Yesterday I met the wonderful Artie Isaac, whom I discovered via his blog Net Cotton Content. As with any conversation between men in their fifties, our own turned to the topic of our children, whose stories weren’t ours to narrate we agreed. When it was time to bid adieu, Artie asked me, if he could give me a book – one that might enrich my discussions with my daughters around diversity. Being the shameless book collector that I’m I eagerly accepted his gift of Ta-Nehisi Coates’ Between The World And Me.
Later in the day, I found myself nearly 15 minutes early for my next meeting (a very unusual occurrence for me, as most folks who know me can vouch.) I cracked open the book and began reading. Right from page 1, the book written as a letter to his 15-year-old son grabbed me by the throat and sucked me right into it. All evening I struggled as to how best to describe the impact the book had on me. Then it occurred to me that others had been here before – and it was John Keats who so eloquently described his experience of discovering Homer’s work through Chapman’s translation. I reproduce his poem in whole below.
On First Looking into Chapman’s Homer
Much have I travell’d in the realms of gold,
And many goodly states and kingdoms seen;
Round many western islands have I been
Which bards in fealty to Apollo hold.
Oft of one wide expanse had I been told
That deep-brow’d Homer ruled as his demesne;
Yet did I never breathe its pure serene
Till I heard Chapman speak out loud and bold:
Then felt I like some watcher of the skies
When a new planet swims into his ken;
Or like stout Cortez when with eagle eyes
He star’d at the Pacific—and all his men
Look’d at each other with a wild surmise—
Silent, upon a peak in Darien.
Much like stout Cortez in Keats’ poem or Keats himself reading Chapman’s translation, I too was transported to a whole another realm, held enthralled not just by the word picture that Coates painted but by the raw emotion, the immense clarity and urgent insight that he brought to me to understand what it was for a black man to grow up in Baltimore or the South-side of Chicago. In many ways, it brought back memories of seeing Boyz N The Hood back in 1992!
As leaders or even just as humans, all too often we lose sight of what’s important. Worse yet, we think we understand things – this book and Coates’ writing style brought me back to the simple insight, that there’s much we don’t know or even if we did, we don’t revisit it often enough to question our assumptions. Knowing oneself, the world around us and the others is an ongoing journey of discovery. Run out there and get this book. And thanks Artie for this wonderful gift!
My daughter was all excited, in that way that only teens could be. She was making plans to bring her friends to Bangalore – next summer. And even before that she was keen to take them to not just Chennai and Goa but Benaras – as she calls it – and “Oh. But how can we not take them to Kerala.” If there’s one lesson that I’ve learned from my daughter, it’s to let her speak uninterrupted. At least till she pauses to catch her breath. Or if I can do it, wait till she asks, “Well. What do you think?”
The amazing and scary thing for me with this entire episode was how much of a chip off the old block my daughter is. I was exactly like she is today. Keen, maybe even overanxious, that my friends experience the things about India or my family that I had and that they ENJOY them. It’s surprising that I had any friends left. The truly scary part is why it was not evident sooner.
In many ways doing a startup is a journey of self-discovery.
As a founder, you are going to learn a whole lot about yourself that may not just surprise you but make you doubt yourself. All that stuff you’ve read about Steve Jobs or other self-confident (err arrogant) founders may make it sound successful founders make decisions and move on without much self-doubt. Reality is that any founder, worth their salt and with a pulse, will discover each day – many times a moment too late – that there are things that they could do way better. A lot of this is programming that’s happened before we became even remotely self-aware – our desire to please, or unwillingness to confront, avoidance or procrastination.
In many ways doing a startup is a journey of self-discovery. How costly or expensive this is depends on how fast you learn about yourself and most how soon you accept and forgive yourself.
In my own case, having a great team of folks around me helped me gain the self-awareness. But as they say, you can only bring the horse to the water. So it’s not enough to make or drink the kool-aid. As a founder you’ve got to be prepared to stare at the image that’s reflected in it!
One of the advantages of growing older (and startups can sometimes help you do that fast!) a certain degree of self-awareness grows (or is foisted on you by your team). So rather than berate myself I’ve learned to recognize that is who I am and to recognize the need, in most cases, to change.
My daughters don’t hesitate to tell me if it’s not for the better.
Haven’t you found yourself wondering this in more than one situation? In my experience, the single most critical skill that leaders in general and startup founders in particular need is that of being a good communicator. While most of us find it easy to talk and some of us may actually listen, it doesn’t make us a good communicator.
How many of the meetings you attend seem not only interminable but often indecipherable? If this were a problem with just meetings, you could excuse yourself and read the meeting minutes. But alas meeting minutes, like many emails or other forms of written communication seem to only add to the confusion.
“What is this person trying to tell me?”
All of us are just as guilty as we dash off memos, texts, and presentations, sowing confusion at best and mayhem at worst. Here are three steps to help us communicate better. Try them and let me know how they work for you.
Single central message Whether a 3-line email or a 6-page white paper, your communication should have a SINGLE central message – what our English composition teachers tried to tell us – the theme sentence! This answers the question “What is this person trying to tell me?” So whether it’s the personal — “You need to spend less money on eating out” (that’s to my daughter), “We need to re-do the In-app Purchase (IAP) in this game (the professional)” or “We need to ensure ________ is not elected this year” (the national) or “We need a new nuclear disarmament treaty (the global) we need to communicate a single central message and no more in each of our communications.
Short as possible but long as needed This is one I’m yet to master and often undermines my own communication effectiveness. Even when I have a single central message if I wrap it with too many words, my message is lost. This could be emotional content (especially with my daughters), or excess justification (social or business context) or plain verbosity. Yet, in a corporate context, major changes require context setting, such as environmental factors at play, why this course of action and options considered – alternates considered and discarded and potential outcomes of actions taken or not. So the 3-sentence email one of my friends insists on writing may not always do the job, but ask yourself, does your presentation require 48 pages or can you say it any shorter?
Choose your medium carefully Sure writing email is easy – heck texting someone is even easier. But just as most folks agree, breaking up with your girlfriend (or significant other) over text is not cool, there is such a thing as an appropriate medium for any given communication. I’d say easier a missive is to send, the more likely it’s to sow confusion. Sure there are exceptions, but in general, it’s a good idea, to take a moment, before you send that text or email, to ask yourself, is this the best medium to communicate this message. I find often after having written a draft email, that picking up the phone or walking down the corridor to talk to the person a much more effective way to communicate. Similarly, even when presenting to a group of folks, few words on a slide or a graph to accompany your verbal communication or a handout might be more effective.
In summary, these 3 steps will help us take the first steps to being better communicators
What is my single central message?
Am I saying it as concisely as possible with adequate context?
What is the best medium to communicate this in?
An earlier draft of this article appeared in LinkedIn
After years of planning to lose weight and get in shape (sound familiar?), in 2014 I finally got my act together. Sure, a mild diabetes scare and being termed obese in that clinical way only doctors can helped me finally get off my duff.
Over a six month period, I dropped about 20 kg (nearly 44 lbs) and over the next six 24 months have managed to keep those pounds off – in the bargain, my resting heart rate went down to mid-to-low 50s from the mid-80s and I feel great. I’ve written about how I lost those pounds elsewhere, but I realised that some of the very same lessons I learned while losing weight, were equally applicable to being a good sales person. So here are the four lessons.
Every day counts Weight loss involves only two things – eating right (usually less) and exercising well (usually more). The critical thing is it has to be done every single day, certainly the eating right part. Exercising has to be done at least every other day. Some folks recommend taking Sunday off or even rewarding yourself on Sundays with a treat. Most sales folks get Saturday and Sunday off. Which means the other five days count even more. So make the calls you need, regardless of whether you feel up to doing them, do the research, meet the customers – relentless and daily discipline is critical for steady progress. And you know what? Once it is a habit, it doesn’t feel anywhere as oppressive as it might sound at first. Make every day count.
Plan and start your day early Overcoming 20 years of bad eating habits required me to start my day early and make at least two healthy meals (usually salads) before 7AM, so that when the munchies hit me at 11AM and 4PM I had healthy snacks ready with me and avoided the temptation of empty calories. Of course, it also gave me feel a great sense of accomplishment each morning (even righteous at times) and set the tone for the day. Creating a daily selling plan, before even getting into work and often getting in the first few calls or follow ups before 8AM will give your day a great start. A side benefit I stumbled upon was that many hard-to-connect people were much easier to reach at the start of the day. Planning and starting early meant I could balance some low-hanging fruit with a feel good factor and get chunks of time to handle that hard-to-crack accounts.
Measure but in moderation The first thing I did, once it was clear that I was going to have to lose weight was to get a weighing scale and the doctor did set me a target. I started with measuring everything – how long and how intensely I exercised and how many miles I covered in a given time. Similarly with my selling, I found initially measuring and staying on course with activities – did I make n calls a day, did I send the info to m people, helped me do the right things – so regardless of how I felt on a given day, I was moving things forward, however, incremental at times. Initially, when the needle began moving it was very motivating but excessive measurement (such as weighing myself daily) can be both obsessive and at time depressing, for as I discovered our bodies have an ebb and flow of their own – not unlike relationships in a major account or most other things in life.
Teams make it fun Selling, much like weight loss can feel like a lonely pursuit – worse yet a competitive one with the other members of your own sales team and competitors. Rather than envying the guy who’s running faster than you, on the treadmill next to you, working on a buddy system or with a team of running companions made it not only fun but a learning and fulfilling experience. Similarly sharing leads or even scuttlebutt about buyers or opportunities with team members whether in sales, marketing or technology and occasionally with the guy from the other company, always pays off in spades, not just karmically but often in new business and leads of your own.
Enjoy the journey – if it’s a chore, whether exercise, eating healthy or selling, if you don’t enjoy the journey it’s not worth doing!
An earlier version of this article appeared on LinkedIn.
“Why don’t you tell me what you know about placement in EDA?”
The questions started easily enough. My interviewer, Brent Gregory was this lanky gentleman with a very easy air about him. His soft voice and pleasant manner belied the incisiveness with which the questions came. Within five minutes, maybe sooner, he’d established the limits of my knowledge on the subject of electronic design automation. More importantly, he’d made me truly aware of what things I had clarity on and what I merely knew of.
The next fifty-five minutes were spent in educating me, on what it is his team was attempting to build and answering questions that I had. Here I was, having worked for over twelve years at that time in two countries – in a billion-dollar tech firm and in two startups– selling to other tech businesses across Europe, Israel, Japan and the US. Yet Brent Gregory in under five minutes had established the limits of what I knew – certainly as it pertained to his company’s business and focused on getting me to understand the problem they were trying to solve and why their approach was likely the better one.
Measure first before you cut This old tailor’s maxim can’t be stated too often. Brent Gregory taught me this lesson that first day I met him. He seemed to come into the interview with few assumptions – took the time to get to know what I did know (about EDA that day) rather than spending a lot of time asking me either needless form questions or trying to show me how much smarter he was than me (he still is!) As entrepreneurs we like to think we are action-oriented but how often do we plan (measure) before we act (cut)? By no means have I mastered this lesson, but I’m getting better at it.
Value your team Brent was unique as a leader – while he led a research group – practically every member of the group or so it seemed, was in a different country. He did have a couple of other folks in the same building, but he had an engineer in Goa, India – one in Spain (or maybe the south of France). While distributed teams were not unheard of, a single team with its members scattered around the globe had its share of challenges. However, Brent always made sure that the appropriate member of his team got the credit and recognition they deserved and held himself accountable even while protecting his team’s freedom to work from wherever they were. This in a company that would have preferred everyone being in the same building. Unlike many other scientists and researchers, Brent was also immensely appreciative of the marketing team and the value they brought and always prepared to listen and learn why we proposed some of what we did – even while his boss, our CTO, many times voiced his opinion that “our innovative products would sell themselves.”
Simplify The sign of good engineer for me is one who can explain what he does in simple words that mere mortals can understand. Brent in that regard has few peers to take a complex matter – such as our placement algorithm – and explain not just what it did, but why it did it that way and how it was not just different but better than other methods. This allowed not only the applications engineering team but the marketing team to better communicate, position and support customers with conviction. Simplifying without trivializing – is not an easy thing to do – as folks trying to explain the reasons to stay within the EU (against the Brexit) have recently discovered.
Seventeen years after I first met Brent Gregory, I continue to admire him for his understated and measured manner of working. Thank you, Brent, for teaching me a whole lot and being such a good listener.
A variety of people — colleagues, friends, managers and mentors have taught me many lessons that have helped me grow. This article is one in a series sharing what I’ve learned and my gratitude for the lessons they’ve taught me. You can jump to any of the specific posts in my gratitude series below.
“Yellow car!” Usually, this declaration is accompanied by a playful swat from my daughter. Once we got playing this game, of who can spot a yellow car first, I began noticing a lot more yellow cars out there. I’m sure they were there all along but just that I never paid attention. Much like that – once I met Richa Singh – founder of yourdost.com, a company that helps young people such as students find the help they need, typically counseling or other support for their mental well-being, I’ve been more aware of issues surrounding mental health.
A little while ago, I’d written about Brad Feld, well-known venture capitalist, and blogger who’s brought the discussion around mental health and entrepreneurs center stage. As I continued to explore some of the resources Brad spoke about, I ran across this fascinating video by Dr. Lloyd Sederer, Medical Director of the New York State Office of Mental Health. What struck me about this particular video, was how the four things he recommends for a family on how to deal with mental health is directly applicable to entrepreneurship itself. Here are the four key points that he makes.
Don’t go it alone “Why me or why us?” Is a question that both entrepreneurs and families raise. Worse yet if there’s fear, shame or stigma – we try to handle it alone. Don’t. Whether doctors or counselors for mental health or mentors and other entrepreneurs for startups – seek help, talk to them and don’t go it alone. It will make the journey a lot easier.
Don’t get into fights “Don’t be like your brother. Get a good job” – this is an actual quote an entrepreneur reported his family telling his sister. This is just as true within companies and partners as it with families. Little good is likely to come out of it. As Dr. Sederer puts it, listening and leverage are alternatives to fighting
Learn the rules & bend them While this is particularly relevant to dealing with the US medical – mental health – system, it’s true to any bureaucracy that you deal with – as people and as entrepreneurs. Getting frustrated or being ignorant is only likely cause further unhappiness & stress.
Prepare for a marathon, not a sprint While most entrepreneurs tend to be optimists, often youth or inexperience leaves them unprepared for the length of the journey. Not only do most firms struggle or outright fail, even success takes time. The average software product company takes 7-8 years to get to $50M in revenue – so prepare psychologically and emotionally for the long haul.
Check out the video and share. I’d love to hear your thoughts.
My father was a great teller of tales. However, neither he nor I realized this for much of his life. If I had asked my father tell me a story—which I’ve don’t recall ever doing—he’d have likely said, “I don’t tell stories.” However, he did. And darn good ones at that. Only they were narrated while we waited at railway stations or airports or while he was dressing up for work or waiting for dinner to be served. Many of them were just vignettes – episodes from his own life, that it took me many years to figure were stories – darn good ones – well worth repeating. And today as I share them with my daughters or at times with unsuspecting colleagues, I understand how they’ve shaped me.
My favorite story was my dad’s recounting of how as a young man he’d attended a village playand particularly his re-telling of a specific scene from the play. My dad as with many Indians’ of the pre-WWII generation grew up in a small village. Entertainment meant the occasional village fair, a rare trip to town and most often a religious celebration which would include makeshift theater featuring song and dance. Plays, much like Indian movies of the early forties, were largely based on religious themes – often stories from one of the two great Indian epics Ramayana or Mahabharata.
For those not familiar with the Indian epics, the Ramayana is the tale of the hero-king Rama, who is banished to 14 years of forest exile, on the eve of his coronation. His life in exile, including the search for his kidnapped wife Sita culminating in the epic good vs evil battle with the demon Ravana and his triumphant return to the throne, forms the arc of the story line. Rama’s father, the old king Dasaratha is forced to exile Rama, due to an IOU – a promise he made to his youngest wife Kaikeyi (he had three)—who sought the throne for her own son.
Photo: Margarent Freeman
Village theater, even today in India, is often a makeshift stage, with a curtain or cloth draped to separate the backstage from the action up front. The actors heavily made up, rely on their costumes and loud voices to make up for the lack of scenery or other props. With stories such as the Ramayana, the audience which knows every scene needs little else.
As the curtain pulls back, the old king Dasaratha is reclining on the royal couch. My father’s voice chokes up as he narrates the scene. When I was much younger, I could never understand why dad choked up thus. We knew how the story ended! My dad’s eyes fill up and he’s not able to speak any further. With some nudging and prodding, he starts again. “Rama, Rama, Rama” the King calls out – loudly first, his voice filled with anguish and then softly. He gets off the couch and staggers forward as if wanting to go after his son. He continues, calling out “Rama, Rama, Rama” in a voice that breaks and gets weaker by the moment. And then he collapses and dies right there.
By this time, my father’s eyes, still wet, begin to twinkle – as though he’s thought of something naughty. “Then the crowd goes wild – they clap, cheer, hoot, jump up to their feet. “Encore, encore” a lone voice is heard. Then the crowd picks it up and shouts itself hoarse.” My dad is back in the crowd himself. Then the actor, playing the dead King, rises – steps back and begins again “Rama, Rama, Rama” and goes through the whole scene, crying, staggering, calling out and dropping dead. The crowd can’t have enough. By now my dad and I are both laughing out loud. I never tired of hearing this story and would ask my dad often to narrate it.
Yesterday when my younger daughter asked me, for a school project, to tell her what was happening in Palestine, I started to recount the tale of Israel. But in a moment, my own eyes were filled with tears – hot tears of anger and frustration at the real and perceived injustices. The same tears flow just as easily when I narrate the tale of Abhimanyu the young prince from the Mahabharata, cut down in his prime by eight great warriors, who trapped and ambushed him. While “sad songs say so much” as Elton John put it, it’s not just sad news or unfairness that brings me tears to my eyes. I could just as easily be watching Martin Luther King Jr. assert “I have a dream” on the steps of the Lincoln Memorial or listening to Eminem crooning “Mockingbird” to his daughter Haley. Like my father crying and laughing at the same time while recounting the encore rendition of the death of Dasaratha, I too find myself emoting easily.
“Be empathetic” is the lesson my dad taught me that day and as my kids wipe my tears and try to coax me to continue, I realize how that one death scene has shaped me!
Five years ago today, my father passed away. The good news was that I got to spend a lot more time with my father, the last five years of his life – even as he and my mother struggled with his Parkinson’s Disease. The bad news is that no amount of time would have been enough. An earlier draft of this article appeared on Medium.
My friend was in the process of hiring a private banker to help find a buyer for his business.
“I thought it went really well. He liked what we’ve done so far and felt that there’s some interest in the market. However, he feels it’s really important to improve our EBITDA before we can get a good deal.”
I almost fell out of my chair hearing this. No, not because buyers would like a good EBITDA but that my friend actually said this. The previous two years – we’ve known each other for 20 years now and he’s been in business longer – I’d struggled to get him to clearly state what his gross margins were and what was preventing him from having consistent profitability.My friend by no means is alone. Of course, younger entrepreneurs – many of whom come from technology backgrounds don’t have much exposure to matters of finance (or accounting). Yet having rudimentary financial literacy is critical for I’d argue all of us, entrepreneurs or not. But particularly for entrepreneurs, especially those NOT bootstrapping their businesses should understand the basic concepts and some key terms. As I’ve argued elsewhere, you should then be able to write out each of these, at any time, on a blank piece of paper – so that you have your important numbers at your fingertips. So here goes – with the warning, that these definitions are intended not for compliance to accounting as much to have a realistic image of where your business ACTUALLY is.
Of course, younger entrepreneurs – many of whom come from technology backgrounds don’t have much exposure to matters of finance (or accounting). Yet having rudimentary financial literacy is critical, I’d argue, for all of us, entrepreneurs or not. Entrepreneurs, especially those NOT bootstrapping their businesses should understand the basic concepts and key terms. As I’ve argued elsewhere, you should then be able to write out each of these, at any time, on a blank piece of paper – so that you have your important numbers at your fingertips. So here goes – with the caveat, that these definitions are intended to provide you with a realistic image of where your business ACTUALLY is, rather than for compliance with accounting standards.
Revenue – this is the money customers pay you. The simplest case is when you sell a product (an app, a book or a sandwich) for $0.99, $1.99 or $4.99 that’s your revenue. If you sold 1000 apps a month, your revenue that month would be $990 (1000*0.99) and for 1000 sandwiches it would be $4990. (Let us not in case worry that when you sell sandwiches you seem to make more money. Conceivably you could send millions or even billions of copies of your app – a little harder to do with sandwiches (or not if you are in India :). This is commonly referred to Gross Revenues for clarity.
Net Revenue In the case of selling sandwiches (directly), the entire $4.99 comes into your pocket. However in the case of the app, only 70% of the $0.99 makes it to you (after the app store aka your distributor, takes its 30% off the top). So the reality is that those 1000 apps you sell make you $693 (70%*$0.99*1000). This is a significant difference to keep in mind – for when we plan with revenue in mind, and not gross revenue, that 30% difference (or $300 in this example) is likely to come and bite us in the ass. This is even more important, in the case of marketplaces or services, where your business is essentially acting as a distributor – in which case you get to keep the 30% (or 15% or worse yet 7%) of the revenue and pay your principal the 70% (or 85% or 93%) of the revenues. Given the recent “hot” status of food-delivery companies (can anyone explain what’s tech about these) or any of the e-commerce companies, it’s important to not confuse gross revenues (or GMV – gross merchandise value as they call it) with net revenues. Before we all switch to selling sandwiches, it is important to keep in mind, that software or e-books have practically no incremental costs whether you sell 100, 1000 or millions of units. However, for each sandwich, we incur the costs of those slices of bread (or wraps) and all that you put in between them. This is termed as the cost of goods. So in conventional businesses Gross Revenues – Cost of Goods (- Channel Costs too if they are non-zero) is termed Net Revenue.
Gross Margins (or profit) Gross Margins are essentially the difference between (Gross) Revenues and Net Revenue – often expressed as a percentage. This is a particularly critical measure as the profits of your business are constrained by this value. And yes Dorothy, profits are why you are in business. The higher your gross margins, the higher profit potential your business has. Often gross margins tend to operate in bands for specific industries or businesses and this is a good thing, for you to be able to measure where you are relative to others. In the above examples, for the app business, your grossmargins are 70% and in the case of the sandwich business, assuming the cost of goods for your fancy sandwich are $2.00, then your gross margin is 60%($4.999-$2.00)/($4.99). In these examples, if you sell your apps directly to users – on your website – your margins can increase to say 90% or use cheaper ingredients in your sandwiches (or leave out the cheese) you can increase margins. Such gross margin increases often translate directly to your bottom line. Again keep in mind, we make money in dollars and not in % dollars – so knowing both gross marginsin % terms and absolute dollars is important. Do you know what your gross margins are and how you can increase them? Can you increase your gross margins to be so high that it can hurt your business? Yes, you can but that’s for another day.
Operating Expenses Simply put, all the expenses you incur, regardless of whether you make a dollar of revenue or not, are your operating expenses. And should you be lucky enough to make revenues, these are only likely to grow. So the cost of paying your engineers or employees, your rent and utilities, the cost of maintaining a website (and that fancy domain name you bought), advertising and trade show expenses are all operating expenses. In an ideal world, you’d try to keep your operating expenses low – but not so low that you are not able to ship product or deliver services that generate the revenue. And depending on the nature of your business, for instance, if you do drug discovery or build semiconductors, your operating expenses are likely to be high – even without R&D costs. Operating expenses too, like gross margins tend to operate in bands for specific industries, so you can benchmark yourself – allowing for where you are in the life cycle of your business (early, steady-state etc.). By nature operating expenses have some non-negotiables such as salary, rent, and utilities – you can decrease them only so much or not at all and others such as market or R&D expenses that are more amenable to adjusting.
Operating Margins This is your Net Revenue minus the Operating Expenses. This like the gross margin is a critical metric of the health of your business.When businesses talk about reaching operating profit, they are essentially saying that their operating margins are higher than zero. In your app business, if you are spending $4000 a month and bringing in $4500 in net revenues (70%*$6500 in gross revenues) then you have achieved operating profit. Operating profit does not imply that your business is profitable (yet) but is capable of being so. For instance, in the example cited, this doesn’t take into account the 1 year and $50,000 you spent already to get to develop your product and this run rate.
This operating margin is what the some bean counters love EBITDA – Earnings (profits) before Interest (on your loans), Taxes (yep those exists and you may have to pay them if you actually make a profit) and Depreciation and Amortization (lets not even go there). It’s a somewhat independent measure the ability to your business to make profits.
Net Margins In plain English this determines whether your business actually makes a profit – money you can put in the bank, or pay dividends with or better yet flow back into your business. So even though you may make real operating profits, if the interest on capital you’ve borrowed for instance is high, you may not have any net margins. This is why the cost of money or borrowing costs can make or break businesses that have high amounts of debt. Similarly, if you have to pay taxes (and you do if you make profits) this can drive your net margins down. At the end of the day, this is the ONE metric that will keep you alive and fund your growth. However, maximizing this requires you to manage every one of the above – increasing gross revenues and gross margins allows more money to flow into the company. Decreasing or managing operating costs and financial costs ensures you maximize profit and can fund growth.
The table below summarizes the terms discussed for a variety of different businesses
Can businesses run without making operating profit or positive EBIDTA? Did not Amazon do this for years and Flipkart and others doing this even as we read this? Sure – all that means is someone (investors, founders, in rare instance public markets) is pouring capital and investment into the business – usually with the reasoning that you are capturing market share or leadership and therefore spending more than you are making. They are also operating under the assumption, that one of these days you will make a profit and enough of it to justify the investment.
Meanwhile, for the rest of us 99%, knowing and keeping a good eye on these numbers would go a long way to ensuring you stay alive and thrive.
Marketing is probably one of the most misunderstood of functions – particularly in startups. Product development or even sales seem easy enough to understand but the average entrepreneur struggles with marketing. One of the reasons for this is our common confusion of activities (what does marketing do) and outcomes (what should marketing accomplish). The emergence of the internet, mobile and social media has only muddied the waters further. Popular media, particularly television and to a lesser degree the movies haven’t helped, painting a picture of marketers as either slick Madison Avenue types or slimy snake oil salesmen.
Theodore Levitt, the American economist, said “marketing … view(s) the entire business process as consisting of a tightly integrated effort to discover, create, arouse and satisfy customer needs.” Whilst I certainly agree with Levitt’s definition in his book “The Marketing Imagination” I’d simplify it to the following assertion:
For startups, at any stage, marketing has to achieve only one goal or outcome – profitable growth!
I’d argue there are only one of three ways to achieve this.
shorten the selling cycle
optimize the selling price
maximize profit in absolute terms
A little math before we jump into each of these. Regardless of whether a business offers products or services, profits boil down to
Profits (P) = Revenues (R) – Costs (C)
This would imply that anything that improves revenues or decreases costs, is likely to increase profits. So ideally marketing will increase R and decrease C thereby maximizing P. As our Chairman was fond of saying, there’s the minor matter of managing cash – it’s better for money to come in today rather than tomorrow – in other words we could be profitable on paper but still fail as a business because we ran out of money.
So what should marketing do? Marketing needs to be doing whatever is required to achieve one or more of these objectives which will result in the desired outcome – profitable growth (in case you missed it the first time).
Shorten selling cycles If your customers buy whatever you are selling sooner (than they would if you didn’t do any marketing) then you are doing something right. So if the brand value (or recall) will help shorten selling cycles you’d do that. If educating the customer (inbound marketing) or free trials (freemium), partnerships or Google ads shorten the selling cycle you’d do those. Alternately, any of those if they have no impact on shortening selling cycles, you’d abandon them. In other words, rather than doing what you did in your previous job, or what your competitors are doing, or what TechCrunch or HBR say is the hottest marketing trend, let the results drive what you do. You may use some or all the previous methods, but measure and keep only those that shorten your selling cycles. So any time your marketing team proposes a campaign or a strategy, you’d want to know will this shorten my selling cycle. Shortening selling cycles is the knob that you likely have the most influence over.
Optimise Selling Price One way to shorten selling cycles is to drop your price – it’s also a good way to go out of business or rush to the bottom at least. If you make a loss on each unit, no amount of sales volume is going to make it up. And dropping price alone does not make selling (or revenues) easier. Ask all those mobile app developers trying to sell a $0.99 app. And if that is hard, making a $2,500 course or $60,000 service, you’ll discover takes even longer. Selling at the highest possible price, that the customer is willing to pay or market can bear (real estate anyone?) is one way to maximise revenue. However, this may affect the number of units you may move and the time it takes to make the sale. The market for 5 million-dollar homes is finite – say you make one a year. Then again you’d have to sell fifty (50) $100,000 homes to make the same $5 million revenue, which may mean one a week!. So marketing has to make two critical determination – who’s our customer and what are they prepared to pay and how do I get them to pay me the best price? Again brand perception, may command a high price ($120 white T-shirts) or positioning – can you afford to risk your family’s safety (Volvo) – the cost of alternates or non-purchase (insurance) are all things marketers may do – with the optimising selling price. Different segments (homeowners vs farmers) may consume the same product (insecticide) in different volumes (frequency of use), form factors (storage constraints), and therefore price. The higher unit sales, at lower price (but high margins) of homebuyers may underwrite the lower price (and margins) at high volumes of farmers (which drives unit cost of production down). So segmenting, positioning and pricing are strongly correlated.
Maximize absolute profit “We make 200% (or even infinite) margin on each unit we ship,” would be a true statement for products such as software – where incremental unit costs are negligible or even for a sandwich or burger. But such unit margin is illusional if you take the cost of all the software engineers or cooks (and the rent to house them). Unit (or gross) margins are important, but high or at least positive net margins are nicer. Even if you make a profit on each sale, funding new product development or growing your revenue requires more money – in which case profit (gross or net) cannot be a matter of only measured in percentage terms but in absolute dollar terms. Almost for any business (there are exceptions) this means growing revenues while maintaining or even growing margins, so that you can at least keep up with inflation that leads to increasing salaries or other input costs, even if you don’t wish to innovate or grow. Marketing can help achieve this by bringing growth – be it demand creation (new markets), greater market share (revenue growth) that will not just increase revenues but profits.
Everything else, you’ve learned or heard about marketing whether the four Ps (product, price, positioning, promotion) or four Cs (consumer, cost, communication, convenience), inbound or content marketing, paid or earned media or any other flavor-of-the-week are all mere methods or tools to achieve these objectives.
“I remember the first time I closed a big deal – was for about 50,000 bucks. That evening, I went out and got myself a fancy watch – that probably cost me half as much,” my friend Murali recounted. He’d been invited to talk to a group of young entrepreneurs, who were looking for mentors. “I was so ignorant, that I didn’t know that revenue is not profit,” Murali continued. “And of course, I knew nothing about revenue versus cash flow even. So here I was spending money that I didn’t have and in hindsight couldn’t have afforded to spend, even if I had it.”
Murali is by no means the first entrepreneur to fall into this particular hole. He’s the one that I’d seen recall it with the most relish and absolute candor. His point was that doing business requires a good understanding of financial basics. Not an MBA but just plain nuts and bolts of understanding, what revenues are, net and gross margins, cash flow versus revenues. In other words everything your mother, or for those of you lucky enough, your spouse, felt you should learn about budgeting and handling money. And of course if he could do it, so could you – was his unstated message.
This is never more evident or critical than when you set out to sell your company.
As entrepreneurs when we engage in sales conversations, we tend to focus on the “selling price” a great deal. And all too often, they mistake their selling price with the cash that may flow into their accounts. This is made a lot worse, especially when the negotiation is around selling their business.
“How much money do you want to have in your bank, after this whole thing is done?”
You’d think this is a simple enough question to answer. And it is. This is usually the first question I pose to entrepreneurs when they talk about selling their business. Most of them, after some initial hemming and hawing, are able to give reasonably specific answers – “A million dollars. five crores.”It’s almost always a round number. I don’t ask why that number, whatever it is. But have a slew of other questions?The first one I ask them, is this before or after taxes? And what if it is not in cash but in stock? What if it is deferred or staggered in time? Against deliverables or future performance? And how would you partners answer these same questions? By this time, the entrepreneur’s turned quiet and introspective. Given how often this conversation takes place, I reckoned it makes sense to capture these starter questions.
How much money do you want to have once everything is done? The answer to this obviously is a very personal thing. One woman’s 250K maybe another woman’s billion dollars. But this is the amount you want – never mind if you will get it – in your bank account with NO strings attached – no further taxes to pay and no assumptions about what more you may get. In other words, you would be perfectly willing to walk away from you business, for this much money in the bank NOW.
What taxes are you liable for? Knowing this is critical. Keeping the usual disclaimer, that I’m no tax expert and this should not be deemed as any sort of competent tax advice, consult your own tax advisor, recognise that you are liable for capital gains tax – which may vary from taxed as straight income (up to 33% in some cases) to varying degrees (long-term vs short-term, privately held vs publicly held) and liable to state or local taxes in some jurisdictions. In other words, if you wanted to still have that X million dollars, you may have to clear (x/(1-tax rate) (1.5M to have 1M left over after 33% tax for instance)
Will the cash all come in tomorrow or will some of it be deferred? Does this matter? It may if you need or want all the money now. It may also matter whether the amounts are deferred simply over time, to retain you for instance or they are tied to performance or other deliverables. In both cases, will you be ready to walk away if you got nothing beyond the first payment or tranche? If so would you revisit your answer to the first question?
Will it all be in cash? While our answer may always be yes, reality may not be. And getting some of it in stock may not be all bad – but as my mentor Chandrashekar would put it, balancing your need and greed is important. And how would this change your answers to the questions we’ve already asked?
Finally, how would your partners answer the above questions? Whilst what you need or want should, in an ideal world, be not influenced by what your partners want, reality is that a good deal can be consummated only if all parties are at least semi-clear on what they want. While this is NOT critical, as with salaries or many things in life, we might be happy with the answers we come up with, till we find out what the other guy is making. So thinking about it and factoring it in, helps our mental wellbeing if not our bank accounts.
In an earlier article, I spoke about Valuation 101 – how you can value your company. The reality is that your answer to the first question “How much money do you want to have once everything is done?” is really what sets the valuation of your company – or the walk-away price. So stop reading and get out a piece of paper or a spreadsheet if you prefer and begin answering these questions as the second step to selling your company. For those still looking for the first step – you can find it here.
As many companies that I’ve been involved with grow past their fifth or even seventh anniversary, they are facing new questions around exits – be the outright sales or mergers or in some case existential questions. I’m hoping to write about these questions in what I’d like to think of as “Selling your startup” series
Over the last several years, I have written about startups, entrepreneurship and business in general in the Hindu BizLine and Wall St. Journal. I have compiled these for easy access in the column below.