Subroto Bagchi is the chief operating officer of Bangalore-based MindTree Consulting, an IT and global services firm that went public in February 2007. In the second of a two-part interview with India Knowledge at Wharton based on his book, The High Performance Entrepreneur: Golden Rules for Success in Today’s World, Bagchi discusses the challenges entrepreneurs face in building their ventures. These range from competing with larger competitors to setting in motion the right processes for growth. (Click here to read or listen to the first part of the interview.) An edited version of the transcript follows.

Knowledge at Wharton: You make a couple of interesting statements in your book. One is that “Startups can avoid mistakes by pretending to be big”. And second, you write that “being big is not about size, but about mindset”. Could you explain what you mean?

Bagchi:  Thank you for that question. The concepts behind both are very dear to me. One is about pretending to be big. If you look back in time, all of us at some point in time have pretended to be big. It’s a very important directional statement. For example, the little girl, who, when Mom is not watching, puts on Mom’s lipstick or tries to step into Mom’s stiletto shoes, or the little eight-year-old boy, who, when nobody is watching, is foaming his face with Dad’s shaving cream. When you do that, you are mentally growing up. You want to grow up to be a big boy or big girl someday.

In an organizational context, there are two things that come to mind. One is process, and the second is governance. Usually, start-ups underestimate the power of these two things and their capability to properly reduce in size and sustainability.

Let’s take the example of process. There is a mistaken notion that every start-up [begins its existence in] a garage, and a [garage-sized firm] doesn’t have to have a process. More start-ups remain at that size and then they go off the scene, because they fail to embrace process. Even if you start small — and you have to start small — you can pretend that, “You know what? I’m a Fortune 500 company, and I need to front-load my organization with the right process.” This is because process is not about a framework that will bind you up; process is like plumbing. It’s like infrastructure.

Let us imagine that you want to someday build a skyscraper. You have to pre-think what plumbing must go into the skyscraper. It cannot be an afterthought. The plumbing you require for building a skyscraper is very different from the plumbing that you require for a two-bedroom house. You don’t build the plumbing for a two-bedroom house today and say, “As I build another floor, and then another floor, I will add to the plumbing.” No. That doesn’t work. So you have to pretend that, “I am a skyscraper.” The inlet and outlet for the skyscraper is going to be very different. So pretending [or imagining] is a very, very important thing.

The second issue is governance. Many start-up companies will not give thought to governance. What happens is that for many years, you will spend money on everything. You’ll spend money on R&D, you’ll spend money going to trade shows, you’ll spend money trying out various things, but you will not spend money on setting the right accounting system in the company, and you’ll run the company on spreadsheets because it feels good. That’s not the [right] way.

When we were a company of 250 people or less, you’ll not believe this, we bought an accounting package. We didn’t try to run our accounting on spreadsheets. But that accounting package, we were very clear in our mind, involved implementing an ERP solution. We did that when we were just a 250-person company.

We didn’t have Oracle expertise. We went and spent $250,000 hiring Oracle capability from PricewaterhouseCoopers and implemented an Oracle ERP with which we ran the company until recently. Then we scrapped that and we implemented another SAP-based ERP system.

I’m making two points here: One is that when we could hardly afford to run our company on an accounting package rather than an Excel spreadsheet, we actually spent a quarter million dollars on implementing an ERP system. But more than that, even while doing that, we had a clear view of when we would need to move beyond that ERP system. Ours is a seven-year-old company that just went public a few weeks ago, but we have actually migrated from one generation of ERP to another generation of ERP. That is what pretense means.

Now, the second point was about size being a mindset, and not being a matter of your physical size. I’ll give you two examples. Look at Singapore. It takes two-and-a-half hours to enter Singapore from one end and get out at the other end. That’s the size of the country. Look at Israel. Countries like Singapore, or Israel, or Finland, are world leaders in many ways. These are developed countries. These countries are at the top-end of GDP. But they are so tiny. They’re microscopic when you compare them to countries like India or Pakistan. Many of the African countries are significantly larger.

In today’s world, physical size does not guarantee success. What is important is mental size. Nokia was created out of Finland. Singapore’s GDP is way bigger than the GDP of India, and … the population of Singapore is half the population of Bangalore.

It’s very important to understand this because I think entrepreneurs suffer from an inferiority complex. They think that the world is going to favor size. No, today’s world is not about size, it is about an idea. If you have the right idea, you can take on size. So don’t be scared of size. You know, size gives you a sense of the power of incumbency, and entrepreneurship is about non-incumbency. I keep saying that in a world full of monochromatic tadpoles, if you are fluorescent it does not matter what size tadpole you are.

Knowledge at Wharton: Would you explain the concept of the process to empathy ratio?

Bagchi:  Yes. This is actually not a scientific explanation. I, like any MBA, would talk about P/E ratios [price-equity ratios]. You talk about one of the indicators of the financial health of an organization through P/E ratios. When I was raising MindTree, one day it occurred to me that we were putting too much of an emphasis on process and building of process and process as an enabler. I found that the Human Resources folks — we actually call them People Function folks in MindTree — were becoming more process-centric, and process does not solve all problems. Process works only when it is given life through empathy. I didn’t know how to drive home the point, and then it occurred to me that we could have a different take on the P/E ratio concept. I called those folks and said that we need to balance every process with empathy. Think of it as a new way of looking at the P/E ratio. Deal with every situation partly by looking at process and partly by looking at empathy.

Process is not a substitute for building an emotionally rich organization. Process without emotion can quickly bring you down to the lowest common denominator. It is very important while dealing with human situations, dealing with customers, suppliers, investors and with our own people. We must balance process with empathy. We must build on process but be led with empathy.

Knowledge at Wharton: What are some of the most common reasons why entrepreneurs fail?

Bagchi:  There are many reasons why entrepreneurs fail. Sometimes people fail because they don’t take a long view of time. Sometimes they fail because they do not adapt. I think adaptability is very important. You know, you fall so much in love with an idea, an immediate idea, a product or service idea. You think that that is the be-all and end-all. When that idea itself fails, since the idea has become your entrepreneurial dream, you see the enterprise fail and then you go a different path. When you look at building an organization, yes, the first idea is important, but an organization is built only as an idea of ideas.

Look at Apple. When the company started out, if somebody had said that it would be a music company, Steve Jobs might have shown him the door. But look at where Apple has gone. Apple is not about Apple 2E; it is not about the Mac; it is basically an idea of ideas, or what is sometimes called a memeplex. The enterprise called Apple is about building that enterprise called Apple, and that has nothing to do with computing.

It’s the same case with the Intel 8086 family [of microprocessor chips] on which Intel was built, but who knows what Intel will be tomorrow? But if Intel’s founders only saw creating the 8088 or even PPS4 microprocessor chip, and that was all there was to it, the company wouldn’t be what it is today. It’s very important that people understand that creating a microprocessor chip is different from building Intel. You need to have a long-term view of time. You need to be adaptive. You need to go with the flow of emergence. You need to be in love with the concept of building a company as against bringing to life one idea, which could be a microprocessor chip, or a new way of slicing bread, or a new kind of a mousetrap.

Inventive thinking is important to building an enterprise, but that is not the same as building an enterprise. I like to put it this way, when I speak to young managers. I say, “There is business and there is the business of business.” When you try to create a company, you need to be cognizant about the business of business.

One other thing I must tell you is that many entrepreneurial activities fail because of under-funding. You don’t want to be looking for money when you’re running out of money. How can you be non-under-funded? Again, going back, you need to think through the mission, vision and values. You need to think through the exigencies. You need to be honest about where things can go wrong. Then, you make the right calls and raise the right amount of money at the right cost and at the right time.

If you’re under-funded, the whole world gangs up against you. Similarly, in the high tide of the 1990s, during which there was irrational exuberance, there was a lot of over-funding. Just as under-funding kills you, over-funding also kills you. It breeds the wrong mindset, and the wrong culture, and that can lead to excesses. That’s one major lesson that I learned from the highs of the 1990s.

The other thing that kills you is lack of resilience. You start a company and suddenly you find that you are in the middle of a messy divorce. You start a company between three friends and suddenly find that somebody has a huge domestic problem. The capability of large, established organizations to take these things in their stride is far greater; this is where the power of overhead kicks in. In a fledgling organization, the capability to rise from personal adversities is relatively lesser.

When we started MindTree with 10 of us, many people thought, “Oh my god, this is too much overhead.” But we used to say, “No, we are blessed with bandwidth.” If you look at a seven-year-old run between the starting of the company and the IPO, different people among the 10 had different problems. But because we had the collective bandwidth, when somebody dropped the stick, somebody else picked it up before it fell to the ground and ran with it. So, resilience is a very, very important thing. It is not a sprint; it’s a marathon. Any of these things could lead to failure.

I also think it is important to have the right level and the right kind of ambition. If you’re aiming too low, you’ll fail anyway. If you’re aiming too high and you have not thought through the details, if you’re not realistic about things, again you’ll fail. People also fail because they fall in love with their own image. This happens in the early part of success. It is a very Silicon Valley thing to happen. The press interviews you. I actually can see the faces of some of the people who even made it to the cover of Fortune magazine during the 1990s high. These people had their publicists and their PR folks. The press made heroes out of them. And these people fell so much in love with their own image that they took their eye off the rearview mirror. Like the Cisco chairman says, you have to be very careful not to believe your own press.

Knowledge at Wharton: What would you single out as the biggest challenge in building MindTree and how did you overcome it?

Bagchi:  First of all, I don’t think there was one single biggest challenge…. But I always say that the job of leaders is to build infrastructure. We have to continuously build infrastructure. An organization, an enterprise, is about infrastructure.

However, if you look at the ongoing challenge of building infrastructure, it is at three levels. At the lowest level, it is about physical infrastructure. It’s about software units you create; it’s about offices you open in different lands. It’s about the building; it’s about the network; physical infrastructure is about all those things. Physical infrastructure has to be ongoing. On top of that physical infrastructure is building the intellectual infrastructure – the domain expertise, the tools, methodologies that are unique to you. It is about the intellectual properties that differentiate you.

Now, many companies do a good job of building the physical infrastructure. Some companies even do a good job of building the intellectual infrastructure. But above these two layers is what I call the emotional infrastructure. This is the most difficult – the most difficult to build and the most difficult to sustain.

In a hyper-competitive world, it is easiest to demolish a company at the physical layer. It’s less easy to demolish a company at the intellectual layer. But it is the most difficult to break a company apart at the emotional layer.

In building MindTree from zero to 4,200 people today over the last seven years, I think what has held us together is the fact that we paid sufficient attention, not only in investing towards building the physical and the intellectual infrastructure, but also to building the emotional infrastructure. If you look back in time in 1999, many companies in the same space were created, in the United States as well as in India and in other parts of the world. Nine out of 10 of those companies don’t exist today. This is not because we have a better physical or even intellectual infrastructure. We survived the severe economic downturn of 9/11 and all the other bad things that the world saw in the intervening years because we had built the emotional infrastructure.

This will be the single most important challenge for us as we brace ourselves for the next phase of growth. This is because, as Peter Drucker said, growth is inherently destructive. Any growth is inherently destructive. It is a tussle between centrifugal forces and centripetal forces. One wants to hold on and the other wants to go on.

The key issue going forward will be how our leadership continuously is able to build the case for, and invest in, creating the next higher level of emotional infrastructure. That is our single biggest challenge. Physical infrastructure you can buy. Intellectual infrastructure you can create, borrow, or inter-network. But emotional infrastructure is the most nebulous and most difficult to build. It offers the most sustainable competitive advantage.

Knowledge at Wharton:  Speaking of challenges, you just went through your IPO. One of the chapters in your book refers to taking a company from idea to IPO. In the light of your own experience, is there anything in your chapter that you would have rewritten?

Bagchi: … I did not want to write that chapter because you know entrepreneurs get too over-focused on the concept of taking a company public. There is a Silicon Valley kind of mindset where you think that your job is over once you take the company public. You take the money and then it is a teenage party and then you probably go somewhere to the south of Spain and retire thereafter.

So the whole essence of the book is, “Don’t think about the IPO”. It’s a rite of passage. It will happen when its time comes. I stand by every single bit of information that I wrote in that chapter and we didn’t have any surprises. The only surprise that of course happened was that the IPO got over-subscribed 103 times. We were looking for just about $54 million dollars you know, public investment, and $5.6 billion flowed in – which is not necessarily a nice thing because what happens is then you have so many people who are left unhappy that they could not get the amount of stock.

Knowledge at Wharton:  Is that part of the too much money that kills you?

Bagchi:  Well, it doesn’t kill in this case. But you want the investing community to be happy as well. Here was a situation where we didn’t anticipate that the issue would be subscribed 103 times over, which I think will cause its own challenge in terms of taking care of investor interests which again, is something that becomes both an opportunity and challenge.

And I have been telling my own people that, look we have to look at the enterprise as a three-legged stool. One is the employee, one is the customer and the third is the investor. The three have to be balanced at all times. If you try to deliver to the investor at the cost of the employee, or at the cost of the customer, this three-legged stool topples over. So we need to be careful not to get carried away by our own success, what would be the size of that success. We need to continue to focus on doing the basic things like one customer at a time, one MindTree mind at a time. That’s what we have to do.

Knowledge at Wharton:  If you had to give one piece of advice to young entrepreneurs about to start of their journey what would it be?

Bagchi:  Can I give two?

Knowledge at Wharton:  Absolutely.

Bagchi:  The first piece of advice is to just do it. No amount of simulation is equal to the act. You absolutely have to do it. The essence is in the act. That’s why the last portion of my book I had written that it’s like falling in love. It’s also a little like having a baby. No amount of spasm is a substitute for conception. So be seized with it, get pregnant and, for heaven’s sake, deliver.

Having said that, here is my second piece of advice, if you are 20-something, don’t be in a big hurry to be another Bill Gates.  You should work for a while for somebody, because you know that in today’s world, you have 40, 50, 60 years. We started the company when one of the co-founders was in his late fifties. Three of the co-founders, including myself, were 42. The rest were about 35.

So the message here is that when you are about to build a large sustainable, successful organization for a long time to come, take your time, see the world a little bit. Understand how other people build organizations. Go try and sell to some real paying customers on behalf of somebody else. Gather all that experience and build a little maturity before you start an organization. While there is no law against starting a company when you are 19, 20, 21 or 22, by all means you can try and do it, yet you will acquire more “street smarts” and that comes only when you have walked the street.

Don’t be in a big hurry. The world will wait for you to come and change it. Go observe, absorb and then go and do something that is memorable and worthwhile. These are the two messages. Do it but don’t think that the world is rushing past – the time to do it is now. The time is now if you have done all the things right. You have done the mission, vision, core values we’ve talked about, and you have put a complementary team. You know you have a good reason why somebody should invest in you. You think you can go out and get a paying customer. Then go and do it!

Knowledge at Wharton:  One last question. What is your next book going to be about?

Bagchi:  Actually I can’t tell you a whole lot about it because I’m sure my publishers would flinch if I were to give too much information, except that a lot of people say, “Is this going to be a sequel?” I hate sequels because no sequel is really memorable. The second book is not a sequel. It is not about entrepreneurship.

It is going to be about the workplace and what I would like to do is take slices of the workplace and write about workplace issues – for a much wider audience. So if you are 20-something, 30-something or even 40-something, you will find this book to be interesting because it will be anecdotal. It will take probably 30, 40, 50 aspects of working and look anecdotally at what works, what doesn’t work. It will be something like that so. If all goes well, it should out by the end of the year. Let’s see.