ENTREPRENEUR SPECIAL................... At Debt’s Doorstep

At Debt’s Doorstep 

Debt’s Doorstep is where the dreams of thousands of aspiring entrepreneurs in India are stuck, caught in a grip of loans, equated monthly instalments and other financial commitments,

    In the Mahabharata, Arjuna’s son Abhimanyu knows how to enter the Chakravyuha—a multi-tier arrangement of troops employed by the opposing Kaurava army—but not how to exit it, leading to his death. The starting up ambitions of thousands of aspiring entrepreneurs in India meet a similar fate after being trapped inside the deadly formation of debt and EMIs. For these young men and women, the sleek automobile that was an absolute must-have or the cosy apartment with a fantastic view suddenly do not seem that appealing anymore—the loans taken to buy these “assets” are now the biggest obstacles for executing their entrepreneurial plans. Almost a dozen startups are launched in India every week. But for every startup idea that sees the light of day there are at least four more that remain in the dark due to prior financial commitments of the would-be entrepreneurs. “Equated monthly instalment obligations are the biggest hurdle for a young professional today to live their dream of entrepreneurship,” says Sunil K Goyal, founder and CEO of YourNest Angel Fund. Goyal has personally invested small sums in startups such as mobile engagement platform ZipDial, hospitality software provider Hotelogix and online baby product retailer Hoopos. “Almost daily, we come across young executives who cannot venture into starting up or joining a start-up as their EMIs become a threshold for monthly earnings,” he says. And the biggest culprit is the home loan. About 6.3 lakh crore worth of real-estate mortgage was taken in India last fiscal, according to credit rating firm ICRA. Most of these loans are taken by salaried professionals—the source of the most exciting startup ideas in the country. “The biggest hurdle to my startup dreams was the 40-lakh home loan for an under construction apartment I had taken in 2007,” says Neeraj Biyani, cofounder of Hector Beverages. In November 2010, on the day his daughter was born, Biyani decided to take the plunge. “I requested my wife, who had wanted to quit her job, to continue working,” recalls Biyani, 33. His wife Eeti, working in a NYSE-listed business process outsourcing firm, took charge of even his daily expenses, from her monthly salary of about 1 lakh at the time. “We kept all household expenses to a minimum; we stopped eating out or going for movies.” In four years, Hector Beverages has gone on to build two national brands—its energy drink Tzinga, and a range of traditional Indian beverages, Paper Boat. Hector now sells about a million packs each month totally. Financial planners advise entrepreneurs to be debt free before launching businesses. “Short-term and costly liabilities, such as credit-card debt and car or personal loans, should definitely be retired,” says Pankaaj Maalde, head of financial planning at ApnaPaisa, a comparison site for financial products. “Under construction houses which may take over two-three years to build, should ideally be surrendered.” Swati and Rohan Bhargava, cofounders of discount coupon site CashKaro, decided to forego the dream of owning a house in London, when starting up. “Instead, we started transferring a bulk of our savings into fixed deposits in Indian banks, to build a corpus on which we could live off for a year,” says Swati Bhargava, 31, an London School of Economics graduate and an alumnus of Goldman Sachs. The Bhargavas also pumped about £150,000 of their savings into the startup, and moved to their parents’ home in Gurgaon last year. “We have even delayed having a child,” she says. However, not all entrepreneurs are financially savvy. In 2011, UK-based Explara founder and CEO Santosh Panda, 39, went bankrupt from his humungous credit-card dues. Panda was using his personal credit card to pay the salaries of his five employees and borrowed cash to pay back the debt. “We often meet entrepreneurs who believe in their idea so deeply, that they fund their startup with personal loans, gold loans, or credit card loans. This is dangerously risky,” says Goyal of YourNest, a chartered financial analyst. “Instead such people should get a like-minded investor.” Education loan is another big hurdle. “An education loan of 12 lakh for my PG at IIM-B has become a nightmare, as my startup is yet to turn break even,” says IITian Gandharv Bakshi, 30, founder of Bangalore-based Lumos Design. Lumos Design makes solar fabric laptop bags with an inbuilt battery that gets charged through sunlight. Bangalore-based Lumos was funded last year with about 30 lakh by angel investors such as Google India managing director Rajan Anandan. The funding helps Bakshi to manage his EMI of 20,000 per month. Financial planners also advise taking the early in life. “Starting up is a lot easier when you are single,” says Sai Chaitanya Gaddam, 33, who started Kernel Insights last year. Bangalorebased Kernel Insights offers analytics on a customer’s intentions and needs. It is also prudent to take adequate insurance cover. Something that Alok Bhatnagar, founder CEO of online insurance aggregator EasyPolicy, did soon after quitting his job. “Though, I won’t get the money back at the end of the term, it has given me immense peace of mind.” He took 2-crore term cover at just 25,000 per year premium. “My family will be taken care of if something happens to me,” says Bhatnagar, who started EasyPolicy in 2010. But the most important financial decision for an entrepreneur is to decide the amount of reserve cash a startup needs. “Before starting up, one should build a reserve equal to at least 18 months of household expenses,” says Srikanth Bhagavat, MD of Hexagon Capital Advisors, a wealth management company. The amount should last double the time of the expected breakeven point feel some. Pune-based Shachin Bharadwaj and his cofounder Sheldon D’souza saved 2 lakh between them to start online food ordering venture TastyKhana in 2007. They made a business plan where cash would begin flowing in within two months. “Our plan was woefully short sighted. In six months money hadn’t come in and we had just cash for one week,” says Bharadwaj, now 32. A propitious angel investment of 1 lakh saved them. TastyKhana now aims at revenues of 12 crore by fiscal 2015. As the cash pool dwindles the entrepreneurs need to be realistic. “Once the cash extinguishes, entrepreneurs should get back into a job, build reserves and start all over again,” says Bhagavat of Hexagon Capital Advisors. “Remember, you might have lost the battle but you do not want to lose the war.” Golden Rules of Money Management

Pre- startup Phase

Prepare the family to get in the bootstrapping mode for 2 years Build a reserve equal to about 18 months of household expenses, which should include groceries, utilities, fuel, rent, school fees, medical expenses (see pie chart) Build a reserve towards capital contribution for your business If you do not already own a home, plan to move in with your parents or in-laws! Build a financial plan to figure out how much of your savings is to be kept apart for critical family goals like children’s education Better to know when to call it quits, get back into a job or assignment and build reserves to start all over again

Startup Phase

Do not assume that you will be able to draw a salary till the venture is funded
Keep 12 to 18 months household expenses in a liquid fund
Do not take on systematic investment plans till you draw a salary
The house you live in should be mortgage-free and the provident fund must remain untouched
Keep company and personal funds / accounts separate.
If your venture gets funded, keep it in liquid cash.
Be thrifty, avoid spending on lifestyle.
Try working out of a less expensive city

Share resources and space with other entrepreneurs

Tips and Tricks

Take Insurance
Buy Term Cover for yourself ( 1 crore cover costs just 15,000 per annum) Insure yourself and dependents adequately Get adequate medical insurance for parents before quitting your job, or before they turn 60 Insurance firms charge very high premia (upto 50,000 for a 2 lakh cover) for parents above 65 years Set aside a pool (at least 10-12 lakhs) for their exigencies

Go Debt-free
Aim to retire all debt before starting a venture Pay off all auto, personal loan and credit card debts before starting up Increase limit of credit card before you quit your job, for emergency use Never mortgage the house you live in to raise funds for business

Renting is Better
Home loan tenures extending till 20-30 years eat up precious working years, when a person can pursue his entrepreneurial dreams Rentals are 2%-3% of residential property costs in Metro Cities It’s much cheaper to live on rent in a CBD than pay EMI to buy it If you are a property owner, letting it out on rent, may never cover the cost of its EMI Investing proceeds of an exit, in another venture may give better returns than using it to buy another property

Fix the Loan
If it is an under construction house and may take 2-3 years, sell it rather than wait. If you are staying in the house that is mortgaged, plan a contingency fund to pay EMIs Get your spouse to manage mortgage payments for at least 2 years. Determine the break-even point, and start saving a pool of cash for EMIs till that point. If property prices are stagnant, it is better to sell than pay an EMI on them.

SOME NAMES
Shachin Bharadwaj, cofounder, TastyKhana In 2013, a few months after Shachin Bharadwaj, cofounder of TastyKhana got married to banker Shweta Ramesh, they thought of buying a home. On realising that they would need to make a down payment of 10 lakh, Bharadwaj shelved the idea. But not his wife. “Every month she would ask me for some money for some expenses or the other,” recalls Bharadwaj. However, instead of spending it Shweta put that money and more into savings. By end of the year they were able to make the down payment of 10 lakh. “Thanks to her we have a home now,” says Bharadwaj.

Neeraj Biyani, cofounder, Hector Beverages Neeraj Biyani was able to start up as his wife Eeti dropped her plans to quit her job after their daughter Kanushi was born in 2010. Until 2012, most of their salaries went into paying a monthly home loan EMI and repaying a 10-lakh loan taken from Neeraj’s family. In 2012 post-funding, the four founders began drawing salaries to meet just the basic expenses. Neeraj’s first investment was a child savings plan to take care of Kanushi’s education. “I prefer equity investments, but I wanted a safer plan to ensure my daughter’s future was taken care of.”

Swati and Rohan Bhargava, cofounders , CashK aro Entrepreneur coupl e Swati and Rohan Bharg ava quit their jobs in London to start CashKaro, an India focused discount coupon site for e-commerce purchases. “We became extremely cautious on what holidays we take and where we spent our savings,” says Swati Bhargava, 30. The couple even delayed buying a house or having a child, to focus solely on the startup. “A house in London would have meant sacrificing our risk-taking years to pay for the mortgage,” adds Swati, an ex-Goldman S achs associate.

 Harsimran Julka and Radhika P Nair ET140124