It all starts one fine day, when a brilliant idea flashes, that you think may be socially relevant or monetizable or both. And you think over it and suddenly, what was once a simple idea has been converted into a viable business! Yes, you have just got the ‘start up’ fever. The bug has bitten. And just like any other fever, temperatures are going to rise, bad symptoms are going to appear, but at the end of the day, almost everyone survives a fever. But can you?
Before you go further in this read, more out of convenience, I am using he to denote both he and she, and using product more generically to denote products or services or any solutions that is being offered.
The general working habits of an entrepreneur are to be totally driven, committed to succeed and very assertive – he is not afraid to take risks, is very focused on goals and results, learns from his mistakes quickly and adapts to newer environment well; works well with people and other employees; and is able to juggle a lot of things at the same time. When an entrepreneur sees an opportunity, he immediately pounces upon it and successfully drives it to create something of social or financial value. Some characteristics that are typically associated for any successful entrepreneur are- persistence, resilience, good motivational power, great communication skills and a very high regard for ethics. For an entrepreneur it is important to realize that three things are non-comprisable – ethics, morals and legality of doing business.
Creativity, Innovation and risk taking are their DNA. They all want to make it big. I am terming enterprise as a company that earns money and is fairly large in size and offers a lot in value to their customers, and I hereby want to describe to the best of my experience how to turn a startup to an enterprise in years to come.
In a broader sense, an entrepreneur starts off as one of these three types or organization:
- Non Profit – typically a non-governmental organization that wants to deliver to some social cause like – educating farmers to take on organic farming, setting up schools for under-privileged kids, etc. They are usually funded by some grants and managed by one or two highly socially motivated individuals. Such individuals could be highly successful folks who have left known enterprises to be driven by their own inner passion to make their community better – they may get some paltry salary to meet most of their living expenses.
- Social (for Profit) – typically the undercurrent theme is the same as a non-profit but there is a little commercial side to things here, hence this type of an organization is also called a hybrid as it has both a social value and a financial value. A good example here would be a construction company who wants to recycle wastes and make buildings; installing water stations in remote villages that supplies potable water at low cost, a government library etc. They do work for the benefit of the people but they also have to work for small profits as they have to employ quite a few people, invest in some infrastructure and are continuously looking to grow. Any school or hospital, given that they are partly guided by the principle to serve the society has to operate in this mode, but do they?
- Commercial (for Profit) – Examples are banks, phone or automobile companies to name a few. These companies may in turn give back to the community through their corporate social responsibility programs. This is what the default type is for most entrepreneurs- to build a successful organization that they can sustain for years or sell out strategically for bigger money. They all want to make money and plenty of it.
There are a few things a founder of a startup needs to understand and do business accordingly:
- What type of company do they need to form and register?
- What are the financial parameters involved in running the company?
- How do they start the team and how do they grow as they find more footholds in the market?
- What is their short term and long term plan for their business and how do they market and sell their solutions?
- Who are the competitors now, both direct and indirect, and how to gather intelligence about them so that they can do better?
Here are more in-depth details about the factors –
- Type of company – this can change as business grows or declines, but normally they start off as a proprietorship or a partnership company and go on to be a private company. One must be clear about the legal liabilities, financial reporting and tax obligations against each of these to ensure they are operating at the right type at any given time. I am not talking about the legal registration of the company but rather introducing the options that the founders can have while they start the company.
- Sole Proprietorship – this is owned and managed by one individual (founder) who assumes all the risks and takes all the profits.
- One person company (OPC) – one can create a single person legal entity and allows the lone entrepreneur to run the business with limited liability protection.
- Partnership – this is owned by two or more individual who share the risks and receive the profits in their proportion of partnership, and they have a formal partnership deed between them
- Limited Liability Partnership Company (LLP) – a form of business where the liability is limited to the partners and one partner is not responsible or liable for the other person’s negligence. The partners become shareholders of their company and they have the right to manage the company directly.
- Private limited corporation – this functions as a separate legal entity and gets registered according to the local laws of establishments and is owned (and usually operated) by two or more individuals (called stockholders). The risks here are limited with accordance to their financial investment and the company is monitored by a set of independent directors to whom the stockholders have to report.
- Franchising – totally an orthogonal type of company, where by paying a franchisee fee the individual(s) gets the rights to use the parent company’s name and sell their products and services, and is always responsible to maintain the same quality standards of the parent company. An example here is how the global fast food joints like Subway and McDonalds expand their footprint across geographies. Growth here depends on the volume of transactions that happens, and scalability is related to what the parent organization does.
- Sole Proprietorship – this is owned and managed by one individual (founder) who assumes all the risks and takes all the profits.
I am not mentioning the other type (which is any public limited company) here as this article is about startups and generally, public limited company means that you have done an initial public offering with a lot of investors and this usually happens about 8-10 years after successfully starting the company and so are pretty close to becoming an enterprise.
- Finance – It is all about funding needed at every stage and therefore is critical to understand the cash flow and to maintain a precise record of transactions to show revenue and profits. While I am no financial expert, I would like to introduce some commonly used jargons used in the daily life of entrepreneurs and what they mean in layman’s terms, without any deep accounting interpretations.
- Investment capital – The initial amount put into the business by the founders either through their personal savings or through an obtained loan. Usually one must have their first 6-9 months of operating cost covered by this investment capital.
- Sales is simply the money one makes selling their solution.
- Revenue: At the very start, sales and revenue would mean the same, but as days go by, any investment returns and royalties of your IP -to name two- gets added to sales to denote revenue.
- Profit (or Loss) is the money one has left (or lost) after taking care of all the expenses of running the business. The word earning is also used to mean profit.
- Gross profit – this is essentially difference between the revenues and the cost of goods sold.
- Operating cost: this would include the real estate and office space rental expenses, employees’ salaries, all utility bills etc. – this would always be there, irrespective of whether you are making money or not.
- Working capital: This is cash that is needed for every company to cover their operations cost. Efficiently managing the working capital in terms of faster receivable conversions to cash and lower inventory translates to better health of the company. A business needs to have this liquidity to continue its operations.
- Operating profit (or Earnings before Interest and tax – EBIT): This is the profit from business operations before the deduction of taxes and interests. This is got after deducting the operating expense from the gross profit. Operating profit is the best measure for running a company and it is best to keep both the labor costs and the manufacturing costs down.
- If you do have profit (also called pre-tax profit), you need to take care of the government by paying their dues in terms of taxes.
- Also if you have to grow the business, you need to reinvest in your business in terms of more employees or equipment from your profit.
- One needs to pay the interest part if the company has been financed by debt
- After all this, the money left is yours as post-tax profit, also known as Net profit.
- Cash flow: Every entrepreneur has to understand the difference between revenue, profit (before and after tax) and Cash flow. The most important is definitely cash flow which is the one that pays your bills and salary. Simply put – it is the money coming in and going out. If you cannot manage your cash flow, success is almost unobtainable.
First the startup has to realize profit and then later find means to maximize the profits. Profits can be made through outstanding receivables but is realized only if it gets converted to cash that one can use. One can convert all the profits realized into growth through investing in the company through better equipment and adding marketing muscles, and still have no money left. Profits are also used to pay debts (interest on loans etc.). Profits stuck as receivables or on immobile assets do not help cash flow.
- Funding patterns:
- Bootstrapping – basically from one’s personal savings
- Crowdsourcing – raising money from a few people
- Seed – This is got formally from some professional angel investors in the early stage of your startup, usually smaller amounts compared to what a VC can provide.
- Equity financing – means you get money in exchange for part of your company.
- Venture Capitalist (VC) and Private Equity (PE) come with a formal series of funding your company in exchange for stocks (of your company), which essentially means the founder’s ownership gets diluted at every step. They usually come in the picture at a later stage when you have built some credibility.
- Debt financing – one can borrow cash which needs to be paid back, irrespective of whether the startup is turning a profit or not.
- This is done through bank business loans, credit lines, and even through VC debt
- Grants – usually given for any social development causes and are rare to find.
- Various team structure as growth happens – with most of my experience being in IT companies, the numbers and timelines listed below at every phase are just ball park estimates and they do vary from industry to industry, and on the technology maturity.
- Hi Octane phase:
- Team structure: Absolutely flat, everyone multitasking and all of them are high on energy to prove something valuable.
- Total Employees in company: 1-10 employees, essentially the founders and a few friends. “Men on a Critical Mission” being the work culture. Engagement model between the employees is just informal and everyone rolling up their sleeves and contributing, all in an ad-hoc manner.
- Approximate time period : First 6 to 9 months of the startup
- Customers : May not have one, but still searching for one or two
- Typical Funding: Mostly boot-strapping through the founders. No money is coming in and only outflow is happening and hence critical to keep operation cost very low.
- Maturity of product or service: Basically an idea that is given a form in terms of a novel minimal viable product which gets showcased as a demo or a pilot.
Confidentiality about the innovative solution is maintained by all the team members and nothing is documented during the process- they all know what final solution they all want. There would be some good feedback and ‘hazy’ acceptance (or not) in the market, which gets incorporated into the solution being offered to make it more robust.
- “Survival or Death” phase:
- Team structure: Still flat, everyone is still multitasking but is also clearly responsible for some part of the solution.
- Total Employees in company: 5 to 20 employees, adding some dedicated test function, few more developers and your first sales and marketing person. Engagement model between the employees is transforming to be more semi-formal as they are held accountable for part of the overall solution. While hiring new employees, it is important to get folks who are entrepreneurial, have an appetite for innovation and are ambitious in their quest to solve problems; if the growth happens, this is the core team that would be leading and managing the company down the road including managing the entire execution of deliveries for future products. Small ‘undefined’ teams of two or three are developing parts of the solution and the founders are slowly getting the hang of leading and managing teams and products together.
- Approximate time period : 6 to 24 months of the startup
- Customers: Definitely have one, maybe two, and engaging with them closely and more regularly. The team needs to deliver a good product to them.
- Typical Funding: Again no money may be coming in and hence, there is a need to crowdsource from friends and family to survive.
- Maturity of product or service: First sellable product or solution is ready in accordance to the essential features that the market needs. You already know what the bull’s eye is and you are focusing on the same. Exiting this stage may throw a few surprises – having validated your idea as a product, now the rubber hits the road to check for the actual potential of your solution in the market.
Since some acceptance is happening, it is important to lock down one or two customers and work with them to make your product happen with proper non-disclosure agreements signed legally. As the team just grew a little, with everyone wearing an entrepreneur hat, they would tend to pull in different directions and hence, it is critical for the founder(s) to give them the focus to achieve their common goal.
As you wind down this phase, you may be shocked to find that quite a few competitors are offering similar solutions. Your solution may be better or faster or cheaper, or your solution has a unique flavor that is liked by many – in all scenarios, it is better to go back to the drawing board and make the suitable corrective actions speedily. If you survive, you are growing. If you are nearing death, it is time to start new ventures based on lessons learnt or do something else that one is more passionate about. Probably one can take the next step to growth if there are a couple of angel investors and VCs knocking at your door – it is time for to strengthen one’s financial acumen.
- Sprouting (First growth) phase
- Team structure: One level hierarchy established and although not a true matrix organization, getting a specialized project manager would help to drive execution formally through a process. The founders feel they are not in total control, delegation of responsibility has happened and they start operating more strategically leaving the tactical execution to their managers.
- Total Employees in company: 20 to 50 or 60 employees, with clear functional responsibilities assigned to team leads or managers. Time to make the engagement model between employees more formal and a people office to manage talent is now in place (maybe two members – one HR and one recruiter). Start developing policies for the company and the values that you want to establish to highlight your cultural fabric of working. Also a dedicated sales and marketing team is in place to acquire more customers.
- Approximate time period: 2 to 4 years since establishing the startup.
- Customers: Handful of them to whom one starts delivering to or customizing their solution. Need to add lot more features to the product to make it more valuable, and maybe add parallel products similar to your original one, but targeting different industries or offers variations in features from light to heavy.
- Typical Funding: More crowdsourcing and funding from good angel investors, or may be a business loan to do some debt funding as a second choice. If angel investors are in, some dilution of equity may happen. Now is the time to contract out the financial part to a specialized expert to work for company and its well-being. Cash will start flowing in as the product is being sold now and it is time to get into proper financial planning – budgeting and forecasting etc. At the same time, the operation costs has also increased in terms of more salary and more marketing costs, and hence one needs to ensure cash flow is good and some reinvestment is happening.
- Maturity of product or service: Variations of the product are being sold, across industries. Lots of word-of-mouth feedback on the products going on in the market and newer avenues are opening up.
This is the real execution phase – it has to be ensured that all the solutions for various customers are delivered on time and with high quality. Good publicity around the product is happening due to various offerings at different price points for the customers. If operating in the services space, start expanding on the disciplines that one can offer solutions for and add different industries to the customer list. One would see an organization emerging here with some clear span and accountability. As long as the ‘novelty and utility’ factor of the offerings are not wearing out, one would be ahead of the completion with your own USP (Unique Selling Proposition).
- Irons in the fire (More Opportunities) phase – honestly, the previous phase and this phase may be seen as one phase as they have a thin line separating them. But this phase is distinctively a steep exponential growth phase where there would be struggle to meet commitments. The offerings are rocking in the market, the goods manufactured are growing in volume and are respected for high quality leading to customers increasing business in the offered services lines. This is the best phase of growth where delivery skills matter the most – as long as one executes, they would be dancing to their bank.
- Team structure: Still at one level hierarchy but with a working model that bears distinct resemblance to a matrix organization with handful of project managers and accounts teams. The first formal organizational chart with vertical and horizontals is in place.
- Total Employees in company: About 100 to 200 employees, with managers having technical product leads to address each and every product or service line. Since 75% of the team is new, it is important that they get integrated into the company properly and they feel welcome and motivated.
- Approximate time period: 3 to 5 years since establishing the startup.
- Customers: About 10 to 15 customers now from various industries and of different sizes, asking for more and more.
- Typical Funding: Now is the time Venture capitalists and Private equity folks come in with their first series of funding, trying to get as much of equity from you as possible. If one can, it is better to always go through some debt financing through loans as a first option so that one can still preserve the equity and ownership properly. This is the time when lots of money is flowing in, and the first taste of profits is being relished.
- Maturity of product or service: Variations of the product are being sold, across industries. Many forces are pulling the company in various directions to deliver on their commitments and it is imperative that good customer relationship gets maintained in this process.
You are a mini-enterprise now. So far, all the growth has been organic or may be acquisitions of smaller entrepreneurial teams to close some gaps or add some value in the offerings to strengthen the complete portfolio. At every phase, the customer base is expanding. Your exit plan is to build it to a proper enterprise over time or get bought off by a bigger organization.
- Gorilla phase – I term it in this way because on land, Gorillas are not that agile as the other apes, and this is true for your organization but they do have tremendous strength and power. Also Gorillas are very intelligent, can do complex tasks and can communicate with people. The Entrepreneurial founder is now sitting far away from the real action and there is a hierarchy below him to work his plan. Agility in execution may be lost or definitely get slower and hence it is critical the customers gets managed properly in this phase by the founders directly as there could be fallouts due to bad execution and improper communication.
- Team structure: Two levels of hierarchy with a Project Management office and a proper People Office in place. Recruiting is a challenge here as you need to have more people executing the planned work across many customers. An international office may also need to be created.
- Total Employees in company: About 200 to 1000 employees, with senior managers and managers responsible for most of the execution. Again here you would have 75% or more of your organization new and hence it is important they get nurtured, trained, feel important and motivated within the organization.
- Approximate time period : 5 to 8 years since establishing the startup
- Customers: Lots of customers, big and small, across various industries and various geographies.
- Typical Funding: The best case scenario is to fund the expansion through the cash flows and profits, or through more business loans. Or one may need the help of few more angel investors and VCs/PEs to expand at the cost of equity. The advantage with going the VC or PE route is they have an established network and can find synergies between many investments they may have and also have extensive network to sell your solutions better.
- Maturity of product or service: Many different products are being sold, across industries and many different services lines are making money.
At this stage, you are close to an enterprise and likely that you are taking your company public to ease any money pressures on the expansion plans. One must start thinking beyond their industry and comfort zone and may go after an additional industry or start some neat inorganic acquisition to expand the baseline. The company is now considered to be the top 5 players in the field they are are in and since loads of money is coming in, careful financial decisions needs to be taken to address all the objectives.
- Reinvestment Phase – I call it so plainly because you are towards the tail end of the bell curve of your industry and hence not able to grow anymore. Classic example is when the PC market died, all the computer manufacturers moved to laptops and then as the laptops are in the stage of less growth phase now, now we see the same manufacturers in the field of tablets and smart phones – Lenovo and ACER are typical case studies here. Since the technology shifts so fast now, the timeline that one can become history is shrinking as well and hence one need to act smarter to expand with new technologies while still making money in the older one. It is time to revisit the whole startup phase again, but now with a newer technology and newer areas of investment. But there is no guarantee for success. Say for example Intel and Microsoft who are leaders in the computing have not been able to get a foot hold in the smartphone market yet, yet they still rule the roast in the enterprise and server market.
- A one year and a three year Plan, revised annually – I see this being missed by most of the entrepreneurs. It is all stored up in their head and unless this is clearly articulated and understood by everyone in the team, engagement of employees does not happen. It is good to have a documented plan that gets revised regularly as to where one wants to see the company heading, who are the target customers and where do they see their products fit in the big scheme of things.
- SWOT analysis – assess one’s strengths and weaknesses and capture one’s opportunities and threats. The reason I suggest this being done annually as an exercise is that most of the time, your strengths quadrant would be increasing as you start to innovate and learn new things and in this process, old weakness become your strength. You would now have new weaknesses though. Also, some the threats you would have captured earlier would not seem to be so, and newer and modified ones do come into the picture. Likewise, you would suddenly see an ocean of opportunities as you start tweaking and building your solution to address adjacent areas as well.
- Business plan – Although a marketing and financial plan will be part of an overall business plan, one needs to do a careful analysis of the environment regarding the technology being used, the political and economic environment in the target market and how it may influence your product or service; and understand all legal requirements pertaining to your service or product. This detailed analysis of the business environment has to be done even before one start’s’ working on the demo or pilot. It is best to articulate who the potential customers would be, what markets to target and what would be the likely demand of your product or service. There are lots of free templates available online to write a good business plan.
A proper business plan is a golden document that gets revised every year, and gives a strong baseline to all the team members so as to have them all on the same page, ensuring everyone understands and is clear about their startup objective. This plan must also indicate key risks to their business, when they may get triggered and how to mitigate them if they occur.
- Marketing plan – This is the part where one needs to clearly articulate their target market segments and how the new innovative products or service would be positioned and have a selling strategy around the product along with a proper pricing strategy. Get some intelligence about the competition, have a good promotional and distribution strategy and map out a proper marketing implementation of the product including the marketing budget, sales objectives and how one would be monitoring the translation of the marketing program to sales.
- Financial plan – This would show the burn rate of the cash reserves to cover your operations for the first few years on a monthly basis. Estimate a break even analysis when one would realistically see earnings for their products and service, the funding plan for a 3 to 5 year horizon and list all the expenses one would incur during these first few years. One should revisit this financial plan every quarter for due diligence purposes to understand where one stands and what corrective actions needs to be put in place to continue a successful operations. One needs to understand the usage of money coming in and the profits being generated so that reinvestment happens prudently.
- Competitive landscape – there is an old adage that says if you have thought of an idea; someone is already working on it. The other way to look at it is if there is no competition, there may not be a market at all for that idea. So, before jumping into the arena, it is better to chart out your PIE in the bigger Eco-system and see where you fit in and what exactly you are addressing and if there is a credible market for the same. Once the idea gets firmed up, look at close competitors to understand what they are up to and try to incorporate something better than what they are doing in one’s solution. Remember, this world is all about the bigger fish eating the smaller fish.
If your business in not scalable, it may end up being a one man show throughout. For some businesses, this is fine. Scalability is not to be confused with growth, as the former is about the architecture of your product and the latter is about how efficient your sales force is. The former is about business models and the latter is about size. Growth happens usually at an additional operational cost whereas scalability does not need to be.
Self-proprietorship and franchisee companies are usually not scalable as they work on an individual’s offering of his expertise like a consultant, architect, accountant, shop-owner etc. You can still grow without being scalable but you would soon reach a plateau. Only if the business is scalable can you grow to be an enterprise someday and this is the SOLE CRITICAL criteria of startups that want to aim big and create more jobs and newer markets. You can fund your startup through external sources only if you show you can scale your offerings and have a plan for the same. And the growth has to be seen and realized either in terms of value they add or revenues they generate, or preferably both.
The latest trend I see with young folks is that to develop a mobile app in the latest operating system and sell it in an IOS and Android store – this is great and if the users like it, you are reaping in some good money. But this does not mean you can scale this app or monetize these apps otherwise. Having a mobile app developed does not mean you can run a business with it.
As an entrepreneur, you can offer a newer solution in an older technology, offer an older solution in a newer technology, create a newer technology by being the first to offer something in it, can make an older solution in an older technology faster or cheaper or better , offer a known solution of one industry to another industry where it is novel, manufacture products with high quality and better cost and cater to variety of industries, or offer your professional services to customers who want to engage and partner with you to develop products or solutions for them. Yes, the opportunities are vast. But an entrepreneur also will find it difficult to realize that he may not have the control of the organization as it expands and hence critical to have the best seed team as his first recruits that he can count on who would deliver what he wants every time with high quality.
And closing remarks, in most instances, I have never seen the startup selling the same product or service they started off with, but their learning experience on the way with the feedback loops involved at every stage would see them offering something that could be totally different from what they had planned. This is the irony of startups. What you start off planning is not usually what you end up doing and being known for.
Although it may look like I have simplified the journey of an entrepreneur through this write up, I’m just trying to put some formal process around how things evolve. Every journey is different and difficult but not very far from what has been documented here. I always see an abundance of energy and enthusiasm of an entrepreneur and his confidence rubs on other team members to make the startup work. Success is not always measured by whether the startup made money or not, but also by the experience and self-learning they go through which helps them in future and in other walks of life, beyond their career. And the pleasure of working for themselves is the best thing of an entrepreneur. The author is a business and technology consultant associated with Business Intellects, Bengaluru who has been privileged to assist a few startups at various phases of their journey. His passion is to help small and medium enterprises be more successful or turn around their business, and also does some value based leadership workshops and corporate training.