The path to success comes with survival. In the start-up market, survival means profit.
With new start-ups coming up in our country every day, there is a lot of competition going on. But the truth is that 9 out of 10 start-ups fail because of a lack of innovation. Behind all the failures is the root cause of the shortage of money. The Indian start-up ecosystem is led by the venture capitalists and the angel investors that invest in promising ventures and hope to see them bloom. The major issue here is that the Indian start-up ecosystem refuses to build their niche first and then expand. They are so caught up with the process of growing and building more avenues that they don’t mind the cash flows of the business.
Let us first understand why India has so many start-ups
The unemployment rate is always soaring high in India. There is a huge gap between realistic job pay and real job pay. A person who is working in a multinational corporation has a start-up side-by-side to fulfil the cash crunch. Someone who did not get a job owns a startup. Every new venture is called a start-up in India. The concept of start-ups came up not with the innovative minds but with unemployment. We are sure that there are plenty of start-ups that are innovative and are working fine right now but the harsh reality is that most of them fail. They are started because there are no jobs available by the Indian market and the government promotes them to hide their own shortfalls of lack of employment.
How are startups started
Most of the Indian startups form an idea and then look for funding. Friends, family, venture capitalist etc start funding them. There are external investors who are there in the company so basically you are dealing with someone else’s money with your own innovative mind. They are funding well driven organizations instead of encouraging revenue positive nature that is making profits. Their valuation is termed to be good even when they are making losses. After the first round of funding is done, the investors are to be paid back, another huge investor comes up which formulates the plan and pays off the small investor.
The whole ideology of start-ups is built on using someone else’s money to materialize your own dream. Till the time it is not your money that you are using, you will not have the motivation to multiply it.
People need to come to terms with the fact that venture capitalists don’t want profit. They want revenue. It is not always the case that they are favorable for your business. They will not wait for two whole years so that you can achieve the profitability level. They will always and always tell you to move ahead and expand your business so that the revenue streams can be increased.
Concentrate on the money
What major start-ups fail to do is not concentrate on the amount of investment they have put into their business. They just aspire to move ahead and start new sub-ventures. It is essential that all the time of the business is used to build revenue and increase profitability. In the start of the business, owners feels that profitability comes in the long run. But the truth is if we do not aim for it in the short run, we will fail.
If we look into the concept of a conventional business, it states that one should start making a profit from day one to attain the breakeven point. Why does the sole purpose of business lose it’s identity when it comes to a startup?
When it comes to a conventional business that is started by the generation of old times, they usually achieve the breakeven point within months. They are okay with lower returns but they are not okay with losses. Most of the time in today’s scenario is spent on customer acquisition and expansion. A huge amount of expenditure is done on advertisements and on discounts. But the truth is with the advertisement cost increasing, this is only leading to higher expenditure costs for the business.
We need to understand that there is a huge difference between having 1000 customers who do not pay anything but having 100 customers who pay to use your product.
Only 3% of the start-ups go past three years of functioning. This happens because of a lack of strategy and a lack of practical implication of the knowledge. There needs to be proper teams divided in the startup so that people can focus on different aspects. The whole concept of profitability comes with four major steps.
The first one is thinking of an idea, the second one would be scaling up and funding, the third one would be solving the real-time problems and prioritizing the revenue stream and the last one would be profit-making. By increasing the revenue stream, we try to expand the profit horizon.
Raising money is not equivalent to the generation of revenue
- Many start-up founders fail to understand that raising money is not just the final step. It is the first one instead. But the point is that before raising the money, you need to understand how you will get the revenue going so that profit can be achieved.
- It is also seen that the start-ups make their social media accounts, goodies, brands, advertisements before the actual operations of the company start. This is just revenue outflow till the time there is no profit or revenue inflow. You cannot be an entrepreneur till the time all you do is advertise but make zero money out of it.
- All you are doing is using the money which has come from the investors. Entrepreneurs formulate teams and start paying them salaries before the actual customers of the company start coming.
How profit helps
When the company starts making a profit, it starts paying back the investors. If you are using your own money you get a lot of freedom. You will not be under constant threat of paying back the loans and listening to the investors. You will be the sole decision-maker of your company and it will be like your own baby. There will be customers who look up to you and not to your investors. You will be paid for all your hard work.
And the harsh reality is that every investor looks for an ulterior motive. Till the time you are not selling your goods to the public and are not minting money out of it, people will not be attracted to your company. Big brands are always preferred over the smaller ones because they have a higher market share. And the reality is that these big brands have goods priced at a moderate rate because of economies of scale. They produce a large number of products every day with higher technology that leads to a reduction of cost per unit.
Positive revenue vs profit
There is a huge difference between making money and being profitable. Making money is called positive revenue while profit is subjected to the nature of the business. It is said that you can be profitable while you are losing money. This happens because income statements are made according to accounting standards which are designed in such a way that they need to match revenues and costs in the period of which they should be attributed. Money received is recorded even when money is not received at that time.
How to stay afloat
If you want your business to grow, you should focus on profitability. You should focus on capturing that one big customer which will give you a lot of revenue and will prepare you for the future. Profit percentages must be set up every year so that they can be achieved. Positive revenue does not often mean that your business is going in a favorable direction. Money can come from any source, but your own money is the real asset. You must do well financially which will come only by increasing your revenue that is above average which will lead to profits.
Setting up a team is advisable only when the customers have been acquired and they need handling. An average salesperson needs about five lakhs of pay per year. If you hire five of these people, you will be shelling out about ₹25 lakhs per annum, and what if you don’t have any revenue during this time? all these questions are very essential to understand the importance of profit in business. Old and conventional businesses were started with the sole motive of profit and that is why they are flourishing till date.
All the information above comes from the great experience of large entrepreneurs. They must have done something right and that is why they are sitting today with millions of profit. No one quotes their revenue now, it’s all about profit.