Forget accounting standards, forget what the market values, forget what e-commerce companies tell you, forget terms like GMV, GTV, topline revenue, contribution margin, cost of goods, and licensing costs.
If you’re an entrepreneur, the ONLY two numbers that should matter to you are:
- What do you get to keep?
- What did it cost you to get that revenue?
So, qualitatively, is there a path to make #1 greater than #2?
During the course of 2016, as talks about the downturn and slowdown start picking up steam, the boys and men will soon be separated. The real entrepreneurs are the ones who are in this game, not because of the hype or the coolness or because it’s the fashionable thing to do. They are in it to build a business that delivers value to customers and gets a fair share of the incremental value created.
One of the key things I look for in an entrepreneur is one who doesn’t sugarcoat the facts. He must clearly recognise that, at the end of the day, the only number that matters is what you get to keep. If that value is more than what you need to spend to make it, you have a profitable and viable company.
I’ll give some real world examples that are nothing but hype:
GMV (Gross Merchandize Value): e-commerce companies often use this value. If you are selling a Rs 10,000 product at Rs 9,000 and make Rs 90 crores in sales, to me you’ve also added up Rs 10 crores in losses. You can justify it from time to time as a customer acquisition strategy, but please make sure you don’t kid yourself into believing that you are doing great. This is NOT your revenue.
GTV (Gross Transaction Value): Some payments companies use this very often. GTV is only relevant if your business model is to get a percentage of transaction value. In India, most payments companies make less than 0.25 to 0.5 per cent of GTV. So a GTV of $1 million really means $5000 in revenue at best! GTV is NOT your revenue, and don’t confuse yourself into believing it to be so.
There are several other methods used by accountants and investors. Advisors can brainwash you into believing that you are doing great, but as an entrepreneur, you must try to focus on the basics. Value is only what you get to keep. A lifetime value is what you get to keep over the life of your customer remaining your customer, and a lifetime value/customer acquisition cost had better trend to greater than three overtime.
It’s also important to note what I’m not saying.
It’s okay to invest in growth. And it doesn’t mean that a company can’t make a loss initially or temporarily have poor unit economics with a goal of achieving some scale. Just don’t get caught in the rut of tracking the wrong metrics and justifying that everything is hunky dory. At some point in time, often sooner rather than later, reality will hit hard and you need to prepared.
It’s okay to take measured risks and run controlled experiments to see what works, and what doesn’t. Giving Rs 100 off or cash back isn’t a bad thing, if you can attract the right type of customers. But, if this translates to you attracting the wrong customers, don’t persist with it.
At some point, the only thing that will matter to entrepreneurs is “If you can make enough to accommodate payroll on your own”. Venture Capital is a means to an end - not the end. I’ve seen many startups celebrating the raising of a round as if it were a lottery! Sorry to say this, but this has just heaped huge responsibility on your shoulders – to increase the value of your company by at least 4x so that your investor can get a 3x gain from you!
Build your business in a systematic manner, recognise that you are taking a seven-year outlook and have a plan to get there. It’s not a sprint, but a marathon. Tomorrow won’t matter unless you can see today through!
Build your company as if it’s the last thing you will do in your professional life. Over time, opportunities will arise to sell the company and exit, even though you may or may no be opportunistic about it. Those should never be the goals.
Build a great company, one you can be proud of over time.
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- Corporate finance
- business finance
- Gross margin
- Management accounting
- Contribution margin