Ep103: Ramesh Raghavan – Entering a Start-Up? Leave Your Baggage at the Door

Ramesh Raghavan is currently vice chairman of Business Angel Network of Southeast Asia (bansea), one of the leading and oldest organizations of its kind in Asia. He is also as an early-stage venture investor, an advisor in several start-ups and advises on risk management in traditional public market investments and alternative investments to family offices and emerging hedge funds. Ramesh previously held global leadership roles in derivatives, capital markets, and sales and trading at Morgan Stanley and the Royal Bank of Scotland, and has worked in New York, London, Hong Kong and Singapore. Prior to his career in investment banking, he had a fast-moving consumer goods and commodity trading career with multinational corporations. Ramesh holds an MBA from the London Business Schoola masters in international business from the Indian Institute of Foreign Trade, and a mechanical engineering degree from India’s oldest technical institution, the College of Engineering, Guindy, Chennai, India.  

 

“Communication from start-ups is actually quite poor. They only communicate good news, they never communicate bad news … But if you don’t (receive) communications for a period of time, it raises a lot of red flags.” 

Ramesh Raghavan

 

Worst investment ever 

Investor takes first flight as an angel  

Ramesh’s first taste of angel investing happened about 12 years ago when a former college friend approached him to invest in an “execution-type business” that seemed interesting even though it was not a fundamentally new idea. Ramesh listened because the friend had been “the smartest guy in the room” at university and had a good work history with large multinational companies. So Ramesh decided to invest his own funds and gather an investing syndicate to take part because he believed in the person more than the actual idea.  

Too many generals and not enough soldiers raisefirst red flag 

After a few months, red flags began to appear. Ramesh couldn’t see any traction. Communications were worse than the usual poor information flow from start-ups. He couldn’t get clear answers when he wanted to know what was happening with the business, and something he has learned with angel investing since is that people tend to take the money for their business and disappear, only reporting good news and failing to provide updates on the bad. Being responsible to his investor syndicate, Ramesh urged his friend to tell him what was happening and if there were any problems. Finally, he then insisted to see the business plan in which he noticed there were eight co–founders, when three or four should be the maximum. That said, he stressed that there should be one “chief”. He also noticed that all these co-founders had a lot of multinational experience but that nobody was doing the job. Everyone wanted to get paid but no one wanted to actually do anything. They lacked the ability to actually get down, roll up their sleeves and do the work. 

Time to trim inactive ‘leaders’ 

After looking at the business plan, Ramesh’s first advice was to fire the loafers and change the whole business model. As the company was not making money, the significant salaries had to be cut to zero. If nobody liked it, Ramesh told his friend they should leave. His friend was unhappy, but after months of pushing, the friend managed to get rid of two co-founders. But issues remained. The company’s leaders still had no key action areas for which each person was responsible. So Ramesh worked with him weekly in four- or five-hour sessions over about six weeks, to figure out how to help him create a viable potential business plan that included setting out key responsibilities for each of the co-founders, who were visibly unhappy at the prospect of doing some actual work.  

Remaining team fails to listen to chief advisor  

After a lot of prodding and mental anguish, Ramesh’s friend introduced him to the remaining cofounders and they found someone able to best be the pitch person from the team to raise more capital, which, after a few months, they were fortunate enough to do. This gave them some breathing room. lot of the time though, Ramesh began to realize that the team would say yes, but they would not carry out his advice. So the traction was very poor and he learned that it didn’t matter what he said, the red flags were clear. Ramesh also advised his friend that if the current business was not working (which it wasn’t) in the current state of the market, they should pivot the business. The friend was so stuck on his idea that he thought pivoting meant accepting failure, despite Ramesh telling him that every start-up pivots just about every other day. Great ideas do not just take founders to success in a straight line.  

Investor becomes CEO and tells everyone to adapt or die 

It was at this point, Ramesh took over as CEO. He had to put his foot down with the board and the team and said if they were not on board with pivoting, they should leave. After that, two other cofounders did just that, which left the company with a team of the ideal size, with three or four cofounders. Salaries were slashed and Ramesh had to point out that “entrepreneurship is not a salary-collection business modelRamesh said that despite being friends, he had to be frank about how they should go forward giving life to the business, because Ramesh had a responsibility to the investors he had brought into the deal.   

“Entrepreneurship is not a salary-collection business model”

Ramesh Raghavan

Boss tells team weekly to focus on getting customers – still no progress 

As another year past, Ramesh noticed that traction was still lacking, and his friend was losing hope. He found that he was not just playing CEO but also playing therapist to his friend while taking a very hands-on approach trying to motivate the people to keep the business alive. Still without processes to manage employees, Ramesh told them to forget everything else and just focus on finding customers to pay for the business, and that all other activities were irrelevant in the grand scheme of things. Despite getting another investor to help out, he tried to look for progress every week, and every week there was no progress and hundreds of excuses. 

Team continues to do ‘busy work’ without achieving much 

So the team was still acting like bureaucrats or employees, seemingly just sending out emails to each other. They were too used to working for large organizations, which for most of the time can run on their own. But this was a startup, running with zero revenue, zero brand value, and zero everything. There were still too many chiefs, and their ability to manage the soldiers was very poor.  

Investors call halt after money dries up and team effects no progress 

A few more months went by, and the team came back to the investors asking for more money. Ramesh told them there was no more money out there and that they should put in their own funds. They refused. The discussions went on but it all became too much for Ramesh and he decided to close the business. He told the team that, yes, they had tried to do something, it didn’t work out, but stressed that he was more disappointed that they had failed for the wrong reasons. If it didn’t work out for business reasons, that would have been fine. However, the fact that they could not manage the people side of the business, had a top-heavy business model for a start-up – in which the soldiers were not paid and the generals were skimming salaries off the top – was a very bad precedent, so bad that it was very unlikely they could do anything more with the company.

 

Some lessons 

Be clear about the reason for investing in a start-up. Be clear whether you are investing in a business for the sake of friendship or for the sake of business. Be clear whether you expect a return from the investment or not. Once those things are clear and you expect a return from the investment, then do all the due diligence before getting involved. But never invest just on the basis that someone is a good friend, a smart guy, or due to their successful corporate background, because the start-up life is a different kind of animal altogether.  

Don’t invest in a business with too many co-founders. Too many chiefs are a waste of time.  

Investment must go to build the business. It must not go to supply the founders huge salaries before revenues and profitability are realities. Look carefully at the business plan and see whether the “leaders” are eating up the investment in salaries.

In a start-up, people must have a sense of urgency. Every day you have to do something that adds value and adds something positive to the basic objective of driving the business forward: Find customers, lower costs, build a network, raise revenues, or whatever it is, every day.  

Don’cling too tightly to your idea. A least 90% of businesses start up with an idea does not work, so they have to pivot and figure out a better model for it to work.  

It’s very important to take care of your soldiers in the business. They are crucial for the success of your business. First pay the soldiers and then pay yourself. Don’t pay yourself first and leave the soldiers in the air.  

Vitally important is the ability to listen to and execute advice. If you execute it and it doesn’t work out for valid business reasons, people understand. But you should not give reasons that are flimsy. Don’t put your excuses on lack of capital or feedback from investors.  

In a start-up, you have to be a hungry dog. You can’t wait to be fed, you have to hunt down the necessary capital to feed your company. You have to go after people because people don’t come after you. When you work for a large multinational, people come to you. When you are a startup, you go to the people.  

Have a good mix of talent in your team, with defined roles. Such people should be experts in their domain with specific responsibilities, not just people dressed up as co-founders who are doing nothing. Makes sure you can identify the roles, identify the action plan stemming from each role, identify outcomes, and then actually execute your business. Then you will have a much better chance of doing something much more credible. 

 

“When you’re getting into a start-up … leave the baggage of what you did before (at the door) and be open to new ideas. Roll up your sleeves and do what needs to be done to get the business off the ground, because nobody is coming here to help you. You have to go to the people to help yourself.”

Ramesh Raghavan

 

Andrew’s takeaways 

Collated from the My Worst Investment Ever series, the six main categories of mistakes made by interviewees, starting from the most common, are:   

  1. Failed to do their own research  
  2. Failed to properly assess and manage risk  
  3. Were driven by emotion or flawed thinking  
  4. Misplaced trust  
  5. Failed to monitor their investment  
  6. Invested in a start-up company 

Be wary of putting trust in someone who doesn’t fully deserve it. The fourth category of the most common investment mistakes gathered through Andrew’s My Worst Investment Ever series is Misplaced Trust. Ramesh put trust in somebody who was perhaps undeserving on the basis of what Ramesh needed him for; in this case executing a successful startup.  

Investing in start-ups (number six) is an extremely high-risk venture. When you invest in a start-up, it is such a high-risk activity, that Andrew usually recommends against it. Doing business with or investing in friends’ enterprises doesn’t always work, but it can work. Idoesn’t always work with family, but it can work. Some people can truly earn our trust through good performance over a long period.  

When doing small business, you must do everything. Iyou’re thinking about going in and doing business, and you think it will give you more time, think again. You’re going to be overwhelmed and you’re going to have to do many things you never dreamed you would have to be doing. 

 

Actionable advice  

Never have a business with more than three co-founders, and each must have specific, clear, identifiable responsibilities for what they will bring to the table.  

The equity should be split based on what the investors or co-founders bring to the table, rather than the pure capital that they put in.  

 

No. 1 goal for next the 12 months  

To figure out exits for some of the investments Ramesh has made so that he can convert that locked-up capital to liquid capital for better uses in the future. 

 

Parting words  

Be bold and remember that the first step in making money is actually to lose some money. So don’t worry about losing money, as long as you win more than you lose. 

 

 

You can also check out Andrewbooks  

Connect with Ramesh Raghavan

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Further reading mentioned  

 

About the author, Andrew

Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company that provides institutional and high net worth investors with ready-to-invest stock portfolios that aim to beat the benchmark through superior stock selection.

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