Thursday, October 25, 2007

Issues with partnerships when starting ventures.

As an entrepreneur, I have had quite a few offers where people come to me with ideas that they have come up with. Some are quite good actually and some not. People expect me to fund these ideas and take them to market. Rknowsys sometimes does help people with this. I have had quite a few unique problems in this process. Our usual modus operandi is that we first discuss the idea to see whether it does have monetary potential. After that we look at logistics and issues involved in taking it to market. We work with some management consultants. We also work with for Intellectual property issues. After that comes the technology part which is where R-Knowsys is paid either with cash or stake in the new venture i.e. R-Knowsys acts as an incubator. We have relatively easy access to VCs due to our partnerships.

Now, a lot of people underestimate the effort and difficulties involved with entrepreneurship. We need a very well defined product/service offering. We need clarity on what we are NOT doing and at some point people need to be paid for services - including R-Knowsys built prototypes. Recently I have had 3-4 people come to me with ideas. One of the ideas was a pretty good one too. My friend wanted to have a web-site dedicated to educating consumers for a very specialised financial product. He wanted to make money off advertisements. Not a bad idea but I wasn't sure if people will visit the site just for education. I pitched the idea of comparing different products in terms of features and cost and then actually selling the product online. We got pretty excited and R-Knowsys built a prototype and we started going about making the business plan. We made some initial progress but then we started facing issues. Eventually my friend landed a very high paying job and risking that for this venture did not appeal to him. He lost interest and dropped out. There were a few issues which could have been handled better. We had a deal with various vendors. I had paid some of them and it was understood that my friend will pay for one vendor. The liability was split roughly based on stake in the venture. One of the vendor's work was slightly short of our expectations. My friend resisted paying this vendor and I ended up picking up the tab as I have continuing relations with this vendor. I think that this is a very important decision that should be made upfront. What happens to liabilities if the venture is abandoned midway?
The second issue is that R-Knowsys is sort-of expected to put in effort for prototypes/solutions and valuation of this work could be more professional. For Eg. Lets say we put in 3-4 man months of effort for a working prototype which we demonstrate to a VC. What is the valuation of this? Now, we are a service company and charge in dollars/hr for our work. We are based in India and though we pay on par with the market, this is lesser than the actual earnings. Now I believe that the valuation should be what we would charge any client for this. i.e. It should be around USD15k for a 3-4 man month effort. We have had people looking to value our contributions based on our cost rather that opportunity cost. We are working on correcting this, the time/effort we spend on these projs should be considered as lost opportunity with respect to our services business. This has been one of our bigger challenges.

Other issues include - lack of interest/drive from some parties. This is a bigger problem than it appears. There needs to be a clear agreements on responsibilities even among founders. Though painful, formal legal agreements even during prototype stage are a good idea. I have seen parties who are extremely risk/responsibility averse but hang around just in case things work out.

Hope to discuss other issues as we come across them.

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