My friend Nandu Pradhan sent me a message if I have opened a blog tap! The fact of the matter is that I am on a bit of a sabbatical for a week or ten days. Thoughts keep on coming in the mind and somehow I am able to reach the end line pretty quickly.
I read an article about venture funding this morning. It said that venture fund taps seem to be shutting down, albeit slowly, at least in India. I don’t understand much about venture funding but I am told that this funding is given to start ups with brilliant ideas; then there is second and third round of funding as the idea tries to bloom into business. One term that goes hand in hand is “burn rate” while discussing startups. Burn rate is the money spent every month, without doing any business at least in the beginning.
Most of my life I have been running a small business and during this period, barring a few years, I never needed outside funds! Of course, those loans were in the form of bank facilities. I paid outrageous interest charges on the bank funds. At some stage, I decided that enough is enough and returned all the bank funds. Idea behind running my business was simple, it was my job, and it earned me a living! So idea was to keep on making money from whatever activities I was doing!
Don’t get me wrong but I honestly do not understand this concept of venture funding and startups. All can’t be Microsoft, Apple, Facebook and Googles of this world. These are some of the names that come to mind when we talk of starting up in garage and so on! Don’t forget that people behind them were brilliant people. They may not have had the best of the ideas to start with. Apple took 20 plus years to really hit it. Microsoft initially had a tough time but the idea of MS-DOS is what really took off! These guys had different business models. Microsoft has been making software products and are now also in cloud computing, in a big way! Microsoft’s obituary has been written a few times but lately they have become extremely agile to customer requirements. I need not write about Apple; once the iPod became a hit, rest as they say is history. They have real world hardware that they are selling at very high margins. Google made a brilliant search engine and the advertisements on the engine are their bread and butter; they hardly have anything else that is earning money. Facebook was pioneer in social media and have taken up Google business model but this forms 80% of their income. They have about 20% of their income from other sources. What I am trying to imply is that they are all real profit making companies and balance sheets have been in black, most of the times. They all have hard cash.
Coming back to start ups. I am sure that there is a genius lurking behind all these startups that we keep on hearing. Mr. Mukesh Ambani recently made a statement that Jio is a startup! I think what he meant by that is Jio is thinking out of box, its agile, its is taking business behemoths in the same field head on but of course there is a business plan which will make it profitable sooner than later!
I am naming two large e commerce giants in India, Flipkart and Amazon. Amazon is doing billions of dollars of turnover world over but I understand that even after 20 years their E commerce business is not in profit! So they keep on pumping money. Because of market capitalization Bezos of this world have become billionaires. So must be Flipkart honchos. What is their business model? To my understanding this is trading business as these two companies’ sale products themselves or through their partners; they do not manufacture a single product. How come their burn rate is much more than their income? I feel that it is because of the discount war they keep on playing to gain territory It is a good thing that they do not take loans from banks; otherwise list of bank NPA’s will grow longer! Loss figures March 2016 Amazon Rs.3572/ crore, Flipkart Rs.2850/ crores, Paytm total loss Rs.7971/ crores! Not bad! Profits can always wait! (Ref. Economic Times dated 24th Sept 2017)
If the organization is not making money then what is the point in doing business? With the taps of funds being slowly turned off, the startups are thinking, in terms of operating profits! Real profits are miles away! I am not sure about operating profits too! I am surprised about both sides. Those running business are not really bothered about profits and the funding guys are hoping that one of their clients will become a Microsoft or a Google and then they will get windfall! I am sure the funding guys are very very smart people and they are pumping only part of their billions as investment in startups! But what about startups which are very small or medium size? Or do the promoters also make their money, on the side, from the “burn”? If there is no profit then how do you sustain? What do you achieve by having a high “burn rate”? Is the business model right? Do these guys have enough maturity? They must be real smart technically but running a business is different ball game! An idea, a great presentation, business plan (which always look lovely on paper) get them funding. But how long can the operations sustain on funding? Should the business not be self-sustaining? Is it easy to convert a brilliant idea into a self-sustaining business? There are many so called brilliant ideas, on paper; they face different hurdles, when they come into business domain.
Coming back to my lack of knowledge, I feel that business is a business is a business! The aim should be to make it profitable, of course not at any cost! One has to follow business ethics. When you get funding you don’t have to pay interest on funding that you get though you actually borrow it! Funding is a cool name for this borrowing! One is really lucky that this is interest free loan. That most startups fail, is to me, an indication that most ideas don’t get converted to profitable business.
I will give you an example of a “startup”. This was not a startup in the conventional way. This person’s business and products were not hi fi type but products made for farmers and used in farming. Of course it was not cool! He was mentored by my wife Jaya. Jaya happens to be on cool side of life i.e Computers, IT and all. What she found was that the person was brilliant and knew his subject and had good products. He was trying to make too many products on laboratory scale for different produce. After a few meetings Jaya asked him, “What is the USP of your products? Which is your best product?” He said, “My products will give immediate results with very high returns in Pomegranates!” Jaya told him to concentrate only on that. He did it and rest as they say is history. Now he is a reasonably successful businessman. He received recognition from United Nations and business wise he is doing pretty alright! Mind you, he took funding but only after his business had grown reasonably well and was very much in black! Writing this story probably has answered the questions which I raised in the beginning! So startups and venture funding is good provided you have good profitable products and a profit making business plan; otherwise you have to be Amazon or Flipkart or Paytm! To hell with losses! There are enough people who will fund you, if you are large enough!