By Pratap G. Subramanyam Most businesses, including Microsoft, Wal-Mart and Amazon started small and grew to encompass a large business space. Herein, we discuss some of the important aspects of the start-up phase of a business. Generally, the start-up phase of a company begins with the germination of a concept or a 'business idea' and lasts till it has been able to successfully commercialise the idea for the initial scale of operations. Knowledge industry businesses such as IT, ITES, Biotechnology, CROs, media etc. fall under this category. Other businesses which are process-driven or investment driven such as FMCG, Pharmaceuticals, Auto ancillaries or other conventional manufacturing units have to survive the initial implementation and market risks to come out of the start-up phase. The core team
Most start-ups are formed with a core team of entrepreneurs, each representing a particular skill set. In most situations wherein technology and /or product and market development is involved, some of the skills are with the founders and the rest are sourced by hiring professionals. Apart from technical skills, it is important to have persons with business management, marketing and financial skills in the initial team. The support staff would normally consist of accountants, front office and administration. The business plan
The Business Plan comprises of a thorough understanding of the business model and its constituents for the execution of the business idea and the commercial feasibility of the said model. Seeking professional advice
It is customary for start-up companies to seek professional help in various matters. A practicing chartered accountant assists in the incorporation of a company and more often than not, gets appointed as its auditor whereas a practicing company secretary can help in incorporation and providing an annual compliance certificate. A legal firm assists in drawing up contracts, protection of intellectual property such as trademarks, copyrights and patents, and in inspection of documents and title deeds. A financial and management advisor, marketing consultant, property consultant and HR expert are some of the other professionals who may be hired during this phase. Business and product / service registrations
In knowledge intensive businesses, intellectual property registration and protection are of paramount importance. In addition, other necessary filings would be under the following heads -  | Filing of IEM with Secretariat of Industrial Approvals under the Ministry of Industry, | | The Directorate of Industries in the relevant State | | Factories Act (for an industrial unit) | | Pollution Control Acts | | Software Technology Parks Scheme (for software units) | | EOU scheme (for export oriented units) | | Central Excise (for manufacturing units) | | Customs and DGFT (where capital import licence or exports and imports are envisaged) | | SSI registration (for small scale industries) | | Central and Local Sales Tax (for product sales) | | Service Tax (for services) | | Income Tax filing for allotment of a Permanent Account Number | | Shops and Establishments Act (for setting up commercial activity in urban area) | | Professional Tax (for collecting professional tax from professionals | | Provident Fund Act (if the number of employees exceeds the specified minimum) | | ESI Act (where there are industrial workers) | | Reserve Bank of India for foreign currency remittances under exchange control regulations (where necessary). |
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Formulation of business strategy and corporate structure
A well-thought out strategy can actually add value even to a seemingly mediocre business idea. In formulating the overall business strategy, the business model has to be kept in mind and individual aspects relating to positioning, marketing, pricing, delivery, customer relationship management, technical support and upgradation, mechanisms for continuous enhancements etc. have to be evolved. A well-structured strategy could be an important determinant in the valuation of a start-up by prospective investors. The corporate structure of a start-up should be transparent and simple to understand. Value creation has to be concentrated in the company rather than being distributed in a group of interconnected companies. The main objective should be to avoid cross-holdings and diverse holding patterns that vitiate investor confidence and dilute value. Key commercial contracts
Key commercial contracts are those that drive the business model. These could be marketing contracts, technology contracts, purchase contracts, manufacturing contracts or even infrastructure related contracts. The structuring of these contracts in the form of several layers of agreements not only requires careful drafting but legal expertise in envisaging adequate protection of interests as well. Most of these contracts are fundamental to the existence of the business and should therefore envisage all upside possibilities and downside risks and address them appropriately. Board and management structure
The Board of Directors is the face of the company and should therefore be crafted to perfection. A well-constituted board reposes confidence in whatever the company sets out to achieve. The Chairman should be a person of character and sound business acumen and should possess demonstrable value that he can pass on to the company either in terms of management inputs, contacts or vision. The other members of the board may be drawn from the promoters, nominees of VCs or lenders as the case may be, working directors and independent directors. The provisions of the Companies Act 1956 have to be kept in mind while crafting the Board. The organisational structure has to be chosen based on the type of prevalent industry work culture and business dynamics. It is necessary for a start-up to identify key executive positions at the time of drawing up the business plan. These are generally the positions of a Chief Executive Officer (CEO) or Chief Operating Officer (COO) and Chief Financial Officer (CFO). Some firms have a Chief Technology Officer (CTO) and a Chief Marketing Officer (CMO) as well. Key employment contracts
All permanent employees including the core team have to be hired with proper employee contracts. Compensation structuring would require some expert advice for ensuring employee satisfaction, tax efficiency, cost-effectiveness and permanence. A well-structured start-up would stand a better chance of survival and metamorphosis into a later day global corporation than one that is not. About the authorPratap G. Subramanyam
Pratap Giri Subramanyam, B.Com., F.C.A., A.C.S. is a rank holder in the CA Final Examination with post-qualification experience of 18 years. He has been a consultant for the past eleven years in the area of investment banking and corporate advisory services. He specializes in strategic financial advice to companies. As part of corporate consulting, Pratap has acted as advisor to some SME corporates assisting them in drawing up business plans, financial and capital structuring, capital market advisory, raising capital and in restructuring financially distressed companies. Presently he is an independent director in three SME companies based in Hyderabad and adviser to two SME groups in Bangalore and one in New Delhi. | 