What is most important for a company to focus on? P&L or Cash Flow?
I think people get lost between the two, or confuse them for being the same thing. The difference is in the title of this post.
When you want to talk about how at a very high level, the company will bring revenues, highlight expenses, employees, CAPEX, OPEX, taxes etc - P&L is the way to go. It talks about how your numbers will look in Y1, Y2, Y3, Y4 and Y5.
Same drama - hockey stick growth, high sales per person, 50x ROI over 5 years. $100 Million Sales in Y5. Net profit over 25% in Y5. Thanks to Nesheim (Google him), most startup P&Ls look alarmingly similar across domains, markets and products. Great, the story looks Ok.
Now, Execution. Imaginary Execution = Month on month Cashflow. And when you get into actual Execution, we are talking about Weekly or even Daily Cashflows. What are the exact dates on which the revenues will come in? What are my expenses on the 31st of the month, and the 1st of the next month. Rent goes on which date? For the Product when are the expenses for vendors, transportation, assembly folks, and when are my revenues?
See it? Cashflow is a reflection of Execution. All the changes entrepreneurs go back to their investors with, in their "shift in plans", is basically a reflection of how right or wrong their cash-flows were w.r.t their original projections.
Here is a Tip. Do a monthly Cash-Flow for 5 years. Estimate in as much detail, your dates of revenues, dates of procurement of goods, periodicity of cycles, credit terms with suppliers (they will reflect in outgoes w.r.t incomes in your cashflow), salaries (which you hire etc). Use this to prepare your Yearly Cash Flows, and you will have a reasonably good idea of your estimated P&L.
Become as Cash-flow oriented an entrepreneur as you can be, and you will be doing yourself and your investors a BIG favor.
Wednesday, March 17, 2010
Wearing a Pessimist hat for scrutinizing Legal Papers
Ok, lets face it - A legal paper, is something that holds good in court. And you wont go to court, unless you are in a disagreement. So, fundamentally, these are the terms and conditions you are supposed to abide by, should you be in court over disputes.
Great. Now you know. Wear that Pessimist hat.
Things will go wrong. You will fight. About deliverables, about commitments, about payments due, about expected scope of work, about time and deadlines.
Do not sign on any clause thinking "that will never happen". Want examples? "Right of first refusal", "Anti Dilution", "Liquidation Preference", "Drag along rights", "Tag along rights"... etc are all things you need to read very carefully - in a Share Purchase/Subscription Agreement.
Understand this about business - Everyone is trying to take as much of your money by giving you as little as possible. And you are trying to take as much of everyone's money by offering them as little as possible. Conflict of "Value Proposition" and "Pricing Premiums".
So read carefully to understand - What am I gaining, What am I losing, What are my commitments, What are their commitments. If there is some commitment they offer, but not in writing - insist on putting it down on paper. You wont regret this.
You may hear this often - "Some things have to be left to trust". Its bullshit - and it doesn't hold good in court. If you are engaging with a person/company for any reason, state the reasons on paper (of course in legal fashion - call them commitments from their side). Sign, and move on.
Great. Now you know. Wear that Pessimist hat.
Things will go wrong. You will fight. About deliverables, about commitments, about payments due, about expected scope of work, about time and deadlines.
Do not sign on any clause thinking "that will never happen". Want examples? "Right of first refusal", "Anti Dilution", "Liquidation Preference", "Drag along rights", "Tag along rights"... etc are all things you need to read very carefully - in a Share Purchase/Subscription Agreement.
Understand this about business - Everyone is trying to take as much of your money by giving you as little as possible. And you are trying to take as much of everyone's money by offering them as little as possible. Conflict of "Value Proposition" and "Pricing Premiums".
So read carefully to understand - What am I gaining, What am I losing, What are my commitments, What are their commitments. If there is some commitment they offer, but not in writing - insist on putting it down on paper. You wont regret this.
You may hear this often - "Some things have to be left to trust". Its bullshit - and it doesn't hold good in court. If you are engaging with a person/company for any reason, state the reasons on paper (of course in legal fashion - call them commitments from their side). Sign, and move on.
Saturday, March 6, 2010
10 Things you need in a Business Plan
What is necessary in a Business Plan? I like this list from Sequoia Best:
Present a lot of information in as few words as possible. The following business plan format, within 15-20 slides, is all that's needed:
Company Purpose
* Define the company/business in a single declarative sentence.
Problem
* Describe the pain of the customer (or the customer’s customer).
* Outline how the customer addresses the issue today.
Solution
* Demonstrate your company’s value proposition to make the customer’s life better.
* Show where your product physically sits.
* Provide use cases.
Why Now
* Set-up the historical evolution of your category.
* Define recent trends that make your solution possible.
Market Size
* Identify/profile the customer you cater to.
* Calculate the TAM (top down), SAM (bottoms up) and SOM.
Competition
* List competitors
* List competitive advantages
Product
* Product line-up (form factor, functionality, features, architecture, intellectual property).
* Development roadmap.
Business Model
* Revenue model
* Pricing
* Average account size and/or lifetime value
* Sales & distribution model
* Customer/pipeline list
Team
* Founders & Management
* Board of Directors/Board of Advisors
Financials
* P&L
* Balance sheet
* Cash flow
* Cap table
* The deal
Present a lot of information in as few words as possible. The following business plan format, within 15-20 slides, is all that's needed:
Company Purpose
* Define the company/business in a single declarative sentence.
Problem
* Describe the pain of the customer (or the customer’s customer).
* Outline how the customer addresses the issue today.
Solution
* Demonstrate your company’s value proposition to make the customer’s life better.
* Show where your product physically sits.
* Provide use cases.
Why Now
* Set-up the historical evolution of your category.
* Define recent trends that make your solution possible.
Market Size
* Identify/profile the customer you cater to.
* Calculate the TAM (top down), SAM (bottoms up) and SOM.
Competition
* List competitors
* List competitive advantages
Product
* Product line-up (form factor, functionality, features, architecture, intellectual property).
* Development roadmap.
Business Model
* Revenue model
* Pricing
* Average account size and/or lifetime value
* Sales & distribution model
* Customer/pipeline list
Team
* Founders & Management
* Board of Directors/Board of Advisors
Financials
* P&L
* Balance sheet
* Cash flow
* Cap table
* The deal
Wednesday, March 3, 2010
Why you should have Agreements & Paperwork
Have an agreement for everything ready. Vendors, Consultants, Employees, Non Disclosure Agreements (NDAs), Rate Charts etc.
Each time money flows into your system, ensure there is proper paperwork for that. Invoices, Share Purchase Agreements, Convertible Debenture Agreements, Loan Acceptance Documents, etc...
Each time moeny flows out of the system, ensure there is proper paperwork - Employee Contracts, Rental Agreements, Vendor Agreements, Petty Cash Books, everything.
The reason for this is simple. When there is a dispute, everyone runs to signed paperwork.
Signed paperwork should clearly spell out: What is expected from the party receiving the money, what is the schedule of deliverables, what is the penalty for late payment, fines, interest if any, everything.
More paperwork you do, better your chances for dispute resolution. Also when someone comes and does due diligence on your Startup for funding, it is good to have your papers in order. Ideally, you are meant to keep all your papers, bills, receipts etc for many years after the expense or revenue incident actually happens.
Here is a handy tip - make everything (expenses and deliverables) measurable. Do yourself a favor - Put the responsibility of alarms and whistles every time a billing crosses a budgetary limit - on whoever you are paying (eg: vendors etc) - so you don't get surprise BIG invoices. Make a habit of putting this in your agreements. You will thank yourself for this later.
Each time money flows into your system, ensure there is proper paperwork for that. Invoices, Share Purchase Agreements, Convertible Debenture Agreements, Loan Acceptance Documents, etc...
Each time moeny flows out of the system, ensure there is proper paperwork - Employee Contracts, Rental Agreements, Vendor Agreements, Petty Cash Books, everything.
The reason for this is simple. When there is a dispute, everyone runs to signed paperwork.
Signed paperwork should clearly spell out: What is expected from the party receiving the money, what is the schedule of deliverables, what is the penalty for late payment, fines, interest if any, everything.
More paperwork you do, better your chances for dispute resolution. Also when someone comes and does due diligence on your Startup for funding, it is good to have your papers in order. Ideally, you are meant to keep all your papers, bills, receipts etc for many years after the expense or revenue incident actually happens.
Here is a handy tip - make everything (expenses and deliverables) measurable. Do yourself a favor - Put the responsibility of alarms and whistles every time a billing crosses a budgetary limit - on whoever you are paying (eg: vendors etc) - so you don't get surprise BIG invoices. Make a habit of putting this in your agreements. You will thank yourself for this later.
How to Hire a Consultant
A consultant is someone who takes your watch, and tells you what the time is.
In a startup, use consultants wisely. Do not mistake them for employees. These are on-time facilitations that you can use as and when you need them. Period.
They will charge you for every word they speak, every cent they spend on you - whether phone calls, petrol, coffee, whatever. So ensure that the legal document for their engagement covers areas like.
Clear Deliverables.
Clear Timeframe.
Estimated time to be put in.
Estimated expenses.
Demand a warning from them when the expenses/billing exceeds budget.
Better still, ask them for alerts each time the billing crosses 1/10th of the estimated budget for the work (in real-time) i.e. within 1 day of it crossing each 1/10th.
Ask them to take prior approvals for estimated out of pocket expenses above a certain limit.
I don't recommend paying consultants for time. Pay them for specific works instead. Fix a budget, and ask them to take it up if they can deliver whats expected within the expected time and budget. If they don't deliver, fix a price for useful efforts done.
Use a consultant only if you need one. The first thing a consultant will do once they get a work from you, is ask you the answers to the questions you want them to answer. Then they will format this nicely (with html, tables, bullets etc), and send it back to you, with an invoice.
Do all of this so you don't get a bomb of an invoice later for bullshit work.
In a startup, use consultants wisely. Do not mistake them for employees. These are on-time facilitations that you can use as and when you need them. Period.
They will charge you for every word they speak, every cent they spend on you - whether phone calls, petrol, coffee, whatever. So ensure that the legal document for their engagement covers areas like.
Clear Deliverables.
Clear Timeframe.
Estimated time to be put in.
Estimated expenses.
Demand a warning from them when the expenses/billing exceeds budget.
Better still, ask them for alerts each time the billing crosses 1/10th of the estimated budget for the work (in real-time) i.e. within 1 day of it crossing each 1/10th.
Ask them to take prior approvals for estimated out of pocket expenses above a certain limit.
I don't recommend paying consultants for time. Pay them for specific works instead. Fix a budget, and ask them to take it up if they can deliver whats expected within the expected time and budget. If they don't deliver, fix a price for useful efforts done.
Use a consultant only if you need one. The first thing a consultant will do once they get a work from you, is ask you the answers to the questions you want them to answer. Then they will format this nicely (with html, tables, bullets etc), and send it back to you, with an invoice.
Do all of this so you don't get a bomb of an invoice later for bullshit work.
How to deal with Key Employees
My definition of key employees - don't mean senior employees or CXOs. It means employees without which the business will be in major trouble. Or employees you wont fire, and will try to retain even if they want to go. Those are key employees.
Treat them with respect. Understand their pulse. Understand why they are working for you, what their passions are, requirements are, problems are, and provide them with the environment that is required for them to become stars.
Do this - and you wont regret. Employee morale will be up. Everyone will know why these employees are being recognized. Others will work towards getting similar recognition. This is the true definition of meritocracy. Everyone loves it.
Identify key employees in each division. They needn't necessarily be the team leaders. Push them to achieve results, and they will !
Treat them with respect. Understand their pulse. Understand why they are working for you, what their passions are, requirements are, problems are, and provide them with the environment that is required for them to become stars.
Do this - and you wont regret. Employee morale will be up. Everyone will know why these employees are being recognized. Others will work towards getting similar recognition. This is the true definition of meritocracy. Everyone loves it.
Identify key employees in each division. They needn't necessarily be the team leaders. Push them to achieve results, and they will !
How to Negotiate - Part 4: Good Cop, Bad Cop
You will see a lot of this in negotiations.
Someone will bully the hell out of you, spit in your face and make you crap in your pants. Then someone else will come in, wipe your face, and spray deo on you and make you feel better about yourself.
This is typical in negotiations - with investors, clients, vendor collections, anything.
The goal is the same - wear you down, send you into a whirlpool of thoughts, and make you feel like latching onto the first nice thing that comes your way.
Seasoned negotiators know this. And they go in to the negotiating table with a Good and Bad cop of their own. While the bad cops fight it out, the good cops have a talk. Everything that bad cops discuss results in the terms and conditions, and the good cop talk results in the sign on the dotted line.
Good luck. Learn to play this game. Don't fear the bad cop. Don't love the good cop.
Its business as usual. While going into a difficult client meeting - ask your investors for advise. They can help a great deal with such situations.
Another tip. Have a great understanding with your own bad cop. If both of you try to be good cops - you will get used. If both of you try to be bad cops, the agreement will not happen. Play it, it's enjoyable :-)
Someone will bully the hell out of you, spit in your face and make you crap in your pants. Then someone else will come in, wipe your face, and spray deo on you and make you feel better about yourself.
This is typical in negotiations - with investors, clients, vendor collections, anything.
The goal is the same - wear you down, send you into a whirlpool of thoughts, and make you feel like latching onto the first nice thing that comes your way.
Seasoned negotiators know this. And they go in to the negotiating table with a Good and Bad cop of their own. While the bad cops fight it out, the good cops have a talk. Everything that bad cops discuss results in the terms and conditions, and the good cop talk results in the sign on the dotted line.
Good luck. Learn to play this game. Don't fear the bad cop. Don't love the good cop.
Its business as usual. While going into a difficult client meeting - ask your investors for advise. They can help a great deal with such situations.
Another tip. Have a great understanding with your own bad cop. If both of you try to be good cops - you will get used. If both of you try to be bad cops, the agreement will not happen. Play it, it's enjoyable :-)
Why you need to keep "Smart Money" Smart
If you don't tap into the connections of your VCs or Angels, or they are not listening to you anymore after they give you their money - you have a problem.
The problem is that the money you got is not smart money anymore. It is just dead money - and believe me, both you, and your investor are making a fool of yourselves. I'm sure entrepreneurs took a beating on the valuation, as investors promised their money to be smart. I'm sure Investors will lose their investment, if the money doesn't remain smart.
Entrepreneurs - Do all you can to reap 20 out of every 1 you have.
Investors - Please pass on connections, advise, sometimes without being asked - so that your 1 has a better chance of becoming 20.
What can I say? Smart money is the only thing that makes Start up Funding business successful. The only thing that promises visibility, broader market, and earlier access to businesses and partners for Start ups.
Use your money smartly, Do everything to ensure that the money remains smart.
The problem is that the money you got is not smart money anymore. It is just dead money - and believe me, both you, and your investor are making a fool of yourselves. I'm sure entrepreneurs took a beating on the valuation, as investors promised their money to be smart. I'm sure Investors will lose their investment, if the money doesn't remain smart.
Entrepreneurs - Do all you can to reap 20 out of every 1 you have.
Investors - Please pass on connections, advise, sometimes without being asked - so that your 1 has a better chance of becoming 20.
What can I say? Smart money is the only thing that makes Start up Funding business successful. The only thing that promises visibility, broader market, and earlier access to businesses and partners for Start ups.
Use your money smartly, Do everything to ensure that the money remains smart.
What makes a good Management Team
Team = the set of people who will bring business, and will deliver the promise of the business.
Having a brilliant team is absolutely critical. That the team gels well, and has an understanding that brings resonating results is even more critical.
If the team is full of A list people who cant get along, it is a recipe for disaster. Chilli in curry is good. Chilli in everything is not so good. One needs to "fit" into a team, and the team should be good and complete.
And then, the team should be promising and oozing with potential to make money. Experience, connections, street-smarts, and eye on the collective goal. All are important.
When bringing in people from outside as member of the team - pay special attention to skill sets and attitude. Gelling well is paramount - and I cant stress this enough.
If you just cant get along with someone for all the right reasons, find a replacement, and do all of you a favor by being frank and nice and upfront about it.
May the best teams win !
Having a brilliant team is absolutely critical. That the team gels well, and has an understanding that brings resonating results is even more critical.
If the team is full of A list people who cant get along, it is a recipe for disaster. Chilli in curry is good. Chilli in everything is not so good. One needs to "fit" into a team, and the team should be good and complete.
And then, the team should be promising and oozing with potential to make money. Experience, connections, street-smarts, and eye on the collective goal. All are important.
When bringing in people from outside as member of the team - pay special attention to skill sets and attitude. Gelling well is paramount - and I cant stress this enough.
If you just cant get along with someone for all the right reasons, find a replacement, and do all of you a favor by being frank and nice and upfront about it.
May the best teams win !
Dos and Donts with VCs - What you need to know
Everything stems from this. VCs are basically fund managers. Angels are typically experienced entrepreneurs or sometimes very successful corporate CXOs, who have made their money and now want to invest in companies that created value like their companies did for them.
Either way - the math is simple. Here is a Investor mind: Banks give me 10% return on investments. Market linked investments give me 20% per year. Real-estate gives me ~%. I continue to look for better investment opportunities. On an average, any safe investment route will double my money in 5 years.
If I invest 1 Million dollars each in 10 companies, and only statistically 2 succeed: that's 8 Million down the tube, and all bets hanging on the 2 Million giving me disproportionate growth over 5 years.
To recover my cost of capital over 5 years (i.e. 10 x 2 = 20 Million in any safe route) - I need to make 20 Million from the 2 Million investment that is going to give me returns. i.e. 10x returns over 5 years.
So, investing is only good for me, if all Startups GUARANTEE me over 20x - 50x returns over 5 years in return for my money and advise and contacts.
Hear that Entrepreneurs? Does your financial plan convincingly say this? Can you indeed promise this kind of return over 5 years? Is your business that special, risk-free? Is your business a better investment proposal to the angel/VC than investing it into a Bank or Share Market?
Dos and Donts:
Think from this angle. Figure out your Dos and Dont's.
Do:
-Be ambitious, and optimistic
-Be Informed
-Be Sharp
-Be humble, and ask for connections, contacts, advise
-Be a miser and spend money carefully
-Be looking for returns, fast sales, road to market.
-Show areas were you lack experience, and need help
Do Not:
-Show a convincing and guaranteed expense report without a clue of returns
-Pretend to know anything you don't.
-Think they owe u money, you are asking for support, and they are considering it.
-Be arrogant, unless they have no choice but to talk to you.
-Take too much of their time.
-Let go of the Relationship, things go in circles and you will meet again in another opportunity.
Either way - the math is simple. Here is a Investor mind: Banks give me 10% return on investments. Market linked investments give me 20% per year. Real-estate gives me ~%. I continue to look for better investment opportunities. On an average, any safe investment route will double my money in 5 years.
If I invest 1 Million dollars each in 10 companies, and only statistically 2 succeed: that's 8 Million down the tube, and all bets hanging on the 2 Million giving me disproportionate growth over 5 years.
To recover my cost of capital over 5 years (i.e. 10 x 2 = 20 Million in any safe route) - I need to make 20 Million from the 2 Million investment that is going to give me returns. i.e. 10x returns over 5 years.
So, investing is only good for me, if all Startups GUARANTEE me over 20x - 50x returns over 5 years in return for my money and advise and contacts.
Hear that Entrepreneurs? Does your financial plan convincingly say this? Can you indeed promise this kind of return over 5 years? Is your business that special, risk-free? Is your business a better investment proposal to the angel/VC than investing it into a Bank or Share Market?
Dos and Donts:
Think from this angle. Figure out your Dos and Dont's.
Do:
-Be ambitious, and optimistic
-Be Informed
-Be Sharp
-Be humble, and ask for connections, contacts, advise
-Be a miser and spend money carefully
-Be looking for returns, fast sales, road to market.
-Show areas were you lack experience, and need help
Do Not:
-Show a convincing and guaranteed expense report without a clue of returns
-Pretend to know anything you don't.
-Think they owe u money, you are asking for support, and they are considering it.
-Be arrogant, unless they have no choice but to talk to you.
-Take too much of their time.
-Let go of the Relationship, things go in circles and you will meet again in another opportunity.
Why I started this blog
I consider myself a failed entrepreneur. That's because I don't think there is any such thing as success. You are always chasing something - and till such time, you are in pursuit of success.
Experiences come from Failure. And Failure is nothing but making mistakes. Since there is no absolute 'right' in business, one is bound to keep making mistakes, and hence face failure, and accumulate experience.
I have been a young, spirited Steve Jobs inspired entrepreneur who believed in changing the world. I further believed that create a compelling product, and money will follow. I had my own notions based on readings I had done from other people's experiences. Then I set out for the task myself.
I did everything that leads to the path to success. Built a team, built products, raised capital, hired people, sometimes fired people (for the right reasons), went through cash crunches, experienced the million dollar effects, covered in newspapers and magazines. signed large multi-million contracts. All you can think of, short of taking the company public.
Been in office politics, fights with investors, fights with team members, negotiations, making up, hugs n kisses, and finally delivering products to the consumer.
These are my experiences, and insights from my journey.
Experiences come from Failure. And Failure is nothing but making mistakes. Since there is no absolute 'right' in business, one is bound to keep making mistakes, and hence face failure, and accumulate experience.
I have been a young, spirited Steve Jobs inspired entrepreneur who believed in changing the world. I further believed that create a compelling product, and money will follow. I had my own notions based on readings I had done from other people's experiences. Then I set out for the task myself.
I did everything that leads to the path to success. Built a team, built products, raised capital, hired people, sometimes fired people (for the right reasons), went through cash crunches, experienced the million dollar effects, covered in newspapers and magazines. signed large multi-million contracts. All you can think of, short of taking the company public.
Been in office politics, fights with investors, fights with team members, negotiations, making up, hugs n kisses, and finally delivering products to the consumer.
These are my experiences, and insights from my journey.
Saturday, January 23, 2010
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