Social Yogi amidst Vanity, Voyeurism, Facebook

Facebook is the largest personal service known to mankind. I don’t think any single service has so many engaged users. It is a great service too, it allowed people to stay connected with 100s of people instead of the 50 or so that we were used to. In a way, everyone has a shot at becoming a celebrity (defined as a person having a light touch relationship with a large number of people). It also helped augment physical relationship with photos of friends and families adding richness to the connect we wish to share.

The universal adoption of facebook also shows that it appeals to really basic human instincts. It probably appears that the basic instincts are the need to connect socially but when we dig deeper into the kind of interactions, the basic instincts are revealed to be: Vanity and Voyeurism. This kind of makes sense, the largest other services on the internet are also sin industries. Facebook’s appeal is that it has a convenient facade.

The very roots of facebook included a restrictive membership starting with ivy league colleges or a work email-id. It became a vanity badge early on to say whether you were in the club or not. The facebook team understood the potential for vanity and voyeurism and has always interpreted privacy of content such that it can leak to a circle of people who would be interested in gawking at it. Except for a small band of privacy conscious, for the larger user base once the fact that content will get leaked and peeped into is normal, the content itself becomes customized for peeping. Voyeurism driving Vanity in short.

This explains why only happy vacation photos are shared, all statuses are about having fun and people in general feel that everyone around them is having a time of their life except themselves. Not getting enough likes on your photo can lead to depressive thoughts or a habit of liking them yourself.

Facebook’s strategy of encouraging vanity and voyeurism is great for service adoption but that may also explain its failure to monetize the wealth of user information it has so far. The user information is simply what people want to show they are rather than what they are. Facebook may solve this over time with deeper analysis of user interactions then it does today.

So given Facebook’s active enticement of users towards these vices, some users I know are quitting or reducing usage. But the user also has an option to treat it like the the Tapovan of the ancient past and be a Social Yogi taking advantage of this (no longer) new medium while avoiding the treacherous pitfalls which Mara has in store for you. Or as Calvin’s Dad would say, ‘It can help you build character’.

Practical Open Source for Entrepreneurs

Typically content on open source tends educate people on the licensing details, difference in open vs free software or gratis vs libre. The unofficial authoritative account to read is Cathedral and the Bazaar if you care to have background. Otherwise just make do with this (hopefully) short post on background and then some practical usefulness that I have seen in action.

Open source traces its roots to the free software movement pioneered by Richard Stallman aka RMS who might seem a cranky old man today but was a ‘charan-sparsh’ category genius in his young age. His most novel idea being that of making the first copyleft (as opposed to copyright) license which protects free software or content from being appropriatedfor commercial use by another party. Creative Commons licenses are the content equivalent outcomes of the same copyleft idea, as GPL (and Apache, BSD, LGPL etc) are the software equivalents.

Over time the free software idea was diluted to open source (to much consternation of RMS) which allowed many commercial organizations to use this concept profitably. Now to the main 3 practical examples that would be of use to an entrepreneur:

Open source has become a tool for young companies to assure clients that their investment is safe in a software which can have life which is longer than its creators. As a young product company the first objection an IT purchase manager will have to your fantastic product is: ‘Will you be around in 2 years to support me’. And let’s face it, the mortality rate of young startups isn’t something to write home about. Open Source becomes a very smart way to decouple the company’s mortality with the software’s mortality. There is still the hard work of making great software that enough users adopt it and hopefully a few join in the community development or ownership of the product but that’s a battle for which coding entrepreneurs might be more prepared for. Enterprise acceptance of open source has been increasing and you see this reflecting in the success of companies like Liferay, Alfresco, Magento, SugarCRM all of whom have a commercial open source model. Over time all of them have barely left the ‘Open’ part of open source as a mere checkbox and have just used the marketing mileage in the tag. But while building the base, the open part was crucial in the ramp up years. Now they don’t fix crucial bugs in the community versions or have performance issues in the same so that for any serious user, the enterprise paid version is the only real choice. This can lead to ethical arguments which we will steer clear off. You make your choice and even if it is not the same as these folks, you need to understand what your competition will be doing.

I also think open sourcing is a smart way for an IT services company to reuse software between clients. Almost all software projects being done today use some open source components or the other. Be it RoR or the Java language itself are all open source. I know of many services companies or developers which kind of surreptitiously reuse code, mostly because clients also don’t care (most clients are not product companies themselves). The issue of who owns the code is left unaddressed and as it happens creators own content unless rights are explicitly transferred. However, if the issue is made unambiguous and clients educated on the same then the discussions are not so amicable on the rights. If developer makes a library open source and presents it as such, the case is much easier to make and also gives the developer a very clean, legal, above board way to reuse code. Future projects also get freed from implications of stolen code or hidden liabilities. Open source using a liberal license like the BSD or Apache license and not GPL so as to protect the client’s commercial interests.

I recently found open sourcing as a smart way to resolve ownership dispute between a founding team which was going it’s separate ways. Each of the founders felt the software was a valuable entity which they could do something with in the future. However, there was the issue of rights and payments and future liabilities (say one of them built a successful business on the software and others sue him for a share based on the software). By open sourcing they could all use the software without encumbrances and go their own jolly ways. A positive externality being that other folks can also benefit from the software but it doesn’t take anything away from the founders. Competitive advantage is sometimes a concern but let’s face it, there is so much more to a successful business than just the code. Even if a 200k code is open sourced, can it really be used as effectively by a team which has not been part of creating it without spending significant effort. That effort is really the advantage you enjoy.

In short, open source has taken a life of its own and has applications far beyond its original intent of software which was free (libre, not gratis). User caution is advised and don’t rely only on this post to make legal decisions 🙂

Tech Trends (and one I would like to see)

This post is derived from a recent talk I gave at a Gild Meetup in Bangalore. I think most of the ‘trends’ below would be obvious for a reader of this blog. I do hope that some new light does get shed on them here. However, I found most of the young audience I met not clued into the below at all. So in the hope that some more folks may find this useful, here are the top technical trends as we see them in Neev today. We have the benefit of an interesting view since we are a services company but do product development for startups all over the world (mainly in US, Sweden, India and Singapore these days). This gives us an insight into the demand as it is panning out, of course limited by the sample size of our hundred plus clients and prospects.

The first key trend which we are in the middle of is the proliferation of mobile devices, especially tablets. Tablets are now fulfilling the promises of mobility which made nice user stories but in practice were inefficient implementations on 2.5″-4″ phone screens. Tablets are the first usable enterprise mobility form factor and adoption is going to go through the roof. The phone still being useful for consumer applications. HTML5 will be increasingly driven as a development platform of choice since the cost of developing an application multiple times is prohibitive. Native applications will co-exist but HTML5 will slowly take the lions share of the development. This is not unlike how rich web applications slowly marginalized desktop clients since early 2000s. The really cool applications are still native though as of today: occasionally connected apps for field force (doing field surveys for example), visualizations of large data sets (showing 1000s stocks moving in real time on one screen) are just few of the apps Neev is doing for clients. A friend’s company is doing an interesting tablet app for a hospital where patient data comes on the screen of the tablet that a doctor is carrying when he comes near the hospital bed. It automatically updates the bedside tablet once the doctor moves away after updating records.

The second key trend is the rise in open source adoption. Turning open source has become an accepted strategy for small product companies who can’t fight the FUD created by large enterprise players. Though not really the initial intent of the open source software movement, currently this is being used as a marketing tactic of choice by challengers in the software product ecosystem. Customers are comforted that they are not locked into binaries that no one can open and are backed by shaky, small players. The product companies reconcile themselves to the fact that the product development is sunk cost and hoping for license revenue from them is a lost cause. Hence, lower cost subscriptions create a new revenue model and clients are in a win-all situation with no lock-in and substantially cheaper (and often better) products. Starting with web servers, then app servers, portal servers, eCommerce engines and even the specialized ETL segment has open source challengers now. Good rule engines or business process modeling frameworks are also no longer just the proprietary preserve these days.

Clouds will rule it all. In the last three years we have not done a single non-cloud deployment at Neev. In fact today customers don’t even ask if there is an alternative. Sometimes the question is – Which Cloud. Application stack specific clouds like Heroku look very promising and Amazon might become the infrastructure for these specific clouds in the future. A clear trend where application architecture is considering cloud features from ground up is visible (rather than as a hosting after thought). So whether streaming has to use S3 or SQS should be the queue in the application gets decided right upfront.

Big Data and no-SQL databases as its consequences are increasingly becoming popular. This is not as ‘in the middle of it’ trend as the previous one’s but surely something which is on the uptrend. The challenge of transactional scalability (supporting high number of concurrent users) has become passe and the solutions are practically commoditized. Partitioning, load balancing etc are not really new problems to solve and no longer challenges to surmount in 2011. Practically speaking high transaction load hits a very select few of the systems anyways. In contrast, big data is a problem which increasingly hits every other application today. Social media with its humungous data generation (facebook dishing out few billion likes every day dwarfs its massive 550M user database size) is plugged into many apps these days bringing the huge data load problem into all domains. RDMSes hit their limits, hence enter nosql databases. Programmers especially need to adapt fast since the programming paradigms in the nosql world are very different from RDBMSes. The change in orientation almost akin to making the leap from procedural programming to object oriented mindset. Its not tougher but it surely needs a different training for the thinking. This is not helped by the fact that nosql databases have no single standard or theory unlike RDBMS. So a developer moving from Oracle to MySQL remains on familiar territory but but not from BigTable to MongoDB!

That brings me to the one trend which is still conspicuous by its absence. The sheer lack of contribution by Indian software developers to the open source ecosystem. This asymmetry between consumption and contribution is also evident with wikipedia and online QnA forums (where seldom are answer givers of Indian origin but huge number of questions get asked by Indians). Wikipedia is earnestly trying to engage and solve the problem. Open source by its nature doesn’t have a single champion and considering the huge amount of debt we owe to open source software as an industry, this is a trend that begs to start. Indian software developer will surely do no harm to his/her global reputation by joining the cause. Open sourcing interesting work being done here and also joining existing projects as contributors has to start . Lakhs of students can benefit hugely by getting plugged into the best practices of open source projects which can compensate for the removed-from-reality education they are receiving in colleges. I am surprised to see students struggling for summer assignments when 1000s of open source projects await more volunteers.

Hope this was useful and encourages further deep dive into the topics above compared to the very brief treatment here. Thanks!

Starting the next 50,000 Software Service Companies in India

When I started Neev 6 years ago with a friend, many people thought its foolhardy to start a software services company in today’s age. The golden period is behind us and the biggies are already entrenched.  Today again I hear the same arguments. Even NASSCOM which is trying to engage more with smaller companies is encouraging more companies to do products rather than services. In the meanwhile I have seen multiple companies start and create services businesses doing several million dollars in revenue in this last 6-7 years.

Product companies generally create more value and there seems to be more glory in the cause of starting a product company. I myself am a strong believer in products and IP. However, does one exclude the other? Isn’t there still space for more services companies. Why should the National Association of Software Services Companies give up the cause of the small service company? And why can’t we have thousands of product companies AND thousands of services companies. We are not short of people, are we?

As I understand, currently there are 5000 software companies in India with less than $5M revenue. The latest revenue figures of the IT sector say that ~$50 billion is the 2011 number (excluding hardware and BPO which take it up to ~$75b). The exact numbers are probably not required for this thesis but its good to have the ballparks in mind. My guesstimate is that the bottom 5000 companies probably have an average revenue of $1M, making them together earn $5b of revenues or less than TCS alone. The comparison with TCS is intentional. Since the Tier 1 companies such as Infy and TCS have the maximum mindshare we tend to benchmark all IT companies with them. Some say, wouldn’t we be better off with one more TCS with its economies of scale rather than 5000 struggling companies. This symptom is also called the Tyranny of the Or since again one option doesn’t preclude the other. Take a look at how revenues are shared in the IT Services ecosystem:

Revenue Distribution (guesstimates by author 🙂 )

The larger companies also have a good portion of BPO revenue which is not a part of the above numbers. The interesting question to ask at this stage is, where does the money come from?

Client Revenue Mix

It seems pretty obvious (sometimes in hindsight) that size begets size and the companies outsourcing to the bottom 5000 are not the same one’s to the top 20. It should also not come as a surprise that we can explode the bottom 5000 companies also into a self-similar structure with really small companies doing revenues of $100-200k catering to 10s of thousands of small customers all over the world. The average project size here ranges from $2k to $200k, in itself a large range. This is really the SME sector of IT industry and it begs to be studied in more detail. We don’t understand them well enough as a group and nor the many variations in this category.

So now it should look obvious that this is a separate market which a TCS like player doesn’t cater to (and can’t). To not focus on the bottom of the pyramid on both the sides would mean leaving (lot of) money on the table. Now the real potential: the tier 1 clients won’t increase from 1000 to 10,000 but the 50,000 clients being catered to right now in the bottom segment are just tip of the iceberg. These are perhaps the early adopters of outsourcing in their size of companies. Once they are successful, the next wave of 500,000 clients will jump on the outsourcing bandwagon. Even today I see many clients in this segment shocked when they see that serious purpose built software can be developed at times in budgets of $10k or less (mainly due to open source maturity in last 10 years and also due to general software development maturity). So lot of this outsourcing is not projects diverted away from local players but projects which would have never happened since the budgets were always short of the requirements. Large players by definition can’t cater to these clients and we will need the next 50,000 software services companies in India to capture this market. These will be companies with an average of $1M revenue making a total of $50b (as much as the current total size).

In all economies it is this mass of SMEs which make for a healthy sector and there is no reason why Indian IT sector should be exempt. These are the small nimble players who will latch on to new trends, take new bets, will be happy to work in very small niches. Can’t imagine Infosys doing Magento eCommerce projects, SugarCRM implementation, Drupal sites or making $5k iPhone apps. This will also be a segment of great churn with large number of players exiting and entering the arena every year. The segment as a whole will show great resilience though and will really make India into an IT services powerhouse which can’t be dislodged. A key role in this ecosystem will also be played by platforms matching buyers and sellers of services since a major challenge will be for these small players on both sides to find each other.

This is not pie in the future but probably the lay of the land in the next 10 years. Is it for you? Well, if running a Rs 10 Cr ($2.5M) business that requires no seed capital to start doesn’t seem beneath your ambition hop on the bandwagon!

TDS: The Cash Sucker

Every day on my way to work, I cross the Income Tax office and the advert outside: TDS is not Tedious. Indeed, it is not and the tax department has over years perfected the art of collecting money before it is due to them. There is a plethora of rates on TDS and the only justifiable rate is 0%.

The tax dept is fed up of running behind people for taxes though and has taken revenge by making people run behind them for recovery of excessive tax taken without any consent. TDS also serves as a trail of transactions and allows the tax dept to catch pilferage. If a company doesn’t deduct TDS, that particular payment is not deemed a valid expense hence resulting in higher tax liability for the payer. This keeps all the parties honest and the tax dept has to just develop skills in returning tax money rather than in collective tax.

That now brings us to the matter of the TDS rate. In the myriad rates mentioned above, the services sector is besotted with the rate of 10% (as are many other). Let’s understand what does 10% mean: If my invoice amount was Rs 100, then my receipt would be only Rs 90 since Rs 10 will be submitted in my tax account by the client directly. I can later claim it against my tax liability. But what is a typical service company’s liability? At a 30% tax rate the liability would be Rs 8 if the profitability was 24% (100*24%=24 and 30% of 24 = 8). This leads to a claim of Rs 2 from the tax dept. No wonder record claims are happening every year.

The service sector is 60% of our economy and one of the fastest growing. The best of the companies make 25% of profit. The more humble one’s make 15% to 20%. The strugglers – 10%. The struggler has the unenvious position of trying to make monthly payroll while 10% of his revenue is siphoned by a govt for a full 16 months before he sets eyes on it. His tax liability is Rs 3 on a Rs 10 profit but the TDS Rs 10. Rs 7 which could be a welcome investment into the business or in many cases a cashflow lifeline has been deducted at source. This coupled with the fact that a services company can’t easily get a loan (due to absence of any collaterals) is a double whammy.

If the govt wants to take the easiest step to give a small but significant fillip to the growth in an entirely non-inflationary manner. It would be to reduce TDS rates to 2% across the board.

Would be too easy perhaps.

 

Andamans

Just came back from a short trip to the Andamans and thought will jot some things I saw. There are enough sites on the travel recommendations and site seeing so I wanted to stick to just a few observations which I did not find in the readings I did before I went there.

A friend had helpfully told me that Port Blair is much like any Indian town and I was much disappointed to find that it is true. There is no excuse that this practically virgin territory must have the same rotten urban planning that we have in rest of the country and it was just a sad reminder that we have some way to go before becoming city builders. I wish all town planners be made to play Caesar or Sims for 6 months before being put on the job.

Then I also had a chance to ponder a little more on the geography of the place. Its a mighty fluke that this bunch of islands has ended up with India. Andamans being closer to Burma and Nicobar being closer to Indonesia. Andaman, the local mythology goes, is named after Hanuman and this was considered an alternative route to attack the Lanka (a little far for that right?). Nicobar was probably named by the Cholas and has Tamil naming roots.

There is not much justification in lumping together Andaman AND Nicobar together also since they themselves are pretty far apart (Port Blair to Nicobar being 24hrs on a ferry) and with very different racial/cultural composition. Then there are couple of islands in the middle which are neither Andaman nor Nicobar. Kind of like Jammu AND Kashmir and then who cares about Ladakh. It seems there was a proposal by the British to convert these islands into a new country for the anglo-burmese and the anglo-indians but that didn’t (thankfully) materialize.

A big surprise for me was that everyone speaks Hindi there. The main population is Bengali followed by Tamil but Hindi is the lingua franca. This is probably the consequence of a central govt rule in the place. The central government rule by all local accounts is mostly about siphoning funds in the name of tribal welfare and subsidies for a remote area. Most of the foreigners who were living there for long also spoke conversational Hindi. A lot of population is Bangla refugees settled in the 60s when they were fleeing East Pakistan. There are quite a few Burmese who still keep trying to illegally settle in. Britishers had occupied the islands around late 1700s and used Andamans as a big jail (kind of like Australia) but seems there are not many descendants of the convicts.

The most famous landmark, cellular jail was formed after the assassination of the then Viceroy by a convict. It was built most intelligently and operated most cruelly. What I did not know was that the Japanese also ruled the islands and the jail for few years during the world war and surpassed the British cruelty by far. The most famous nationalist to be housed in the jail ‘Veer’ Savarkar is also honored with the local airport being named after him. His clemency appeal does make me wonder where the ‘Veer’ (brave) came from.

There are many different tribes on the islands. Primarily the Andamanese seem more Negroid (are negrito though) and the Nicobarese have features similar to Indonesian tribes. People in charge of the islands are torn between their dual roles of integrating the tribes and not accomplishing the task so that the money flowing to do it keeps flowing forever. I wish the only job the govt would do is to protect indigenous folks from unwanted contact. The Nicobarese were hated by all the local folks unanimously. They seemed to be the tribals who are most congenial with the government and hence have been showered with benefits (like reservations) must to the dislike of rest of the islanders. Incidentally, Nicobar is also off-limits for all Indians except residents and people with ‘some work’ over there.

Overall the islands seemed to me a place with immense potential and future. Its a new place with most people (except the tribals of course) having settled within last 50 years. That also robs the place from any ‘culture’ per se but also gives it the flexibility to become whatever it chooses to. Tourism is booming and european backpackers love the place with high end tourists also starting to flow in (Taj has leased land in Havelock and will start a resort soon). Unlike Maldives, the islands are big enough for meaningful agriculture/forestry to be done on them to provide alternatives other than tourism. The current settlers didn’t show enough industry (as in the trait) to me though. Imagine Islanders falling short of fishermen to supply fish to the teeming tourists. That is because these were not Islanders till a few decades ago and local skills are not acquired in a jiffy. The agriculture also seemed primitive and a total absence of tiled roofs was disappointing (how tough is it to make a kiln!). I think it is for more enterprising people from the mainland to settle in and make it a success that it is destined to be and for the government to get out of the way.

Payment Terms for bootstappers

Long break without a post so thought will put something quick and (hopefully) useful.

Given the importance of cashflows for a bootstrapper an important thing to consider is payments. All the calculations can come to nought if your clients don’t pay on time or (as happens) don’t pay at all! I recently met a good friend who started out as a bootstrapper and his rudest shock was that seemingly respectable companies don’t easily pay for services rendered and many times the payments were small enough that chasing them was costlier than looking for new business. I think the biggest adjustment in mindset from a salaryman to a bootstrapper is the absence of a fixed incoming monthly paycheck. However, once you hire employees and an office the outflow of salaries, rent, electricity, phone, fuel will become very regular. This absence of regular incoming payments is also the biggest impediment to crossing the chasm into the world of entrepreneurship.

So firstly its important to establish paying intentions of clients. Best clients are those you have some history with so that they are honest about payment and delivery expectations. However, new clients are most welcome with just a little bit of checks. Try a small pilot engagement and get paid for it to have a cycle of expectations cleared from both sides. As a bootstrapper short milestones with quick payments works best. Price in such a way that losing your last milestone payment will not kill you. If things go wrong (in more ways than you can imagine) the last payment will surely not come. At that time if the ‘last payment’ was the full charge of your engagement, it can be devastating.

Will just summarize the payment terms to use with your clients

1. Take an advance
2. Don’t start without a purchase order from client. That can give a clear intent to pay a certain sum from the client which is tough to renege on.
3. Create intermediate milestone based payments
4. Invoice or contract should say payable immediately
5. Price such that last milestone is expendable
6. I have never tried, but some folks recommend giving a discount of 5% on early payment. Just mention it as a footnote in your invoice.

Early stage VC

Back after a long break. Thanks to all those who insisted that content here is worth reading.

Early stage VCs in India invest in early stage ventures BUT those started by late stage entrepreneurs. If you are a young, first time entrepreneur with no track record, fire in the belly and a great idea – tough luck. This seems not limited to India since recently I met someone who emigrated to Silicon Valley from Singapore due to this problem.

So,

early stage company + experienced entrepreneur = FUNDING

late stage company + experienced entrepreneur = FUNDING

late stage company + rookie entrepreneur = FUNDING

early stage company + rookie entrepreneur = ?

Alternatively,

Missing funding quadrant in India

I think this is just the lifecycle of startup funding in India and nothing much can be done about it right now. At current risk appetite in India, people bet money on trust which derives from track record. Now either the track record is in the company or the person or in the reference. The ideal reference comes from another funded entrepreneur who would typical reserve it for employees whom he has seen first hand. If funded entrepreneurs in India are less, ex-employees looking to start up even lessor. And angels who are (ex)entrepreneurs even rarer. It just takes time for this ecosystem to setup!

I think the current generation of entrepreneurs will turn angels in 10-15 years and provide the critical mass to fill the early stage funding gap in India. Finally figured out the early stage VCs in India. It also reminded me again that the only credible alternative for young entrepreneurs without access to capital is to bootstrap (which as I have said earlier is not the best way to start but surely the next best).

Pricing for bootstrappers

Pricing is a difficult art to say the least and is dependent on so many factors that this subject itself may be topic of books. We have the benefit of sticking to the small bootstrapping phase of businesses and will apply our learnings of cashflow and paucity of debt, investment in India – few reasons you are bootstrapping in the first place – to discuss some pricing guidelines.

Bootstrappers take pride in running a tight ship, delaying gratification by not paying themselves enough and being creative about doing things no one thought could be done that cheap. Once your costs are so low its very tempting to look at your price as a competitive tool. Its so much easier to go to a prospect and say ‘hey, for what others charge Rs 100, I can offer the same for Rs 60 – sale done. We need to introspect before doing that – what is the reason you are able able to deliver the goods at 60 unlike your competition. If you have created a new business model with a fundamental innovation which reduces price, thats perfect. However, if the only reason you are lower cost is since your costs are low due to small/stingier operations then playing on price might be dangerous.

A friend once gave me a simple formula – find (if you can) how much is the customer willing to pay and calculate how much you can sell for at a profit, then quote higher of the two numbers. The formula is nice and usually works. Just beware that in the low cost Indian economy many people are simply not able to pay much but want your service also. At times what they are asking maybe 25% more than what it costs you. But in small bootstrapped operations percentages have little meaning. Calculate your costs again if you remove all the subsidies like lower salaries, rentals etc and grow your business to 10x. Does it still look 25% profitable? Now projecting costs for 10x your size with zero subsidies is also not the gospel for pricing since otherwise the customer may as well go to the established 10x players. The reality will need to be somewhere in the middle but closer to the later figure. As long as the following works

1. You are profitable on the small base and can scale the operations while maintaining profits, you are pricing it right. If you are ‘subsidising’ the company, thinking that subsidies will scale is going to lead you to a wall.
2. Since you are going to depend on retained profits for growing the company, always try to get a little more profit that you think is enough. It may come from charging higher (by delivering more value) but mostly will come from spending lessor.

Another problem with playing on price is that you get bracketed in that range. A customer which pays you X will refer you to more customer who want to pay X. So if you think it is a temporary affair to play cost, it is not. References are how sales work for bootstrappers and you want the right kind. If you want to play cost to create an initial base be very clear on what you want the projected price to be and then offer a reluctant discount valid for a short period. In fact better than a discount I prefer the try for free option since free is not a price which brackets you. What you really want is the customer to give you a chance even though you have no brand/credibility but buy in to the fact that you are worth the price if your claims are true. What better way to prove the claims than to show/give a free sample. But if the customer can’t even afford the rates you need as a bootstrapper to grow bark up another tree.

You will notice that the above thinking will typically lead to much higher margins than the 15-30% range. More in the 60-80% bracket. Smaller margins workout on high revenues (7.5% EBIDTA works for a Walmart) but to run a small business on a 15% margin is a road to frustration. As you grow the margins will close in to the natural range of your sector or your business. Bootstrapping phase is almost an artificial state which requires a huge stimulus of energy from the founders. With the wrong pricing instead of getting out of bootstrapping you will just end up quitting and going back to a job.

An important question not considered is if people are willing to pay what you want. Once you callibrate what you want with the above, you may want to relook at the business plan’s viability itself.

Example: Opening a call center in a small town

This blog advocates thinking of local opportunities and bootstrapping your way to success with local strategies. Someone may think business principles are universal so what is the difference in the way a bootstrapper will work in India. Here is an example which I think will not exist in a bootstrapping blog of a western writer.

As customer service standards are increasing in India there is significant demand for call centers serving the domestic market itself. Also with increased phone penetrations, teleselling is a strategy no company can ignore. Its a natural evolution if you consider that all the call centers in India were earlier operating from within US serving their own domestic market. Hence, if you have been associating call centers with only offshoring please don’t. Outsourcing yes. It is an ideal function to outsource to a specialist company since it can handle seasonal spikes, experience from across the customers, investment in call center equipment, recruitment/training of personnel etc.

As a bootstrapped Indian startup you want to minimize investments, think local and be creative. All of these come together if you were to create a call center in a really low cost town like say Allahbad. Hmm … lets list fundamental problems – no electricity so power backups will kill a bootstrapper and no english speaking talent. Apart from that there are pluses – low salaries, low attrition, low rentals, low deposits.

Now what if we were targetting only Hindi speaking customers. That seems nice: suddenly this looks like a niche which is not crowded and being in Allahbad seems like an advantage given that people speak better than average Hindi in that place. Suddenly one of the problems has disappeared and almost seems like an advantage.

The other one i.e. infrastructure seems less tractable. Even in bigger cities a full backup is needed to even start the operation and this doesn’t really suit a bootstrapper. Let’s consider the workings of a call center in a nutshell

1. For customer service an incoming number with multiple lines is needed. A switch is needed to operate the voice menu and route the calls.
2. For tele selling even if each person has an independent line its not a problem
3. The result of the call need to be logged in a computer program

To reduce costs, lets drop incoming at the outset. Becoming a telesales/outbound only call center reduces capital investment and hassles. Its an easier sale to businesses also especially if you create an incentive based pricing. If a phone company in Allahbad agrees to give multiple land line phones there is no need for local power to make calls. You can substitute with long battery cell phones at a short notice when needed. Now also break the process of logging results into paper and online. Create paper based processes which are later transcribed online. Since labor is cheaper in India, the western insistence of full automation need not be followed.

This for me is an good example of a bootstrapped Indian business. We have taken cognizance of a typical Indian problems and have created a ‘thought-business’ in the spirit of this blog. We could really make a detailed business plan out of this and not gloss over details but that is left as an exercise for the more dilligent/interested reader 🙂