There’s been some brouhaha about a new feature at Cleartrip which tells you how many seats are left (at the mentioned price) when you search for tickets.

A post on moocube called “The Cleartrip Hurry Algorithm” started doing the rounds of the Indian web, with the author accusing Cleartrip of trying to make people “hurry” to buy a ticket by conveniently cloaking the “(at the mentioned price)” in the visual interface. You get to see something like:

and the moocube blog writer believes that gives the false impression that the plane is nearly full – his subsequent searches with more passengers indicates the flight isn’t full at all.

Hrush Bhatt, co-founder at Cleartrip, pitched in very quickly with an explanation. Airline ticket pricing is “bucketed” – up to a certain number of seats, you get a certain price, and then onwards a higher price will apply. The interface therefore means there are “n” seats left at this price, not that the plane’s filling up. In fact if you “hover” over this red box you see the missing “at this price”.

The interface, admits Bhatt, is not really conveying the right impression, and others claim in the comments that a lie is a lie. The intentions are not malafide, though, because in some cases you may search for 1 ticket and get a “5 seats left” – indicating that even this bucket isn’t full; a strategy that would be inconsistent if the intent was to intentionally mislead a customer. But it’s best to convey the right image, and it looks like they’ll address that soon. Sadly, Bhatt also tried to malign the author of the post, calling him a liar for not mention

What I learn from this:

• As a business owner, you have to respond to detailed accusations like the moocube post. And fast. But you mustn’t respond to haters and trolls – and they will litter the comments of any negative feedback post anyhow.
• You must admit your mistakes but avoid looking arrogant. People are irrational, they will accept the strategy of “hurry, buy now” from a real estate agent who pretends that a project is sold out when it’s not, or from a movie hall that says “nearly sold out” but you find it empty walking in. But not from you, the website that sells plane tickets. That’s how people are. You don’t call them out for lying when they accuse you of lying – it’s counterproductive.
• Don’t let an episode like this make you think “I shouldn’t do this”. We’ll all make mistakes, the idea is how well we respond to them. Cleartrip gets a lot of publicity for both having done a rush job and for hurrying to clear it up. That’s better than no publicity. In a service business you get recognized for action; and sometimes it’s better to have to apologise than to endlessly argue about whether you should do it at all. [Yes, caveats apply, but you know what I’m saying, no?]
• What the heck is with the “scratched out” numbers – 35,255 for one image, 72,403 in the other? I suppose one might make the argument that those are not fares anyone is expected to pay, but will people take offense to that next? [I doubt it, because that’s less highlighted in comparison]

I personally don’t book on Cleartrip because I get better prices directly from the airlines, where refunds or rescheduling is cheaper as well. (I used to be able to allocate seats, but the silly DGCA has removed that privilege) But I think they have a nice interface and are out there running a good business in a field that is ridiculously competitive.

To end an off-topic post, here’s Seinfeld on airline travel:

"Good Morning, Sehgal sa'ab". It wasn't a reference to Mr. Sehgal's car. "Sa'ab" was short for Sahib, the equivalent of "boss" or "sir". In any case, Mr. Sehgal had a Honda.

"Hello, Sudhir. Good to see you after all this time. Don't tell me you have a tax problem", said Sehgal, in a worried tone, wondering why a chartered accountant was always the guinea pig during tax return time.

"Not really, Mr. Sehgal. This is Rakesh Mannan. We want to start a company together. Tell us how. We're going to make software for solar cars, and make loads of money. "

Good luck with that, thought Sehgal. Great ideas, and very little operational knowledge — however, crazier ideas have succeeded and you can't let an opportunity go. So he started.

"So you have many choices — a partnership, an LLP or a private limited. A partnership is the least cumbersome, but you do have the issue that each of you as a partner has full liability".

"What does that mean?", asked Rakesh.

"Rakesh, if your partnership takes a loan or your company gets sued in court, each of you is, individually, liable for everything. That means your personal assets are on the line in case the partnership needs to pay and doesn't have the money; and if Sudhir doesn't pay, you will need to  pay the full amount, regardless of your share in the partnership."

"But he won't do such a thing", said Rakesh.

"That's not the point. Tomorrow you might add more stakeholders — will you have the same opinion? Will that person take on full liability of everyone? Partnerships are great for small businesses, but if you plan to do much more, you need to consider a Limited Liability option."

"Ah, I see. No partnership, then. What are the options?"

"You can create an LLP or a Limited Company. These take a little more time, but I can turn it around in two weeks. The two concepts are similar, in that your liability is only to the extent of your investment in the company, and if the company is sued, you aren't personally liable. A Limited company is better than an LLP if you wish you get, for instance, foreign investment or venture capital, and eventually list as a Public company on exchanges."

"Limited Company it is. So what do we do? We have this great business plan, we know we need just five lakhs to start the business and I'll put in 3, while Rakesh puts in two", said Sudhir.

"That's good. So you'll create a private limited company — you tell me a name, tell me what you plan to do and I'll work to register it. The company will have to issue shares. For five lakhs, at Rs. 10 per share, there will be 50,000 shares, and you, Sudhir, will get 30,000 shares, and Rakesh gets 20,000, in proportion with your investment."

Sudhir thought this was nice, but was it right  to restrict stakes based on money invested?

"But the five lakhs is really the seed capital — over the next six months, both of us will put in a lot of effort, which is worth a lot more. How can we divide our capital accordingly?"

"You can alter shareholding based on effort, if you create a stock option plan that compensates you with stock. This is a more tedious process, and I would only recommend it if you want to bring in external investors. For example, you might decide to issue yourselves 10,000 shares each, every month, for your effort. In a year, your individual holding percentages will change, and will reflect more of your effort and less of the cash you initially invested. Remember your shareholding today will get diluted as you raise more capital tomorrow, and the percentages are likely to come down substantially."

"Oh. So we can't own this company anymore?"

"Well, there's a difference between management and ownership. For example, if you manage the company, you can decide to pay yourself a very high salary. If you own the company, you want to keep salaries down so that profits are higher and you get better dividends.  When you let other people invest, you part with ownership, but usually not over management control. So there will always be a tussle between your investors and you on that note, but people have learnt, over years, that it makes sense for founders and management to have a significant stake in the company. And since you are starting off with such small amounts as 5 lakhs, if you aren't getting a big stake, you can always quit and start a competing company with a higher stake. To motivate you to stay, investors need to give you a meaningful percentage."

"But don't investors require you to sign non-compete clauses?", asked Rakesh.

Sehgal sighed. "Yes, but it's very difficult to enforce non-compete restrictions in India. Investors might try but they know that it's better to keep you motivated than to let you run away; legal agreements only make sense to enforce if you succeed.

Only novice entrepreneurs part with more than 50% equity in the first round of fund-raising. In fact, even in listed companies, you find that most founders or "promoters" continue to own a majority (or near-majority) stake in the business".

Sudhir chewed on his pencil.

"That's interesting. So we decide how the stake between us is split, and later, someone will put in money. I need to give that person shares, but at that time, I will have a product, and revenues; I might need 50 lakhs — but my share capital is just five lakhs! How does that work?"

"Once you generate revenues and profits the overall valuation of the company increases. Let's say you generate 20 lakhs in profits, and using industry figures, you are given a valuation of 10 times profit — or Rs. 2 crores. If the number of shares hasn't changed, it's still 2 crores divided into 50,000 shares — or Rs. 400 per share. Remember, you bought in at Rs. 10 per share, and you have grown it to the Rs. 400 a share valuation without putting any more money. That's the power of effort, and that's how great companies are built — not by money alone", said Sehgal.

Sudhir and Rakesh gave each other a look. Just five minutes into the conversation, they were worth 2 crores together. But it's easy to be a millionaire in your dreams, they knew.

Sehgal continued, "Now you need 50 lakhs and your investor agrees to value you currently at 2 crores. That will add 50 lakhs of cash to your company, and you will issue him new shares at Rs. 400 per share, which is 12,500 shares. Now there are 62,500 shares in total. Each of you owns a little less as a percentage, and the new investor owns 20%".

"So how does the investor make money? I can take a salary and get a return on my investment. Why should a non-involved investor bother?"

Sehgal got up to pace his room, a tactic he often employed when he was about to explain a delicate detail.

"Two reasons. One: you might be successful and give dividends to investors by sharing your annual profits, which can realize great returns on the initial investment. But this is no longer the preferred reason to invest at the early stage. The main reason is to exit at a high value. If I trust the founders, understand the market and believe in a product, the initial seed funding can multiply many times if things go right. You, for instance, might either get acquired by a big company that's making solar cars, which gives your investors a great return. Or, you might grow big enough to get listed in the stock exchanges, through an IPO — this allows anyone else to come in and the original investors to sell."

"Nice. That means we, as founders get to exit as well, even partially, I guess. But then, how does one list on a stock exchange?"

"If you choose to list yourself on an exchange, you typically make a public offer, where you offer the shares to just about anyone. There is regulation involved, and you will need to employ bankers and underwriters and have a great track record. With that, the greater investing crowd in the stock markets may see even more value in your shares, perhaps even 20 times profits, and the shares can be richly priced."

"Like 4,000 rupees a share? Or 40,000?"

"Sure, but because people get scared of large numbers, listed companies tend to reduce the share prices through bonuses or splits. Imagine that when your company was worth two crores with 50,000 shares, you chose to issue another 50,000 shares for free to all shareholders, in the same proportion as current shareholding. Now the same 2 crores of value is  spread across 100,000 shares, which is Rs. 200 per share, versus the Rs. 400 a share earlier. This is how listed companies tend to make their shares look affordable."

"But if listing is so great, then why doesn't every company list itself?"

"Many don't qualify. The regulations require either a good record of profitability or high quality institutional investors on board, plus approval of your specific offer. Then you need to reveal your financial details every quarter, and make sure the exchanges are aware of any large decision you take. And because you have shares listed, any material information needs to be revealed immediately. This could put you at a disadvantage in a competitive field. A number of companies use creative accounting that will not be acceptable in public markets."

"Whoa. So if we're clean, we are okay. But this is brilliant, Mr. Sehgal. Thanks for your help. Now to get back to making our solar car software."

"All the best, Sudhir", said Sehgal, wondering if he should ask for shares as his fee. The Honda is nice, but petrol isn't getting any cheaper.

More Yahoo Columns:

• Dirty Money Is Not Just Black (Archive)
• Of Underreported Sensex P/E Ratios (Archive)
• The Unnecessary Prepayment Penalty (Archive)
• How To Manipulate Stocks (Archive)
• Loaded in Disfavour (Archive)
• Spooked By The RBI (Archive)
• India's Inflation Kool-Aid (Archive)
• Five Easy Ways To Get Suckered (Archive)
• ETFs and Skewed Indexes (Archive)
• Statistically Losing The World Cup (Archive)
• Accelerated Correlation (Archive)
• The Japanese Fallout:Is Nuclear Power Dead? (Archive)
• Amnestasia: A disease where you forget to pay tax (Archive) #Budget2011
• Cutting Real Estate Down To Size (Archive) #Budget2011
• Good Stock. Bad Stock. (Archive)
• Budgets and Stock Markets (Archive) #Budget2011
• Losses and Endowments (Archive)
• Moving Averages (Archive)
• Did you Know? (Comments)
• Reconsider That Fixed Deposit (Comments)
• Market Interventions (Comments)
• ULIPs or Mutual Funds? (Comments)
• Taking Stock of Commissions (Comments)
• Innovations and Curses (Comments)
• Free Money (Comments)
• The Illusion of Low Risk (Comments)
• Tips about the Tipsters (Comments)
• The Good, Bad and Ugly of Credit Cards (Comments)
• The Problem with Multi-Level Marketing (Comments)
• Planning for the Grim Reaper (Comments)
• Of Options and Choices (Comments)
• Riding the Equity Wave (Comments)
• The Art of Picking Stocks (Comments)
• (The Whole Lot)

And yet, I don't have such a retirement plan for myself. I'm a strange guy.

Oh, I do have a savings plan for my son. And about 12 months of expenses in an emergency fund. But I haven't quite saved for retirement. I'm banking on a lot of luck.

As a startup founder, I can't expect a fixed salary every month. It will come, but I've grown to accept that it will be much lesser than whatever I could get at a regular job. I have a lot of fun, but the financial payback is not expected to be a larger paycheck; it's supposed to be one large cheque.

I'm betting my future on the hope that I'll make a ridiculously large sum of money when I sell my company. Or that my business will get so rich it'll pay me way beyond anything I could get in a job. In my own way, I'm focussing on capital appreciation of my investment (of time and opportunity cost and money) rather than income.

There is no diversification. I'm betting on me and my luck. In a job, you can switch employers, without much of a thought. To me, that's like switching out of me, a failure of sorts. I'm not afraid of failure - after three startups you don't give a damn what other people think - but I'm going to give everything my best shot before I give up, for sure. But it is true that I have a very concentrated portfolio - it's just what I do and how lucky I am, now even necessarily in that order.

The one big difference is that I get to build an asset. At a job, you hardly ever own a piece of what you do, though stock options do provide some upside. At a startup, you build an asset for yourself. Sometimes it's junk. And some other times it's so valuable people will pay a lot of money for it. And you get to shape that asset, so unlike buying a company's share and hoping they'll make more profits, with your own company you can convert that hope into effort and reality.

What I'm really doing is betting that if I keep at it, something big will happen. It has, in the past, and I'm grateful that gave me the money to be able to do this and not have to really worry about the rent. But to truly be able to retire, I have a long way to go financially.

So my retirement plan is a pot of gold at the end of a rainbow. In a world increasingly populated by gadgets that I want NOW, time I need to take off today, that plan sucks. Until one day, when it doesn't.

(Yes, you should try it. No, it's not glamorous. Yes, it's so much fun. No, I'm not smoking.)

Satish Dharmaraj says Founders of startups must take up the post of Chief Executive, because they can best communicate the culture and vision, raise money or scale/exit the business.

Satish used to run Zimbra which got acquired for a cool $350m by Yahoo, and now is a partner at Redpoint Ventures.

A gem in that post: “Culture is not taught but is learned by copying. Work ethics, how you treat people, challenging ideas, debates, hierarchy, salaries, stock options all define the culture of a company.”

I think Satish’s point – in all the sub-points – is that a founder is best able to communicate the vision and culture of a company to employees, customers and investors, which helps further in scaling and in exiting the business. External CEOs – hired top honchos who don’t necessarily come up with the idea but have expertise in managing and growing businesses – tend to lose the vision and culture picture in early stage startups; exceptions exist of course, like Google’s Eric Schmidt (who’s as close to founder as one might think possible)

Then founders also need to work hard to improve their communication skills. Not networking – that can be bought. But simply the ability to translate a vision to impress anyone listening: prospects, employees, investors and peers.

And that takes some work. While I don’t have the credentials Satish does, I’ll go ahead and make some suggestions to founders who love what they’re doing, but find this communication business slightly threatening:

• For verbal communication: Joining a local Toastmasters group is a good idea; they help you overcome stage fear, and use eye contact, speech modulation, hand gestures and body language to keep an audience – a diverse audience – hooked to your speech. And they count the “ahhhh”’s in your speech until you get rid of them. It’s the little things that make a big difference.
• Written language is nowadays even more important with geographically dispersed teams. The best way to learn to write is to write. Joining a local writer’s group, a writing workshop or even being active in forums will help.
• You needn’t be succinct. In fact, when you want to send a simple message, you might need to repeat it in as many different ways. They say in hindi, “samajhdaar ko ishaara kaafi hai” – or, the smart only need a signal, not even words – but you are unlikely to be speaking with the smartest audience all the time. See Google – they hire the smartest in the planet, and tell them to do no evil, but every once in a while, they censor the internet. So, repeat where necessary. (Note: do not do this verbally. Especially not with people holding heavy equipment. Routers are heavy equipment.)
• Learn to be yourself. It’s not easy because most of us are tuned to become someone else when we write or stand on stage. Some of us put on an accent, some talk slowly and mutter away the ends of sentences. Some write like they’re arrogant when they’re the nicest people otherwise. We put on a show, but no one wants a show, they want the real you. Join a theatre group if you can. Yeah, no one has the time. But when you train to be someone else, you learn how easy it is to be what you are, on stage.
• Be candid, honest and upfront. I now live in a city where things are entirely the opposite, but I believe that being straightforward is the best culture. From telling people they just don’t cut it, to telling customers you can’t deliver on time, or giving investors bad news – its better if the news comes from you, and it comes with sincerity.

For what it’s worth, communicating effectively isn’t an art or a talent. You can learn it. And more importantly, with the passion you bring, you can teach it. More power to all of you.

[Back to regular programming]

This post is written by Deepak Shenoy, at Capital Mind.

According to a filing with the Securities & Exchange Board of India (SEBI), Infomedia18 had paid a total amount of Rs. 4.255 crores for acquiring Burrp. Previously, the amount paid was undisclosed.

Now this seems to be an interesting deal. Earlier reports at MediaNama indicate a murmur that Haresh Chawla, the Infomedia 18 Managing Director, had funded Burrp with a loan or a convertible debt of sorts; technically, is that a related party transaction, if Haresh didn't own shares? I guess not, because the SEBI filings haven't mentioned it.

Rajiv Dingra's take on it at WATBlog analyzes the valuation; at 300K unique visitors a month, the valuation of Rs. 150 per user is a miniscule $3 per unique visitor.

That sounds quite reasonable but it's unlikely the founders would've made much if the Haresh Chawla debt story is true. Still, this acquisition is going to be yet another low valuation overall; You want to see huge successes and massive payoffs but the M&A part of Indian business is yet to scale up.

Examples: HT's acquisition of Desimartini was announced as "less than $10 million" but it turns out that figure was overstated - don't know by how much. But a look at the 2007-08 balance sheet of HT Media reveals:

• Desimartini was acquired by Firefly e-Ventures, a fully owned subsidiary of HT Media
• Firefly, which was capitalized in the same fin-year, had an equity capital of 10 cr. and another 9.85 cr. loan/payable to HT Media. So 19.85 cr. is about the max they ever had - Firefly's total assets are shown as 17 cr. at the end of the year.
• Desimartini will be listed as an asset, most likely at cost.
• Firefly also owned Shine.com in this period, and that's likely to have accounted for around half of what's in there.

Slightly bigger stories: Jobsahead, a job startup, was acquired by Monster for 40 cr, around $9m at the time. But it had a $5m funding from Chyrscap which would've taken at least 1x liquidation preference (meaning they make at least 1x their investment even if company sells for lower valuation) - but the remaining 4 million would have given the founders/angel investors/employees 16-18 cr. to share. Baazee of course was an incredible $50m, which looks like a fabulous return for the founders.

Update: Manish points me to the TravelGuru sale which was at $9-10m, which after a $25m investment from the Sequoia type VCs, would hardly have left much on the table for founders. The other big players in the travel space - Yatra, MakeMyTrip and Cleartrip - have serious funding, and just-as-serious competition in the form of larger overseas players like Travelocity, or from the Airline web sites directly. (I still use MakeMyTrip/ClearTrip to find the airline/price I want, and then hit the airline web site to see if I can get a better deal.)

This is good money in an absolute way but doesn't make the founders filthy rich (I would say each founder making > 50 cr. is seriously inspiring).

A U.S. example: an acquisition in 1999 - of clearstation.com, a very cool financial site, by E*Trade, was for around $28 million (E*Trade paid with 469K shares, and it was around $60 at the time) Clearstation had 90K registered users - that is $30 per user, though you must remember this was the height of the internet boom.

Still, the difference is incredible. Most Indian web site M&A deals seem to be very low on valuation, and the culture of big payoffs like the US has just not come here. We're at early internet stages in India right now, but given the relatively low payoffs and the high attrition (lemme throw a guess: 80% or more of web startups fail) the "expectancy" of the web startup isn't positive. That's a trading term - basically it means if only 20% of startups succeed then the payoff must be at least 4x of investment, to make up for the losses of the other 80%.

Having said that, it seems like these are great times for online startups - the internet growth is starting to show, and in mobiles, I'm seeing more and more scale. Indian Celebrities are using Twitter. Indians are pretty huge on Facebook now. Maybe this is the right time to start!

Note: One marked difference is in InfoEdge's valuation - the owner of Naukri.com gets a 35 p/e on the market. Maybe the right thing for startups to do is to hope to get listed instead of this M&A thing.

Note 2: The Indian VC community sits at the top end; at the early stage there are few or no angel investors. Read this discussion at Venturewoods for some interesting insights and an angel funding framework; the idea is that if the angel community develops we'll see better startups and perhaps more big payoffs.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.