A simple lesson in business – For Startups, Entreprenuers, & Founders

This was taught to me in school as part of Mathematics subject. I am not sure in which grade though.

Rule No. 1 of Business: [Sales Price] – [Cost Price] = Gross Profit

The teacher told us very strictly that this should always and always be a positive number, in real life, if you wanted to be successful in whatever business  you would like to undertake. Though occasionally, in the question paper you may get a negative answer for the above equation, in which case, it means that the business is making loss.

Rule No. 2: [Gross Profit] – [Expenses] = Net Profit.

Again, this number had to be positive, if you intend to continue being in business. It was possible, the teacher explained, that the first equation is positive but the second equation is negative. This meant that you were spending more that what the business could afford. You either don’t know what you are doing, or you are not being disciplined with your expenses.

Unfortunately, my teacher did not know that a decade down the line, people will do exactly the opposite of what she had taught to us.

Today, I see businesses termed as “Unicorns”, that are in outright violation of the rules of doing business. None of these business seem to have any will of making the first equation positive. So the second equation doesn’t even come into play.

But expenses are the reality of any business. So, what do you do? Get someone (Venture Capitalists) to foot the bills of your lavish, arrogant and audacious growth plan.

These e-commerce companies in India, seem to have a very short term memory. Last time one company was in trouble, it cut it’s employee count. As soon as it got more funds, it went out on a lavish media campaign.  This money did not last even for a year and it was back in a bad financial situation and dumped more employees.

You see, they think it’s only a few hundred people that they dumped. But don’t they realize the those few hundred people are also their customers? According to one book on salesmanship, it is said that a person has the ability to directly impact the perception of a brand/product in the eyes of an average of 250 people. Just multiply the number of people you dumped last year and this year with 250, that is the number of customers who are now lost. Hope and pray that these 250 people are not from different families, else you can easily make that number 2x or 3x.

In the traditional sense of business, you’d pay off all your creditors before you paid yourself. But, in the startup world, it seems the equation is higher the money you have borrowed (raised), the higher pay you take home. I say borrowed instead as raised, because – if it was an investment, then the business has to have a plan of making profits so that the investor is rewarded with dividends. However, these financial tricksters have come up with terms like GMV that is used to boost the evaluations. This way the first investor can exit with a profit by allowing the next investor to enter the game.

I don’t know what these intelligent investors have in mind. Do they not realize that they are playing a game of musical chair, where the winner is left alone while the others have made money and exited the game!

This is what I guess they call as a bubble. And the next recession is due in few years. Last time the banks were directly responsible, this time it will be the investment firms. But anyhow, the 1% will not be affected, they would have already figured out a way to offload things on to the banks just before the bubble bursts (explodes of the rest of us).

You think Vijay Malya was big? 9000 crores will seem like the tip of the iceberg when the startup bubble bursts.

To all the people working in the startup industry, I would sincerely advice – Make hay while the sun is shining. Get yourselves at least 2x to 4x the fair market package. Save, Save, Save as much as you can. Live in rented accommodation and travel in company cabs. You never know when they will pull the rug. Don’t buy a house or vehicle on the basis of startup evaluations.

If anyone tries to justify that it is difficult to make money so soon in e-commerce then please review Alibaba, and if you are looking for something closer to home, check out Infibeam.

Disclaimer: I am not associated with any of the companies mentioned in this article.

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