The traps of scale up*

The process of developing an enterprise is like an endless game of chess, with destiny as your opponent. And, just like chess, there are some unique moves that may force a player into a trap.  If you fall into those traps -- there will be consequences. Such traps are the tool of choice against aggressive novices. As entrepreneurs, rookie mistakes may crop up when  aggression is at its peak, which is often the case when we are scaling up our enterprises:, that’s when we are most vulnerable, most likely to fall into dangerous traps.

The US equity market is making its longest bull run since World War II, and  globally there are indications of  a bullish trend in venture capital funding deals as well. Importantly, there's also an increase in the median deal size for early-stage companies. All these indicate that there's more scale-up happening in the start-up world today than ever. In such exciting times, it is even more important to remain vigilant and avoid the perilous traps of scaling up a business.

1. The Beast -- Unruly Overhead Expenses

Overhead expenses are stringent and not easy to scale down once built into the system. They also require complex accounting procedures. And, scaling up is almost impossible without an increase in overhead. The fact is that the overhead expenses are a necessary evil, the beast. Taming the beast requires two things: efficient accounting and proper aspirations.

It may be conventional wisdom that cost accounting is the preferred method of accounting because it is simple -- one single report is used for both internal and external presentation. But, it can lead to a loss of oversight, especially when the time comes to reining in these overhead expenses. For businesses scaling up,  using activity-based accounting instead of cost-based accounting can actually work much better and helps maintain control over skyrocketing costs.

Activity-based accounting focuses on connecting cost directly with their activities,, and thus simplifies the decision-making process. It requires two set of books -- separate for internal and external consumption -- but it’s worth the pain. To use a simple example, it can be easier to split the total monthly expenses in half with a roommate, but it doesn't quite help us control our expenses until we account for each of our individual  activities such as the amount of groceries consumed or the internet usage by each.

The scale-up phase comes after a large capital infusion and defines the moment we decide to push the accelerator.Then our supporting ecosystem often demands luxuries like a bigger office, a better team and salary hikes, etc. Although it is often difficult to deny such requirements, prudence is key. For example, it may well be perceived as a strength to have a number of professional CXO's in the company, but, instead of going out and hiring top professionals at the apex your organization chart (who come at top prices), it is better to hire people a rank below and let them rise to the top with time.

2. Easy Capital -- No Such Thing

This is the most ironic of all the traps. For many entrepreneurs struggling with fundraising, it may even sound like a harsh joke, but any money that doesn't come as revenue from sales is a serious liability, however easy it may seem. Grants, donations, subsidies and such are very important tools in enabling businesses but they can have deadly consequences at the same time. Access to capital is the key to shaping our aspirations and the easier the capital, the wilder the aspirations and higher the chance of failure. You could say that easy capital is the sacrificial chess piece used by your  opponent to lure you into the deadly checkmate.

I built a social enterprise that provides electricity to villages distributed across a poorer part of India and parts of East Africa. Our work has greatly benefited by leveraging a wide spectrum of capital, half of which, I today wish, were not available to us. Access to easy capital often blinds us to the dark spots in our models. It also leads to creation of unruly overhead expenses. Therefore, it pays for any enterprise to be conservative in putting a dollar figure to their immediate needs while fundraising.

III. Play (Smart) by the Rules - Strategic Compliance

Regulatory compliance requirements are like the rules of the game. Any planned move that does not conform to the regulation only leads to a change in plan. Sometimes they can be obscure like the rule of En passant in chess (a pawn that has moved two spaces can be captured by an adjacent pawn in its fifth square in the very next move). But just because you might not know this rule doesn’t mean it doesn’t exist, and ignorance of the law is not considered a valid defence against non-compliance.

Compliances go way beyond filing different forms which are in themself quite a hassle. For example, if you are a company based in US, did you know how easily you could be sued by a disgruntled candidate? You have to make very sure that there is no discrimination, not even accidental, in the hiring process. Same applies to the process of taking disciplinary action against non-performing employees. How about the Family Medical Leave Act violations? Or, not complying with the Affordable Care Act. There are a number of such regulations that may seem trivial but could become really painful really fast.

The compliance issues get trickier as the business goes global. Different countries have different requirements, and as the enterprise structures get increasingly complicated so do the requirements. I have had to face situations where we had to let go of more than a year and half of efforts once the realization struck that certain of our activities were not quite compliant!

A wise thing to do for any start-up is to have a separate compliance team in place from the beginning. Many companies prefer to combine the regulatory compliance responsibility with their risk-assessment team. This goes to show that there's always a risk of non-compliance, and every single activity must be well vetted against the regulatory framework.

All start-ups dream of a successful scale-up and the challenges associated with scaling up any business model are unique. But, being aware of the most common  traps ahead of time can avoid a surprise checkmate (especially at the beginning), give you a big leg up on your competition, and set you  on a much smoother path to  success and your own perfect game.


*edited by Justin Ross .

What makes a good first level manager?

I mean the very first level. The supervisor in the factory. Or, the facilities guy in an office.

One very interesting thing about human motivation is that it's not the less that fosters a desire for more, more fuels more. In corporations, bonuses and higher salaries don't warrant improved productivity unless tagged with serious repercussions. Productivity is always ensured by the lurking fear.

However, this approach goes down the drain the moment we start dealing with those who have less. The kinds that corporations don't want to deal with - that unruly helper in the forger's dungeon. How do you motivate the one who has no cognizance or understanding of 'more'? How do you influence the true yogi who is living just for the day?

When I was experimenting with building a grounds-level team, for the record - I don't recommend such experiments, I had a thing for these three or four letter pithy maxims - mantras of sort - that I'd tell my guys. I am not sure that many really got 'em because then the whole thing would have definitely succeeded, which is kind of wishful and conceited, but that's irrespective. One of those that I really like till-date is the method of 3C for a relationship based management approach to manage the uncaring.

Communication, Consideration and Caution. 

A good grounds-level manager is a master communicator. Targets are set and adhered to not by the whip but by creating an environment that removes the overwhelm of a tough ask. The Alps doesn't get crossed the Napoleon way. The air at the floor diffuses the idea of a mountain. That's the power of communication. A written notice or a verbal delivery has little meaning till the idea to be communicated is in the air - with clarity and persistence.

Since the uncaring yogis have a rather mercurial and oft unknown set of considerations, it falls on the manager to apply a due-diligence of considerations while planning. The migrant worker's wife in a late-stage pregnancy is a good sign that the trusted loader will be gone awhile, whether he asks for leave as per the policy or not. Considerations are the key to setting goals, committing output and such. And, they require a deep knowledge and understanding of the worker. Also, good caring forms an integral part of a good consideration. 

Its very easy to be a considerate fool. Have complete faith in the goodness of us wonderful creatures of God, but, don't forget that its not how we are. The silly saint may be beating his chest in abject sadness over the news of his father's kidney failure for two whole days only for some peanuts of advance. Problem is that these peanuts add up and encourage monkey business, thereby ruining the culture and killing the communication. To a great extent, caution is the name of the game of a good manager of men (and women too). I believe that one of the greatest impacts of technology has been the increasing ease in exercising caution with men, women and machines. Well, animals and other things too. 

Dealing with the government - I

The conventional, and rather inexperienced, perspective portrays the government personnel as cogs of this highly inefficient machinery rife with corruption. This does help us assign a reason to an unsuccessful attempt but doesn't lead us anywhere towards taming the beast or, at the least, knowing the beast.

First of all, corruption is not all about money and bribes only. Corruption is about every deviation of intent from the presumed "ideal" in execution of a policy or principle. It is almost impossible to be not corrupt by this definition. Simply because the intention behind a certain process or system does not get laid out well enough and there have been little efforts in the ways of measuring fidelity to the intending intent. Cutting a long rant short, corruption cannot be a reason. Corruption doesn't mean that there are no ways. It just means that there are ways that you find hard to deal with. Change yourself or do something else.

Second of all, the inefficiencies in the machinery are more by design than by violations. There has always been a learning from every scam ever that has led to the idea of a systemic change that can ensure that the scam doesn't happen ever again. Now, why wasn't the idea put in action before the scam commenced? I strongly believe that the government machinery performs super fantastic, the role its designed to play.

Its the design of hell. And, boys and girls, out here, every respected government servant is dutifully trapped in this vortex of confusion, indecision and subjugation. They deserve our pity, not antipathy.

We, the lame and tame, never get to get the design. That's why we curse and sigh. Those that do, ride and glide or stay the hell out.

Its rather simple though - there is very little that any one of them can do for you but every single one of them can aid miracles. Think of a peon in a public works department office. The peon can salute you and not force you to make an entry in the visitor's book at the most in the general case but the same peon at his best can be your man and messenger in the office.  The same applies to the secretaries of the central ministries and every other member of the bureaucracy in between. You have to understand their capabilities and limitations.

What I have realized is that every human, "corrupt" or "clean", appreciates the difference between right and wrong. I keep some loonies out of my definition of humans but government personnel are some of the best people, civil and all. So, that applies to them as well. You gotta capture that line and stay well on the right of it. And the cliche to remember is that the greasing is, most often, only required for an overload of expectations.

Also, most of us fail to properly account the expected time to the job for different costs, if you get the drift. There is always a relatively predictable pace to the movement of files in any bureaucratic setup. It may not be as claimed in papers and official bulletins and it must not be estimated on the words of the officials. It can be best guessed by discussions with people. Others who have done it or are doing it can be your best guides when it comes to the timeline guestimates for the models in excel. The point not to miss in any such exercise is the cost. There may be a good range of delivery period at the same office for the same work but at different costs. And the sample size of your observations is another thing to think of too.

If you don't want to do all this thinking and doing, there are always these agencies or consultants that can get things done for you, at a cost of course. They are the cleanest way to deal with the government for most of the mundane. For levels beyond you may not have a choice.

The miracles in the lap of the government can only be spun with a complete understanding of the machinery. Every piece of detail. Its a jig-saw puzzle. Once you know the picture, you gotta be able to place the pieces together. These dreaded personnel are but pawns. There's a way to move them and there's always a place for them. If you know that, the democracy guarantees you power almost everywhere.

Dealing with the unskilled labour - I

There's something very pure about winning bread by the sheer physicality of your being. The moment it gets cerebral, the work loses its innocence. The higher up one goes, the lower gets the job at hand.

And, just like all the other pure things in this world, say, a mother's love for example, there's a great deal of inherent irrationality in such mindless and mechanical approach to making a living. However, I have always believed in a 'sense' in most of the irrationals, like, pi, for instance. The ratio of the circumference to the diameter of a circle is a fixed number that's irrational. A constant ratio that can never be fully comprehended, and is doomed to be approximated, by the best of efforts. But it makes total sense once you don't think much about it.

And so it applies to the vast unskilled labour force in my country - forever irrational. Don't think much about it. Do it the way its been done. And, if you understand that much then you don't need to go any further in this piece. And, in the rare extreme case, if the methods to this madness seem to have a conscience-level problem with you then the cure is simple - stop using them. Figure out a way such that every job at your work is a skilled job. Automate the heck out of your system. Invest in computers and electronics to soothe your conscience - plain and simple.

Some of the ways that it is done today are -

DON'T PAY MORE THAN THE NEIGHRBORHOOD. You will attract loafers and thugs who have left their homes in some remote corner of our great nation to make a quick buck and see the world before they run back to their filthy swamp to wallow in relatively subdued happiness.

Neither carrot nor the stick works. The vast pool of labour resources in our country don't live in the past or the future. The sole reason that they are able to survive is because they live in the present. This makes such doubly pure. Spiritually very high-level but on the floor a serious pain in the ass. A reward in the future doesn't strike chord with them just as a reprimand for a mistake in the past. If you want to manage them, manage them in the present.

Create a system to control the churn. The unskilled labour is not looking for a career. They just need a job. The job at your wonderful and super unique organization, neck deep in the ultra sophisticated process of changing the world, is as good as the drudgery 500 kms away because of a number of trivialities such as a third cousin from the mother's side of your noble worker. They will leave for reasons less understood than divas and superstars. They roll in hordes and they are capable of turning your bustling vibrant factory into a ghost stable overnight. This is not a scary scenario from a fantasy tale. This happens way more often than commonly understood. So, there always has to be a system to check the churn. From delayed payments to brute force - the spectrum is largely murky. Guess what, ladies and gentlemen, there is absolutely no clean-cut way of ensuring a low churn of unskilled labour. So much for all the management philosophies, theories and practices. This is especially true for start-ups when you can't afford to grant them super awesome hostels (hence confining them to premises under your control).

Much better playing legal when it comes to labour licenses, provident fund, employee insurance etc. Its a huge hassle given the state of our inscrutable bureaucracy but you need to play the ball just because you need to cover accidents at your workplace. Your unskilled workforce will have a serious proportion of very dumb and unskilled types who will create trauma out of the thin air. Don't be surprised to see the helper convulsing with his fingers in the plug socket. The way it works is - unless you have set aside a huge pool of money to take care of such nuisances that are bound to occur, you will need some sort of insurance. Now if you go to the private insurance guys, the bloody babus keep a constant tap on those. Next you will realize that you will have different inspectors - from labour to ESI (employee state insurance) knocking on your door and fixing their monthly rents. So better be legit and keep these suckers at bay. Downside is that the executor of your unskilled tasks cares only about the cash they receive in their hands. You cannot expect them to always appreciate how their forsaking a small percentage of money in the provident fund also attracts a contribution from you and is deposited in a government secured account that attracts interest.

The alternative to all this is a much more serious approach to business which my require dealing with the voice inside and possible unrest and lots of chaos.


    

The way they see us

Building business in the modern days is same as the old days of the world's oldest business. The best of the prostitutes got started the hardest ways imaginable. And this is where it starts.

The making of a perfect prostitute and a perfect business, both have to go through a process that is infinitely more painful at times because of the way they see us. They being the rest.

Our savior madams and investors see us as if they own us. We are there to churn some gas out for them.

The 'respectable' financial institutions and agencies are of absolutely no use to us. We lack what they need to support us.

Our customers want us at the cheapest because with no brand value, the best of us is just a matter of taking a chance for them. They don't care about what it takes for us to be doing what we do..

Our pimps and employees don't think for a second to take us for a ride. With little systems and little resources, we can but only pray that our biggest assets stay faithful to us.

The pricey escorts and corporate minions see us as filthy, disgusting and vile. They see error in our ways because they have been trained to know the best practices.

The police and other enforcement officials see nuisance in us. They still want to squeeze a bit out of us here and there because we are the only that are ever in their reach.

Everybody who knows us and is not in the same boat has a piece of advice that is almost always almost completely irrelevant.

The general public sees us with amusement and often disdain. A lot of condescension as well.

We do have friends but they often don't want us talking about what we do. They enjoy us for other reasons.

Those that are planning to start out can't have enough of us. They look for secrets where the game is still being sorted.

Both of us see a day when we'd either be the best and the greatest, or far away with a security net.

Then we go to sleep feeling good.

Innovators in the way

The path of innovation is fraught with, well, innovators. God forbid, if you are not a black-belt in any and every little skill and solution required in the fruition of your innovation, you are to be hit with a barrage of master innovators who have almost done exactly what you need done. Almost being the key. And, this is the key that holds the door to, well, the juicy fruit of success. The succulence lies beneath the dodgy exterior of ‘almost done’.

Mister Ken comes highly referred by a 30 year veteran of the industry. Mister Ken has supposedly devised just the machine that does absolutely everything that we want done and a little more. Can’t wait for the meeting.

Mister Ken starts with the story of how his grandfather was almost violated by the angry Pakistanis and how his association with the industry dates back to the days of such a lucky soul as the dearly departed grandpa. A quick wire review of the industry and what ails the ecosystem followed a dismal resignation over the state of affairs. The state of affairs is not very bright, I concede.

Then, the interception by an increasingly intolerant yours truly. A couple of counter-interceptions later a curt Q n A.

Q : Do you have a machine that can perform the functionality X? Yes or No.

A : Yes.

If I were to ever come face to face with the powers that grant powers, I’d ask for the simple power to cut through the bull-shit. The amount of hours that every entrepreneur spends negotiating through the pervasive ocean of bovine excreta is bound to beat the devotion to another rather silly activity of fantasizing who/what we like fantasizing.

What’s not fair is that there are no such powers and there is no escape. You have no choice but to let the humbug drone hum its course. You devote a million anxious moments in an indeterminate hearing to listening ratio for a single mention of the point in the picture. The entire frame is ornate with the precision of a Turk miniaturist except the big black ball of interest.

Having been at the helm of a hugely popular misadventure, it gives me shivers to reflect at the number of emails, voice calls and in-person meetings that precede a realization of no interest - each of them demanding equally serious consideration – one after another ad infinitum. To seek is to fall in the trap of possibilities - tough laws of the universe and rather putty concerns for the unfortunate suffering.

So you suffer through the circle of the other innovator’s concerns and petty attempts to understand you and your pocket, doing your best to avoid commitments till the mere certainty of a deal is established. You steer and duck, you jump and jog, you hmmm it and ignore it, you race like a maniac to get a proper validation of the curt Q n A - mentally reframing the offer / proposal along with the tinge of skepticism that you are desperately trying to suppress. You get battered by tangential projectiles and pull yourself back after a rather unhealthy mastication of a pill that just didn’t matter.    

A roller-coaster ride precedes every disappointment just like the damn egg comes before the damn chicken – every single time. Countless assertions, negations, interjections, exclamations, examinations and other such activities later, the first answer of an emphatic ‘yes’ takes a simple turn of ‘almost’ which is oft expressed by adding a ‘but’ after the ‘yes’.     

It is the Mister Ken innovators that shoot emails of salutations along with a proposal of merit to every interesting work in the news. It is the Mister Ken innovators that have the first plausible solution to every problem in the other’s domain. It is the Mister Ken innovators who usually have the accreditation and affiliation with weighty organizations. It is the Mister Ken innovators that make living just a little bit more painful than it should be, and thereby motivating to take charge once more. It ’s a lonely universe and we are but a pack of stardust trapped in a ginormous pool of antiseptic bullshit.