Journey from a Startup to an enterprise

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  • Rajagopalan V

    Business Intellects Bengaluru, Karnataka, India

    Journey from a startup to an Enterprise

    It all starts one fine day, when a brilliant idea flashes, that you think may be socially relevant or

    monetizable or both. And you think over it and suddenly, what was once a simple idea has been

    converted into a viable business! Yes, you have just got the start up fever. The bug has bitten. And just

    like any other fever, temperatures are going to rise, bad symptoms are going to appear, but at the end

    of the day, almost everyone survives a fever. But can you?

    Before you go further in this read, more out of convenience, I am using he to denote both he and

    she, and using product more generically to denote products or services or any solutions that is being

    offered.

    The general working habits of an entrepreneur are to be totally driven, committed to succeed and

    very assertive he is not afraid to take risks, is very focused on goals and results, learns from his

    mistakes quickly and adapts to newer environment well; works well with people and other employees;

    and is able to juggle a lot of things at the same time. When an entrepreneur sees an opportunity, he

    immediately pounces upon it and successfully drives it to create something of social or financial value.

    Some characteristics that are typically associated for any successful entrepreneur are- persistence,

    resilience, good motivational power, great communication skills and a very high regard for ethics. For

    an entrepreneur it is important to realize that three things are non-comprisable ethics, morals and

    legality of doing business.

    Creativity, Innovation and risk taking are their DNA. They all want to make it big. I am terming

    enterprise as a company that earns money and is fairly large in size and offers a lot in value to their

    customers, and I hereby want to describe to the best of my experience how to turn a startup to an

    enterprise in years to come.

    In a broader sense, an entrepreneur starts off as one of these three types or organization:

    - Non Profit typically a non-governmental organization that wants to deliver to some social cause

    like - educating farmers to take on organic farming, setting up schools for under-privileged kids, etc.

    They are usually funded by some grants and managed by one or two highly socially motivated

    individuals. Such individuals could be highly successful folks who have left known enterprises to be

    driven by their own inner passion to make their community better they may get some paltry

    salary to meet most of their living expenses.

    - Social (for Profit) typically the undercurrent theme is the same as a non-profit but there is a little

    commercial side to things here, hence this type of an organization is also called a hybrid as it has

    both a social value and a financial value. A good example here would be a construction company

    who wants to recycle wastes and make buildings; installing water stations in remote villages that

    supplies potable water at low cost, a government library etc. They do work for the benefit of the

    people but they also have to work for small profits as they have to employ quite a few people,

    invest in some infrastructure and are continuously looking to grow. Any school or hospital, given

    that they are partly guided by the principle to serve the society has to operate in this mode, but do

    they?

  • Rajagopalan V

    Business Intellects Bengaluru, Karnataka, India

    - Commercial (for Profit) Examples are banks, phone or automobile companies to name a few.

    These companies may in turn give back to the community through their corporate social

    responsibility programs. This is what the default type is for most entrepreneurs- to build a

    successful organization that they can sustain for years or sell out strategically for bigger money.

    They all want to make money and plenty of it.

    There are a few things a founder of a startup needs to understand and do business accordingly:

    What type of company do they need to form and register?

    What are the financial parameters involved in running the company?

    How do they start the team and how do they grow as they find more footholds in the market?

    What is their short term and long term plan for their business and how do they market and sell

    their solutions?

    Who are the competitors now, both direct and indirect, and how to gather intelligence about

    them so that they can do better?

    Here are more in-depth details about the factors -

    i. Type of company this can change as business grows or declines, but normally they start off

    as a proprietorship or a partnership company and go on to be a private company. One must

    be clear about the legal liabilities, financial reporting and tax obligations against each of

    these to ensure they are operating at the right type at any given time. I am not talking

    about the legal registration of the company but rather introducing the options that the

    founders can have while they start the company.

    Sole Proprietorship this is owned and managed by one individual (founder) who

    assumes all the risks and takes all the profits.

    One person company (OPC) one can create a single person legal entity and

    allows the lone entrepreneur to run the business with limited liability

    protection.

    Partnership this is owned by two or more individual who share the risks and receive

    the profits in their proportion of partnership, and they have a formal partnership deed

    between them

    Limited Liability Partnership Company (LLP) a form of business where the

    liability is limited to the partners and one partner is not responsible or liable for

    the other person's negligence. The partners become shareholders of their

    company and they have the right to manage the company directly.

    Private limited corporation this functions as a separate legal entity and gets

    registered according to the local laws of establishments and is owned (and usually

    operated) by two or more individuals (called stockholders). The risks here are limited

    with accordance to their financial investment and the company is monitored by a set of

    independent directors to whom the stockholders have to report.

  • Rajagopalan V

    Business Intellects Bengaluru, Karnataka, India

    Franchising totally an orthogonal type of company, where by paying a franchisee fee

    the individual(s) gets the rights to use the parent companys name and sell their

    products and services, and is always responsible to maintain the same quality standards

    of the parent company. An example here is how the global fast food joints like Subway

    and McDonalds expand their footprint across geographies. Growth here depends on

    the volume of transactions that happens, and scalability is related to what the parent

    organization does.

    I am not mentioning the other type (which is any public limited company) here as this article is

    about startups and generally, public limited company means that you have done an initial public

    offering with a lot of investors and this usually happens about 8-10 years after successfully starting

    the company and so are pretty close to becoming an enterprise.

    ii. Finance It is all about funding needed at every stage and therefore is critical to

    understand the cash flow and to maintain a precise record of transactions to show revenue

    and profits. While I am no financial expert, I would like to introduce some commonly used

    jargons used in the daily life of entrepreneurs and what they mean in layman's terms,

    without any deep accounting interpretations.

    Terminologies:

    Investment capital - The initial amount put into the business by the founders

    either through their personal savings or through an obtained loan. Usually one

    must have their first 6-9 months of operating cost covered by this investment

    capital.

    Sales is simply the money one makes selling their solution.

    Revenue: At the very start, sales and revenue would mean the same, but as

    days go by, any investment returns and royalties of your IP -to name two- gets

    added to sales to denote revenue.

    Profit (or Loss) is the money one has left (or lost) after taking care of all the

    expenses of running the business. The word earning is also used to mean

    profit.

    Gross profit this is essentially difference between the revenues and the cost of

    goods sold.

    Operating cost: this would include the real estate and office space rental

    expenses, employees salaries, all utility bills etc. this would always be there,

    irrespective of whether you are making money or not.

    Working capital: This is cash that is needed for every company to cover their

    operations cost. Efficiently managing the working capital in terms of faster

    receivable conversions to cash and lower inventory translates to better health

    of the company. A business needs to have this liquidity to continue its

    operations.

    Operating profit (or Earnings before Interest and tax EBIT): This is the profit

    from business operations before the deduction of taxes and interests. This is

    got after deducting the operating expense from the gross profit. Operating

  • Rajagopalan V

    Business Intellects Bengaluru, Karnataka, India

    profit is the best measure for running a company and it is best to keep both the

    labor costs and the manufacturing costs down.

    If you do have profit (also called pre-tax profit), you need to take care of the

    government by paying their dues in terms of taxes.

    Also if you have to grow the business, you need to reinvest in your business in

    terms of more employees or equipment from your profit.

    One needs to pay the interest part if the company has been financed by debt

    After all this, the money left is yours as post-tax profit, also known as Net profit.

    Cash flow: Every entrepreneur has to understand the difference between revenue,

    profit (before and after tax) and Cash flow. The most important is definitely cash flow

    which is the one that pays your bills and salary. Simply put - it is the money coming in

    and going out. If you cannot manage your cash flow, success is almost unobtainable.

    First the startup has to realize profit and then later find means to maximize the profits.

    Profits can be made through outstanding receivables but is realized only if it gets

    converted to cash that one can use. One can convert all the profits realized into growth

    through investing in the company through better equipment and adding marketing

    muscles, and still have no money left. Profits are also used to pay debts (interest on

    loans etc.). Profits stuck as receivables or on immobile assets do not help cash flow.

    Funding patterns:

    Bootstrapping basically from ones personal savings

    Crowdsourcing raising money from a few people

    Seed This is got formally from some professional angel investors in the

    early stage of your startup, usually smaller amounts compared to what a

    VC can provide.

    Equity financing means you get money in exchange for part of your company.

    Venture Capitalist (VC) and Private Equity (PE) come with a formal series

    of funding your company in exchange for stocks (of your company),

    which essentially means the founders ownership gets diluted at every

    step. They usually come in the picture at a later stage when you have

    built some credibility.

    Debt financing one can borrow cash which needs to be paid back, irrespective

    of whether the startup is turning a profit or not.

    This is done through bank business loans, credit lines, and even through

    VC debt

    Grants usually given for any social development causes and are rare to find.

    iii. Various team structure as growth happens with most of my experience being in IT

    companies, the numbers and timelines listed below at every phase are just ball park

    estimates and they do vary from industry to industry, and on the technology maturity.

    Hi Octane phase:

  • Rajagopalan V

    Business Intellects Bengaluru, Karnataka, India

    Team structure: Absolutely flat, everyone multitasking and all of them are high

    on energy to prove something valuable.

    Total Employees in company: 1-10 employees, essentially the founders and a

    few friends. Men on a Critical Mission being the work culture. Engagement

    model between the employees is just informal and everyone rolling up their

    sleeves and contributing, all in an ad-hoc manner.

    Approximate time period : First 6 to 9 months of the startup

    Customers : May not have one, but still searching for one or two

    Typical Funding: Mostly boot-strapping through the founders. No money is

    coming in and only outflow is happening and hence critical to keep operation

    cost very low.

    Maturity of product or service: Basically an idea that is given a form in terms of

    a novel minimal viable product which gets showcased as a demo or a pilot.

    Confidentiality about the innovative solution is maintained by all the team members

    and nothing is documented during the process- they all know what final solution they all

    want. There would be some good feedback and hazy acceptance (or not) in the

    market, which gets incorporated into the solution being offered to make it more robust.

    Survival or Death phase:

    Team structure: Still flat, everyone is still multitasking but is also clearly

    responsible for some part of the solution.

    Total Employees in company: 5 to 20 employees, adding some dedicated test

    function, few more developers and your first sales and marketing person.

    Engagement model between the employees is transforming to be more semi-

    formal as they are held accountable for part of the overall solution. While hiring

    new employees, it is important to get folks who are entrepreneurial, have an

    appetite for innovation and are ambitious in their quest to solve problems; if the

    growth happens, this is the core team that would be leading and managing the

    company down the road including managing the entire execution of deliveries

    for future products. Small undefined teams of two or three are developing

    parts of the solution and the founders are slowly getting the hang of leading and

    managing teams and products together.

    Approximate time period : 6 to 24 months of the startup

    Customers: Definitely have one, maybe two, and engaging with them closely

    and more regularly. The team needs to deliver a good product to them.

    Typical Funding: Again no money may be coming in and hence, there is a need

    to crowdsource from friends and family to survive.

    Maturity of product or service: First sellable product or solution is ready in

    accordance to the essential features that the market needs. You already know

    what the bulls eye is and you are focusing on the same. Exiting this stage may

  • Rajagopalan V

    Business Intellects Bengaluru, Karnataka, India

    throw a few surprises having validated your idea as a product, now the rubber

    hits the road...