The Startup Guy

There is a major gaga (No, no, nothing to do with the Lady with the name) going on as to whether Venture Capital is good or bad. Should you be a fat startup or a lean one; if Entrepreneurs are made or born and if exits at all are important and the fun behind lifestyle businesses. Phew, that pretty much summarizes all the noise out there.

There is a load of bullshit in all of that talk. I’ll tell you why.

At the end of the day, these are templates as to how to go about doing something. I believe Entrepreneurs are born not made, precisely for this reason. Entrepreneurs are original in thought and the one trait that will distinguish an entrepreneur from a businessman or a Trader is the fact that they are originals and will do what others, at times, are hesitant to do – and will almost always do it in their own way. This is where Artists and Entrepreneurs become very much alike – Someone who sings someone else’s song is called a Karaoke Artist – as Simon Cowell will gladly agree – Definitely not an Artist.

One of the fundamental things you will realize about business is that it revolves around the very simple notion of “Revenue – Cost = Profit”. The revenue is quite simple – anything that you receive as payments for your service – either through advertisements/cross subsidy or directly from the customer. The cost usually comprises of three elements – cost of acquisition of the customer (+ customer service), cost of delivery of the service and cost of creation of the service. In the case that you are a non-IT company and are in manufacturing, the cost of creation of the service is split into two – the cost of the infrastructure (read: Production Plant) and the cost of the product (think a shoe manufacturing plant and the actual cost the company incurs to make it)

Most businesses are innately margin businesses. What is also now widely called as Ramen profitabililty is none other than the company trying to balance that simple equation of R-C = something other than a number which is negative. And thats the starting point. Traditional businesses, and until phenomenon such as Cloud services, the scalability that Technology brings in etc, are all margin businesses. It might cost 2 Rs to build and deliver a service and you charge the customer 5 Rs, pay a tax or Re 1 and take the rest to your bank account.

Traders and Merchants (and that is what the infamous Marwari and Baniya communities do) are all in this businesses – and that is what a significant potion of India’s businesses really are. And there is absolutely nothing wrong with it. Truth be told, they personally make more money than most high-tech entrepreneurs in India today and I think thats a crucial thing you MUST at some point think about. There is no point running an NGO of sorts, being underpaid, if you are infact a high calibre individual (more on this towards the end)

A typical trading business does about a crore in revenues a month, and has about 15% in margins – since there is no investor, shareholding involved or the promise of an exit, the “entrepreneur” can take home most of it – if they are smart, they will set aside a portion of that profit to venture into new businesses or expand. Thats around 15 Lakhs a month for the mathematically challenged. Think about it.

If you ask me, this is the utopia of building and running a business. You get to set the pace at which you live your life, there is no one breathing down your throat, and you are truly your own boss. There is but one glitch. The initial capital.

Most of these lifestyle businesses are self-funded or by family money. Usually two generations ago, someone borrows a few thousands from someone, multiplies the money, returns the principle and uses the profits to grow it further. Two generations later it is grown into an empire and a lifestyle that the entire family enjoys.

The true value of Investors is that if you have the potential, someone might actually fasttrack this entire process for you. But you also are slightly stuck, because unlike the forefathers of the rich empires, you are also taking a lot of money which comes with a whole load of promises to deliver on – remember that everyone is used to managing the “margin” and expect atleast that out of you.

In order to do that, you start with the business, prove the model and bring it to a point where you can afford Ramen Noodles. And then comes the big bet of making the growth – especially the profit exponential. This will come quite naturally if its anything related to Intellectual property (think of a book written once – which means cost is incurred once – and sold multiple times without linear costing) – and this is the reason why most investors will ask what your Intellectual Property is – they couldnt care less about the patent filing you have which most probably will have no bearing, but intellectual property that really will make this exponential return happen. The other bit that could contribute towards this are the right set of processes, and the appropriate technology.

Go to an investor and ask for invesment towards buying technology – even if its infrastructure cost – that will start making your margin business into an exponentially profit making one, and you’ve hit the bullseye on what everyone is looking for.

So you see, it doesnt really matter if you are fat, obese, lean or darn sexy, what you need to have is the required amount of capital to go about your business in the best way possible and justify your investor with appropriate returns.

I know this all sounds a bit gloomy – it says that it takes time, effort and an extraordinary capability to actually make money fast – then again, who said it was easy? Smack anyone who tells you otherwise. Please!

PS: There is also the highway of building a business – for a vision much higher than just profits. Call it the Zoho way – in which case don’t dare go near investors.