About when we grew a company’s bottom-line by 5% over 3 years

How it began

Alpha Limited is a 5 year old company providing IT & ITes enabled services with a top-line of over USD 6Mn based out of India with offices in Sydney, San Francisco & São Paulo. Prequate was brought in to help Alpha manage growth during the period of rapid scaling. Alpha was in a spurt stage with idea of expanding its service visibility overseas. They relied on a set of marketing consultants for their onground presence in the overseas locations.

20140627-163257-59577785

Getting to work

Alpha started a continuous engagement model that allowed Prequate to develop the management reporting frameworks within the CFO Office offering. Over the course of the next 6 months, Prequate became an integral part of the business with specific charge of the management reporting for Alpha. In the course of such delivery, Prequate Team noticed:

  • Huge expenses on commission to Business development teams
  • Commission was a standard rate of paid out at a flat rate on sales upon collection
  • Established business practice was the  logic/rationale behind the % paid and not visited periodically

While BD is critical function, the payment of standard rates that don’t match business interest meant BD meant transactional support and no partnership approach.

The approach

The main questions to be addressed behind any variable based payment needed to be addressed. We asked:

  • Does it keep the teams motivated?
  • Is there continuous incentive for continuous involvement?
  • Do incentive payments breed loyalty?
  • Do the incentives accrue for greater involvement?

 

⇒  A new incentive plan was needed.

Action Time

1

Detailed contract study: Identify and develop master tracker of all BD agreements, past and present

2

Understand the rationale: Speak with all key past and present BD professionals on how they viewed the terms

3

Ask the fundamental questions: Do the terms of the relationship address the long term vision keeping in mind the above fundamental questions?

4

Create responsibility matrix: Break down the activities and related responsibilities over their critical parts

5

Develop new scheme: Create a scheme that rewards greater involvement while reducing cash outflow

6

Buy-ins: Communicate with current providers on new scope and greater opportunity and help visualize lon term win-wins

Activity x Continual Generation Structure (AxCG)

New Incentive Plan.png

Impact

  • Win 1 | Net addition of ~5% to net profits over 3 years
  • Win 2 | Increased efficiency and long term involvement by the BD team
  • Win 3 | Attrition rates lower by 22% over 1 year
  • Win 4 | High loyalty for continuing accounts among BD teams
  • Win 5 | Proactive account management assistance from BD teams
  • Win 6 | Simplified measurement and monitoring of the sales cycle

 

What happens when Finance goes beyond financial statements

 

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.

 

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How & Why Tech companies today are seeking help today

It may come as no shocker to tech firms across the world that ‘Tech development’ as an industry has been slowing down. Large enterprises don’t seem to be buying as frequently and fervently as before. Smaller development projects seem to have dried up. Growth estimates (Gartner Q1 2017) to 2020 hint at a 3% CAGR over the next 3 years.  At the same time, for the first time in history, 6 among the 10 most valuable firms in the world are technology companies! If the logic of stock price being indicative of future earnings, something seems to not add up. What is really happening and what should a tech company be doing?

Understanding it takes some retrospection.

What happened while I was working?

Over the 20-year period beginning in the mid-80s, there was a flurry of businesses which jumped on the convergence of affordable computing and leap in telecommunication and the opportunity it threw up for businesses across the world. Large enterprise technology development efforts with large organizations starting to implement technology as infrastructure to add efficiency in operations and bring data sets together became the new age conquerors of this portion of the information revolution. Some big names that emerged were the IBMs & Oracles of the world and closer to home, the Patni, Infosys and TCSs of the country.

Around 2005, a new buzzword emerged with the improvement in telecommunication ecosystems across the country – Cloud. Information could now be stored anywhere and accessed anywhere. One did not have to maintain physical infrastructure to be able to house information, which meant that a small business could now hire only the infrastructure they needed at the efficiency of a large data center. Smaller organizations now jumped in as infrastructure costs and setup costs was virtually nil and barriers to entry were virtually eliminated. A few years in, a tiny revolution was brewing with the name of SaaS. A new revenue model of charging for use and value rather than the committed models that existed. This picked up immediately as now the cost of subscribing to technology solution was close to nil. The ‘innovators’ and ‘early adopters’ of early 2005 now made way for the ‘late majority’ in less than 5 years.

Business as usual was threatened for the first time.

An early realisation for a few

Many businesses across India, while cognizant of the change, decided to continue as usual and wait it out. They believed that enterprise technology over a one size fits all model was a passing fad as large organizations were not going to take the bait for a few pennies less. A few others on the other hand, understood how it challenged the entire world.

One company among them, whose efforts to take this cognizance head on, was Cognizant Technology Solutions. In late 2011, with the help of sound consulting advice of a large consulting behemoth and introspection on the lines of ‘The Innovators Dilemma’, Francisco D’Souza (Frank) took on the challenge of keeping Cognizant relevant. While the obvious strategy would have been for Frank to concentrate on growing the reach of the core businesses and get the new blood’s brightest working on the building the future businesses, he did the exact opposite. He first broke the business into 3 strategic verticals.

  1. The core businesses which made up the mature service & product lines – mature cash cows where competition was high and so was the competence
  2. The businesses that can potentially become great money spinners in the near future – higher margin new competencies existed and can be fostered and built into a core business in the short term
  3. The forward future technologies and business models – that are highly profitable, if you could find a customer

He jumped right into the 3rd giving up all operational activities. He built crack teams to scan for the latest in technology and build expertise. He got them to meet every client and learn from them. If it was important enough a technology to have immediately, acquire. If you could cultivate, invest heavily and wholeheartedly. He would effectively spend 70% of his time on this vertical which would later get the name of ‘Emerging Business Accelerators’. A costly choice in the short term which would draw up all possible accumulated reserves and if the strategy did not work, a sure collapse.

Work it did. CTS is still valued at twice the PE multiple of its peers and continues to boast of one of the highest earnings growth in comparison to most IT behemoths. While it seemed counter-productive in the short run, it paid off many Xs over in the longer run.

The next wave is rising

In 2015, this further matured. With the evolution of the SaaS business model, companies now began to be able to deploy solutions at virtually pennies on the dollar. And in 2017, another big leap happened. The first day of the internet of sorts. An even bigger transformation. AI & ML. Essentially, if it’s a problem that’s been solved before. Consider it solved forever. Self-repairing and regenerating software. Doomsday conspiracies aside, this is going shake things up all over again. In under 30 years, the industry transformed 5 times.

Are we looking now?

While many tech companies have found a new niche, a lot of the infrastructure is not leaner, on-demand and more potent. Companies have begun to build trust on platforms rather than on native solutions. Rather a known referred & recommended devil than an experiment of a few million $ right? While the choice has been obvious, the sheer math is threatening.

Are we really looking?

Let’s understand the math. A disclaimer, a very simple dumbed down math for the benefit of all who read this, who may not be a technocrat but in pure software development services for other product companies.

As client-server models have started becoming service-oriented-architecture (SoA) platform businesses, the billings initially increased. Development time for creating a platform meant the seller has a lot more control of how he wishes to price as it requires ‘product minded’ development companies (say, 100 hours).

Redundancies in common requirements across similar organizations are removed as platforms have grown. Say, savings of maybe 70 hours.

So, under SaaS/ PaaS/ IaaS, the 70% time saved is effectively billability lost today. This could have been billable revenue for a development company, 7 years back when platforms were not yet mainstay.

Evidence? The enterprise market will register 7% CAGR as compared with IT services which will be looking at a CAGR of under 5% over the next 3 years. Add to this, 28% of all IT expenditure will be towards cloud-based solutions by 2021 with IaaS growing at a 23% CAGR by 2010 as per Gartner.

What is everyone doing then?

A lot of the technology development firms are beginning to face the heat as many large development projects are now requests for customization of existing SaaS platform solutions. Many them are starting to work with advisory firms across the country and begin planning for enabling their sustainability and continuing generating shareholder value. The good news is that, unlike manufacturing or infrastructure businesses, as fast as the industry changes, businesses can too.

Let me take you through some of our experiences over here of how you can be agile in 2018. Almost all of the organizations in the technology industry we have advised, that have gained a certain scale have started sensing the need for a course correction exercise. A few specific examples of how they were able to achieve transformation could help perhaps.

Let’s take an example of one of the companies we have advised, Gilfrend (names and some specific information have been changed/ kept out to honour our commitment to client confidentiality). They have been running a profitable business concentrated on development services for the media industry. Since the last 2 years, they have been finding themselves losing to competition. Their CRM on win:loss showed a clear indicator of pricing being a key point of decision-making on lost bids. Outbidding typically meant under-pricing here.

The management took initiatives to reduce the cost of operations to be able to bring down price expectations but to no avail. Smaller outfits, with lesser infrastructure spends, could afford to undercut on contracts as credibility was now shared by a platform company. Under-pricing meant digging a deeper unprofitable spiral.

3 months into advising the company, the real problem slowly surfaced across various board meetings and market review. The technologies they had built a significant competitive advantage around was also the most price elastic. They had built a silo of expertise in a soon to be crowded segment. While making a strategic choice, their strategy to specialise was costing them viability.

Getting out of this situation would require a concerted rethinking of what the company stood for. Over the next 3 months, they embarked with our help into redesigning the way in which the management viewed the business. ‘No more Business as Usual (BaU)’ was the mantra across the management.

Step 1.

Understand and challenge why we were working on each vertical. Now that there was no BaU, everything was questioned. GP profitability was not enough of a reason.

Step 2.

Understand and evaluate what segments & technologies are worth spending time on growing competencies in over the next 3 years.

Step 3.

Understand how the buying process works and what are the expectations from each vertical and the ability of growth in accounts of each vertical – cross-sell/ up-sell opportunities.

Step 4.

Do a thorough analysis on market attractiveness frameworks to identify the verticals and develop a strategic roadmap for the organization as a whole.

Step 5.

Run simulations on multiple scenarios of strategic choices and evaluate the impact on cash flow, ability to sustain growth, use internal talent pool, longevity of relationship, difficulties of sourcing, fitment to plans and future potential.

Step 6.

Nib what doesn’t fit. Do more of what does fit.

Step 7.

New mantra: ‘Experiment. Simplify. Concentrate’.

Over a period of a year, the company would potentially add over 12% to their bottom-line while becoming leaner by 20% and reducing unutilised time by 15%.

While this may sound magical, none of it was rocket science. Mostly common-sense in retrospect, but seldom prospectively.  it meant taking some hard calls for the management. A BaU routine meant that they were so busy with operational activities that looking inward was something they had forgotten. Having a flexible, dedicated, concerted effort on finding research backed outcomes is what an advisory team brought to the table in this situation.

The same rules or approach need not apply ctrl c + ctrl v (If they did, a consultant would be replaced by AI this year too). The sensitivities and culture of a business is what makes one organization different from another. Understanding this is probably Step 0 and marrying this Step 8.

What can I do myself?

If you look at what you need to do, for yourself as a company if you are unable to access a professional who can help you do this well, let us break it into simple overarching mantras.

Logically speaking, if you are a pure services company or a company with run of the mill development strengths (anchored on cost or labour arbitrage), by building great products for your clients, you may have shot ourselves in the proverbial foot. It’s not all bad news though. While the nature of game has changed, the size of the pie has increased. More and more organizations can afford and are letting in technology into their businesses. There will be more development effort to come your way.

But….

You need to step up.

Learn new skills (read technologies).

Learn to sell better (read solution selling than price warring).

Learn to price better (read Equity + Revenue rather than just sales).

Remove internal redundancies (read Performance rather than cost cutting).

You shouldn’t be worried.

If you are product company or a services company with a defined focus (seeping through the DNA of the organization) or in a new age technology specialisation, you are set. This is the time to make merry.

The world is now your oyster. It’s becoming easier for people to find you and for you to find people. There can’t be a better time in history to exist. Your Innovators and Early Adopters are weeks from each other if you have something worthwhile to give the world.

What happens next?

The Bad

  • Security to get all the attention. More instances of security breaches will emerge as data has become the new asset class worth more than the cash flows of a company.
  • Debate. The debate of technology taking away jobs will take up a new heat as large companies begin to let go of teams in the advent of better technology and AI/ML.

The Neutral

  • Skill-gaps. Education and knowledge building in recent technologies and newer development methodologies.
  • Consolidations. Industry-wide consolidation of enterprises will lead to companies merging strengths together and capitalising on higher utilisations and lower costs.

The Good

  • User Vs. You. Businesses will be keener about user c-sats as now individual users have more choices and the cost of switchover is low.
  • Level-ler playing field. You don’t need to be a mammoth 100,000 work-force to deliver a quality product. A 13-member team at Slack delivered a $Bn giant in under 18 months.

Conclusion: A beginning

Let me quote some Dylan for explaining my thoughts to the point:

Don’t stand in the doorway

Don’t block up the hall

For he that gets hurt

Will be he who has stalled

For the times they are a-changin’

Credits: The Times They Are A-Changin’ – Bob Dylan

If you think your organization is facing a similar set of dilemmas, situations commanding an understanding of Strategic Finance or you know you need to go forward while you’re still ahead, I can be reached on nag[at]prequate.in.

5 factors a VC/ Angel Investor considers while making investment choices which they may not tell you

One question lingering in the minds of every entrepreneur looking to raise funds is what the VCs and angels are looking out for and what backs their decision in investing in a particular startup.

dt150221

Photo credits: http://dilbert.com/strip/2015-02-21

Here are 5 factors a VC or angel considers while making investment choices.

1

Is there a need for the solution?

Aspiring entrepreneurs find solutions to problems which they think are revolutionary. What they skip is validating the idea! Investors look for a solution which solves a mass problem and not just that of your mother or family or friend.

The key is the problem and not the solution!

A solution which is born out of an identified problem is the winner amongst other solutions looking to address some problem.

2

Is the market big enough?

The “total addressable market” of a business is what grabs the attention of the investors. With the expectation of returns on their investment, investors want to ensure the market size has the potential for growing sales. Your aspirations of being a market leader or creating a niche market is what will excite the investors.

The product or service may not target the entire market at once but the potential and a detailed phase-wise roll-out plan is what makes it investible.

3

Is it the right timing?

Are you entering an industry which is bustling with new entrants or one which is here to stay?

Investors want to know about the stage the industry is in at the time of your entry. If there are already enough players doing what you are proposing to do, an investor might not see you as a good fit in his portfolio unless you have an extreme differentiating factor.

4

Why you?

Investors want to know that your team is capable of implementing and executing the idea. Co-founders need to acknowledge their areas of expertise and their limitations.

An important factor that investors take into consideration while making investment choices is whether or not the values of the co-founders match with theirs.

If your startup is built on a value-system don’t forget to mention it. The investor will be all ears on this one!

5

Is it Scalable?

Growing does not mean scaling, yet growth and scalability are two sides of the same coin.

Growing means you are adding resources at the same rate that you’re adding revenue. On the other hand, scaling is about adding revenue at an exponential rate while only adding resources at an incremental rate. The key is to recognize the strategies that help create scalable models that explode without burning through bigger and bigger investments.

While the investor is interested in how you plan your sales growth, what he is more interested in is ‘CAN IT SCALE?’!

So go ahead. Walk into the meeting with potential investors with a positive attitude and belief in your business proposal. Drop hints that you have already factored these 5 factors. Let us know how it turned out with an email to us at connect[at]prequate.in or visit us at our [Website].

About when we remodeled a company to 10x returns

How it began

Quattro Private Limited is a 4 year old company providing hardware development services with a team of over 100 employees. Prequate was brought in to help Quattro remodel the business for proposed investments.

Quattro had just developed a great product with good interest for introduction to rural markets. They were aiming to manufacture the products with a EBIT of 27% of USD 10Mn in 5 years. They had been approached by investors who had asked them to perform a scalability assessment.

dt150509.gif

 

Image credits: http://dilbert.com/strip/2015-05-09

Getting to work

Quattro started a limited engagement that allowed Prequate to develop the renewed business model within the IBM&A offering and strategize investments.

Prequate started off with looking into the product that was developed. In the course of such delivery, Prequate noticed that:

  • Product had been designed with abilities to remotely manage the software backend
  • Model was built on a product sale model that netted cash on each product sold
  • Working capital requirement bloated due to lead time payments
  • Profit needed scale which needed continuous inflow of money

While the product delivered ongoing benefit, the revenue model was one-time only.

 

The approach

Prequate deduced that the fundamental business model was a value-in-use as compared to value-on-sale. It meant that the business model needed to address:

  • Is the model rewarding usage while de-risking delivery?
  • Who gains from using the product – the buyer or someone else?
  • Are we profiting from the continuing value of the product?
  • Can contracts become onerous someday due to support?

 

⇒  A new approach to the business was necessary to highlight value.

Action Time

1

Perform a scalability assessment: Identify the key variables that provide sustaining value to the business

2

Fit an ecosystem fundamental: Develop a new business model to boost the NPV of the business and create an eco-system

3

Redesign the revenue model: Developing continuing revenue streams based on usage

4

Re-design the fund raise strategy: Create new raise plan in a tranched manner using off balance sheet funding arrangements to increase IRR and decrease dilution

 

Improvements made

Prequate redesigned the business model that:

  • was based on a dynamic franchise + sale model of the devices and had a revenue model was based on per use basis
  • strategized delivery of training manuals online over displays in different vernaculars for faster adoption
  • created avenue for performance incentives for promotion and use
  • split cash flow to
    • equity infusion: development of content, marketing
    • debt: device roll-out
    • off-balance sheet: working capital

 

Impact

  • Win 1Cumulative EBIT increased by 1000% over a 5 year horizon
  • Win 2Net jumped to 47% from existing 17%
  • Win 3 | Adoption risk brought down to 25% from 80%
  • Win 4 | Cash requirement reduced from USD 10Mn to USD 4Mn
  • Win 5Big Data opportunities opened up in 3 years

 

What happens when Finance understands your product

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.

About when we saved a company ~20% of subcontracting costs

How it began

Beta Limited is a 15 year old well established manufacturing company with a top-line of approximately USD 3Mn based out of India. Prequate was brought in to help Beta manage further growth by analyzing and changing old systems and introducing future thinking.

Beta was in a mature stage and wanted to move to a people independent setup. They relied on experience and rule of thumb for determining the key controllable factors in their industry – pricing and costing mechanism.

Image credits: http://dilbert.com/strip/2010-05-05

Getting to work

Beta started a continuous engagement model that allowed Prequate to develop the management reporting frameworks within the CFO Office offering. Over the course of the next 12 months, Prequate became an integral part of the business with specific charge of the management reporting for Beta. In the course of such delivery, Prequate Team began the process of overhauling the finance function and noticed that:

  • Costing of all products were on an ad-hoc basis for specific projects only
  • Pricing mechanisms were based on rule of thumb and increments factoring the BOM costs only
  • True profitability for each LOB and product line was never evaluated as products were launched

Costing and pricing function are primary to any business, more so for a manufacturing company where sustenance becomes questionable if not adequately assessed and monitored. Each unit may become potential onerous to the company.  A new sceintific approach was necessary.

The approach

The main questions to be addressed behind any cost or pricing mechanism need to be addressed:

  • Does the system capture all costs?
  • Are there costs factored? Say, the cost of the standard delivery and collection terms and associated credit costs or customization efforts and related manpower costs?
  • Is there information flow for studying profitability on SKU basis or is it a work back?
  • Is costing information dynamic? When was the last time it was updated?

⇒  A new costing philosophy which was linked to pricing was needed.

 

Action Time

1

Detailed operations study: Understand the setup and functioning of all systems including the composition of every product and its manufacturing line

2

Review of SOWs & Job orders: Study the term, conditions and pricing system and the competitive position of the company in each SKU with dependencies between product lines

3

Process Study: Study each process in isolation and then as a whole as a part of the organization to analyze gaps in understanding and cost capture

4

Analyze wastages: Understand the products and the wastages associated at each step to set up standard measurements

5

Understand consumption: Understand the consumption patterns of different products and their respective reorder and fulfilment levels

6

Build Standards: Build out standard worksheets with manufacturing workflows tied in which will form the new norm for cost capture and reporting and get buy-ins

 

Improvements made

  • Dynamic BOMs were incorporated into the system to generate real time feedback across product lines
  • Renegotiations with sub contractors since their pricing was constant and not pegged to the size and nature of work
  • Study of individual processes and production lines led to recognition of numerous hidden costs
  • Building of a dedicated purchase team to reduce wastage and monitor levels with defined goals to reduce purchase costs
  • Developed a method for recognition and accounting of abnormal wastage which was not even identified before
  • Introduction of reporting at a manufacturing line level on efficiency and wastages was introduced

Impact

  • Win 115%-20% reduction in subcontracting in Year 1
  • Win 2 | 12% reduction in wastages due to continous monitoring
  • Win 3 | Economies of scale due to consolidate buying from ‘Purchasing Team’
  • Win 4 | Higher accountability + Better cost determination of time costs due to improved reporting and accountability
  • Win 5 | Finance thinking from all departments within the organization

What happens when Finance thinks business

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.

Private Placement – A Practitioner’s Guide

There are a lot of questions about funding and the right way to work with them. Considering the changes in the Companies Act, 2013 which has changed some of the basic fundamentals and imposed some restrictions for investor protection, the challenges faced by startups have increased.

So we thought that putting these thoughts together in an instructional FAQ would help as part of our ‘Practitioners Guide’ series.

Disclaimer: Please note that these are our answers  based on our experience in being advisors on various Seed/ VC/ PE/ Technology collaboration transactions. They are for the limited purpose of educating founders. The facts and the procedure to be followed can vary significantly based on the exact nature of the transaction and the stage of the business. 

How can I receive
funding into my venture?

There are primarily only 2 ways in which money enters and rewards leave the business.

 

Debt

(Loans, Debentures, Guarantees, LCs, Convertible Debentures)

 

§  Harder to access for most start-ups

§  Usually taken when business is likely to generate cash flows in the near future

§  Expensive in the short term, Cheaper in the long term

§  Utilization is primarily for shorter gestation based purposes – marketing of a B2B product, new factory premises, new equipment, working capital

§  Usually comes with covenants on how the funds need to be put to use

 

 

Equity
(Common Stock, Equity shares, Preferential shares, Convertible Debentures)

§  Easier to access for most start-ups (as cash required is not in relation to their asset base but their ability to generate future value)

§  Usually taken when expenditures are in longer gestation activities such as product R&D, customer acquisition, content development, platform development

§  No outflow in short term, Really expensive in the long term

§  Occasionally comes with covenants on how the funds need to be put to use

 

 

Where do start-ups go wrong?

Roopa’s Notes: As a start-up, one of the things Founders fail to understand is that Equity carries a rate of interest of between 20-30% (sometimes as high as 40%). Businesses tend to think that the fact that they are saving current cash flow and pushing repayment liability is the only consideration. Equity on an average costs the Founders 2.5x to 3x more than debt does.

Nag’s Notes: What is important is the long term value that this person/ institution brings to you. If the value is as short-lived as the cash brought in, you need to reconsider parting with Equity. For a great VC, we have seen Founders chose lower valuations. Further, Equity does not mean that you don’t need to repay a VC/ PE. They are a business just like you. Just that they need to see viable ways to access returns from investing in you.

For the purpose of this document, we will delve a little deeper into the second one – EQUITY, where most start-ups/ mid-sized companies wish to have more clarity.

 

 

 

Ok. For Equity,
what options do I have for my raise?

2 ways provided by Companies Act, 2013 –

  • Private placements
  • Rights and Bonus issues

 

Where do start-ups go wrong?

Dilip’s Notes: A private placement is when an offer at a certain valuation is made to potential investors. Investors need to bring in the required capital for the valuation fixed in the offer for private placement. Investor discussions are usually the first activity that happens in such cases and term sheets get signed. The offer is then made and noted in the respective places. A rights issue on the other hand is made to investors who are already shareholders of the company. An offer is made to all the existing shareholders to subscribe at a certain value and every shareholder has a right to offer his interest to subscribe.

Nag’s Notes: There is a logical reason that the 2 routes of placement have been provided. Private placement is the right route for a new investor who is coming in at an agreed upon valuation. During our consulting of start-ups, we have encountered several circumstances where the minimum capital requirement of INR 20,000 (as explained in the table to follow) of face value cannot be fulfilled especially at the seed stage. Founders tend to take a shortcut method here at times to comply. This might not always be the right way  in the long term scheme of things.

 

What is a
Private Placement really?

Private Placement is a term that is often heard of but rarely understood in its entirety. Let’s look at a few pertinent questions.

When you are making an offer to issue new equity shares (to less than 200 persons/ institutions), you need to comply with certain provisions of Companies Act, 2013.

Ref: Section 42(2) of the Companies Act, 2013

Where do start-ups go wrong?

Roopa’s Notes: A common problem that persists in the system is a lack of understanding of Private Placement. There have been many instances where companies have resorted to other ways of structuring an investment which are perceived to be less cumbersome. They may issue shares to investors through the rights issue channel since it does not require a Valuation Certificate by a registered valuer or a requirement to adhere to the provisions relating to the minimum face value of the equity instruments.

Dilip’s Notes: There are a few things that a Founder should be aware of when choosing the route to be followed.

  1. Private placement allows for a valuation exercise to be conducted which may be a logical arms-length basis for an investor discussion.
  2. It sets the precedent and valuation parameters in stone. This can be leveraged in future rounds of funding.
  3. It is a lot cleaner way since it ensures that companies comply in letter and spirit of the law.

Bordia’s Notes: The ideology behind the law is the most important aspect. Though it seems slightly hard to comply with, it is instated to ensure that investors are protected (especially smaller investors coming in at the seed stage). It also prohibits a company from accepting too many such small tranches of investment to bypass the rules relating to acceptance of deposits.

 

 

 

Can we have a better understanding
of Private Placement?

Issuing capital in securities through Private Placement would require an in-depth understanding of the provisions laid out in the Companies Act, 2013 which mentions the manner, restrictions and provisions for Private Placement.

Ref: Section 42(2) of the Companies Act, 2013 read with rule 14(1) Companies Rules, 2014

We understand that a Private Placement as mentioned above is any offer of securities or invitation to subscribe to securities to 200 people or less in a financial year. The section requires that any such offer made is only through the issue of a Private Placement Offer letter and as per the prescribed conditions. This should be accompanied with an application form for the persons receiving the offer letter to indicate their acceptance.

Exception – 200 people or less does not include employees or institutional buyers.

Key procedural aspects
for a private placement

  1. Special Resolution needs to be passed approving the Private Placement terms
  2. A private placement offer letter needs to be created and circulated
  3. Offer should not be made to more than 200 people
  4. Only one kind of securities can be issued under one offer
  5. The subscription should not be for less than INR 20,000 face value
  6. The price should be based on the valuation conducted by a Registered Valuer
  7. Allotment of securities should happen within 60 days of the receipt of Application monies

 

What is the
documentation required?

A complete record of private placement offers in PAS 5, offer letter in form PAS 4, along with prescribed other details need to be filed with the RoC within 30 days. Form PAS 3, a return of allotment of securities, must be filed with the RoC within 30 days.

 

Key questions
that are on Founders’ minds?

What should the number of shares offered for a single round be?

The Offer size should be a minimum of INR 20,000 face value of the securities.

 

Dilip’s Notes: This means that if your authorized capital is INR 100,000, you will need to issue not less than 16.67% (20/120) of the capital of the company.

 

What should be the price? Can the securities be issued at any price?

The price of the securities should be based on a valuation certificate given by a Registered Valuer.

 

Nag’s Notes: A reasonably justified valuation is based on the exercise conducted by a valuer. There are no rules of thumb here. Simply speaking, a $ billion company may have an authorized capital of less than USD 100,000 also. What is important, is the valuation itself.

 

Is there a restriction on using the application money? When can I begin to use the proceeds?

The application money must be received in a separate bank account and cannot be utilized for any purpose other than for allotment of securities or repayment of monies. Further, any securities in relation to an offer made under private placement must be allotted within 60 days of receipt of the application money.

 

Roopa’s Notes: It is important to not utilize the money till the same has been issued and filed with the authorities. The maintenance of a separate bank account is also one of the most important aspects which can ensure that this does not happen.

 

What do I need to do? Do I need to obtain approval from shareholders?

A special resolution (not less than 75% of existing shareholders) has to be passed approving the private placement.

Bordia’s Notes: The simple logic for this is that any capital related transaction affects the shareholding of all the current promoters and investors. This provision protects all the shareholders from instances of future misunderstandings.

 

 

 

 

How different
is a Rights issue?

Rights Issue means offering shares to the existing shareholders (only) in proportion to their existing shareholding. Procedurally, there is no requirement for a valuation certificate for rights issue.

Roopa’s Notes: A particular existing shareholder can choose not to subscribe to the offer if he so wishes  to but each shareholder is granted with the same rights as everyone else.

 

What is the benefit
of taking the right Private Placement route?

Private Placement requires the price to be based on the valuation by a registered valuer thus the price is determined on a logical and justified basis. It also acts as an internal benchmarking exercise and helps outline the milestones.

Nag’s Notes: An investment done through Private Placement provides complete transparency of the entire transaction and reduces the complications during a Due Diligence at the times of subsequent rounds of funding/ investment.

 

On this document

 https://www.linkedin.com/in/pradyumnanag/  https://www.linkedin.com/in/rakeshbordia/  https://www.linkedin.com/in/roopakrishnamurthy/  https://www.linkedin.com/in/dilipraj/
PRADYUMNA NAG RAKESH BORDIA ROOPA MURTHY DILIP RAJ


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A Critique on the 9 Crucial Factors for Successful Strategy Implementation using Dilbert

The success of a plan is not in the planning but in the execution. It is estimated that over 60% of strategies fail because they are not implemented. When asked about challenges, managers responded that their biggest concern is “It’s the successful implementation of a strategic plan” or “It’s getting your strategy done.”

With the number of management executives who are trained on building strategy plans and attend executive programs on various strategies, the one thing that needs to be emphasized is the ‘act of getting things done’ as outlined in the book ‘Execution:  The Discipline of Getting Things Done’  by Larry Bossidy and Ram Charan.

According to Larry Bossidy and Ram Charan, the heart of any Strategy Execution lies in 3 core processes: Strategy, People and Operations.

STRATEGY

1. STRATEGY FORMULATION

1The process of laying out the strategy is a significant factor, but not the only crucial factor. However, it defines all the other factors and how they can be achieved. As laid out in the paper, the central conclusion of research indicates the importance of procedural justice. All levels of the organization have different perceptions of strategy and interests in the formulation process. Unifying them is the task of the management function. Thus, unifying strategy must be consistent and accommodative.

 

2.ORGANIZATIONAL STRUCTURE

2Organizations are continuously thinking of adapting to times. Having a strongly thought out Strategy supported by an organizational structure is half the process in successful implementation. Further, different strategies require different organizational structures that can allow action items to flow down smoothly across levels. For example, executing a strategy to permeate leadership requires having a structure that allows more decentralisation of decision making activities. As pointed out by Olson, Slater and Hult (2005) four different combinations of structure/behaviour types of: management dominant, customer-centric innovators, customer-centric cost controllers and middle ground have to be matched with behaviours that best serve to facilitate the process of implementing a specific strategy.

PEOPLE

3.EXECUTORS

3

Organizations are made up of people. People in an organization take up responsibilities and become responsible for certain activities. According to the paper, enrolment of the top, middle and lower level management is essential for the purpose of rolling out a strategy. However, organizational structures are dynamically changing to become more flat so that they can be quicker and more responsive. While the hierarchical structures worked in the 20th century. In the 21st century organizations, people at various levels are required to take ownership of functions that work directly with the strategy as well.

Further, the most important part of the execution with relation to the executors will be the selection of the team of executors and arriving at how they need to be motivated to ensure that they work proactively for the success of the strategy.

 

4.COMMUNICATION

4While the strategy and team can be put in place in an organization, what makes the glue is establishing the right channel and mode of communication. Once the strategic plan is in motion, the organization needs to be brought into a single binding communication philosophy which ensures that right things are escalated as and when they become critical and avoiding failures due to inaction/ indecision. Further, organizations need to also be aware the importance in learning from one another to avoid future failures at the granular level. As put very beautifully by Alexander (1985), the content of such communications includes clearly explaining what new responsibilities, tasks, and duties need to be performed by the affected employees. It also includes the why behind changed job activities, and more fundamentally the reasons why the new strategic decision was made in the first place.

 

5.CONSENSUS

5Getting the buy-in from the organization and all levels is extremely important to ensure that the strategy is played out as envisioned. This can only happen when the organization feels that they are in on the decision making consensus. People care only about leadership that they have willingly provided, be it on strategies or on the leader itself. Further, a lack of consensus can lead to creation of obstacles in the implementation of a strategy.

As Floyd and Wooldridge argue, strong consensus exists when managers have both, a common understanding of, and a common commitment to their strategy.

 

6. COMMITMENT

6No amount of consensus can lead to execution unless supported by commitment.  As pointed out in the paper, strategy implementation efforts may fail if the strategy does not enjoy support and commitment by the majority of employees and middle management. This will hold true irrespective of whether or not consensus was achieved at each and every level of the planning. Commitment means that degree or extent to which each owner feels associated in order to support it without an immediate benefit accruing to him/ her. In flatter organizations, authority has no place. It’s all about accountability and ownership. Hence, commitment needs to be existent and permeating across the organization to ensure that the plan gets implemented.

OPERATIONS

7.RELATIONSHIP ACROSS FUNCTIONS AND LEVELS

7The relationship between corporate business units and inter-functional processes defines the functional competencies, allocation of resources, decision-making participation and influence, inter-functional conflict and coordination. As pointed out by Slater & Olson (2001), the relationships between different strategy levels also reflect the effect of relationships among different cross-organizational levels on strategy implementation (Slater & Olson, 2001). There is a significant trust required between functions in order to understand the long term implications of a strategy. If any lose sight of the end goals or get disheartened, the implementation may fail completely.

 

8.IMPLEMENTATION TACTICS

8The planners and executors both need to be a part of the implementation. The planners need to facilitate an environment that is conducive for the smooth implementation. Nutt (1986) identified four types of implementation tactics used by managers in making planned changes: intervention, participation, persuasion, and edict. In order for implementation to work, there must be sufficient direct and indirect motivational methods that need to be used as well as a certain sense of urgency to facilitate the change in thinking and direction of efforts.

 

9.ADMINISTRATIVE SYSTEMS

9While strategy is being implemented, the organization needs to have a strong enough review function that ensures that progress is monitored and managed. In the absence of review, there is absence of control over the manner in which the organization is carrying on implementation. Further, a strategy without accountability cannot be successful and monitoring systems are the only way to ensure accountability is taken seriously. In the absence of proper administrative systems, you cannot have cohesive and sustained implementation.

 

This document is a critique on the paper ‘Making Strategy Work: A Literature Review on the Factors Influencing Strategy Implementation’ (written in 2006 by Yang Li, Sun Guohui & Martin J. Eppler at the Business School, Central University of Finance and Economics, Beijing, China in collaboration with Institute of Corporate Communication, University of Lugano (USI), Lugano, Switzerland) which puts together a synopsis drawing out the nine most acknowledged crucial factors for a successful strategy implementation.