Last week, I shared some of the insights that Bea Wolper, entrepreneur and lawyer focused on family businesses, shared with my class. An area of special interest for Bea is how succession happens well (or not) in family businesses. She shared the four critical steps for succession (which is rarely seamless) to happen well. Upon discussing this with some of my students, it dawned on me, that this is just as applicable to startups and non-family businesses as well. And not just in a founder or CEO transition, but for any major role in a business – such as HR, Marketing or Sales heads.
Photo by Glenn Carstens-Peters on Unsplash
Ownership In a family business this is usually a controlling interest. In a startup or other enterprises, this is equity with the potential for significant upside. As Bea pointed out this is the easiest to “do” – you sign a piece of paper and it’s done. This is however only a necessary condition and not sufficient. If you do this alone, it is almost always going to result in failure.
Knowledge Change is never easy. Having a new person in charge without equipping them with everything that your organization and you know is dooming them to fail. This ranges from how things are done, who does them, how they are done and why they are done (or not) the way they are. I have walked into marketing positions, with nary an introduction to existing customers, current prospects and can tell you it’s not fun. Successful organizations, debrief and even put together a “Bluebook” of everything the person leaving the position knows for their successor. Ideally, you have a team, including the person presently playing the role do an ongoing knowledge transfer for the successor.
Relationships The old cliché “business is all about relationships” is true. So formally introducing the new person to key employees, key customers and of course key business partners—starting with bankers, component suppliers, channel partners is vital for success.
Authority This is where the rubber meets the road and even well run companies stumble. When you promote someone or hire someone new, but other employees still come to you or their old boss or colleague, you’ve not handed authority. Most times the founder/entrepreneur is the problem (or “Dad” in the family business) when he is not willing to relinquish his authority. So the new person while having the title has little or no actual authority – or what he has is undermined by others.
As you can see any one of these, even when you’ve done the other three well can cause your executives to fail. I’ve been guilty of violating every one of these, at one point or the other. Which ones have you not been giving adequate attention to?
One of the joys of teaching is the opportunity to invite guest speakers who bring their experience and insights alive for the class. The speakers have the added advantage of being a “guest” lecturer and their message not only sounds new but resonates well. I was fortunate to have Bea Wolpert, an amazing entrepreneur, lawyer and woman leader. Over an hour, Bea in her inimitable style—reality laced with humor and self-deprecation—shared her own experience as a lawyer and entrepreneur as well as the stories of some of her entrepreneur clients. I realized her stories and insights serve well as advice for most prospective and practicing entrepreneurs. Here they are
Purpose Be purpose-driven – It’s well worth figuring out what are you passionate about. Pursue that passion rather than money alone – be it dog-walking, raising Labradoodles or being a chef or lawyer (all examples she illustrated)
Relationships Work on building authentic relationships – these take time and will pay off in spades
Give forward Focus on giving something of value first – people will automatically seek more and become customers. This could be a blog, seminar or webinar, free consultation, or samples at farmers markets – make it easy to buy from you.
Sales Recognize your job is selling – not just being a chef, designer, lawyer and learn to become good at it.
Numbers Business is about numbers – so the more you learn to understand numbers – costs, profit & loss the better off you will be
Commitment Be all-in. Don’t expect a bank (or anyone else, except a parent possibly) to fund your company or you, if you are not willing to be all-in and
Plan Whether a business plan for a bank, succession plan for yourself or a marketing plan for the company, planning is both important and will help.
“How will your company become a billion-dollar company?” An analyst at a venture capitalist firm, likely a freshly minted MBA, posed this question to me. I tried to keep my temper in check and answered “Never.” You’d think I’d slapped him across the face – “Then I’m afraid there’s no point in talking to us.”
I was a still a relatively new entrepreneur. It seemed like all I heard was NO. Worse yet, people kept telling me why it wasn’t going to work. Not just venture capitalists but prospective partners, friends, and relatives.
That’s when I learned that You’ve gotta Hold Fast To Your Dreams.
Even my father, a man who loved me, inspired me and most importantly lent me a lot of money had the “Talk” with me. “Son, sometimes businesses fail. Just because your business failed doesn’t mean you have failed.”
If you have a wonderful and supportive wife, you are still likely to face questions – “Honey, I want you to pursue your passions. But I hope you realize we have two young kids and no income”
You’ve gotta Hold Fast To Your Dreams.
In my case, there was a happy ending – my company first survived, then it thrived – okay mildly thrived and then we got lucky and we were able to sell the company for a tidy sum. Now you might think, “Nah Sri, you are just a lucky fellah.” And I’ll tell you I’m a lucky fella – but only because I held fast to my dreams.
It was film producer Samuel Goldwyn who said: “The harder I worked the luckier I got.”
Is holding on to your dreams easy? No.
There will always be naysayers. People will put you down.
You will doubt yourself. “How do you know that you are not being just plain pig-headed?” You don’t.
Here are three things I’ve learned: Dream BIG. And write your dreams down. Ask yourself why this is your dream. Read biographies – read other’s life stories – those who have achieved amazing things. Most importantly, Surround yourself with people who love you and care about you. But who will speak the truth and keep you honest
Two weeks ago I spoke and wrote about the inspiring story of my grandfather, who epitomized what holding on to your dreams can help you achieve. You can read it here.
As an entrepreneur, you are likely to face any number of obstacles. Worse yet will be the naysayers around you – people who don’t believe in you or what you are trying to get done. Even friends and family – well-intentioned as they may be will doubt, question and even actively discourage you. So it’s really important to Hold Fast To Your Dreams.
I realize that the challenges I’ve faced are hardly worth boasting about. My life has been one of relative privilege. But the lessons I’ve learned from my father‘s life and that of my grandfather, his father in law are a living testament to why you should hold fast to your dreams. I’ll share one story – that of my grandfather who Held Fast To His Dreams well past his nineties.
A rough start
My grandfather was born in 1902. His father died of tuberculosis barely two months before he was born. His widowed mother, then barely 19, moved back to her father’s home in a village in south-western India, another mouth to be fed. Then at age 2 my grandpa contracts polio. His left leg is permanently shortened. When it’s time to go to school, his grandfather says, “What’s this crippled boy going to do with school?” I’m sure he was not a cruel man, but those were the times they lived in.
My grandfather even at that age never gave up on his dream to making something of his life. One day the schoolmaster showed up at his grandfather’s house. “Why have you come?” he was asked. “Your child has been showing up in school, so I’ve come to collect the fees.”
More Deserving Candidates When my grandfather graduated from high school, he had to come to the city for college. When he appeared for an interview, the head of the department told him, “You are a cripple. Why do you want to study science? You’ll not be able to stand up and do all the laboratory work. I can give the seat to a more “deserving” candidate.” My grandfather was not happy, but he did not give up his dream. He enrolled in English and tutored other kids to pay his way through school, even as he lived in a “Mission” home for poor boys.
By the time he graduated with a Master’s in English, my grandpa had been teaching & tutoring for several years. So rather than work for someone, he turned into a tutoring entrepreneur and eventually started his own private college – whose motto was “Under the Minerva roof, you are failure proof.”
Dream Achieved?
It looked like grandfather’s dream of making something of himself, and liberating his mother from poverty and dependency on others had come true. He was a renowned Shakespeare scholar – his Minerva notes were sold across the Commonwealth from Kenya in Africa to Australia in Oceania. He’d also gotten married and over time fathered ten kids – yep 10! Five girls, the fourth of whom was my mom and 5 boys.
Setbacks again Just as it looked like all was going well, his wife died in childbirth leaving behind twelve kids, ten of his own and two grandkids. But as he was fond of saying “Ambition is made of sterner stuff.” He had his daughters and sons put through college and most of them married – more grandchildren were on the way, and it looked like normalcy was back. But a year after I was born, my grandfather was in a car accident, and he lost the use of his other leg and his right hand. Now at age 62, he was confined to a wheelchair and 100% dependent on others.
I think you can safely guess he still had things he wanted to do and he held fast to his dreams. He did not give up his dreams.
He studied classical Indian dance and became an expert who every dancer of repute consulted on their latest projects.
He built a house in which a wheel-chair bound person could live by themselves – this was in the early 70s.
He became an educator for nurses who worked with the “handicapped” as they were called then.
By the time my grandpa passed in 1995, chess grandmasters, dance divas, Sanskrit scholars and hundreds of others’ lives had been touched by him. And the thousands who’d been through his college eulogized his memory.
I can’t think of a better example of what “Holding fast to your dreams” can achieve.
Dreams
Hold fast to dreams
For if dreams die
Life is a broken-winged bird
That cannot fly.
Hold fast to dreams
For when dreams go
Life is a barren field
Frozen with snow
This morning I read Om Malik’s piece on DropBox and how they’ve become the company to achieve a billion dollar run rate in the shortest time – 9 yep, nine years!
The Internet might have hastened the pace of our world. The network has turbocharged growth and expansion. However, it looks that growing into business still indexes at human scale.
In the early naughts, when we’d meet venture capitalists, who’d ask “How will you become a billion-dollar business?” (my answer usually was we wouldn’t) and subsequently, when I heard young entrepreneurs pitch business plans, I’d often point out to them that average software product company takes 7-8 years to get to $50M in revenue. Yep 50M in run rate.
So if DropBox was able to get to 1 Billion in the same time, does that mean the clock has gotten faster? The two operative words here are unicorn and average – an even more important word might be run rate!
One way I’ve always thought about it, is despite all the advances in medicine, having a baby still takes – give or take – 9 months. A business in many ways, especially one that lasts, takes time nearer a decade to get to a significant size, on average!
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.
“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 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.
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