The seven commandments to avoid cash burnouts for Startups

Leading Indian unicorns such as Flipkart, Paytm and Ola had a brilliant year in terms of the multi-billion-dollar funding they raised in 2017. Between them, they secured around $6.3 billion, expanding their cash reserves and providing some of their early investors a much-needed exit.

Meanwhile, some others such as online classifieds site Quikr and messaging app operator Hike are yet to show strong growth in terms of revenue. When it comes to building a healthy and sustainable business, every dollar counts. It is very important to ask ourselves "Would I spend my own money this way?"

However there are certain businesses which are network, scale driven and need to operate at scale to earn profits, at sub-scale level if they aim for profits the hindrances created on achieving a scale on that business become manifold.

In one of his talks at ISB leadership summit 2017, 'Bootstrap to Billions', billionaire tech entrepreneur Bhavin Turakhia, founder and CEO of Directi rightly pointed out the 'Deadly Sins of Over Funding'. His journey of borrowing 25,000 Rupees as seed capital from his dad, to fund the early days of his Venture in 1998 to building the Best bootstrapped tech company in India as of 2018, is a classic example for modern day startup entrepreneurs to learn the virtue of building a sustainable revenue generation model.

"The Right amount of Funding is like a Vitamin. But over funding can result in ODing. The fundamental definition of business has profitability at its CORE."

Dear entrepreneur, here are seven commandments you must follow to save your start-up from a cash burnout!

1) Focus on value, not valuation.

Don't over focus on Metrics like GMV (Gross merchandise volume), number of users, etc surrounding valuation (because users can be bought!). Startups and businesses that focus on spending their money in order to only enhance valuation metrics and to raise a higher amount of funding in the subsequent round, never make it to the big leagues.

?Rather focus on metrics that create true sustainable value.

There are startups delivering groceries at your doorstep, because you didn’t have time to go and pick them up. There are people you interact with online, because there was simply no time to meet them or there was no way to find out where they are. There is a photo sharing app, because it wouldn’t be possible to print your photos and distribute it all the people you know. Cars are too expensive to maintain, and such a headache to park, hence Uber. Hotels are simply not accessible or are able to provide the user engagement as staying with someone else does, hence Airbnb.

2) Focus on earning, rather than spending.

Focus on earning revenue so that the business can sustain on its own. When a leader focuses on increasing valuation, so that he can raise a greater round of funding at a future date, the entire organization's focus shifts to this goal which eventually leads to doom since they run out of cash. A sustainable earning model should be the primary focus. Charge a price in exchange for your product or service right from the early stages, too many free samples, trial offers, cashbacks, mega discounts etc create a misconception in the minds of customers that their money is not worth the exchange.

3) Substitute cash with creativity.

Throwing money at a problem will not solve the problem. In adversity you are forced to be creative. With limited capital, you hire the right people and design the right marketing campaign that result in maximum impact, rather than a 100 million dollar advertising campaign that reaps minimal results. Cash is a good substitute but a short term substitute.

Communicate with your potential customers. Learn their requirements and validate your ideas with real users.

4) Ensure that customer acquisition costs are less than the lifetime value of the customer

In business, you get paid in proportion to the difficulty of the problem you solve. Paying your customer to use your product in the form of recurring cashbacks, discounts, referral offers etc don't work in all kinds of business models. Resist the temptation to scale up too quickly, so that you don't incur huge losses while scaling down. (layoffs, pay-cuts, disinvestment, etc)

Having a process through which you guide prospects can accelerate client conversion and lower your customer acquisition cost.Winning a customer long term depends on consistently exceeding their service expectations. 

To compute the cost to acquire a customer, CAC, you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period.

To compute the Lifetime Value of a Customer, LTV, you would look at the Gross Margin that you would expect to make from that customer over the lifetime of your relationship. Gross Margin should take into consideration any support, installation, and servicing costs.

5) Substituting quantity with quality.

Bhavin Turakhia shares that great tech products at Directi have been built by 50 to 60 developers that are much better than their competitors, who have 500 or more developers. Invest in the right talent. Hire the right people for the right job. ?A hundred Musicians cannot do what one Beethoven can do!?

6) Don’t postpone launch waiting for your product to be completely ready.

Don't wait for your product or service to be fully ready to test your hypothesis, it might result in eventual extinction of the gap in the market.

Start with a minimum viable product, the least value you can bring to your customer in exchange for a price. This must be followed by product market fit – testing your hypothesis, customer review and feedback, improvements, market segment and customer experience.

Then comes the, sales ready product. This is when you start scaling in full throttle, roll out marketing campaigns and promotional techniques to expand business and pump in cash to meet targets.

7) Focus on unit economics right from the early stages of the business.

Unit economics are basically a summary of your company’s current performance. They are intrinsically specific to the business model you have. Regardless of the business model, it is essential that you know what percentage of your revenues is considered recurring. This is what VCs look for. They want to see that your business is able to generate a minimum amount of monthly recurring revenue before considering you for investments.

Most people in India wrongly think of entrepreneurship and start-ups as 'early stage cash burning entities' that raise funding on the basis of an 'innovative idea' without a 'proof of concept’ or ‘execution’. As a result, the traditional investment banking alternatives seem to be a safer choice to invest their money, in comparison to loss making start-ups. This mindset should not be encouraged.

The age old truth still stands. The only way success can be attained is through hard work and perseverance. However, knowing the tricks of the game doesn’t let that work go waste. And what better way to learn than from other’s mistakes who’ve sailed through the path before. 60% of Fortune 500's that existed in the 1970's are no more, the billion dollar companies that once were at the top 47 years ago have become extinct today! This gives a clear message that constant innovation builds radically successful businesses.

I firmly believe that 100% of the world's problems will be solved by entrepreneurs and problem solving is at the heart of entrepreneurship having profitability in focus. Great ideas are the starting point and execution is the real game. Lastly, a self-sustaining, value generating business model should be the primary vision, mission and goal!

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