They may demonstrate different behaviours in an organised and predictable environment than they do in a start-up. A start-up is a high stress, demanding environment where decisions are not hedged by a large team and wrong decisions can actually waste valuable money and time.You cannot predict all this but you can deal with it. More on conflicts arising and how to deal with those will be discussed later in this series.

(Note: a version of this framework appears in “Dear Female Founder” edited by Lu Li, who has kindly permitted the publication of this piece.)