Design of Business

Business, Culture & Entrepreneurship

Category: Entrepreneurship (page 2 of 10)

Do You Understand Revenues and Profits? A Primer

“So how did the meeting go?”

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 gross  margins 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 margins  in % 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

Revenues & Margins

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.

What is marketing’s role in a business?

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.

How much money do you want?

English: The Miz's Money in the Bank briefcase

 (Photo credit: Wikipedia)

“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

5 Questions Founders Need to Ask, Annually

“Can I meet with you today?”  Usually, when I get such a call, which I do about once in two weeks, the entrepreneur wants to meet immediately. In this instance, I suggested that we can meet the next Tuesday. The entrepreneur, let’s call him Jack, persisted, “If it’s okay can we meet today please?” So I agreed we’d meet at 530pm that evening and moved around a few meetings to make it happen.

At about 445pm I get a call. It’s Peter, Jack’s partner. He says “I’m going to be about 10 minutes late.” As I’m wrapping up a meeting, I tell him “Don’t worry about it. I will be at the coffee shop. See you there.” At that time, I didn’t pay attention whether Peter had said “we’d be late” or “I’d be late.”  So at 530pm, I’m surprised to see only Peter show up with no sign of Jack.

“So what was so urgent that it couldn’t wait till next Tuesday?”

Peter was polite enough to apologize for Jack’s absence, “A major customer crisis has arisen. Jack had to go in person to placate the customer,” before jumping into why he’d asked for the meeting.

“BigCo has made us an offer. We’d approached them as a strategic investor. As we talked to one another, the discussions turned into an M&A one. They are interested in acquiring us. So we’re looking for advice on what we should do.”

Over the previous six years Jack, Peter, and another partner had at first bootstrapped their tech business and then raised both an angel round and a series A. They were on the verge of operational breakeven and had impressive Fortune 100 customers that any startup would kill for. They’d also dabbled in hardware and systems, pivoted a couple of times and overcome significant challenges in pulling together a fragmented supplier marketplace. In short, they were not just smart and hardworking but successful by any measure.

“What do you want?” I asked. “What does Jack want?”

Peter’s responses, many of which were questions rather than answers, sounded similar to ones that I’d faced more than a decade ago when my own startup was acquired. And one that I’ve heard from many entrepreneurs since. Most founders rarely stop during the madness that is doing a startup is, to ask, let alone answer these questions. So regardless of where you are in your own startup journey, here are some questions for you to ask yourself. I’d suggest revisiting these once a year, more frequently they’d be a distraction.

What do you want? Why are you running/doing a startup? To make a zillion dollars? Because people don’t have easy access to mental health? Because every kid should go to college? Whatever be your reason – only money, only greater good, some combination of both or yet another reason, knowing what it is, is important. This will help you figure out, are you close to it? And regardless of your distance from it, do you want to keep doing it?

How much money do you want? Despite startups being businesses, many entrepreneurs haven’t really put thought into how much money, specifically, they’d like to make or have. So when they are faced with a sudden offer to sell or particularly when they face a hostile or shall we say unwilling ejection, they are in no position to figure out what they want in any dispassionate manner. Surprisingly many entrepreneurs, starting with myself, find that they are uncomfortable talking about money for themselves. So this is a good question to answer if only to get comfortable talking about it.

What do your partners want? Usually your co-founders, especially at an early stage startup, much like you would also have not given this much thought. But in some cases may have greater clarity, which is usually a good thing, but you’d better know what it is and how different it is from your own answers to the question. Again, they may have thought of things only in terms of money or in terms of outcomes and not money. Knowing the answer to both and knowing your differences will be immensely useful.

What does your team want and what do you want for them? This may or may not matter to you, or you may even be unclear if this matters to you or not. Knowing this is critical at some many practical and even ethical reasons. For instance, what matters to them – that they work in a startup, the freedom or independence they get maybe very different than what they get from BigCo once they acquire you. What are they likely to get monetarily if you sell your company?

What will you do tomorrow, if you get what you want? If your company were to be acquired today, in an all cash deal, with no strings attached (and let me know if there are such deals out there 🙂 what will you do tomorrow or ninety days hence, after you take that well-deserved vacation. In many ways, this is similar to the first question around purpose? If you’d still do what you are doing today, what does that tell you? And if you’d do something totally different, what are you waiting for – what should you do differently today?

I believe if you ask and answer these questions both individually and collectively as a founding team, periodically, it would help you make better decisions when you are at crossroads in your startup.


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.

Entrepreneurs & Mental Health

This last week, Brad Feld, a managing director at Foundry Group in Boulder, Colorado – shared a video (below) he’s made for an upcoming event about Entrepreneurship & Mental Health. Brad as an entrepreneur who went on to become a VC belongs to the small group of VCs (including Fred Wilson, Mark Suster) who are both prolific and compelling writers – demystifying the venture world, entrepreneurship and often taking a very pro-entrepreneur stand. I’d thought of Brad alway as different given his location in the Rockies (Colorado) rather than either of the coasts (Silicon Valley, Boston or New York) where most of the well-known VCs are based.

Brad’s open discussion of mental health issues, including his own depression, that he’s written about (here) and spoken about (here) makes him a very special person. In India, we’ve seen folks such as Indian actress Deepika Padukone recently talk about her battle with depression (video) and young entrepreneurs such as Richa Singh, who founded YourDost, and Shipra Dawar who started ePsyClinic try to help young people address mental health issues. Last October at the demo day of the Brandery, I saw Jordan Axani present his startup Bounde, which is “Tackling mental health through technology.”

In India, as many folks have commented two big challenges lie in the way of people getting the mental health support they need

  • Social stigma – both ignorance and the stigma (or fear of being branded) mentally unstable
  • Access to good counselors/psychologists and psychiatrists

In the US while neither of these issues is fortunately as big a hurdle, as Brad points out in his video – entrepreneurs in the US (and in India) suffer from the social pressure (real or perceived) of having to be strong leaders, without too much any self-doubt or exhibiting weakness. Also in both countries, certainly in the entrepreneurial ecosystem, there is little or no talk of mental health issues – which is a big shame. With folks such as Brad talking about it openly and with young entrepreneurs who’ve faced mental health issues themselves or seen in around them, we’ve taken the first step.

Entrepreneurship is hard enough without physical, emotional or mental health issues. But addressing these is critical for both individual entrepreneurs and the ecosystem. And talking about it is the first step. So break the silence and talk about it. Doing so gives others both permission and encouragement to do so. What are you waiting for?

Brandery Demo Day Insights

The Seed Accelerator Rankings Project reports over 150 accelerator programs in the United States. In India too we’ve seen a large number of accelerators pop up over the last two years. Yet this last week, Dave McClure of 500Hats was quoted saying “If you think that running a startup is a bad idea, then running an accelerator is an even worse idea” at StartupIstanbul.

Tweet from StartupInstanbul

Yesterday I attended the Demo Day at Brandery, (ranked #12 accelerator program) based out of Cincinnati, thanks to an invite by Tony Alexander, ex-entrepreneur and GM of the Brandery.  The day was eventful for many reasons – all of which I’m hoping to write about. But the thing that struck me most was how the Brandery has followed much of the advice we give entrepreneurs to set itself on the path to success. Not just accelerators but regional ecosystems everywhere can take a leaf or two out of the Brandery’s playbook.

By playing to their strengths and clearly articulating what those are, the Brandery have set themselves up for success. The short version:

  • Focus strong & narrow focus on branding, marketing and design, playing to their strengths
  • Partnerships Strong local ties with consumer goods & retail firms – both as investors and partners
  • Geographic Mix Attracting startups from around the country (& the coasts) to magnify networks
  • Metrics Measuring and reporting key outcomes – exits, startup equity raised, jobs created
  • Long game focusing on their entire ecosystem and the long run gets community commitment

Of course they offer the table stakes that all accelerators & incubators need to bring – strong mentors, equity, good cohorts and co-working space. I’ll get a longer version of the insights garnered hopefully soon.

Anger & Knowing One Self

ConflictLike nearly every family WhatsApp group, mine if often filled with all kinds of forwards – that I tend to largely ignore or quickly glance and not dwell too long on. This morning my sister shared this piece on WhatsApp and it made me stop & think. It’s always sobering to see oneself in the mirror.

As entrepreneurs, there are a million things that frustrate us, tick us off and many times we want to scream at someone – some of us do, others keep it inside and the rest try to drink it off I assume. But this little story or parable brings home the message of “responding and not reacting” – to recognize our reactions stem from what’s inside us and not things that happen outside of us. Enjoy.

A monk decides to meditate alone, away from his monastery. He takes his boat out to the middle of the lake, moors it there, closes his eyes and begins his meditation. After a few hours of undisturbed silence, he suddenly feels the bump of another boat colliding with his own. With his eyes still closed, he senses his anger rising, and by the time he opens his eyes, he is ready to scream at the boatman who dared disturb his meditation. But when he opens his eyes, he sees it’s an empty boat that had probably got untethered and floated to the middle of the lake. At that moment, the monk achieves self-realization, and understands that the anger is within him; it merely needs the bump of an external object to provoke it out of him. From then on, when he comes across someone who irritates him or provokes him to anger, he reminds himself, “The other person is merely an empty boat. The anger is within me.

Acting on what’s important

Last weekend, two men, neither of whom I knew personally, died in separate accidents in North America. Yet this morning, as I sit down to write I find the deaths of Dave Goldberg, CEO of Survey Monkey and Parag Parikh, value investor have impacted me in ways I’d not have guessed. Yes we live in a world, whether the earthquake in Nepal (7500+ dead), war in Yemen (1250+ dead) or Syria (200,000+ dead) which in many way inures us to the news of death if not death itself. Yet the death of both these men, one admired in the startup community – known to many as the spouse of Sheryl Sandburg of Facebook (and Lean In fame) and the other in India’s value investment community, should make every one of us in the entrepreneurial community stop and take stock.

As founders of startups and otherwise active members of the ecosystem, we get caught up with the chase – whether news of rounds raised or customers won or milestones made. Our startups are constantly faced with existential crises be they cash flow problems, key employee loss or co-founder shenanigans. Many of us make it a badge of honor that we don’t have time for personal lives or the long hours we put in or how we’ve spent days at the office with little or no sleep. What little time we have we spend poring over startup news, networking and hustling. Many of us who left the corporate “rat race” have only traded it for the startup roller coaster, without the perks and the sobering truth of what working for oneself really is. Almost every one of these things is what makes the start up life the exhilarating and infuriating ride that it is.

The sudden death of these two men in their prime only brought home the truth of what’s important in our lives – our families, our health and what we can contribute to our communities. All too easily our own time can be taken away – so don’t put away what’s important to another day – don’t wait for Mother’s Day or any other special day to call on a loved one, to read to your child, take a walk with your spouse or a long hike with friends.

Stop reading and go give someone a hug!

4 Lessons from 3 Months as a Gaming Startup

Since 1988, when I began working, I’ve been part of three multinational firms (National Semi 1988-96, Synopsys ’99-2000, SiRF 2006-08), two startups (Microcon 96-97, Sasken 97-99), started two companies (Impulsesoft ’99-2006, Zebu – 2009-’11) and one non-profit (NEN, 2011-14). Between 2006-2011 I also invested or advised a variety of startups, a few of whom have thrived and a few died. Most of course are hanging in there. You’d have thought I’d have learned a few things over these 26 years and I have. Yet, doing a gaming startup has brought home loud and clear how much more there is to learn.

Follow The Dots

In mid November, my partners and I began working with a young man, for now code-named Don Knuth to pivot Zebu Communications – our originally marketing automation, then marketing consulting startup – to be a gaming studio. Since then we’ve launched two games on Android HomeBound and Follow the Dots and one on iOS. This post is a quick summary of 4 Lessons that I’ve learned (some granted needed reminding). Some of these are true for all startups but particularly relevant when embarking on a startup outside your own area of domain expertise.

Act fast and often I’ve never stop to be amazed to discover how much I STILL don’t know – not just about game mechanics, App Store Optimization or customer acquisition, monetization or mobile eco-system and even doing press releases. I’m sure there’s more stuff that I don’t even know that I know nothing about. Yet whatever I know, that I need to know, came from doing things. We got our first Android game out the door in 3 weeks – sure it didn’t set the world on fire (yet) – but I’ve learned more in this time, that’ll keep us rolling for the next one year. Reading is good (and I’m a big proponent of it) but acting fast and often, especially when it’s a new domain is very important.

Business first Doing a startup, particularly a gaming one, is loads of fun – there’s ton’s to do – games to play, code to write, logos to design – it’s very easy to keep busy. And as you learn stuff (see above) there’s even more stuff to do. Of course all the things that involve product development (concept, design, coding, testing, competitive analysis) are all in your “control” and feels like “real” work. So there’s a real risk that you’ll spend all your time doing these “fun” things and its easy to lose sight of the fact that you are a business – in other words you need customers – who’ll generate revenue for you – whether by paying you, through ads or other purchases. So spend as much time thinking about how you will make money and validating that – fast and often. We are yet to figure this out, but think about it and try things every day.

Consult others Luckily both the entrepreneurial community and gaming in particular is quite giving and willing to share. There are so many unknowns in building a gaming business that it is both an opportunity and a risk. So talk to people who are in the business. For instance a friend introduced me to Rajesh Rao, founder of Dhruv Interactive – India’s oldest game development company. They’ve been through the whole cycle – game development as a service, product development, to game incubator and Rajesh was sweet enough to take the time to give us an unvarnished view of the pluses and minuses. Others whether Vishal Gondal or Alok Kejriwal have been active speakers, writers and supporters of the gaming scene in India. Numerous indies have been forthcoming in sharing their time and insights locally and globally. It would be a huge mistake to try to do this – for any startup – on your own without consulting others and seeking their counsel.

Do your own thing Of course having sought others counsel, you still need to do your own thing – at least you’ll be well-informed. The challenge when you consult others is that you will get a lot of seemingly contradictory advice – do this, don’t do this. If we went completely by what others said – and I’ve done that more than once – we’ll come to rue it. What they said was most likely true – for them and at that time – the very opposite may be true now or for you. So getting to know what you need to know and what others have tried or not – regardless of whether it worked or not for them – is important but beyond that you gotta do your own thing. We were told that interstitial ads work better, but we found text ads worked better for us. Of course we may find video ads work even better or not. So do your own thing to verify.

Once a quarter, I will share our learnings as we embark on yet another startup journey. Meanwhile – support us by downloading our games, reviewing them and spreading the word. Thanks.

3 Steps to Achieve Profitable Growth

I never ceased to be amazed at how fast time seems to run right by us. Here we are in the second week of December and soon another year will be gone. Over the last four weeks as I’ve talked to a variety of entrepreneurs – it seems like they just got started and now already they’ve been in business for 4-5 years. Where did the time go, I find myself wondering. I’m not always sure that they wonder about it!

More importantly as some of them struggle for consistent growth and profitability, I find our conversations veering towards figuring out what’s working for them. In these conversations, I find myself repeatedly asking three or four questions

  • What is a typical deal size for you?
  • How long a selling cycle do you have – between first contact and first payment or purchase order
  • How many of these are repeat customers?
  • With which of these customers are you actually making money?

The funny thing is despite age or relative success of the business or experience of the entrepreneur this data is not that handy usually in most startups that I meet. It’s when they encounter a bump or worse yet a wall, they seek help and often the answers lie within such data. Of course sometimes it does not, but we’d know that only after we look at the data. Three things that are worth doing are

Analysis framework Build yourself a simple revenue and profit analysis framework – this could be simply a spreadsheet, like a sales tracker, but instead of forecast it shows what transpired. Ideally you would cover revenue, sales cycle, gross margin by account or customer (outside-in) and by-product or service offering (inside-out) and if you have a large enough team, even by salesperson. Depending on the nature of your business this could over a weekly, monthly, or quarterly period. Even if you review only on a half-yearly or annual basis, having the breakdown at least at a monthly level, helps.

Periodic reviews Any data and analysis is not of much use, unless you periodically review it. I’d include as many senior folks (if not your entire team) in such a review. The goal of the review is to really understand, which customers and products actually make profits for you – how long it took you to acquire them and why they’ve stayed with you or given you repeat orders. Alternately it will tell you if you are NOT getting repeat orders or those repeat orders are NOT coming fast enough or at better margins. Including the larger team, allows you to do find bottlenecks and assumptions within your own team – why proposals or demos take longer than they need to (selling cycle), costs are higher (team tries to get one customer to pay for entire dev cost etc.) Also it reminds the team that business is about making profits, not just shipping products (or proposals) alone.

Action plan Three critical actions can come out of such reviews

  • identifying what worked and doing more of this. Could include up selling to existing customers, culling non-profitable ones, tracking and shortening lead-to-customer conversion cycle times
  • designing experiments to validate things that are unclear – did that email campaign work, did pricing make a difference, what worked for one account or sales person can it be used for others – this helps find what worked (and what didn’t)
  • modifying your analysis framework do you continue to measure what you are presently measuring? What do you remove? What do you add, so that the analysis framework -> periodic review – > action plan cycle serves your purpose of profitable growth.

As December winds down and a new calendar and fiscal year loom, this might be a good time to look at this.

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