Liquidity Preference 101 : All you want to know about Liquidity preference in venture Capital world

Liquidity Preference is one of the few terms in a VC term sheet (other than drag along/vesting and management rights) that really evoke strong reactions from either side. While Majority (or rather 100% ) of VCs swear by it and won’t sign a term sheet without it, entrepreneurs see it as another “Shylock” term inserted by very, very bad VCs to suck blood from poor innocent entrepreneurs. We see numerous posts/blogs by entrepreneurs (funded/wannabes) denouncing “Liquidity preference” and terming it as a draconian term.

So what is “Liquidity Preference”? Liquidity preference is a macroeconomic term, that was first described by renowned economist John M Keynes in his book “The General Theory of Rate of Interest” where it was emphasized that Investors are entitled to a premium to invest risk capital for a long-term which is a function of demand and supply.

However, in Venture Capital / Private equity, liquidity preference refers to the division of proceeds once a company (investment) is liquidated and is one of the standard terms in the shareholder agreement between Investor and company founders.

First, let’s see what is liquidity in this context? Liquidity event does not necessarily mean when the company goes bankrupt, wound-down or insolvent. In this case, Liquidity also means when the company is sold or gets acquired, or there is a change in management control. However one must note that liquidity does not include when the company goes for IPO ( initial public offer) or get listed in a public stock exchange.

Liquidation preference provides downside protection to VC/PE investors from losing money by ensuring that in liquidity event they get a certain return on their money before any other equity claimant. If the company is sold at a profit, liquidation preference can also help them to be first in line to claim part of the profits. As VC/PE investors invest through preference shares (Cumulative convertible preference (CCPS) or optionally cumulative convertible preference shares (OCCPS) etc, they have preferred rights over general stockholders and are paid before holders of common stock.  It is important to note that company founders and employees etc. get common stock and do not have preference shares.

Liquidity preference is defined as: “Liquidation Preference: In the event of any liquidation or winding up of the Company, the holders of the Series A Preferred shall be entitled to receive in preference to the holders of the Common Stock a per share amount equal to [x] the Original Purchase Price plus any declared but unpaid dividends (the Liquidation Preference)”.

Let us see as how liquidity preference works:
Let us assume that a company “ABC private limited is being bought over by XYZ limited for Rs. 800 million in March 2011. ABC Private Limited shareholders include promoters holding 65% stake and the rest 35% is held by Private Equity fund by investing Rs. 100 million in April 2007. So at the time of investment, the company was valued at Rs.285 million

In the above example, the preference shareholders will be first paid out. So out of Rs.800 million, first Rs.100 million will be paid to Private equity fund.

If the company has declared a 10% dividend every year for the last 4 years, but unpaid, totaling to Rs. 20 million, then that amount has to be paid.

The remaining Rs. 680 million will be distributed in 13:7 ratio between promoters and private equity fund. The promoters will receive Rs. 442 million and private equity fund will receive Rs.238 million.

So in total, the private equity fund will get Rs. 358 million for a 35% stake and the promoters will receive Rs. 442 million for 65% stake.

Now, it’s clear that PE fund got almost 44.75% returns despite having 35% stake and promoters made “only 55.25%” on 65% stake and this creates heartburn among entrepreneurs. However, like all scenario, there are more shades of grey (of course not 50 shades) than we can see. Likewise, in this case, VC made 3.58x on multiple and 258 million while entrepreneur made 442 million. It is important to remember that investor provides all capital and hence all risk on capital loss is taken by investor and one must not forget that these kinds of liquidity events are very rare. So rare, that Economic Times will run a screaming headline, CNBC and every business channel worth its name will conduct innumerable interviews and rest of world mentally calculates the money VCs and founders made and plan their next venture!!!

So what happens when these rare events don’t take place, in a day to day scenario. Liquidation preference helps investors to protect their capital when the company is either average or unable to scale up, which is the case in at least 8 out of 10 times Now let us see how investors use liquidity preference to protect their capital and try to get fair value out of it.

2 Ivy league graduates who just returned to India are building kwitter.com a clone aiming to target Kannada speaking population from North Karnataka. Their USP is to focus on regional language and to create real differentiating factor they are focussing only on north Kannada dialect so as to create real deep penetration in the first trial market ( a fact harped by every VC in all last 15 conferences they attended over a lot of red wine and chicken tikka masala).

One misty eyed VC who has just returned to India, so as not to miss the growing economy and all heat (in weather and economy) decided to invest USD 5 million for 40% stake in the company thus valuing the company at USD 12.5 million. Since both investor and entrepreneur speak the same highly accented American English, there is a huge degree of trust among them and so VC ignores his legal counsel’s advice and invests without any liquidity preference. The following scenarios emerge after a year

Scenario A: The dreamy-eyed entrepreneurs are not sure of kwitter, anymore as they realized that all north Kannada guys use English as their first language and are not keen to continue due to lack of sufficient market. They wish to close down the company. The company still has $ 8 million cash left. The promoters with a 60% stake in the company, are entitled to get $ 4.8 million as part of their share.

Scenario B: While promoters believe that kwitter doesn’t have much future, they have a solid team and have built a good translation tool for which a leading search giant is willing to acquire for $ 12 million, provided promoters continue for another two years and 50% payment will come after 2 years.

In the second scenario, promoters will make a total of $ 7.2 million,$ 3•6 Million immediately and the balance after two years.
So, in the second scenario, the company can’t be called a total failure and can be seen as a moderate success as there is some suitor for the product.

But wait a minute – what about investor – he invested $ 10 million and in the first case is getting $ 3.2 million (a loss of $ 6.8 mn) and in second scenario$4.8 million ( a loss of 5.2 million). While in a losing venture, founders will make $ 4.8 million despite closing the company and $7.2 million in case the deal goes through.

It is obvious here that such deals are very unfair to investor and in fact, by structure encourage the entrepreneur to quit early or set a very low sight. Hence liquidation preference is designed to protect capital and depending on the type of liquidity preference, Investor would have received all of $ 8 million in the first case and either all $ 12 million or $ 10.8 million depending on type of liquidity preference (we will learn about types of liquidity preference in our next edition of the article).  Hence one can see that despite all bad press, Liquidity preference remains quite favorite terms of VCs and they don’t like to do a term sheet without it!! Hence Liquidity Preference creates a perfect alignment of interest between VC and entrepreneur where both aim to create a high-value company rather than creating incentives for selling too early.

Now, what happened to Kwitter guys? Well being smart entrepreneurs, they chose to take $$ 4.8 million upfront by shutting the company and moved to Valley while our foreign returned VC friend, last heard, was working as an accent-trainer in local BPO in Bangalore after failing to raise next fund.

E-Commerce Bubble vs Modern Retail ~ The perspective fallacy

1/6 Future Retail raised close to 6000 Cr ($1.5 bn) to build a business with a top line of $2.5 bn with marginal profit/loss #StartupBubble

2/6 @Flipkart has raised $3.5 bn to build a business with a top line of $ 3bn in its 6th-year #StartupBubble

3/6 In the time of crisis, between Flipkart and Future Retail, who will be able to cut their costs drastically? #StartupBubble

4/6 Which brand is touching more consumers and reaching remote parts of India? #StartupBubble

5/6 So despite all gyan by Bizz Gurus and all maths, e-commerce is for real and nowhere near bubble #StartupBubble

6/6 In any bizz, there r winners & losers, Some bizz will die & some flourish, that’s not a bubble but usual Darwinian world #StartupBubble

Startup Bubble / Debt Crisis

1. If 2001 dot-com bubble was Type I (false positive) error for analysts/columnists etc, 2015 is going to be type II error (false negative) to all wise women/men.

2. About impending Startup bubble burst, there is unanimous certainty among newspapers, ex-CEOs, Missed the bus-VCs/ entrepreneurs !!!

3. However, as it always happens, Crisis won’t hit the Startup bubble but might come from a totally unexpected quarter.

4.  Debt overhang at Indian corporate is going to bite and bite it big time. Amtek Auto and Now Jindal Steel, debt rating crisis are here!

5. Debt contagion will spread and may start from debt mutual funds who
don’t have the luxury of public money to ensure perpetual liquidity.

6. Debt at top 10 stressed Cos is 10x> all startup funding!! and all startups are not stressed!! So worry about debt MFs / Indian Banks.

7. Brace up for debt crisis at Indian banks. So yes winter is coming but to a lot of other sectors than startups!!

Union Budget 2015: Ordinary Ahoy!

First, let me give a disclaimer before I get into the nitty-gritty of budget analysis. Overall, this has been quite a good budget, and in normal routine times, it might have got 8.5/10 or so. But then these are extraordinary times with extraordinary ambitions, and so, we all need an extraordinary budget and not routine, as routine brilliance is nothing but mediocre in such times!!!

There seems to be quite a euphoria related to the formation of MUDRA Bank as well as the allocation of INR 1,000 Cr to start-ups. But before we all start celebrating, we need to pause and ask about what happened to the INR 10,000 Cr which was allocated last year to start-ups! Last year, the Railways Minister in Modi Government’s maiden railway budget said that every budget makes lots of promises but only a few get implemented and the rest remain on paper. Hence, it is high time the Govt provided implementation records and performance reviews of all the announcements made in previous years’ budgets.

In order to put the nation on a high growth trajectory and to create happiness all around, the Govt needs to foster an environment which enables entrepreneurship, the creation of jobs, a fair level playing field, and a sense of fairness & stability in the legal system. Unfortunately, the budget this year falls short in all parameters.

The Indian tax regime has remained as complicated as ever, and by postponing GAAR, the Finance Minister has just chosen to ignore the elephant in the room. Furthermore, a lot of provisions against black money have been brought in, but how the legal part of it will be solved remains unclear. Given the backlogs in nation’s courts and overall sad state of legal affairs, it’s high time the Govt takes another look at the budgets allocated to the judiciary and work on creating capacities in the system. Unfortunately, the Budget 2015 has chosen to remain silent in this area.

Besides the unstable legal environment, another major issue affecting entrepreneurship and creation of new business is red tape and the amount of paper-work involved, and in this budget, there is now a proposal to appoint an expert committee to oversee all that!!! So now yet another expert committee to view and analyze, which most probably means things will remain as they are. This budget has really fallen short on the expectations regarding making things simple, done no more than offer some words, and it seems words are all we have.

It’s high time we see some real action on cutting of the red tape rather than going back and forth on the same issues. In 2010, the then Govt made a bold move of bringing Direct Taxes Code (DTC) and to do away with all exemptions and thus plug all leakages as well as corruptions. DTC faced stiff resistance from existing power centers then also, and in this budget, got a quick burial.

The announcement related to MUDRA Bank is quite welcome, but again, rather than being a provider of capital, the Govt needs to create an environment where private capital shall flow in an efficient manner and create opportunities for all stakeholders. If Govt provides capital, it will lead to crony capitalism, and in long-term, will distort the system instead of reforming it, as we all have seen in the case of PSU banks in terms of high NPA/high real estate prices. Given the fact that SMEs in India suffer very high-interest costs (18% or above) and have continued to face challenges in terms of slowing demand and high-interest costs as well as real estate costs, it will be better if the interest rate for SMEs are lowered in the way it is done for the housing sector. Here again, this budget missed the chance to kick-start the economy in a major way and has chosen a rather timid option of creating another institution.

The Indian economy, notwithstanding the performance of SENSEX, is witnessing one of the toughest period post-2008/09 with falling corporate earnings as well as a reduction in overall capital formation. Large corporate, as well as small business, are facing serious challenges since overall consumption is falling due to drop in available discretionary income at the individual level on account of the very high cost of housing (EMI/Rentals), inflation and almost flat growth in income. Given the fact that 40% to 50% of individual income in young families, which are the basic blocks of the economy, goes towards housing in the form of rental/EMI, it is high time Govt increases affordability of the first house, and at the same time needs to discourage crowding out by investors. Unfortunately, this budget has remained totally silent on this aspect.

Overall, I agree that though the main aim of a national budget is to present checks & balances of annual revenue along with expenditure and provide an outlook of the overall economic health of the country, the annual budget for all practical purposes needs to go a little beyond that. It needs to shape-up the long-term behavior of the public at large by way of taxation, policies, etc., and therefore, by continuing to focus on exemptions, allocations, and tax limits, it seems that this year the Finance Minister has chosen to grant/allocate more medical leaves right when the economy needed lifestyle changes to jump-start to the next level.

However, it is still a great peace-time budget and would have done well for the economy. But as I said, we are in the middle of extraordinary times and this war-like situation, to which this budget fails to give direction, hope & vision and settles for ordinary. Hence, it shall be rated as 4/10. 

In the time of Euphoria

We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter fall upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking, “What time is it? What time is it?” but none of the clocks have hands.

                                                                               ~ Adam Smith, SuperMoney

Startup India, Standup India: The Missing Link

Euphoria is in the air. Startups – the poster boys of these times – have got another fan-base, i.e., the Government of India, cheering for them. Startup India, Standup India Action Plan announced on January 16th by Prime Minister Narendra Modi has created another level of excitement among all stakeholders – be it venture funds, angel investors, incubators or startups.

It is not the first time in the history of India, that the Govt has announced some major policy decision, but probably it is the first time that the Govt has gone ahead and engaged with a section of society, which was not represented by any powerful industry lobby-groups, business-families, lobbyists or PR firms. If India has changed in last 18 months, then it was very much visible in Vigyan Bhavan on January 16, 2016, as more than 90% of the audience must have visited those august corridors for the first time in their lives.

And the level of engagement was unprecedented; however, the real game-changer was not the flawless execution of the event or the line of speakers gracing the occasion, but the intent of Govt, which was to become an “enabler” from the position of being a “provider”. The statement, “Eventual freedom from State will be a true evolution for startup”, was not made by some anti-govt activist in a dingy hut in some forest, it was made at Vigyan Bhavan by none other than Mr. Arun Jaitely, the Finance Minister of India. The statement, later endorsed by Prime Minister Modi, is a major paradigm shift in the thinking of Govt, and hence, a watershed moment in the history of India.

However, as it happens with any organization, there is always a huge gap between the vision of the CEO and execution being done at the ground level, and the Startup India / Standup India policy decisions were no exception to this. Hence, while PM Modi talked about how to remove Govt interference from day-to-day workings of the startups, the policies announced (barring one or two) just ended up achieving the exact opposite of the stated objective.

Startups as defined by an inter-ministerial group, approval from a Govt approved incubator, tax exemptions, State-sponsored Fund of funds – all these measures will not reduce but increase interaction and intervention by State multi-fold, and will create multiple layers of fault-lines and defeat the very purpose of startup policy as well as act against the vision of PM Modi.

While tax exemptions and sops are welcome, they will not help startups in short-term/long-term as startups/funds are looking for a stable legal environment, clarity in tax laws and minimal interaction with Govt in the initial formative years. Unfortunately, things are totally reverse at present moment and nothing has been done to address these issues.

Startups/investors are loaded with paperwork at every step and every paperwork results in extra costs as well as breeding of corruptions. One such example is “valuation certificate” which is required by the startup to establish the fair value of startups at the time of raising capital. After every transaction by an investor, valuation certificate from an accountant is needed and tax is levied on deemed income if there is a gap between accounting firm valuation and investors. This rule creates huge issues in creating ESOPs / investments / Call / put options, etc. Take Uber as an example. UBER is an Indian company, last year its investors would have been taxed $3 bn on the income of $10 bn as Bill Gurley (Uber Investors) valued Uber at  $16 bn while Damodaran – a worldwide expert on valuation – valued Uber at $6 bn. However, this year Damodaran is valuing Uber at $90 bn while investors valued it at $62 bn. So if an expert like Damodaran is wide off the mark on valuation then how one can trust the valuation certificate by some CA firm using vague methods to value a startup. This exercise is the first step in corruption as well as in vague paperwork.

In fact, every law/process has been designed to harass than to encourage compliance. The biggest proof of such an attitude can be seen in our tax laws, which seems to violate all the basic tenets proposed by Adam Smith. Adam Smith said:

1. Tax rates shall be reasonable (in India, due to multiple levels of taxes, sometimes taxes are as high as 30% or more of revenue even when the company is incurring heavy losses and has cash flow challenges.)

2. It shall be easy to pay taxes (In India, payment of tax is another challenge – try to fill a service tax return on your own.)

3. The penalty shall be severe in case of non-compliance (Penalty area is highly confusing and harassment-driven, where depending upon one’s position, the whole penalty system works.)

So overall, this environment creates a high level of uncertainty and confusion {what to pay (multiple rates), how to pay, and what if we can’t pay?} Needless to say that all these road-blocks create huge uncertainties amongst the moods of entrepreneurs/investors and kills the spirit.

The Ellsberg Paradox demonstrated that its the uncertainty not the risk which makes people activity-averse, and as a Venture Capitalist / Entrepreneur, we face this dilemma every day as we can provide for risk but can’t provide for uncertainty.  Unfortunately, Startup India Standup India policy didn’t do anything to address this issue of uncertainty in the proposed laws and instead created another layer of approval/process in its system.

The only way we can tackle this problem is by eliminating options and being an adult about it rather than being parental about it.  The aim of the policy related to Entrepreneurship/Innovation shall be to build an adult society rather than a parental society, which respects and encourages citizens to grow rather than nag/guide/force/bribe to grow. Hence, rather than various fund allocations/awards, the aim shall be to create the right environment and not an incentive structure. Hence, Govt needs to study the level of interaction a startup has with State and shall aim to eliminate/minimize those interactions for the enterprise of a certain size (say INR 3 Cr annual top-line, as, at this level, the company builds enough resources to deploy in compliances). Limit of INR 25 Cr in top-line is excessive and shall be dropped since a company with top-line of more than INR 3 Cr is no longer a startup and is already in advanced age.

Hence, it’s high time bureaucracy listens to the vision of PM Modi carefully and figures out a way to minimize interactions with startups rather than increasing them. Otherwise, instead of Standup India, this will become Sitdown India and we will miss the golden opportunity of becoming a leader in the era of Startups.

Jai Hind!

Age of Porn / Age of Kali

Traveller, foodie, and photographer!!! These powerful three words, or traits, probably capture the personality profile of 90% of millennials / “generation me” navigating the wild-wild-web on those social, or not-so-social, websites.

These foodie travelers armed with cameras are in the pursuit of creating mind-boggling images every second. Some 800 billion photos were created and shared on social networks in the year 2014, and these numbers are quadrupling every quarter, and the world seems to be shifting to images as demonstrated by the fact that Instagram users (Instagram is social network built for sharing of images) far exceed users of Twitter, which is more about sharing of thoughts/ideas/content along with images.

So clearly, ‘photo’ is in and ‘selfie’ is the official buzz-word of the year 2014, where each day overwhelms us with barrage of photographs shot at perfect times enhanced for that perfect look showcasing our latest travel adventure captured in that DSLR or on mobile with nth options, and reinforcing the photographer/traveler in us. Not to be left far behind, Masterchef TV show continues to attract a new crowd every year and roll out seasons after seasons in the wake of its ever-increasing reach and popularity across every race/culture!!! And thus comes our foodie, traveler and photographer!

So, the age of conspicuous consumption or age of porn!!!

Enhanced photos of self, surreal photos of travel, picture-perfect cooking shows in beautiful kitchens filled with shining crockery, and continued onslaught of beautiful, desirable and unreal photo-shopped images consumed by a generation lurching in their cubicle/pajamas, and as far away from the real thing as possible!!!

As we start to look around and see things closely, it suddenly dawns to us that we are staring at an age of simple and quick gratification where every story is cut/edited and photo-shopped in the most glamourized way with more connection to fantasy than to reality. This is being created for mass consumption, a pattern which one would associate with pornography rather than things like social networks. The onslaught of images, the media and the advent of smartphones are making things more like porn than anything else, and it looks like we are finally in the “Age of Porn” with all things porn.

There is FoodPorn, where a glamourized spectacular visual presentation of exotic food is voraciously consumed by masses of people who rarely enter the kitchen or indulge in any sort of cooking, but savor all cookery shows.

We have TEDPorn, where complex concepts are simplified by big font presentations. This overwhelms the users into a surreal world of make-believe where every big thought/idea can be explained in big font 18 slides. Umair Haque – in his thought-provoking blog post, “Let’s save great ideas from the ideas Industry,” published in Harvard Business Review – argues that TED thinking is an anti-thesis of big ideas where it cheats us by “putting climatic epiphany before experience, education and elevation”. This reduces our experience of a great idea to a porn-like experience where one is consumed by simplicity and glamour and is removed from reality. Thus, argues Haque, users are incapable of experiencing the big idea and enjoying its reality.

At one end, where the intellectual elite are consumed by TEDporn, dreamy-eyed among them are consumed by StartUpPorn at another spectrum. This is consuming hordes of youngsters/business executives, who are blinded by flashing headlines of billion-dollar valuations and are jumping in startup bandwagon without any suitable skills or resources, yet feeling like a rockstar. The fact of the matter is that every startup founder is indeed a rock star, but without corresponding stage-lights and roaring, swooning audience. He is a rockstar where lights are off, stands are empty, and the battle is a long lonely night with Rudyard Kipling whispering softly in the ear, “When there is nothing left except the will, which says ‘Hold on’.” Running a startup is a lonely battle and an everyday struggle with or without funding, and nothing like the glamourized world as painted by the media. However, the glamour of startups or StartUpPorn keeps on attracting all those converts / non-converts with just images of billion-dollar valuations dancing in mind.

However, to make matters worse and probably to make StartUpPorn more palatable, we are now getting ushered to FailurePorn, where failure is getting glamourized in a way to supplement the argument for consuming StartUpPorn. Glamourizing failure is leading many down a tricky path and embarking on a treacherous journey for which they are not ready mentally or financially. Geoff Lewis, a partner of FoundersFund, rightly cautions in his article published in Washington Post about celebrating failure too much. With almost negligible fear of failure, it is creating a myopic view and getting us to consume “failure” as fast-fashion peddled by highly successful people without any relation to reality.

However, all these – FoodPorn, TEDPorn, StartUpPorn, FailurePorn – pale when it comes to the biggest porn created by all of us in the form of those perfect moments of joy continuously fed on social sites – SocialPorn. These picture-perfect moments of others’ lives suddenly make our own life appear mediocre/duller/more boring than what it is, and hence, chips away some part of us every day!

As real porn destroys young minds and makes one incapable of having a real relationship with real people, this multi-faceted porn is destroying every part of life in a way one never imagined!! Probably ‘Age of Kali’, or kaliyug as Hindus believe, is finally here and is manifesting its presence by these daily destructions and consuming us.

It’s here, it’s here, it’s here! Images, images, and Aaahhhhh – more images!!

Drama @ Wagah Border

Nothing captures the essence of India like Wagah Border Post daily ceremony. The show, Chaos, Confusion, VIPs, VVIPs, honks, false rhetoric, and oh yes, the usual second-class Indian citizen, the native who runs from pillar to post to get passes and then some seat, and ends up being a native refugee with hardly any dignity.

Hence, the ceremony at Wagah Border is a Dance of Democracy! Or is it a Drama of Democracy… God knows!!!

Wish List for Budget: Unleash the Entrepreneurial Spirit

The maiden budget of Narendra Modi Govt. is about to be presented in coming days, and as usual, there is loud chatter and demand around raising tax limits, allowing greater tax exemptions, as well as various other tax sops demanded by industry bodies. It is not that these demands are made for the first time; but being Shri Modi’s first budget, the expectations are much higher than ever before. While the aim of a national budget is to present checks & balances of annual revenue along with expenditure and provide an overview of the overall economic health of the country, the annual budget for all practical purposes should go a little beyond that. Since it shapes up the long-term behavior of the public at large by way of taxation, policies, etc., solely focusing on increasing tax limits, etc., is akin to demand allocation of medical leave while what one needs is a lifestyle change to get on their feet!

Hence, rather than doing short-term adjustments related to taxation, etc., Modi govt has a great opportunity to use the budget for changing the fundamental way the Indian Inc. behaves and operates. Following are the fundamental changes needed to transform India from being an emerging market to a super economy on steroids. These key three basic ingredients are:

Focus on Building and Creating Trust

India is a trust deficit society where not a single paper can move without getting notarized by some nondescript shop in some corner of some court.

This basic approach of “trust no one” has resulted in a regime which has loads of laws designed to plug any hole and has ended up doing more harm than good. For example, the new Companies Law 2013 has just added to the woes where it has now become impossible to start a company without spending a fortune on accountants and company secretaries.

Somehow in India, the lawmakers and bureaucrats work with the fundamental belief that every private enterprise has been started with the core aim of committing fraud, launder capital, evade taxes, and commit financial crimes until and unless proven otherwise, and it may come as a great shock and surprise to our giant army of babus that private companies/business – big or small – do add to the wealth of the nation and contribute in their own way in building the nation. The aim and objective of any government are to keep its citizens happy and to help them achieve this goal rather than doubting every motive and treating every enterprise as a den of crime. Hence, the government needs to behave in a more mature way and adopt a more adult approach when it comes to the treatment of companies, instead of having a parental attitude towards everyone.

Foster Entrepreneurship / Encourage Failure

A society/nation is carried forward by the tribe of risk-takers and not by the army of clerks and babus. In not so distant a past, England, being a tiny island, ruled over the world on account of its tribe of risk-takers, and today, USA dominates the world on account of new companies/technologies.

Unfortunately, in India, we reward mediocrity and continuity, and punish risk-takers, as the cost of failure is very high. Try to close a company after a failed business!!! One will end up spending more money and time closing a company than in starting a company. Compliance and taxation liabilities further sink down a struggling company. Moreover, there is hardly any incentive for starting companies. The budget should reward entrepreneurship and allow failures to happen. Taxation rules for enterprises doing up to 5 Cr top-line should be simple, as they are not in a position to manage compliance cost, unlike bigger companies. Opening & Closing of companies should be simplified and made cost-effective. There shall be less tax-filing hassles for companies which have paid up capital of INR 5 Cr or less and are of less than 5 years of operational life.

Bring Accountability / Transparency

India is the land of regulators. For everything to work right, there is a regulator, and every year there is demand for more regulators, and just like it happens for every person in power, regulators’ demand for power just increases year after year, and Yes, all power without any accountability / answering to the public.

Hence, while increased regulation has increased the burden on companies/individuals multi-fold in terms of costs / increased paperwork, there is hardly any empirical evidence of regulators being effective or not being misused by vested interests, since there is zero accountability.

Its high time the new govt makes regulators accountable for actions taken and shall be responsible for all power being demanded by them, as lack of accountability breeds corruption and creates an unbalanced power structure. Until and unless accountability is brought into the picture, frauds like NSEL / Satyam, etc., keep on happening and regulators, rather than being conscience-keepers of the nation, would keep on behaving more in the line of SS/Gestapo and focus on harassing entrepreneurs/companies.

Till these steps are taken, budget in India will remain just an annual accounting exercise without unleashing the untamed spirit of the country.

This article was reproduced and was published in Economic Times.

The Song of an Entrepreneur

Awesome poem by Milton Berle. Captures the mind of an entrepreneur –

“I’d rather be a could-be if I cannot be an are;
because a could-be is a maybe who is reaching for a star.
I’d rather be a has-been than a might-have-been, by far;
for a might-have-been has never been, but a has was once an are.”