Bankruptcy – Dutch Uncles

Failed Agritech Startup, What Did not Go Right

Shalmoli Sarkar — Thu, 01 Jul 2021 03:35:05 +0000

The influx of Agritech start-ups in the past 4-5 years has changed the landscape of Indian agriculture that is considered to be one of the most technology-resistant and backward sectors. Farmers are removing the blindfolds of technology ignorance post understanding what these Agritech solutions have to offer, creating a viable business model improving the farmer’s income.

However, many of the Agritech enterprises, despite tasting success initially face hurdles to expand their businesses that finally end in closure. Here are some of the reasons why Agritech start-ups in India can fail:

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Many of the Agritech enterprises, despite tasting success initially face hurdles to expand their businesses that finally end up in closure.

Probable reasons for Agritech start-ups failing in India

1. Price wars with the retail giants

2020 saw conglomerates Tata and Reliance aggressively enter the retail space with an acquisition. Fresh produce and grocery are a lucrative segment where players are building their private labels of farm produce which they procure at cheaper rates and sell at predatory prices giving them good margins.

This hurts the revenues of major Agritech players with their USP as organic produce which they cannot sell at lower prices.

2. Lack of commercial guidance

The existing incubators and accelerators in India lack the expertise to guide farm-oriented start-ups, unlike IT, Health tech and e-commerce.

3. Not taking the D2C channel

In the current pandemic situation where big retail stores are operating erratically, it will not be wise for Agritech start-ups to opt for retail channels. Opting for a D2C channel will help the start-up gain complete control of the control chain.

A recent example is that Clover, a supplier of perishable fresh produce, changed its approach from B2B to B2C by adapting to the D2C approach in the pandemic. Clover could provide customers high-quality produce at competitive prices under a traceable supply chain. Clover’s sales grew 3 times in the Covid by turning to D2C.

4. Reluctant investors due to the slow turnaround of profits

Lack of funds leaves the Agritech start-ups cash strapped as it fails to lure investors since ROI in Agritech relatively takes time and does not meet market expectations. Also, add is the uncertainty in weather conditions which makes it a high-risk proposition for investors. Agritech innovations in India need patient capital and an ecosystem that has the appetite to programme these innovations for scale and success.

5. Lack of visibility

Supply chain visibility and efficiency are the keys to running a viable agriculture-based business. Given the perishable nature of the products and the sensitive timelines associated, every stage of the supply chain in agriculture comes with integration issues, security vulnerabilities, and other problems.

Therefore, the right technological intervention at the right stage of business will enable solutions that preserve product quality, reduce waste, improve traceability, transportation and storage.

6. Lack of technical know-how

Most Agritech start-ups lack the technical know-how about the health concerns of cattle or crop produce that lands them in major trouble causing low productivity levels.

Agritech players should collaborate with large technology players that can provide an innovative solution for instance MoooFarm a Gurugram based start-up collaborated with Microsoft to tackle mastitis using Machine Learning (ML) and helped farmers save US$500 million per year.

7. Low internet connectivity in rural areas

Several remote rural locations lack strong reliable internet connectivity preventing Agritech start-ups to apply smart agriculture techniques using IoT, Artificial Intelligence (AI), and ML at such places. Start-ups before serving the geographies must do in-depth research about the available internet connectivity.

8. Uncertain climate conditions

Hailstones, heavy rainfall, or drought impacts the crop produce directly affecting the revenues. Adoption of crop monitoring technologies AI and ML improves agriculture outcomes in adverse climatic conditions. With the right technology, a farmer can give each crop individualised care, utilise resources in exact quantities, and can grow more with less.

9. Logistics and last-mile delivery

Logistics and last-mile delivery is key to the operation of Agritech start-ups that do not find cold storage remote sensing and digitisation of field-level data as economically viable. Also, the backward integration of services in agriculture does not attract many investors thus leaving Agritech start-up with scarce facilities.

10. Expensive Infrastructure

Agritech start-ups end up investing money in establishing lavish offices, expensive cattle shades and other infrastructure which mounts debts. In the initial days, one should not spend money on infrastructure, only the necessities and essentials should be the building blocks.

Agritech startups are nascent in India. The idea that agriculture can be monitored using AI, ML and IoT devices is an alien concept to the farmers, therefore its gradual acceptance will lead to slower turnaround time for profits. Keeping in mind that not many investors are interested in investing in agritech, the startups should be wary of spending excessively on luxurious infrastructure. It will be imperative for startups to begin with the basic essentials of infrastructure and spend more on enhancing the tech capabilities keeping in mind the uncertain nature of climate the sector is heavily dependent on.

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What is an Exit Strategy and why do you need one?

Preeti Verma — Mon, 08 Feb 2021 10:35:02 +0000

Everyone must have read or have watched Mahabharata once. So, after Arjuna, his son Abhimanyu was the only warrior who knew how to enter the Chakravyuh. The Chakravyuh or a circular maze was the military formation, initially tricked for Arjuna by the Kauravas in the Kurukshetra battle. But Abhimanyu imbibed only the entry part of it, and he missed the crucial part of escaping the Chakravyuh. As a result, he died at the battlefield. Had Abhimanyu been knowing the exit part, he would have survived the battle. Now or then, exit strategy is the crucial part of planning!

The future is uncertain and nobody knows what it holds for us tomorrow. So, preparing things in advance makes other things easy and smooth. Often in life, we wait until a change in circumstances to make a big decision. Similarly, entrepreneurs strive hard to launch their businesses. But one thing they often forget is that decisions made on day one can have huge consequences down the road. It is not just enough to build an empire; one should make sure to have an exit strategy ready, a way to get the money back out.

Exit planning is something many entrepreneurs delay for long. In business, the target is firmly on the here and now decisions, whether it is marketing, HR, inventory, or cash flow. One may doesn’t feel like there is the time or the motivation to create an exit strategy, especially when you don’t plan to sell soon.

When an architect designs a building, he makes sure that every building, floor, or structure, where people will be living or spending their amount of time, has at least two doors, preferably on opposite ends of the space. Why? Because, if tomorrow anything happens inside the building that requires the occupants to vacate the place quickly then there needs to be an adequate number of exits available.

If something like a fire or other natural calamities happen, which might make it impossible to get out one way, then there needs to be another exit available for the people to use. Now, picture yourself in that room or building, with multiple available exits is not just a matter of convenience, but it is a matter of safety and well planning, too.

Around 72 per cent of small business owners have no exit strategy at all, revealed a study. Of course, when you start a business you start it with a positive note. You don’t want to think anything negative like shutting it down or selling it off later. But trust me, it is always advisable to keep a backup plan for the future. The truth is it can take years to execute a successful exit, so the endgame needs to be in your mind from the start. The earlier you establish your exit strategy, the clearer the vision for you and your company becomes.

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Business owners or even investors can actually make a considerable profit if they make a successful exit strategy.

What is an Exit Strategy?

An exit strategy is a contingency plan to liquidate or dispose of a financial asset once the predetermined event or circumstance for the asset has been met by a business owner, or an investor. This planned approach will either maximise benefit or minimise damage. For entrepreneurs, this is a strategic planning on how to sell ownership to investors. Business owners or even investors can actually make a considerable profit if they make a successful exit strategy. You should always assess your personal and business goals to identify which exit strategy lines up with your future goals.

Now, it is most likely that an exit strategy is executed to close a non-performing asset. This will ensure that the losses associated with a particular underperforming asset are limited. However, an exit strategy can also be applied if the financial or business asset has already met the investment goal.

There can be many other reasons due to which an investor or business could execute an exit strategy. Depending on the slowdowns in the economy for other simple reasons, like the investor facing a liability lawsuit or wanting to retire or redeem his investments.

What Should Be Considered in the Strategy?

Different businesses will need different approaches in an exit strategy. There are different elements that can be helpful across the board. An effective exit strategy should be planned for every positive and negative possibility regardless of the type of trade, investment, or business venture one has. This planning should be an important part of allocating the risk associated with the investment, trade, or business venture.

A business exit strategy is an entrepreneur’s calculated move to sell its ownership in a company to sellers /investors or another company. A proper exit strategy gives a business owner a road map to reduce or liquidate its stake in a business venture. And, if a business is running successfully, then how to make a substantial profit.

Similarly, if the business is not running successfully, then an exit strategy or an ‘exit plan’ can be of a big help to enable the entrepreneur to control the losses. An exit strategy can also be used by an investor such as a venture capitalist to prepare for a cash-out of an investment.

Exit strategies and other money management methods can significantly improve dealers and investors’ trading business by eliminating emotion and reducing risk. Before entering into a trade, an investor is advised to set out points at which s/he will sell the business for a loss and a point at which they will sell for a gain.

Managing money is one of the most important aspects of business. Many traders, for instance, enter a trade without an exit strategy and are often more likely to take premature profits or, worse, run losses. Traders should understand the exits that are available to them and create an exit strategy that can minimise losses and maximise profits.

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Operating a business without an exit strategy is like driving a car with no destination in mind. As a result, you end up to a point where you started!

Why Do You Need an Exit Strategy?

Gives Right Direction to the Business

Outlining your exit strategy, above everything else, gives you a clear blueprint for the future and gives a right direction to your business. It gives you a target to achieve for, acts as a measure of your success and clears your vision for life beyond the business.

It also helps you imagine your business with the other person at the helm. Whether you are planning to pass on your business to generation next, sell to a buyer that your merger and acquisition (M&A) team has identified, or liquidate your assets and shut the doors, your exit strategy will guide the direction of your company. Operating a business without an exit strategy is like driving a car with no destination in mind. As a result, you end up to a point where you started!

After defining an exit strategy, every business decision is tuned accordingly. An exit plan can also be proved as a boon if an unexpected event happens. Let’s say, if you meet a severe accident or illness that forces you to leave early, you can easily ensure the exit strategy is activated without causing the business to lose value.

Estimates Your Company’s Value; Attracts Investors

It may be an obvious question, but have you actually realised how much your business is estimated? And will it secure your rest of the future? Determining this is more complex than you would expect. It is a tiring process of creating a detailed record of your recast financials, identifying your intangible and tangible assets, and gauge the condition of the market. You will also need an ideal buyer, who can pay a premium for your company based on a strategic fit with theirs.

A thorough evaluation will inform you of your company’s value, but only by combining this with the ambitions laid out in your exit strategy will make you understand if you are on the right track with your financial goals, or if changes are required to realise your expectations or needs.

For entrepreneurs looking for investors, having an exit plan is especially important. Any investor can ask you what your exit strategy is before they can put in their money into your business. The answer you give them can make or break the possibility of getting an investment. In reality, investors shy away from betting big on businesses that don’t have an exit plan. As they believe it might be an indicator that the entrepreneur is more interested in building a lifestyle business rather than building a potential high-growth venture.

To an investor, an exit plan is an assurance that they will get a return of whatever they are investing. This is especially when an investor is buying the equity in a business, and not giving as a loan. Equity in a business has no market value until the company goes public, sold, or merged with another company. If you have no exit plan, investors get worried that you might be reluctant to buy them out or provide the return on investment they’re looking for. Investors also ask founders about their exit strategy to gauge their flexibility and ability to make hard decisions when thinking about risk and return. They want to know if you are capable of imagining possible scenarios and have a grasp of the business landscape.

Gives Clear Picture When to Sell; Attracts Buyers

Your exit strategy will help you to determine an end point for your venture. This could be five years, ten years, or more but it will give you a timeline to work within, allowing you to prepare it for a buyer ready. Simultaneously, you can update your exit plan and make strategic business decisions according to the growth of your venture. This will help in upgrading your company’s value.

On the same side, an exit strategy also makes your business more attractive to buyers, which is crucial if you decide to sell your venture. Buyers want a company that has a clear vision and a proper exit plan. An exit plan also shows how much a buyer is committed to sell his business. Your exit plan will also help you in identifying the ideal time frame for selling your company with the maximum returns. This will psychologically prepare you for your future activities, have a thorough evaluation of your business’ market value, and negotiate a best deal for your business. So, it’s not about securing your financial future, but adding your appeal to prospective buyers. It also shows you are a committed seller.

Relieves Stress and Helps Handling Unwanted Offers

An exit plan gives you a firm grip and framework of your expected business lifecycle. This makes decision making much easier for you whenever you hit a roadblock or feel overwhelmed by the daily stress of business operation.

Having an exit strategy also helps business owners to renounce control and delegate tasks that they don’t like or aren’t skilled at. Similarly, exit planning focuses on developing a next-level management team that can take the control over the helm when needed. This gives the owner time to focus on the parts of business operations they like to expand.

An exit plan will help you respond to unwanted offers. Did you know that, according to research by the National Center for the Middle Market, 45 per cent of all sales are opportunistic for the buyers? It can be a risk to accept an offer in this manner. But with an exit strategy, you can address this type of offer.

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Key Considerations to Avoid Bankruptcy in a New Company

Preeti Verma — Tue, 19 Jan 2021 16:22:18 +0000

Kick starting a business can be a big thing in one’s life. One can say it starts with growing pains to investment headaches, while some consider growing and developing a company is far from easy sailing. However, there is nothing much gratifying than running a successful business of your own.If entrepreneurs lack good ideas, credible insights or proper leadership, then they can nosedive or fall flat, and are also often forced to declare bankruptcy. As a result, this can raise a lot of concerns for the creditors, investors, employer and employees. Similarly, it can also affect a business’ reputation and ruin the trust among the peer group. Even a business built upon an original, solid idea can fail if your financial and managerial skills aren’t up to scratch.

But then that also doesn’t mean the end of the world for the company or for the entrepreneur. If the bankruptcy is considered early, as soon as the first signs of trouble appear, the company and its assets can actually be benefited through the process. The process of bankruptcy effectively halts all investor and creditor collection against a start-up, while the company gets a second life to restructure or liquidate its assets to pay off the debts. Bankruptcy can also help the start-up to sell its assets without any liens, hindrances or claims. Similarly, it may also help the company by removing the office lease from the equation.

One of the most preferred forms of conducting business is when the members of a company have the option of limiting their liabilities. A company is a registered association having perpetual succession, a separate legal entity, common seal whose shares are transferable having limited liability. In order to understand the Insolvency and Bankruptcy Code 2016 effectively and to analyse its implementation critically, it is important to understand the pre-existing legal framework on Insolvency and Bankruptcy.

Inception of the Insolvency and Bankruptcy Code 2016

Recognising that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the Government of India introduced the Insolvency and Bankruptcy Code Bill in November 2015, which was drafted by a specially constituted Bankruptcy Law Reforms Committee (BLRC) under the Ministry of Finance. Formal bankruptcy, particularly for reorganising, has long been out of reach for most small businesses, especially after a ‘reform’ 15 years ago gave creditors more power.

After a public consultation process and recommendations from a joint committee of Parliament, both houses of Parliament passed the Insolvency and Bankruptcy Code, 2016 (Code). It got a Presidential assent in May 2016. The law was necessitated due to a huge pile-up of non-performing loans of banks and delay in debt resolution.

Insolvency resolution in India took over 4 years 3 months on an average against other countries such as the United Kingdom (1 year) and the United States of America (1 year 5 months), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts.

Insolvency and Bankruptcy finds a place in the concurrent list of the Indian Constitution (Seventh Schedule). Both State and Central governments can frame laws and regulations to govern Insolvency and Bankruptcy in their respective jurisdictions. The Coexisting List plays a central role in upholding the federal structure of the country. The United States shares a similar structure. Initially, in the United States, insolvency comes under the subject matter of the state, but then once the bankruptcy process commences, only federal laws become applicable. In spite of having dual control policies, there has not been a single case in post-independence India, in which states have practiced their legislative prowess in framing laws either for insolvency or bankruptcy and all responsibility regarding the subject has been left to the centre.

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If entrepreneurs lack good ideas, credible insights or proper leadership, then they can nosedive or fall flat, and are also often forced to declare bankruptcy.

Understanding Insolvency and Bankruptcy Better

Insolvency and Bankruptcy are two terms that are often used interchangeably but in fact, they are not identical. Insolvency, if defined legally, is a state where a company or individual’s liabilities exceed its or his assets and when the debts or obligations become due for payment, the company or individual is unable to raise sufficient cash for payment. In a common language, an insolvency is a form of financial distress for a company or an individual in which it is not able to pay its debts when due. A number of factors can lead to insolvency for a business concern. These include improper maintenance of accounts and human resource management, which may lead to an incorrect-figured budget, increase in input costs, and lawsuits filed against a company.

A company can deal with insolvency by taking corrective actions like straightforwardly negotiating with the creditors and restructuring the company’s debt, creating a functional plan to bring down the overhead costs, and generating surplus cash, in which a situation of bankruptcy does not arise. Bankruptcy is a legalised procedure that companies, organisations, and individuals use to deal with insolvency. A company or a start-up files a petition to be declared bankrupt, so as to become qualified for getting government aid when it is unable to pay off its liabilities.

The two most common types of bankruptcy are Reorganisation Bankruptcy and Liquidation Bankruptcy. Under Reorganisation Bankruptcy, the loan payable by the company is restructured to the debtor’s advantage. Debtors sell off their assets in order to collect money to repay their debt. This is called Liquidation Bankruptcy. All ‘bankrupt’ individuals and companies are ‘insolvent’, but all ‘insolvent’ individuals and companies are not necessarily ‘bankrupt’. Insolvency, most of the time is temporary and can be overcome by effective financial management.

Insolvency Resolution Process for Start-ups

First and foremost, filing a bankruptcy on behalf of your company does not protect you against creditors or investors collecting what they are owed by you personally if you provided them with a personal guarantee. If you operate as a company, LLC or Corporation, your liability is limited. Still, you need to be careful and separate personal from company finances, for example by keeping your bank account separate from the company’s one.

However, even if you are extra careful to separate your finances, if you were not acting in good faith, the creditors and investors can still go after your personal assets. Start-up business owners may also face bankruptcy if a bank determines the owner is out of formula, meaning that your debt to asset ratio requires your bank to call in a loan. For start-ups or individuals and unlimited partnerships, the Code applies in all cases where the minimum default amount is Rs 1,000 ($15) and above. The Government of India may later revise the minimum amount of default to a higher threshold. The Code envisages two distinct processes in case of insolvencies: automatic fresh start and insolvency resolution.

Under the automatic fresh start process, eligible debtors (basis gross income) can apply to the Debt Recovery Tribunal for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh.

The insolvency resolution process consists of preparation of a repayment plan by the debtor, for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order.

Timeframe for Completion of the Exercise Under the Code

The Insolvency and Bankruptcy Code 2016 has chalked out the different bankruptcy settling procedures for companies, individuals, and other types of organisations. It allows both the debtors, as well as the creditors to initiate the procedure. The code sets out a maximum timeframe for finishing the insolvency resolution procedure for both individuals and corporates. As per the Code, companies are required to complete the entire insolvency exercise within 180 days. This can later be extended by 90 days just when a majority of the creditors license or do not raise objections on the extension.

For smaller companies, which also include start-ups with an annual turnover of Rs 1 crore worth of assets, the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days. However, this doesn’t include a partnership firm. If debt resolution doesn’t happen the company goes for liquidation. The Code has set up the Insolvency and Bankruptcy Board of India (IBBI) as a regulator. It supervises the procedures identified with insolvency in the country and furthermore controls every one of the associations that have been registered by the board. The IBBI has over 10 members, including the Ministry of Finance, the Ministry of Law, and the Reserve Bank of India.

The process of bankruptcy resolution will be administered by licensed insolvency professionals. They would likewise practice control on the debtor’s assets during the insolvency procedure. The Code has also presented two distinct courts for administering the procedure settling bankruptcy, for companies and individuals. These are (i) the National Company Law Tribunal for organisations and Limited Liability Partnership companies; as well as (ii) the Debt Recovery Tribunal for overseeing insolvency resolution for individuals as well as partnership firms.

An insolvency plea is given to the relevant tribunal in a corporate account holder’s case; it is NCLT by the debtor or the creditor. The plea can be acknowledged or dismissed in at most a timeframe of 14 days. If the plea gets acknowledgment then the tribunal should rapidly appoint an Insolvency Resolution Professional for drafting a resolution plan within 180 days, which can be then extended by another 90 days.

Along with this, the court would start the way toward settling corporate bankruptcy. For that specific period, the organisation’s directors will stay suspended and the promoters will have nothing to do with the organisation management. The Insolvency Resolution Professional can look for help from the management of the organisation for dealing with ordinary activities. In the cases in which the CIRP is unfit to revive the organisation, at that point the procedure of liquidation will be started.

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Insolvency and Bankruptcy are two terms that are often used interchangeably but in fact, they are not identical.

The Other side of Bankruptcy

Of course, the process is not all sunshine and rainbows. There are many downsides to filing for bankruptcy. First of all, it takes a lot of time and money. The processes of liquidation and reorganisation are often lengthy and costly. The high costs in particular often discourage start-up owners from filing for bankruptcy. Obviously, declaring bankruptcy can help relieve you from your legal obligation to pay your debts and save your home, business, or ability to function financially, depending on which kind of bankruptcy petition you file. But it also can lower your credit rating, making it more difficult to get a loan, mortgage, or credit card, or to buy a home or business, or rent an apartment. So, plan your business in advance, learn from others’ failures so that you don’t have to go through these legal proceedings.

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