Author Archives: Aristotle Consultancy

Successful characteristics of a high-performing startup CFO

CFOIt goes without saying that a CFO should have proven success and appropriate experience in a mid- to high-level financial role within a VC-backed company. But there are several other seemingly ‘soft’ skills and traits that shouldn’t be underestimated.

The role has undergone a large-scale transformation over the last decade. Thanks to the infectious nature of the modern dynamic start-up culture, CFOs are expected to take a leadership role in functions of the business beyond the financials, acting as the right hand of the CEO and strategically steering the company through the challenges of rapid scale.

But this outdated view of finance professionals as being black-and-white thinkers, rigid and often separate from the rest of the team is a hangover from the days of big business ruling the world. Now, the start-up is king, and a CFO must be agile if they’re to be successful. They have to consider the grey areas, be willing to modify their assumptions and strategies if necessary, and be prepared to get involved with the various aspects of the business and take on roles and tasks that don’t necessarily fit snugly within their vertical. In today’s businesses, they’re the only person, other than the CEO, with access to a bird’s-eye view of the company as a whole: in order to successfully strategize for scale, it’s imperative that they possess detailed knowledge of the internal processes of each team.

However, the most important characteristic of a CFO in a founder-led, VC-backed firm is a high level of emotional intelligence, or EQ. Traditionally, when the CFO was viewed as the black-and-white thinker, the CEO would have been expected to possess this trait: the ability to be aware of the emotions of oneself and others and manage them in order to achieve the best possible outcome. But with the advent of tech firms led by their founders, the relationship has, to a large degree, been inverted.

Now many CEOs are, first and foremost, technologically minded creative’s and inventors. They’re highly intelligent, they think differently than the majority of people, and they have short attention spans, often leaping from one engaging idea to the next. They are, by nature, disruptive thinkers who create equally disruptive products and companies, but they’re not necessarily effective or comfortable communicators.

A CFO in a founder-led business must be able to manage upwards: it’s their responsibility to get the best out of the CEO, and to manage the stake-holders. They have to know which battles to fight and when the best time is to fight them, as well as which ones to leave well alone.

Emotional intelligence is equally important, if not more so, as IQ to a person’s career: the higher their EQ, the more money they’re likely to earn. For today’s CFO’s, having this skill translates into reading the CEO’s mood ahead of key company events, managing the board and investors, successfully implementing a change in process and procedure into a long-standing team, and knowing without asking when the founder is calling on their skills as a strategist, a number-cruncher, or simply as a confidant.

Source – Notion Capital

Facebook toying with the $50 billion hyperlocal services market, launches Facebook Services

facebook servicesAlong with virtual reality, Facebook Live and other in-house projects, Facebook is now venturing into the hyperlocal services segment in India. The social networking giant  has introduced the services rather discreetly into the market. One can now look for spas, pet services, and even event planners on the page. This step marks the move of Facebook into an already crowded segment, with other players like UrbanClap, Quickr and Housejoy.

The current services include plumber, medical and health, arts and marketing, automotive(repair), business services, personal care(spas) and pet care among several others. Apart from browsing for the services, the Facebook services page also provides reviews and ratings of the services provided. The customer can thus find businesses and organisations based on the ratings. The bookings however cannot be made via the page, the user is directed to a website, email id or phone number. Hence, the monetisation plans for Facebook services are still not clear.

In November last year, UrbanClap had raised a Series B funding of $25 million. They claimed to serve over 5000 customer requests in a day and had built a base of over 20,000 service professionals.

“Today, UrbanClap sends them business worth US $200 million annually (current run rate), from small carpentry jobs worth Rs 200 to large interior designing assignments worth several lakhs. With this round of funding, we are well positioned to build a large company that Indians will love which will make their everyday lives easier,” the team had quoted.

There are believed to be over 132 home services companies and over 530 local service companies that are said to have raised close to $180 million in funding. The space has already attracted major investors like IDG, Tiger Global, Lightspeed Venture Partners, Saif, Accel and Bessemer Venture Partners.

Listing portals such as JustDial, Sulekha, YellowPages,; and providers such as Jack on Block, Hammer and Mop (which recently merged with Mr. Homecare) also operate in the same segment indirectly.

LocalOye had raised $5 million from Tiger Global and Lightspeed Venture Partners in April this year. Taskbob recently acquired Zepper and had earlier raised $1.2 million funding from Orios, Mayfield and others, Doormint raised $3M  led by Helion Ventures and Kalaari Capital in August 2015, while Timesaverz had raised an angel investment in October 2014.

World’s largest social media network already has over two million small and medium businesses on its platform and Facebook Services launch can further intensify the competition in the hyperlocal segment.

Source – YourStory

Starting Up? Here are some legal formalities you need to know

Legal StartupSaving a great business idea is one thing, but starting a new venture is another. Setting up one’s own venture involves a lot of legalities and first-time entrepreneurs are rarely able to fully comprehend the implications of various legal terms and conditions. If you are embarking on an entrepreneurial journey or are on the verge of raising your first round of investment, then here are some legal formalities that you need to be familiar with.

Documentation at the time of starting up

An entrepreneur can choose to register his venture as a company, a LLP, or a partnership. However, most often ‘company’ is the preferred entity. Also, if he is considering venture capital funding as a source of growth capital in the future, incorporating a company will be necessary given the relative regulatory and operational flexibility it offers. “Assuming that the founder chooses to incorporate a company, he will need to acquaint himself with the memorandum of association, and the articles of association of the company,” says Ashwini Vittalachar, partner at law firm, Samvad Partners.

Memorandum of Association, Articles of Association, and Founders’ Agreement (in case of multiple co-founders) are the defining documents for a venture.

The memorandum of association sets out the main objects and activities of a company. The founder should identify the core business of the company and ensure that the same is reflected in the ‘main objects clause’ of the memorandum of association.

And, the Articles of Association acts as the rule-book or bylaws of the company. It contains provisions pertaining to transfer of shares, further allotments, board and management procedures, Vittalachar adds.

She further notes that Founders’ Agreement is reflective of the intended relationship among the founders. So, rather than acquainting oneself with the terms of a Founders’ Agreement, a founder must discuss the various aspects of how the multiple founders propose to own and operate the company. Accordingly, the agreement will need to be crafted. Typically a founder’s agreement will have provisions relating to shareholding and percentage splits, dilution mechanisms (especially in the context of a fund raising in future), share transfer restrictions and board seat/ management rights, etc.

Clarity is key, believes Sunil K Goyal, managing director and fund manager, YourNest Angel Fund. “Co-founders may ponder between themselves while starting a venture on aspects such as position and role of each partner, delegation of decision making, decision making process for major decisions, clarity on initial and subsequent funding by partners, valuation norms for investments by partners, sweat equity, rate of interest on loans extended by partners, signatory for banking operations, norms for profit sharing, salaries, etc., keeping in mind engagement levels such as full-time or part-time or a sleeping partner, exit valuations between partners, settlement of accounts on liquidation or exit,” he stresses.

Besides having clarity on role and equity, founders must ensure necessary registrations/operational licences are obtained, labour compliances are met with, intellectual property, if any, are registered, and that contracts are properly formalized. This is useful not just from a future investment perspective, but also ensures that the corporate house is in order and that risks are mitigated, Vittalachar says.

Term sheet: A key legal document during fund raise

Once a founder has an interested investor on board, the parties generally enter into a letter of intent or a term sheet. The term sheet essentially sets out the basic framework of the transaction. While the same is non-binding in nature (except for certain terms like exclusivity), the term sheet becomes an extremely important document as this determines how a transaction unfolds. The definitive agreements signed are broadly based on the provisions contained in the term sheet. This document also allows the parties to gain exclusivity, and hence becomes important.

A term sheet is basically a non-binding document. Apart from two or three clauses – like those relating to exclusivity, confidentiality and governing law – the other provisions in the term sheet do not constitute a binding contract. The idea of a term sheet is to say that the parties – founders and investors – have, after discussions, reached a stage where they have a preliminary level of comfort with each other.

It’s a broad, in-principle agreement relating to the key deal terms, including the valuation, explains Vijay Sambamurthi, founder and managing partner at law firm Lexygen.

The term sheet codifies the discussions and includes things the parties have agreed to informally, not legally. Subsequent to the term sheet, there will be a due diligence process and the parties will eventually negotiate, agree on, and sign the definitive agreements.

Term sheet is only the beginning of a funding process, according to Goyal. “A well-prepared entrepreneur should be prepared to cut down the lag from term sheet to money in the bank account. It requires having audited accounts, tax filings, RoC compliances, highlights of major customer and partner agreements, patent filings, and the books of financial statements of the venture,” he says.

And, assuming that the outcome of the due diligence has been satisfactory, an investor then proceeds to negotiate the definitive agreements – typically the shareholders’ agreement, share purchase or share subscription agreement (as applicable), Vittalachar says.

Common mistakes

Mishandling an exit, when the engagement level becomes part-time or one of the founders becomes a sleeping partner, is one of the most common mistakes committed by entrepreneurs. Upfront clarity in the Founders’ Agreement can ensure smooth sailing in such times. And, during rounds of external funding, the founders must retain the management control or the board control with themselves, understand implications of key terms such as liquidation preference and drag-along rights of the investors.

Adding to the point, Vittalachar cautions, “Often, founders undermine the importance of reading and understanding the fine print.” This is true both in the context of material contracts as well as term sheets and definitive agreements. “Another common mistake is laxity in formalising employment terms and incentives (including ESOPs). This becomes difficult to formalise and manage as the numbers increase, and tends to take a nasty turn, especially in the context of disputes.”

Having a legal counsel to assist on various issues helps address all these problems. According to Vittalachar, most of the legal issues that a founder battles with are not necessarily “business law” issues. There could be concerns around IP law, taxation, real estate, employment law, litigation, to name a few. Hence, it is necessary to choose a lawyer who can provide advice relevant to the founder and the business. But this is often overlooked. The right lawyer can anticipate issues and will guide entrepreneurs in the right direction.

Source – Kotak Business Boosters – VCCircle

GIST of 100% FDI in E-commerce Marketplace Model

FDI in EcommerceThe government on Tuesday has introduced 100% FDI in the marketplace model of e-commerce retailing with a view to attract more foreign investments.

A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on business-to-business basis, DIPP said.

It said that an e-commerce firm, however, will not be permitted to sell more than 25% of the sales affected through its marketplace from one vendor or their group companies.

“In order to provide clarity to the extant policy, guidelines for FDI on e-commerce sector have been formulated,” DIPP said.

Snapdeal’s Kunal Bahl,  was gleeful, taking to Twitter to congratulate the centre for supporting the industry and himself: “Always a great feeling when you stick to the course that you believe in, pays off: Focusing on a pure marketplace and not doing inventory.”

In unveiling rules that permit 100 per cent FDI in the “marketplace” model, and disallowing foreign investment in the “inventory” model, the government could complicate matters for Flipkart and Amazon, particularly.

The 25 per cent rule, as well as the fact that marketplaces cannot “directly or indirectly” influence the price at which goods are sold, are the main issues to watch out for.

Smaller sellers may also mean lesser ability to negotiate price and take advantage of economies of scale, again not in the consumers’ best interest. Also, putting the onus for delivery of goods and customer satisfaction on the seller may result in added complications when it comes to grievance redressal.

In summary, the new provisions legitimize what was already allowed in-principle.

Some ecommerce companies such as Flipkart and Amazon, that draw a large proportion of sales from ‘related’ firms, would face a challenge. New rider places a ceiling of 25 % in sourcing products from one vendor or group firm. Flipkart had separated legal ownership of its sole vendor but WS Retail continues to be a driver of the business; Amazon has a JV with Infosys co-founder Narayana Murthy’s Catamaran Ventures, that operated as the key vendor on

Discounts, and thereby customer acquisition, would get tricky as marketplaces now disallowed from ‘influencing’ sale price, directly or indirectly. This may not mean an end to discounts, but firms may have to look harder to effectively subsidise their vendors.

The norms also cover services marketplaces such as Ola and Uber which is both a boom and a bane for them. They get clarity on the taxation front as they are not deemed to be service providers as long as they do not own the cabs or employ the drivers themselves, buy they will face scrutiny on discounts.

Organised retail chains have been complaining that deep discounts offered by e-commerce companies funded by foreign capital were actually predatory pricing. They may get a breather, as one of the USPs of virtual retailers gets blunted, at least on paper.

Concept of Limited Liability Partnership

Limited Liability PartnershipEntrepreneurs starting a new business are curious if they should register a Private limited company or Limited liability company. Both entities offer many similar features required to run a business and its hard to differentiate between two.

The LLP can continue its existence irrespective of changes in partners. LLP is capable of entering into contracts and holding property in its own name. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

Limited liability partnership or LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.

Registration process of both the entities is almost similar as well with some difference in document and forms.

Registration cost for incorporation of LLP is cheaper than that of private limited company. LLPs have been introduced to meet the needs of small businesses and hence enjoys lower fee.

LLP structured as a body corporate and a legal entity separate from its partners. It will have perpetual succession.

Tax compliances are similar for both the entities. However, when it comes to compliance relating to the Ministry of Corporate Affairs, LLP enjoys significant advantage. A LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs. 40 lakhs and the capital contribution is less than Rs. 25 lakhs. A private limited company on the other hand would have to file audited financial statements with Ministry of Corporate Affairs each year.

Advantages –

LLP form is a form of business model which:

  • Organized and operates on the basis of an agreement.
  • Provides flexibility without imposing detailed legal and procedural requirements
  • Enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner

Disadvantages –

  • Private limited company offers its promoters a better image or standing than that of LLP.
  • Private limited company also enjoys better access to funding from banks and foreign direct investment.

Difference between LLP & Private limited company

  • A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for an LLP it would be by a contractual agreement between partners.
  • The management-ownership divide inherent in a company is not there in a limited liability partnership.
  • LLP will have more flexibility as compared to a company.
  • LLP will have lesser compliance requirements as compared to a company.