When I was young, every other boy had a dream of becoming Sunil Gavaskar. In the generation following mine, they had a dream to become Sachin Tendulkar. Both were extremely powerful models and inspired millions of us to play cricket. We could not become what they did, but certainly we played cricket and enjoyed playing it.
Unicorns are something similar in the world of start-ups. They are a few, but have a formidable influence in inspiring thousands of individuals towards the excitement of entrepreneurship. Most of the start-ups have no chance to become a unicorn, but that is not the only thing to a start-up story.
In fact, becoming a unicorn is not so much in the hands of the start-ups. Every start-up has a value proposition and a possibility of rapidly scaling up. However, it is only when one is spotted, catches the frenzy of the big investors, that the transition starts. Big investors have deep pockets and are in a great hurry. As such, they end up pumping huge money requiring the start-ups to scale up at lightning speed mercilessly chasing specific targets. Once it was eyeballs and then it became customer acquisition and so on. They have coined the word ‘burn rate’ as a virtue and do not mind enormous losses for a significant time, as a part of their larger game plan.
A unicorn with over a billion dollar valuation may be losing a billion a year. Still it may have a very high valuation. This is a very different game and quite different from the conventional meaning of the term valuation. In a talk, Professor Ashwath Damodaran, who is often called as ‘Dean of Valuation’ also expressed his surprise at such valuations. However, such valuation is a reality of the day and there is no point in disputing that. The only fact is that such valuation is only for a few. On the other hand, robust business-sense based start-ups is for almost everyone.
A robust start-up can be seen with the analogy of a cockroach. In today’s time of fancy jargons, what a crazy idea it is of drawing resemblance with cockroach? But there are such powerful lessons from the analogy that we can’t afford to miss it. Cockroach has the distinction of remaining alive in all kind of conditions in all part of the world, due to its marvelous capacity of adaptability. A start-up needs precisely that.
If you are flush with money, backed by big funds, you can afford a high burn rate and still survive. But if you have no or little money in pocket and yet a sound value proposition then you need to learn to first survive.
In business, the survival comes by balancing between revenue generated and cost incurred. It has to be well understood that just topline – be it sales, number of customers etc. - is vanity and only profit is sanity. But it does not stop there. Profit is certainly sanity, but it is the cash which is the reality. To survive you need cash and the way to ensure that is to build your start-up on a model that ensures adequate operations within the available cash flow.
In financial terms, the prudence is to have lower operating leverage at the start-up stage. It means minimizing the fixed costs even if it means lower margins. It is important to first develop proof of concept with extremely tight control on costs. The next stage is to go for guarded growth aiming at low hanging fruits. At this stage one can afford to lose time, as in the process one will learn. But one can’t afford to lose money as it would turn the wheel backward.
It is said that a sound business does not involve taking risk. Instead it involves doing things which appear risky to others but removing the risk out of it. A simple example is of a person wanting to enter the real estate industry, starting by doing brokerage, then doing joint venture and only when got well settled that gone in for buying land for development.
The start-ups in the initial days should have focus first on survive, next on profit and only after both achieved reasonably to go for growth.
Actually, there is nothing new in this approach. This is an age-old wisdom. However, it is only on the glamour of the unicorns in recent times that a start-ups have a tendency of getting carried away and losing sight of the fundamental truths. Start-up is a promising career, full of excitement and challenges. When one is guarded and well-equipped there is nothing to worry and almost everyone can embark upon this journey.Mr Parimal Merchant, Director - Global Family Managed Business Program, SP Jain School of Global Management