Sales and Start-ups: Are you doing enough?

‘Sales’ is one of the functions in business that is closest to the customer. There are two big things that start-ups / entrepreneurs miss while handling this important function in business:

  • Lack of methodological practices
  • Lack of a formal feedback system from sales

If the first one is not done, most of the life of the start-up is lived using investor money. Eventually the start-up ceases to exist when investor money or patience dries up. In fact the second loss is much greater than the first one. This is because the start-up has actually invested effort in the sales function, and probably seen some revenues as well. Having come so far into making the start-up a reality, if we don’t learn from the sales activities, it is a great loss. Why is this so? Because, the sales functions is the place where the start-up and the customers meet, engage, and exchange. This results in both the sales people and the customers getting to know each other better. The level of engagement decides the level of knowledge of each other.

Every start-up needs to know the customer – as much as it can understand this group, the better! The problem is that this activity never finishes, because the start-up is changing, the customers are changing and so is the environment and possible interactions between them too. Gaining feedback from the sales people is the best thing a start-up can do to understand customers better. Consumer behaviour, traits, habits, etc can be easily understood by sales people and brought back to the enterprise. These inputs can help the entrepreneur / start-up team re-look at the product, offerings, business models, etc

If you as a start-up are not doing enough sales efforts – start it now!
If you as a start-up are not learning enough from sales interactions – start it today!

How should you do this? Get everybody into a single room, get the sales people to share their experiences, and let all others only ask questions to know more. No one should be allowed to criticize observations, no one should be allowed to dismiss observations, and also no one should be allowed to share opinions on observations. This is the only way to improve the product, the way it is offered, the business model, the marketing efforts, the operations, the sales efforts and may be even re-look at the customer segments themselves.

Think about it!

Creators Vs Curators – who is a better entrepreneur?

What do you think is the answer – Creators or Curators? And more importantly, who are you?

During my research, training and consulting engagements I constantly deal with entrepreneurs. I find that they come in all shapes and sizes. But they essentially belong to two broad categories:

  • Creators: These are typically people with technical backgrounds, training. They normally think product / service design. They are people who love their creations. They enjoy creating. They enjoy it so much that they often forget the commercialization aspect of it. The excuse is – passion. But if passion is for creation, then we should focus on partnering with others for commercialization. Even commercialization requires passion! But the creators are clearly entrepreneurial minds! They are entrepreneurs as well since they took a problem, designed and constructed a solution, and most importantly took it to the customer. This requires courage.
  • Curators: These are typically people who love trading. They are not typical traders (traditional understanding). They are people who are not stuck to their own ideas. They live and thrive on opportunities. They enjoy putting pieces together (created by others) and solve problems that customers face. They are passionate about what creates wealth. They have no attachment to specific products / services. They enjoy the market facing activities so much that many times they become over confident about their supply side – they assume that they can put together any solution. The careful and intelligent curators create innovations by using the fundamental creations of others. If they are for the long term they partner with the creators and formally create businesses. If they are fly-by-night operators, they simply copy and use the inventions, put pieces together and move on. It is difficult to be the former type of curator as it involves being on the field on both the supply and the demand side. It requires understanding not just the requirement of the market, but also digging through the creations to figure out the right pieces for the solution. These curators need smart perseverance.

The world is filled with both the types of entrepreneurs (two types of curators included). My work in entrepreneurship takes me often to engineering campuses across India. I meet number of engineers who have interest in becoming entrepreneurs. But many are stuck to being good creators. On the contrary I find on my visits to business schools that there are number of curators, but not of the first variety. There are occasions both the groups are situated on a common campus – with both floundering with their weaker halves. Why don’t they meet? Is there lack of interest or lack of commitment? Or is our ecosystem not allowing this cross pollination to occur?

While we hope that a lot more of our engineering and business school students interact and form start-up teams, the big question remains?
Who makes a better entrepreneur – Curators or Creators? Or is it as always – the ideal state: a combination of both?

If you have thoughts, ideas or experiences on this please do share so that we can keep this conversation going…

Finance for Entrepreneurs: Importance of Gross Profit

Revenue in a large way is a clear measure of what customers perceive as value. Hence revenue is a tangible way of evaluating value delivered. If we can safely assume that revenue is an indication of ‘value created’ for the customer, then we can also safely assume that gross profit is a reflection of ‘value captured’. These are not accounting terms, but they are reflective of how customers value a product or service and how business creates value for itself. This makes ‘Gross Profit’ an important metric to track in any business.

On the Profit/Loss Statement when we deduct ‘Cost of Goods Sold’ from Revenue, what remains is called ‘Gross Profit’ or ‘Gross Margin’ or ‘Contribution’. ‘Cost of Goods Sold’ refers to the costs incurred directly in the creation of the products or service, thereby the revenues.

‘Gross Profit’ is a widely tracked metric. This is primarily because ‘Gross Profit’ refers to the value that the business is able to create for itself in creating and delivering value to customers. If the ‘Gross Profit’ is high, then it means that people are willing to pay a premium to purchase the benefit. For example: people understand that the cost of manufacturing an iPhone is a lot lesser than the price that they pay for purchasing it, but customers are willing to allow Apple to make the money for creating and delivering the iPhone.

A large ‘Gross Profit’ also means that the business has enough margin to cover its remaining costs and also invest into the futuristic expenses. Growth requires money. Money typically comes either from the business operations itself or from debt or from equity investors. If the business has a large ‘Gross Profit’ then there is enough money to invest for future growth too. But if the business does not have enough ‘Gross Profit’ then the business has to raise money (debt / equity) to fund the future growth. Money from business operations (‘Gross Profit’) is free money for the enterprise, while the money from external sources comes at a cost.

Investors also show interest in knowing ‘Gross Profit’ simply because it is a reflection of the economic power of the product or service. This means that as the business scales the volume of margins will keep improving the self-financing ability of the business. This will reduce the need to raise or borrow funds from outside. This results in the existing investors’ valuation growing by leaps and bounds.

Thus for a number of reasons understanding and tracking ‘Gross Profit’ is an important aspect for every entrepreneur.

Think about it!

Resource Allocation in start-ups

Thought most start-ups have limited resources, hardly any started with nothing! So what makes the difference between the ones that survived and the ones that died along the way? It is fairly easy to guess, isn’t it? Common sense says that the primary difference is in how the limited resources are put to use. But as the cliché goes, common sense is the most uncommon; most start-ups don’t seem to think too much about the resource allocation process.

Resource allocation is an important aspect of enterprise creation and management. Where and how an enterprise applies its resources is an important aspect of business strategy as well – but entrepreneurs rarely like discussing strategy. Most entrepreneurs don’t want to strategize, they want to implement. While I don’t disagree that implementation is key to realizing strategic intent, the former without the latter seems like shooting in the dark.

For entrepreneurs with access to limited resources, it becomes all the more critical to focus efforts on resource allocation. ‘Where’ and ‘How’ resources are to be used should be a call that the entrepreneur must himself / herself take, based on ‘What’ they are trying to create.

Think of resource allocation as a fall out of strategy formulation. It helps keep ‘focus’ which is so important for a start-up.

Think about it!

Entrepreneurs, do you know these people?

The start-up ecosystem is filled with people who are trying to help entrepreneurs get off the ground. Both the people playing the roles (or attempting to) and the entrepreneurs receiving the support are confused over the roles and the related responsibilities.

I have been leading a set of workshops helping people who want to become enablers to the start-up ecosystem become more effective. Over the discussions we have always explored what are the possible roles. As a person playing an active role in the entrepreneurship ecosystem in India and helping entrepreneurs / CEOs start, sustain and scale their enterprises, this is one thought that I have been reflecting on for sometime now. Based on all the work till now, here is a short list of possible roles and a high level thought on what they could be doing for the entrepreneurs.

  • Teachers (educate)
  • Experts (clarify)
  • Consultants (solve)
  • Advisors (suggest)
  • Coaches (skill)
  • Mentors (guide)

I will attempt to share a more detailed description of what these people do for entrepreneurs and also how they are typically labelled in the coming days.

If you are an entrepreneur or one who plays the above roles, please join the conversation and share your thoughts in this conversation. We will try to decipher and arrive at some broad boundaries on what each of these roles do and how entrepreneurs can benefit from them. It will also help build comfortable relationships between practitioners and enablers. Many successful entrepreneurs have tried to acknowledge the importance of these relationships and have attributed them to their success.

What is your start-up building?

Start-ups typically end up building two things. No, I am not referring to products and services! I am talking about value and revenue. Now that may seem too ironical to you, but observe more closely and you will notice the difference.

There are start-ups that focus on building revenue right from the beginning. These are typically driven by entrepreneurs who have bootstrapped or come from a small business background. They are very revenue focused right from the beginning. The entire focus of enterprises that they build is around – what makes revenue?

Another group of entrepreneurs focus on value creation. This is typically the ones who work hard to create intellectual property or a community or a group of followers. They focus on gaining value and following and then eventually work hard to raise money to commercialize the value created. These are the kind of businesses that venture capitalists also seem to like. But this is also the group that has the greatest failure rate!

The question then is to find out what your start-up is trying to build. Based on the intent you need to focus on the right metric. Based on the intent and objective you (the entrepreneur) needs to ask one of the following:

  • If it is value creation, are you constantly assessing the value of your start-up?
  • If it is revenue generation, are you constantly tracking the growth of revenue?

Not asking the right question and creating the right measures could make your start-up lose focus too soon. This is what seems to be happening with most start-ups and their founders these days.

Be honest with yourself and be clear on what you are trying to build. Once you decide, stick to it. This focus helps not only you but also the people who work for you and the other stakeholders who are viewing your start-up (investors, bankers, angels, partners, strategic investors, etc).

Think about it!

Why did you start-up?

The answer to this question makes a whale of a difference on what your actions are as an entrepreneur! Have you heard a story like the below:

The entrepreneur was building a website to generate traffic and then sell to the visitors some related products. The entrepreneur was certain that if he builds the traffic and the following, selling his wares to the following will be certain. This will result in recurring revenues and also tremendous value for the company. More importantly his concept is unique which is already becoming the talk of the town!

If you are immersed in the start-up ecosystem you know that this is not a unique business model. A lot of web start-ups do the same. The entrepreneur was building something that he felt was unique. Why was he building something that fundamentally had a value proposition and not a direct revenue model? It could have been his intention to do something unique! How often have you come across an entrepreneur who is focused on creating value without a sharp eye on revenues / profits? In recent times it is not strange to meet entrepreneurs of this type. But when they are studied as the ideal role models to entrepreneurship, it confuses many others who get into entrepreneurship / start-ups for other reasons.

When one of the invited entrepreneurs to my class shared an example like the above, one of the participants (an entrepreneur himself) in class asked me over lunch how the speaker could focus on the idea / concept over revenue generation? I asked him back this question: ‘Why did you become an entrepreneur?’

He looked perplexed at me and asked why it mattered? I told him to consider a situation where he did not generate revenue for 12-15 months and asked to rate his comfort factor? He said he could not last even 3 months without revenue (at least mentally). I told him that the person who spoke could last probably 10 years without revenue. Does that make a difference? He said ‘Yes’. I told him to think along these lines:

  • Why did you start?
  • Is that the focus of your plan and measurements?

And all of these will be based on the question I asked the entrepreneur – “Why did you start-up?” Let’s be honest with ourselves. It helps us be happy entrepreneurs and stay the course for a longer time.

What do you think?

Two Lessons on Mentoring Entrepreneurs

Last week I was facilitating a session on mentoring skills. As always we had a few entrepreneurs in class who we use as cases over the two days to learn mentoring and apply the skills learned. Apart from these entrepreneurs we attempt to invite entrepreneurs who have used some form of coaching / mentoring in the past and who feel it has helped them to grow. We had one such entrepreneur speak to us about his enterprise and his experience with mentors in the past. Incidentally over tea he (the entrepreneur) told me that most of his experiences have been of poor quality. But the rare few have made the difference.

While the entrepreneur who we invited shared number of thoughts on how his mentor had helped him and how the many who called themselves mentors wasted his time and efforts, the big learning for all of us in the room was – choose your mentee (also the mentor) carefully.

We had also invited a mentor to share his experiences and he almost spoke as if it was the act of a Good Samaritan. Most of his mentoring efforts did not yield him any returns except satisfaction that he had done his bit on being sought. Apart from his other tips which were very good, the big learning for all of us in the room was – choose your mentee carefully and, let them seek you out!

So the big two lessons from the mentor-mentee experience sharing during the workshop were:

  1. Choose your mentee (mentor in the case of the entrepreneur) carefully
  2. Let the mentee seek the mentor

While they seem obvious to those who believe in common sense, the cliché ‘common sense is rarely common’ holds especially true in this case. There are many reasons for this, which we will discuss on a separate conversation later. But for now, for all those who want to take up mentoring of entrepreneurs, please use the two big lessons above wisely.

After all you wish to mentor because you want to share – isn’t it?

Why did you become an entrepreneur?

When people come to me for help regarding their enterprises, I always make it a point to ask their intention behind starting their business. Finding out their true intentions as soon as possible makes it easier for me to decide whether to take on the responsibility of enabling them and more importantly how I should do it.

Here are some top reasons that I have come across for people to start-up:

  1. I am bored with what I am doing
  2. I want to make a lot of money
  3. I want to become famous
  4. I don’t want to have a boss
  5. I want to make a dent in the world
  6. I want to create something unique

And so on…

You come across very few truly entrepreneurial people in your life and if you do, you are lucky and blessed. Keep searching!

In the above list, except the one who wants to start making money doing business, all other entrepreneurs are people who typically have earned some money or inherited some money and are bored. They want some attention, and in today’s world, entrepreneurship can make one popular. Especially if you have something really unique! So many entrepreneurs don’t seem to worry too much about revenue streams or revenue models or business models as much as uniqueness of value proposition.

While both of them require support from advisers, it will be easy to have someone who wants to build revenue as your mentee / client. They will be focused on what makes money. You will also find it a lot easier to draw the boundaries of the engagement. Overall there will be more clarity on why you guys meet up. The other group needs someone who can help them think big. But since they come with prejudice (a lot of it) it is difficult to give them quality advice. They take a lot longer to seek help, very often too late. Becoming advisers to such people is also risk for an adviser since they are also the first to blame the adviser for anything that goes wrong. Since most of the conversations are around assumptions they also tend to be irrational.

As potential advisers / mentors / coaches, it is important to understand right up front who your entrepreneur is and his intention to start the business. This can create a lot of clarity in your life by making better choices of who to give advice to.

Think about it!

Finance for Entrepreneurs: Understanding Profit

Whenever a business is able to generate revenue from the sale of its products or services, it indicates that the market perceives value. It is an indicator that the business is creating value for its customers. Profit on the other hand is an indicator that the business is also able to capture a portion of that value for itself. Profit is a very attractive term in entrepreneurship. Almost every entrepreneur keeps searching for it. Every investor keeps asking if the firm is making profits. But what are profits and what are the various terms that depict profits. This lesson focuses on understanding the various terms used related to profits.

Profits in general refer to the surplus that the business generates after all expenses are paid for from the revenue generated. There are many levels at which profit is calculated in a Profit / Loss Statement. Here are a few of them:

Gross Profit (GP) = Revenue – Cost of Goods Sold

GP is a reflection of the quality of the product or service of the business. We will look at the power of GP in the next lesson.

Profit before interest, taxes, depreciation and amortization (PBITDA) = Revenue – (All expenses except interest, taxes, depreciation, and amortization)

PBITDA is also called popularly as EBITDA. The word profits is replaced with the word earnings. This refers to all operational profits of the business. If a business makes a fair EBITDA then it shows the ability of the business to keep its overheads and operational costs under control. In many businesses this forms the core of their competence, which is keeping the EBITDA large by running a lean and controlled enterprise.

Profit before interest and taxes (PBIT) = Revenue – (All expenses except interest and taxes)

PBIT is also referred to as EBIT or Earnings Before Interest and Taxes. It is calculated after removing any amortized and / or depreciation items brought from the Balance Sheet as expenses.

Profit before Taxes (PBT) = Revenue – (All expenses except taxes)

PBT is also referred to as EBT or Earnings Before Taxes. It refers to the Net Profit that the business generates. It is also the earnings on which taxes are paid by the business.

Profit After Taxes (PAT) = Revenue – (All expenses and taxes)

This is the profit figure that is left with the enterprise after paying taxes due based on the tax laws in the country of operations. This is the money that the business has created for its owners. It can either pay this money to the shareholders or owners as dividend or it can keep it in the business for further investments.

Retained Profits = Profit After Taxes – Dividends Payable

If the business decides to pay dividends then that amount is deducted from the PAT and whatever remains is moved to the Balance Sheet under ‘Retained Earnings’. It is the money that the business keeps with itself which is actually due to the owners.

All the above terms are used to refer to profits of a business. Try to understand them. Go back to your Profit / Loss Statement and your Balance Sheet and locate these terms in them.

We will look at ‘Gross Profits’ alone in the next lesson as it is more important than the others in the case of an entrepreneur.