Pages - Menu

Monday, July 13, 2015

Entrepreneurs need flexible options for paying for the services

How do Start-ups bring their businesses to the point where it's making money, when they don't have the money to pay for the help they need to get there?
About 8 yrs. ago, I took the plunge into the world of entrepreneurship after working for about 15 years in various large corporations in India and in the US. I made almost all the mistakes an entrepreneur possibly could make. I could hardly afford consultants providing professional services in various areas such as finance, legal, IP, branding, positioning, company secretarial, auditing etc. The company paid a heavy price for not doing things at an appropriate time and that made the journey little longer and costlier than it should have been.
But it had the positive side to it too. On the way we learnt most of the mistakes a startup makes, the price one has to pay, and most importantly, how other entrepreneurs can avoid those mistakes. For example, if startups do not document a formal printed agreement, detail relationship with partners or investors, draft social media guidelines, protect intellectual property, etc., it can lead to enormous legal trouble and a huge amount in bills. Yet most startups live with this risk, and more often than not, die under the weight of such troubles. I knew from my earlier experience, that every time I called a consultant, a bill came back in thousands. Now when I talk to startups about why they fail to consult lawyers or consultants, the answer always boils down to cost. For cash-strapped small businesses to assume a certain cost now to avoid an uncertain one down the murky road does not appear to be a priority.
We all know very well that an apple a day keeps the doctor away. But how do we get startups to eat their proverbial apple when we know that startups can't afford those apples at that stage? The top notch professional service providers are not even interested in the business coming from startups since they treat it to be too less in billing for them to consider it worthwhile. Academia and the government’s attempt to help a handful of startups by providing them with incubation centers, soft loans, some seed funding etc. But that's not all they need. Every startup has its own unique requirement for which they need professional guidance. In the present situation, startups have very limited options due to which they are condemned to repeat the mistakes committed by all those who had taken this path before them. No wonder in India we see very few startups that make it really big. I firmly believe, many startups are not able to survive despite having wonderful product/services/ideas which could be converted into huge commercial enterprises.
It's a perpetual problem facing startups: How do you bring your business to the point where it's making money, when you don't have the money to pay for the help you need to get there? Most entrepreneurs are not clear on the strategy on how to go to market. A professional presentation, proposal, MOU, agreement and most importantly help in reaching potential clients in a professional manner are areas if these start-ups are helped, they can do wonders.
We have successfully attempted to address these issues by helping entrepreneurs gain access to professional service providers, such as ad agencies, app and website developers, graphic designers, attorneys, business consultants, company secretaries and others by means that appears most comfortable to them. Our background as an ad agency and a management consulting firm had given us a unique advantage in helping the startups who primarily fail not because of product/service ideas but due to the absence of marketing and management capabilities. We are providing flexible options to startups for paying for the services, such as by giving an equity stake in their business in exchange for services, either at a discount or at no charge, defer the payment till the time startup gets its first funding or even pay outright for all the packaged services together at a final negotiated price.
The equity-for-service option provides an ecosystem that is much more supportive of early-stage ventures. This trend has already started in developed economies of the world. By helping businesses save money, an equity partnership can also give entrepreneurs more room to maneuver and put them in a stronger position when negotiating with other deals. A position of low cash doesn't give you a lot of leverage with potential investors. You never want to be desperate for money. You want to be able to say no if it's not the right fit.
We have recently helped a very promising entrepreneur in the Middle East. When I met the owner of the startup in logistics, I knew their team can execute third party logistic projects of any size with measurable performance improvement. They had also indicated that potential clients were looking for logistics outsourcing provider. But all these companies were large industries with processes for everything including vendor selection. We not only helped this entrepreneur prepare a proposal presentation, detailed case studies, KPIs, but also provided them with a consultant to engage with the potential clients. When the warehouse operations outsourcing project was awarded to them, the director mentioned that this could not have been possible without the help they got from the consultants. 
Last year, a client entered into a deal with us to exchange, equity in the business for services in changing the company's legal structure and guiding it through the process of raising money from investors. The client requested to defer the payment for these services, and after the investors placed a valuation on the company, the client gave us a percentage of equity in the company equal to the outstanding bill for services. The company was able to avoid incurring costs of the future financing until the financing actually happened. The power of that is huge in terms of buying additional time to raise money.
Of course, arrangements like these also mean the entrepreneurs gave up equity worth far more than the services would have cost if they had paid for them in cash. However, entrepreneurs feel, “their partners provide added value to the business that balances the equation. These guys bring very specific talents, tools and perspective to the table that they don't have. It's not just about saving cash or deferring payment; it's about somebody who's truly invested, the consultants have  taken steps to help the company beyond providing legal and professional services including introducing them to potential investors and potential clients.”
Another client mentioned, “When we have conversations with such service providers, we know that they do not just want to get us through our immediate problem and charge their fee. They want us to be successful long term,” he says. “It's much more fun to work together when someone's thinking about the business strategically like you are and wants the business to succeed, rather than just concerned with their fee.”
Based on our experience in the field, we feel it is our responsibility to help entrepreneurs who seek guidance in creating a successful business. I have a goal, and it is to create 1,000 successful entrepreneurs who together create 100,000 jobs across the globe by 31st. December 2020.
I want to hear from you! Connect with me on twitter @khalidak, or email me at with questions, comments or criticisms.
Khalid A Khan

No comments:

Post a Comment

Thank You for commenting