E-commerce - the internet scale utopia

Way too many people - not just naive observers but people who follow the markets, who are in start-up scene have pretty basic notions about internet business especially in business models where hard money to take home is expected to be made only in future - post growth. Particularly true to E-commerce scene and some media circulations. 

Questions like how come they are having this crazy evaluation? How and why are they burning so much cash? Is this a bubble? They don't even break-even and the biggest of all are they even profitable to command all this?

Frankly I am not aware of their current financials of any of the e-commerce business except Amazon's and there is no incentive for me to be a rumour-monger. But i believe the general thought of looking at this is misleading- people mistake profitability in income statements for cash-flow statement – hence this post. 

I guess with “profitability” one is looking to evaluate their prospects.

The question should rather be in the long term will their investment pan-out or having gained critical mass what their yearly cashflow could be?

They may be cashflow negative (losing money) on yearly or quarterly basis Now but they still might be ‘profitable’ even while losing money. That is because according to basic principles of Accounting - you match revenue and cost in the period in which they occur. Discounting, amortization is put in for and obviously it all comes down to assumptions about future and only after taking all that into consideration one could come up with profitability.

Unless of course one is simply asking what their operating margin i.e. cashflow status or margin on sales is?

Cashflow at the bottom of income statement = Revenue - Cost of goods - Operating cost

Margin on sale = Selling price - Cost of goods 

• If the goods are stocked by the e-commerce venture then
  margin on sale is generally 80-100%, varying with type of goods (expiry date,
  type of partnership etc).
  After taking into account Operating cost (IT + Management + Office + Inventory management - efficiency being key here) this would lead to Negative cashflow or +50% depending on scale.
• In the other case, if the goods are not stocked by the e-commerce company then Margin on sale could be simply 20-50%. Again depending on scale one would get cashflow status.

Two businesses having similar Cashflow or Net profit or Revenue could be in a very different boat - so by just asking like Maruti Ad - 'Kitna deti hai' - How much mileage does this luxury yacht give? won't provide any valuable info. People still go bonkers when they hear Amazon's present net profit (after a decade of leadership) vs evaluation.

What have we not taken into account above -

1. Cost of acquisition (discounted to current fiscal)
2. Marketing and sales effort (discounted to current fiscal) - how much money are they investing today to fuel tomorrow’s growth and profits.
3. Their business model and operating model (which could vary for time to time) - Are they an intermediary or do they stock goods, how do they stock if any, are they offering nonviable discounts in short-term, partnerships with retailers etc
4. Future prospects of growth

So I would try to answer a larger issue here - about profitability (mistaken as money to take home now) rather than cashflow(actual money to take home now).

For a business one has to decide if they want positive cashflow or growth or bit of both? One's goal towards profitability should be driven by what they want to achieve - an exit? Small but profitable venture? Leverage and then scale with proper funding?

• Having positive cash-flow helps in difficult times - going by the trends it hasn't been particularly difficult times for e-commerce in India.
• It also gives you leverage with your evaluation while raising funds or at exit.

The present status of e-commerce demands ambition – rather than small but beautiful cocoon.
But when one is trying to scale by acquiring new customers there is always a lag with which the investments in business bear fruit - for that we need investment. And from the looks of things these ventures want internet scale and for that they have relatively easy access to capital.

As far as the VCs are concerned they too seem to want to go big - so the investments. Also revenue of a decent e-commerce site is always high - disregard to cashflow and that helps in raising subsequent rounds and exits for present investors. May be the fear of recovering invested cash also helps in raising more money.


So to summarize one should be more concerned with following metrics and how one stacks on these with respect to competition rather than present cashflow status or are they making money now (generally mistaken as profitability)-

1. Revenue growth and Revenue-to-operating profit growth.
2. Monthly traffic growth, viral coefficient etc.
3. Conversion percentage
4. Beakeven time for Customer acquisition

There would always be less generic metrics for specific business models.
Hopefully people would stop saying they are not even profitable (they mean not cashflow positive) and still burning so much cash - crazy!

Thoughts for a Start-upper - People

Start-up is catching the imaginations of people more than ever. Unfortunately the cool vibe and little experience catches many first generation-first venture start-uppers (I've purposefully not used the term entrepreneur) the on a wrong foot. Learning from others is difficult and reading thoughts like these could very well be like learning to swim through a guide or like internalizing mistakes of others. But the exercise does give an idea of perceived risk and potholes to the start-upper, apart from the obvious satisfaction to me. Some of these might seem like stating the obvious since 1919 but as one finds out not so much so.

Most are lessons for life and have helped me personally to pin down bit vague realities. No matter if you are just starting out, struggling or running a successful venture. I hope to continuously evolve at Newdigm (www.newdigm.com) and in other interests and share more. 

In this series i would cover People, Product, Business model, Exploring out, Funding & Humility. 

PEOPLE, PEOPLE & PEOPLE

Right from team members to your customers and in between. Here is a discussion on team-

Rule of the thumb for taking people on board: If zombies suddenly sprung from the earth, could you trust the prospective team member to cover your back? Would they tell you if they got bit? Most importantly would you give them the team's only gun if you knew they have the better shot? If the answer is no to any of those questions you need to let them get eaten by the cubicle wasteland of corporate culture, because they aren't ready for this kind of work.

Take the zombie call with a pinch of salt - There are exceptions and you do make some compromises on the way – but just bear the thought in mind and evaluate the risk therein.

For founders and partners:
Vesting: the practical way of dealing with zombies is to take a long, long vesting period for all major sweat equity founders. Let everybody earn their sweat equity on a yearly basis with a cap on maximum.

PS: You can hire employees anytime, but you only get to pick your partners once. 

Also if you can find a guy or appoint among yourself “the buck stops here” leader until too late, you could save yourself lot of time to market. When there are partners – there are opinions. If all have an equal say – opinions just maintain the status quo or raise conflicts. A startup has to be decisive – fail-learn-succeed is better than conflict-nothing-fail-RIP.

Dysfunctional Family aka soap-opera: The problem of a start-up with Product development, Project Management and Business Development at uncompromising loggerheads. Although all are doing what they feel best, here the collective of all efforts if not in sync only leads to major pitfalls. An important thing to realize is product component of business should not exist as independent entity to business and should never just become purely technical, scientific or R&D. Market side issues - customer demand, perception, maturity, potential tie-ups and strategy should be given respective weight. Building something that the business side is not happy with would invariably make selling it difficult. 

Here is the importance of project management of the company as the advocate for the customer and the product evangelist. Leaving technology or Product development running the show in a vacuum would leave the overall end product like a deer caught in headlights. Making decisions only on short-term business gains could be equally detrimental. The larger challenge is to have trust and faith in abilities of others and build on the out of domain decisions taken by others. 

Just be selective with hiring: When you've quit your job, put in your own money and grabbed loans from your parents, you simply cannot afford otherwise. In terms of employees, Hire Slow, Fire Fast.

Related posts: Next parts in the series:

Thoughts for a start-upper - Product

Thoughts for a start-upper - Business model

Thoughts for a start-upper - The rest

Thoughts for a Start-upper - Product

PRODUCT/SERVICE:

Be passionate about what you do: You are passionate about internet, entrepreneurship, start-ups and what not. But if you don’t internalize your actual products and services that need all and more of this passion to succeed you would never be able to market, adapt and sell. For example one may be passionate about internet and internalize how it would change the world but has no freaking idea about or even interest in expensive art or journalism. The start-upper still starts an online retail for art or starts a web portal for journalists - only to find she/he doesn’t actually have a feel of the service, what the market is and deep down is not even passionate about what the startup delivers.

A lot in tech bubble has to do with the passion for technology but not the actual product/service.

Fascination doesn't always translate into cash: Business is ultimately driven by economics, and economics is driven by incentives. Entrepreneurs, and in particular web entrepreneurs, are often driven by a myopia that says "if I like it, so will everyone else." Some people say go with your gut. Others say trust the numbers and the research. Find an idea where the two line up. 

Technical vs. market: Never base a business decision on what you can do. Decide first what a good market idea is and only then figure out if you can pull it off. What the consumer wants, may want because of historical trends and nobody sells or you could do a better job in quantifiable time, money terms.

Is your product Just Nice to have? A nice to have feature (although novel is easily replicable by other industry competition) may be (just may be!) a start but you will have to plan and execute much beyond that to even have a chance. A lot of business in web and tech arena just struggles with this. Hypothesizing that a business model would emerge somehow to support a nice to have or a free service is a fatal risk - do the analysis now. Refer b-model part of the series.

You may start top-down by ideating and brainstorming, but then switch to bottom-up thinking once the initial plan is done – immediately jump to action by a real evaluation about the need and willingness to pay for what you are trying to solve. 

I still have a lot of ideas! – Having read everything about the product pre-requisites above, if you have still got a lot of ideas and you want to pick the best one to start with – You got to make your pick on the basis of what surrounds the product – the business model. Refer the business model section of the series

Near-term vs. Long term: Open source, preserving users’ privacy, helping users actually make positive change in their lives — all of the long-term things are great and rational reasons to pursue business. But none of them matter if the product is harder to use, since most people simply won’t care enough or get enough benefit from long-term features if a shorter-term alternative is available.

How much is enough? Please Don’t wait till all the lights go green. Shut your pie-hole; make a core working version first. And get people to use it, even if you have to beg or force people. And keep iterating. After the first few iterations, you will figure out what is the interesting part that makes it work for the user, you, angel, prospective partners and VC. Focus on that, not on the list of features. Building less initially is ok, but the most important thing is that the minimal developed product (you can deliver in near-term, no pipe-dream) should be viable for customer and consumer (value, time, money wise etc). 

Validate, incorporate and be bold: Learn as much in quantitative terms about your product, about your market, their perception, usage and interest patterns. Initially one starts with a set of assumptions (which based on research could be close to reality) but they have to validated before long.
Learn from others and your metrics and incorporate into new versions.
The user/customer doesn’t have the idea of what could be – you have to catch their imagination and differentiate among your competition- the red ocean.

A Real Product versus a Science Project:  release late vs. release often: Should choose the latter. This helps in bring intimacy with the customer, demand, industry and build a commercially scalable product versus a science project in the former.

Note: Quick publicity could unintentionally turn your company into seeker of earth shattering science project. The weight of perceived expectations to deliver a perfect product that would do justice to the publicity could blind one and could keep you away from the consumer. Since the market continues to evolve, in the end you may disappoint yourself, your investor and your consumer. Plain stupid. 

Sales: Start selling now, you don't need a product to start selling. When people really want to buy your product, start the company.

Related posts: 

Previous parts in the seriesThoughts for a start-upper - People

Next parts in the series:

Thoughts for a start-upper - Business model

Thoughts for a start-upper - The rest

Thoughts for a Start-upper - Business model

BUSINESS MODEL:

With all the talk about product in the earlier section, now comes the interesting part –
Your product is not your product. WTF!

Yes, because your business model is your actual product. The product is just cloak, a cover-up if you will, what the general population or your consumer perceives.

A mark-up of 150 percent doesn't mean much when you’re only making 75 cents per item. It would take a lot of key chains bought at 50 cents and sold for $1.25 just to pay the phone bill. That is if one just goes about selling them the conventional way. The invisible costs are always there to eat 150% mark-up esp. when earnings per service are so low. Now it is not like one can’t sell key chains - Disruptive revenue model with such small earnings/unit is the key to make good deal of dough. One needs to plan beyond what meets the eye.

Business Plan: Yes you need one. The most important thing to remember when writing one of these is that your product description should only be 10% of your document. The rest should go over how you plan to bring in revenue, the competition, your technology and why you would succeed aka business model. It would be a humbling experience. If you wrote a good one, it should make you reconsider starting a company; you could even have anxiety attacks. Just like a good meal, let that document sit in your stomach for a couple hours. If you're still excited, it's time to try and find money.

My first tryst with business model was when I along with my most cherished business mates started thinking about how we could start an Indian Aramark in a very fragmented facility management industry in India. We had a half-decent idea about the product and the service but questions like - what channel are we going to use to approach a customer, a partner? How would we describe our USP esp. with zero experience in the space? What is our unfair advantage over competition? What are the metrics and assumptions on which our business stands? The answers to all were equivalent to wishful thinking in business terms. One has to solve these simultaneous equations to find a viable footing.

Essentially your actual product/service should be just a small part of your business model and plan or for that matter of any pitch to an Angel or VC. It of course doesn't mean product is as less relevant but that everything built around the product for it to become a business is equally important if not more. Also short and easy to convey solutions are more acceptable for obvious reasons. But then again you can present your complex solution also in a better way and keep it simple. At least one should strive for that. 

PS: Innovation is mistakenly taken as just product, you could equally have an obvious product and have a really disruptive business model to create huge entry barriers and successful venture. Examples galore- retail, food outlets are just a few.

Rule of thumb: The solution you provide to the problem statement should only be about one-eighth of the entire pitch to anyone. If a prospective mentor/investor doesn't quiz you beyond your product – about the business model, he is invariably not your guy. He is not interested, plain and simple.

You should continuously work upon your business model, as you would do on your product.

A simple format to start for b-model: http://ash.wpengine.netdna-cdn.com/wp-content/uploads/2011/06/leancanvas.png
The exact variables, the amount of space they occupy on the canvas would however vary with your product and industry.

Now if you have got many ideas and they successfully meet the criterion laid in the product section of the series- you could develop the business model for each and evaluate on the following basis –
1. How significant is the problem you are addressing to the customer? Is there payable demand or just a need? Is it worth building the product at all!
2. How difficult is to reach the holy customer for that model?
3. What would be revenue stream and cost structure with appropriate cushion?
4. Is the market evolving? The amount of risk of environment – acceptability issues your product could face due to existing perceptions, regulations or players.
5. How many fish are there in the sea both customers and competitors? How big is the market? Healthy competition also signifies demand and willingness to pay.
6. Do you really internalize the customer’s problem?

Essentially the business model forces you to see the reality before you significantly invest in the product development - The risks the venture faces. Instead if you procrastinate it, because most of us are comfortable with developing the product than the tough questions of actual demand, selling, marketing, channels, pricing etc it just hides the tough reality.

To answer these questions and learn, you have to come out of your comfort zone and talk to people, reach out to the market. Or one could trade this with making up stories for presentations and a chance of losing oneself in the same. 

Related posts: 

Previous post in the seriesThoughts for a start-upper - People

Thoughts for a start-upper - Product

Next parts in the series:

Thoughts for a start-upper - The rest

Thoughts for a Start-upper - Rest

EXPLORE:

Continuing with exploration to find answers to questions in business model-

Can we save money and time and not opt for official Office space: Sure, you can work at home, but the question is... do you really want to? Would you be as efficient there? And even if you would be, a real world realization always helps. May be an office in the neighborhood of really hot, unattainable women just drives you to succeed even more! Say near a college or work with in an incubating firm with many peer start-ups. 

Being wrapped inside one's bubble. Go out and talk to interesting people, find mentors, know what is happening in the field that you are working on. You have to know where dangers for your startup lurk, and you never know where unanticipated opportunities for your startup will come from.

FUNDING:

Angels (generally just forget VCs at the early stages): The only way you're going to get money is if you already know someone or if you have three months to play grab-ass and handshakes. The best thing to do otherwise is to get going - prepare demo versions, do trial runs, research and launch an alpha version. Yes all that without any external funding, making it more likely for you to get a decent evaluation, keep some control and to play a new game - being picky. Yes you being picky. Look for the expertise (marketing, sales, strategy, industry experience etc) the Angel/VC brings i.e. apart from just money. 

PS: If it's that good of an idea, don't be afraid to put your own money on the table. If you haven't saved much, just hope your parents pretend that they understand what you are trying to do and write you a cheque and wish you well.

Selling to an investor - Always be ready with a 2 minute pitch, also known as elevator pitch akin to grabbing hold of a guy in an elevator and pitching your plan. Now of course you can’t convey all the intricacies in 2 minutes, but what you could do is convey the product/service and pain point together in a three-four brief sentences and the business model in a minute. Your goal is to excite him into giving you an appointment for a 30 minute discussion.

HUMILITY:

KISS and ego: When to call one an entrepreneur? A personal demarcation could be when you have (1) at least created something new (2) made money beyond the existing opportunity cost. Until then, one is start-upper (someone who has done or been in a startup, lately which has become a very cool word indeed only next to the mother ship: entrepreneurship). 

You’re not in business until somebody sues you. Just to signify that you have finally made it big and are now getting attention from "evil" corporations.
PS There is a decent chance you would become one such "Evil" corporation if you survive the present lawsuit and continue to grow.

BTW NONE OF THIS MAKES ANY SENSE UNLESS:

Internalize the leanings/experiences of others: By testing them out on the field and realizing the value for you instead of saying “that makes sense” and forgetting about it a few minutes later.

Related posts: 

Previous post in the seriesThoughts for a start-upper - People

Thoughts for a start-upper - Product

Thoughts for a start-upper - Business model

Wrap-up of World cup, what followed and the usual Indian drama -

Are we celebrating the glories of cricket? What would have been our reaction had we lost – all is hypothetical of course but booing the Srilankan team, obscene chest thumping and the needless aggression does beg the question do we actually deserve this calm and composed champion team?

Starting off with a disclaimer – I for one posted on facebook “Srl can just suck it” – what I meant to allude was that their historical ritual against India of pre-match build-up and boasting and post-match over analysis with tons of excuses esp. from Sangakara, they don’t deserve any of my compassion. Even though Sanga sung praises post-match, I am not easily swayed by such sarcastic rubbish. Also they are not the second best in the world; they are just toothless outside Srilanka and are historically mere average against India at home. At least I wasn't being mindlessly aggressive and cocky consciously.  

On the win though- It bodes well for the future of Indian cricket that the next generation won us the final but can we the same for our culture? Of course these are more aggressive times compared the 80s when we first won the cup. As cricket pundits point out that was a team which beat much better teams time and again leaving more to cherish and remember. With this world-cup I for one like to believe it was more predictable and pure rationale that lead me among many to guess the journey and the final outcome; barring of course the upset by New Zealand over South Africa(not completely unexpected though).

The "faithfuls"

Coming back to the disgusting Indian fans venting their frustration publically and projecting it on others as their born right somehow I believe all the talk of India becoming a superpower, the shift in gravity towards India and China, the focus on greed and money and of course the tasteless excess of Bollywood has lead to this cultural shift from grace, dignity in the 80s to eve teasing, racism, aggression bordering on the lines of narcissism so ubiquitous nowadays.

In the end were we a long way from the stone peddlers in Bangaladesh – my guess merely a loss away. The fragile sense of self-esteem, greater sense of entitlement and the ill buffoonery – oscillating between switching off television at the slightest indication of defeat to boasting their belongingness to others are not good signs toward the wellbeing of national psyche, apparently the next superpower.

The other end of the spectrum - with frequent mood swings

Celebrating success like wins in the football worldcup is one thing, but belittling and disgracing those same “heroes” in defeat and the opposition is not way off from the rot that plagues us from within. A metaphor is celebrating Ganesh immersion or a Durga puja with all sorts of gimmicks to inhumane riots when there is a slightest bit of disconnect.