Cost-Benefit Analysis: Startup Decision Making For Geeks

Decisions make or break startups. So how do you decide whether or not to attempt that project with a lucrative markup? How do you decide between two different alternatives? Who should i marry July or Emily? Turns out that you can analyse the costs and benefits of your decisions, within a “Rough” framework to arrive at answers that make a little sense. The answers however are dependent on some of your assumptions about the variables within the frame work.

Standard Cost Benefit Analysis

In standard cost benefit analysis all one needs to do is make assumptions of the costs and benefits of a particular course of action.

For example if you want to do a cost benefit analyses for project X

First Costs……

Operating costs (Cost of resources used for project): 2000$/month

Fixed cost (Cost Of Project acquisition): 1000$

Opportunity Cost (Cost for opportunities you missed): 1000$/month

Then Benefits…..

Project Revenue: 7000$

Now Net Benefit/Cost (-) = (7000) – (2000*months + 1000*month + 1000)

If months = 1, then net benefit is 3000$ so you go ahead and take the project.
If months = 3, then net cost is 3000$ so you don’t take the project.

This is the bare minimum cost-benefit analysis framework.

Cost benefit analysis for geeks

Ok now onto the geek flavor of cost benefit analysis. This is something i developed and use, so pls do point out any mistakes you can find. Anyway the crappy thing about the above frame work is that there is no flexibility. Your guess for the fixed costs might be wrong and hence your whole analysis might be screwed. So in my framework i make room for uncertainty in the guessed values.

So instead of saying my fixed costs will be 1000$

i’ll say my fixed costs could be 1000$ with 80% probability, 2000$ with 15% probability and 4000$ with 5% probability.

So now the above equation becomes

Cost (-)/benefit = 0.8*((7000) – (2000*months + 1000*month + 1000)) + ((7000) – 0.15*(2000*months + 1000*month + 2000)) + 0.05*((7000) – (2000*months + 1000*month + 1000))

Hence the framework becomes.

Cost (-)/Benefit = (benefit1 – cost1)*Probability Of Outcome1 + …….. + (benefit n – cost n)*Probability Of Outcome n

The above two frameworks are only for cost-benefit for a project with a one time payoff.

What if the decision to be taken requires investment and the Return on investment is expected after many years? All you need to then is to use the time value of money paradigm, which is described in my post startup valuation for geeks.

So if you see any mistakes or have any doubts please do leave a comment. Bye

-Suman

PS: I know the post sucks and is humor less but lately my cost benefit analysis shows that its costlier for me to write a long post with attempts at slapstick.

Where Is Superman

Where is superman (Aka Suman) ?

1) Fighting the gargantuan zepholodi of neptune and trying to save earth.

2) Getting his new and better fitting unform for his laterally expanding waist.

3) Is stuck in an elevator in an old decrepit mine

4) Trying to log into his computer which uses face recognition as authenitcation and is refusing access because of its suspicious disposition.

5) Creating useless polls with ridiculous options

Leave Your comments.

BTW Superman(Suman) is expected back anyday now so hold onto your toothbrushes.

Entrepreneurship for students II: 11 things to do before you leap

Ok i know your embarassed they made you wear a gown and a dorky looking hat with a horse tail kind of thingy hanging from it. And I know you are beyond furious that they actually made you go on stage infront of your entire class in that ridiculous outfit to accept your degree. In short your triumphant emergence from the drudgery of student life is celebrated by embarassing you infront of 500 people and then expecting you to pose for pictures to capture this moment for an eternity. Yup convocations can be painful, but hey you get to laugh at all your other friends while they are onstage and you get to throw those dorky hats, so it doesn’t suck that bad. On the flipside all you have to do now is decide what to do with the rest of your life. No sweat, this is only like the most important decision ever which can screw your entire life up, yey! While you are pondering over the “what next” sweating like a pig(did anyone actually see a pig sweat(get back to me if you have)) you have this great itch for entrepreneurship that is begging to be scratched. Ever since you saw some crappy article on some blog this itch has only grown. Finally you decide entrepeneurship is for you and want to jump into the madness and insanity that is a startup. Not so fast buddy, undecide what you have just decided. There are things you need to do before you take that leap.

BTW this part is the shameless self promotion of my articles in this series so feel free to skip ahead.
Entrepreneurship for students I : 11 reasons why you need start now
Entrepreneurship for students II : 11 things to do before you leap
Entrepreneurship for students III : 11 Myths about student entrepreneurship
Entrepreneurship for students IV : 11 things to expect before you leap

1. Introspect

At the risk of sounding redundant please let me repeat what poorna and I have already said “Know thyself”. Ask yourself “why you want to be an entrepeneur?” Not surprisingly that question has all kinds of right and wrong answers.

Right answers
1. I have a passion for building a good company.
2. I have a great idea which if executed well will make me a lot of money.
3. I love the entrepreneur life style.(this can be a wrong answer too given your knowledge of the entrepreneur lifestyle)
4. I want to invest my time for exponential Rate of return even if there is risk instead of the steady Rate of return that a job provides.
many more…….

Wrong answers
1. Steve jobs was an entrepreneur, I luv steve jobs.
2. Tom, dick and harry are doing it why can’t I?
3. Hey the job title ‘entrepreneur’ sounds cool.
4. Because suman(or anyone else) told me to(very bad reason).
many more……..

It’s very important to be aware of all your reasons to be an entrepreneur. It is also important to scrutinize these ideas to withstand the stupidity test. People who are risk averse, easily influenced by others, afraid of failure should understand what entrepreneurship really entails before they decide wether it is their cup of tea. Realizing that you were not meant for entrepreneurship after a couple of months in will really spoil your day.

2. Get your shit together

Entrepreneurship and being an entrepreneur is a luxury and privilege few students can afford. Most wannabe entrepreneurs are kept at bay by the realities of everyday life. A typical graduate in india is expected to support his family. He/she is expected to earn and pay off the umpteen loans and needs of the house. When the vehicle, home and education loan come calling and expect you to pay up every month, starting your business might not be a good idea. Your first responsibility is to your family and the people around you. which means you have to hold off your dreams until “more important things” are taken care of. Don’t count on a steady stream of income when you are an entrepreneur. So get your financial affairs and responsibilities straight and fulfill them before you think about entrepreneurship. For the lucky few of us that needn’t worry about anyone else except themselves, consider yourself really, really lucky and make the best of your situation.

3. Round up the gang

The lone founder is a creature seldom seen in the bootstrapping startup circle, and with good reason. Being an entrepreneur is like being an entire office all by yourself, you need to be the clerk, programmer, boss, accountant, marketer, evangelist and a million more things. Though an enterpreneur is supposed to be a generalist rather than a specialist, not everyone can do all things well. A co-founder or a bunch of them will lighten the load on your shoulders while increasing your venture’s odds for success. The team can afford to have specialists so you have the “horses for courses” option. I also find that the more intelligent people there are around the harder it is for bullshit ideas to survive. For the student entrepreneur a support structure is also very important and vital reducing the cumulative downtime of individuals(if ur down ur buddies will kick ur ass to happy town). What im getting at is that a founding team is essential and a good idea for a student entrepreneur. As a general rule the older you are past your college years the harder it is to find co-founders. So get your team together.

4. What do you want?

It is important that every member of team be aware of what every other member on the team wants and expects from the planned venture. This is the step where most prospective co-founders are filtered away. There are certain core values, beliefs and perspectives that all the co-founders must share, and any compromise on these would most likely lead to conflicts in the future when they will be much more detrimental to the venture and will be harder to diffuse. For example if you believe in bootstrapping and your co-founders think that external funding is the only way to go then that doesn’t exactly seem like a good match, Similarly if you want to grow your company and your co-founder wants to build something and flip it then that doesn’t exactly spell ‘two of a kind’. This does not mean that different perspectives are undesirable, often conflict is a good thing and different perspectives aid in complementing each other to achieve the common goal. The short mantra is “like minded in core, complementary perspectives otherwise.”

5. What’s your business?

This is a not a toughie, before you begin your business you must know what your business is(I know my phrasing sounds stupid and condescending(what do i care, its my blog hehehehe)). Sit down and decide what you are going to do. Are you going to make and sell software? What kind of software? Do you want to get into E-commerce? If you dont have a narrow idea which is a good place for any startup to begin with, then formulate a broad business plan like “I am going to turn man hours into money(software services company)” or “Im going to turn patentable innovation into money”(selling high IP solutions). Validate your business plan or idea as much as you can before you get into it. You must answer questions like “Will people buy this?”, “Is our product unique?”…..

6. Role Play

What role are you and your co-founders going to play in the venture. Who is the people person is he going to be the evangelist and the vp of marketing. Who is the techie/geek does he have the discipline to be the CTO. Ofcourse these are decisions that cannot be taken at the outset but everyone should at the least be aware of their rough responsibilities and ownerships right at the outset like the techie, the money guy, the seller, the lead generator, so on and so forth. However no one should be a specialist and be limited to a small part of the operations of the company, everyone must be involved in everything as much as possible until it starts getting detrimental. The reason for this is that the team should recover and pick up the slack immediately if one of the members decides to leave. So a bunch of allrounders with a bias towards complementary specializations is the need of the day here.

7. Network

It’s never too early to start networking. The network is very important for a startup and it allows you to reach prospective clients while finding partners who you can complement and who can complement you. However one must be weary of the kind of people you need to network with. Often you will come across people that look very good on paper but in reality turn out to be nothing more than bandwidth hogs. The yard stick for any strategic partnership is the amount of mutual benefits. The point cannot be stressed enough, put your connections into perspective. The contact should be beneficial not detrimental and when you are a naive student who is full of energy its pretty hard to differentiate the beneficial and detrimental prospects(its hard enough for the more experienced ones). Help out your peers whenever you can and when you need your back scratched really badly someone will help you out.

8. Mentor

Find a mentor. Better yet find a set of mentors. The tech startup community is by nature very helpful, accommodating and forward so if you prove you will not be a waste of their time you can find good mentors. It is wise to learn from the mistakes and successes of others. Putting your mentors on a pedestal however might not be a good idea and at the end of the day all advice should be taken as just that advice and nothing more. It is you who must consider your every step from all angles and ultimately decide what to do even if it means going against your mentor’s advice. So take all advice from your mentors with a pinch of salt. Also as a rule a lot of advice that people dole out is nothing more than bullshit(including me(not)). One should offer a stake in the venture to the mentor if you think he is valuable enough to the future of the company. However this kind of stake will attract a lot of charlatans and pretenders who can’t add any real value and yet will promise you the sky.

9. The sponge

Be a sponge and absorb all the information that you can about starting and running a business. Your ventures future depends upon how well and how fast you can negotiate the learning curve that a startup requires. Do you know what cost-benefit analysis is? What about product lifecycle? And a gazillion other things. So learn, learn, learn and convert that knowledge into action as fast as possible. Take care that you aren’t caught flat footed on any issues that you should know. If you don’t know ask ex:”should our venture be a partnership firm or a LLC?”

10. The Sitdown

This is probably the most difficult thing you might have to do before you start your own venture, Convince your family that this is a good idea. Ofcourse first they are going to point at you and start laughing as if you just told them that

Ze Look

you would be an astronaut, that is until it sinks in. Once they realize you are not kidding their expression changes and their jaw drops with their mouth wideopen not believeing the words coming out of your mouth. Then you get ‘the look’. What is ‘the look’? you ask. Well it is the most dreadful heart melting expression that makes grown men cry. You know

the sort of look ‘puss in boots’ gives shrek in shrek 2. But don’t let this stop you, explain to them that you have thought his through and tell them what your plan is. Tell them that you know there is risk involved and have not ruled out failure as an option. Tell them this is what you’d like to do and that anything else would make you feel trapped and unhappy. And because they are your family and would want the best for you, they will agree if your idea isn’t something a numbskull concocted on his bad hair day.

11. Get a rich girlfriend

Better believe it, once you start your venture you can’t afford to have a normal girlfriend. For one thing your phone bill alone will bankrupt your company. So get yourself a rich girlfriend if you have to. Infact don’t think “girlfriend” think “angel investor”. Ofcourse it would help if the angel is hot, beautiful and wants to pamper you every chance she gets. And the best thing is you don’t have to get her gifts citing your nonexistent startup revenues.

Anyway my shitty attempt at comedy, and the fact that i could only think of 10 good things and had to fill the list with one sexist thing aside this was a pretty long article. So be vocal about your opinions people and if anything seems like bullshit please call it. Bye Bye.

-Suman

Ridiculous marketing ploy of the day

The internet is a bad place. Its a cesspool of scams, porn and badly designed websites that are not usable at all. Then there are the people online the wierdos, the clingers, the stalkers, the hackers, the identity thiefs and people on orkut. If you thought those were the only dangerous things online that you had to protect your kids from, well think again. There is something far more hidious, despickable, revolting, disgusting, shocking, repugnant, distasteful, repulsive, nauseating (I know, Im good at adjectives), perturbing than anything you have ever seen or heard of before. its NAKED DOLLS KISSING AHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH SAVE US……………………..
Ridiculous

Imagine you are firing up your laptop in the hall of your home with a bunch of ADULTS sitting behind you and something like the image above pops up on screen of your antivirus updating agent. Your train of thought in chronological order…

0.0000001 seconds after popup: The brain of a guy somehow percieves skin faster than nerve impulses can travel.

Cooooooool free porn!!!

0.0000002 seconds after popup: Vague humanoid shapes are percieved by the brain.

shit my whole entire family is sitting beside me. I’ve gotta minimize that popup!

0.0000003 seconds after popup: Your brain activates your superhuman reactionary response system, once again this impulse is exclusively inherited by guys due to millions of years of evolution reacting to unexpected and accidental pop ups when some one is around.

MUST MINIMIZE POP UP (imagine a walkman with low charge)
0.001 seconds after popup: Your brain fires the redundantly wired(TCP/IP over fiber optic backbone of the male body) nerve cells that lead to your hand and you end up minmizing the popup.

Phew!!!

0.1 seconds after popup: After you brain has had the appropriate time to process the visual information it recieved.

Wait a minute. I don’t think that was a homo sapien.

While all this has been going on, all the people in the room only saw a flash on screen.

After seeing the ad again I realised how ridiculous it was, i slowly realised inflicting this image of barbie kissing ken naked would infact mess with childrens heads. I mean comeon everybody knows barbie and ken split up back in 2004. Where has Avira been these past 2 years.

” Mattel announced that Barbie and Ken are separating after 43 years as one of the world’s most famous couples. The pair’s “business manager”, Russell Arons (Vice President of Marketing at Mattel) states that Barbie and Ken “feel it’s time to spend some quality time – apart.” ”

source: http://en.wikipedia.org/wiki/Barbie

-Suman

PS: For anyone keeping count I coined another term today “Entreprenerd” meaning a nerd entrepreneur. I know, just pure genius.

Entrepreneurship for students I : 11 reasons why you need to start now

The end of your “good life” is tumbling towards you like an avalanche. For 20 odd years you have been living off your parents genetic imperative to feed you. But now that well has dried up, worse still everyone is expecting you to stand on your own feet. I know, I know, if life was fair we could all be mooching off of our parents our whole life. But guess what, life is a female dog. So now you need to get your act together and decide what you’ll do for the rest of your life. Well if you are one of those rare people who have a passion for entrepreneurship, look no further. Just sit back and let me convince you why starting your own business right now is not as crazy as you think it is.

This is going to be part I in a series of articles on entrepreneurship for students like the following….
Entrepreneurship for students I : 11 reasons why you need start now
Entrepreneurship for students II : 11 things to do before you leap
Entrepreneurship for students III : 11 Myths about student entrepreneurship
Entrepreneurship for students IV : 11 things to expect before you leap
and more ……….

First i know there must be a searing question that has been eating you right from the moment you saw the title(and even if it didn’t i bet its eating you now.). Why 11? well the simple reason is im sick of “10 tips” lists all over the internet and im also sick of “12 steps to” programs derived from AA(alcoholics anonymous) framework. So (me + judgement call) = 11 points baby. And also im going to spare you the pretentious jedi bullshit that poorna has been slathering his articles with (“Young padwan”). Don’t tell poorna but he thinks he’s ‘obi wan kenobi’ or ‘yoda’ or something. As for me i have a much better grip on reality and know that the only way is the way of the dark side. So you may refer to me by my title “darth vader”. That’s “Sir Darth” to you poorna. Anyway enough about the ways of the force, let’s get cracking on why you need to start now. First let me give you a preview of what your life is going to be like if your passion is entrepreneurship and you don’t start right now. The non-entrepreneur life cycle…..

Normal Life Cycle

1. Your not getting any younger

This is simultaneously the simplest, stupidest and the most logical reason why you should be getting into entrepreneurship right now. If you want to be in the startup business then its going to be tough on you physically and psychologically and 50 isn’t exactly your most energetic age. And as a general rule the older you are the less likely you’ll be starting a venture. Even paul graham is of the opinion that 20ish is the ideal time for someone to get thier own software startup. Besides my bias towards starting early, many points below will also make the case for starting as early as possible.

2. Ability to live like a hobo(Low Burn Rate)

While we are students we have this unique supernatural ability to live on an almost non existential cash flow. This is the Top ramen, Bathe once a week, what is detergent? lifestyle. But these powers somehow vanish once you become a corporate stooge and start spending heavy and fast on even the basic necessities of life. Water becomes a latte grande, a bus ride becomes 10 gallons of gas(petrol), lays become a ‘power lunch’, your annoying company becomes and ‘expensive date’… so on and so forth. This ability of students to sustain themselves with a very low burn rate over long periods of time becomes indispensable when you are an entrepreneur trying to bootstrap your venture.

3. Golden Handcuffs

I call this pehnomenon ‘the dream killer’. Most wannabe entrepreneurs get drawn into this trap like a moth to a flame. You are a year or so into your job and you have gotten used to your healthy pay check and the amenities it affords you. Even though your job sucks and that’s not what you want to do you still do it to keep your lifestyle going. Wether you work or just pretend to work, you will have a check waiting for you always. Your used to the instant gratification lifestyle and are terrified at the prospect of this stream of income drying up. Which is what will happen if you quit and try to start your own venture. You then fall into this endless circle of wanting to quit of your job, but realizing in the back of your head that you have golden handcuffs on and you dont want to let go of them. So start your venture once you graduate and avoid chasing the carrot they dangle in front of you.

4. Only you get screwed

When you are a fresh graduate and your venture or ventures fail, its you who gets screwed and no one else. But if you fail in the same fashion 10 years later your spouse, your children’s trust funds and all your dependents will feel the impact. As you can see most people have a very small window of opurtunity to fail, from their mid 20’s to their early 30’s beyond which people around them start to bare the brunt of the failure. This is the reason why there are so little first time entreprenuers that start when they have a young family.

5. Can’t loose what you ain’t got

When you begin with nothing(no capital) and try to bootstrap your venture like most young entrepreneurs do, you have little to loose other than your time. On the other hand if you launch a venture after you have been working for a couple of years, more often than not you are going to have a higher intial investment and burn rate. Here the young entrepreneur can afford to fail and as a result is able to tackle high risk high rewards ventures. However when a major investment of capital your own capital is involved high risk ventures don’t exactly seem that attractive. A fresh graduate has better downsides to most ventures than someone who has worked for a couple of years. However they share the same or similar upsides to most ventures.

6. Not constrained by the system

‘Thinking outside the box’ is a popular industry mantra that everyone preacher. But this however becomes difficult to do if you are part(employee) of the system. The tendency of any system is to maintain its inertia and that’s the reason why innovations always seem to come from small groups that are isolated from the system. Do you think larry and sergey would be wanting to build a better search engine if they were working for yahoo. For a student this proverbial “Box” is still just a word. As he/she hasn’t been exposed to a constrained thought process he/she is more likely to come up with an innovative or “out of the box” solution to any problem that might present itself.

7. Diverse options

You are fresh out of college, so what product are you going to build. Well your guess is as good as mine. This is the beauty of being a young entrepreneur. You have the basic skill sets and the ability to make a good product and you can choose any direction you wish based on the market, oppurtunity, know how. If you however have been working for a couple of years for a storage solutions company, we can bet good money that most people can predict which market your venture is going to be aimed at. This is because you are comfortable with your area of expertise and your market and cannot take the chance of venturing into new and unknown markets. Once again the student entrepreneur wins out as far as the sheer number of chances he can take with different markets and products.

8. Fail early fail often

Though few people realize it, failure is a very important part of an entrepreneur’s life. There is no better way to keep you grounded in reality than a failure. The earlier and the more often you fail the better it is. Failures in the early stages wont impact your upcoming projects and products as much, while at the same time providing an invaluble experience. If you are however a late entrepreneur you can’t afford to fail, but that does not mean you are not going to fail. So a student entrepreneur can take many shots while late bloomers get to take only a few.

9. High risk tolerance

As i said earlier the younger and the more bankrupt you are, the more ridiculous your ventures can afford to be. It is often the case that “Great Ideas” look like very “Stupid Ideas” (Scott adams agrees). When steve jobs and steve wozniak went to hp execs with their home built computer they were laughed out of the office citing “Who would ever want a personal computer?” When sergey and larry approached yahoo to tell them they can improve search results the reply they got was “who’s looking for a better search engine? People don’t care.” I bet any VC would be rolling on the floor laughing if you pitched a “Blogging” platform to him some time in 1998. High risk ventures allow you to in rare cases look ahead of the curve and even define the curve in sometimes. As already seen young entrepreneurs have a high risk tolerance and this affords them the latitude to attempt high risk innovations.
10. No more mundane jobs

You definitely dont have to be worried about getting stuck in a job that doesnt challenge and tingle your intellectual and physical potential. When you are a young entrepreneur you are like an entire company onto yourself, so you’ll have tons of work that will allow you to meet your potential and exceed it. You’ll often find that you have skills that you never knew you had(not like flying or laser eye beams). When you compare this to your usual mundane job which seems like an endless cycle of being someone else’s codemonkey, it’s a no brainer which you would be rather doing given the choice. On the oneside you have strobe lights, cubicles and an endless supply of work that doesnt lead anywhere. On the other side passion, challenges, risk and your chance to make the world a better place(atleast for some people, most importantly yourself).

11. Bragging rights

Ok your at a bar, this totally hot chick is sitting next to you. Both you and another unfortunate being make a move on her at the same time. So you have this awkward 3 way discussion going on…

Poor guy: So what do you do?

Hot Chick: Im a model.

You: You mean like a model model, with the swimsuits and everything (drooling)

Hot Chick: Yeah. So what do you guys do?

Poor guy: Well im a project leader for a random MNC with an Obscure Sounding product.

Hot Chick: Really! Interesting, and you?

You: Oh nothing much, Just have a big, large, huge(garage) company of my own with employees(your cofounders and you) and stuff. (Ofcourse she doesn’t know your company doesn’t have revenue yet)

Hot Chick: Really! What do you guys make?

You: you know google? we are in the same business(you make an intranet search application).

…………… and so on while the project leader fades into obscurity. But ofcourse later the hot chick’s boy friend shows up with his ferrari. But for now ur invincible.

And on that note we conclude this installment of student entrepreneurship. We leave with the life cycle of a student entrepreneur. Contrast it with the normal life cycle.

Entrepreneur life cycle

-Suman

PS: Leave comments on the following.

Q1) Does this article series suck?

Q2) Does the extermely orange header image suck?

Q3) Darkside or the jedi way which is the way of the force?

Globalization: Wolf In Sheep’s Clothing(Imperialism 2010)

The perils of globalization and a free market economy

The globalisation i refer to above is of the economic kind(which sometimes cannot be seperated from the socialogical meaning of the term). In Lay-man terms globalisation in the contemporary context means the emergence of a free-market economy at the global level. Before I get into the nitty gritty of it let me eloborate on a few things.

Free Market Economy: The free market economy is an ideal of doing away with all trade restrictions or tariffs between economic entities(countries). So if a rolls-royce sells for a million dollars in the US, it would cost only a nominally higher amount in india. This puts all the local industries in direct competetion with the rest of the world.

What this means is that a truly capitalist economy might emerge. Capitalism without regulation(as in a mixed economy) always tends to take the path of most profits rather than the path of the common good. This means there is no mechanism within the corporate capitalist economy that can go against the injustices corporations and economies are ready to commit in order to make an extra buck. Take for example west africa. West africa is the primary resource of the one of the most valuble raw materials in the world “chocolate” yet they live in abject poverty and most of the workers in the plantations are slave labourers mostly children.

Here we see some of the primary traits of a capitalist economy without a watchdog. The capitalist economy needs 3 things to thrive and will acheive them at any cost.

1) Raw Materials And Resources – Most of the poor or poorer nations of the world provide the raw materials and resources for the engine of the capitlaist economy.
This means that if a corporation or a country that is powerful can effect the global atmosphere in some way to increase profits or improve its strategic advantage for future profits it will.
EG: 1) The heavy military involvement of US in the political matters of all the middle eastern countries because they are rich in oil.
2) US bringing authoritarian regimes into power by supporting proxy wars all over the world to exploit the country’s resources.

2) Market For Goods – The third world also acts as a market to dump goods into and generates the bulk of profits. Corporations and countries always try to eliminate local competition by promoting free trade and biasing the country’s leadership to do so. If any country resists it could face sanctions which cannot be handled by such fragile economies so they are inevitably biased towards the powerful. In this and the above case the more powerful an economy, the better equipped it is at negotiating with external pressures.
EG:1) If indonesia tried to increase trade tariffs to be fair to the local entreprenuers, the west might increase the trade tariffs on all of indonesia’s exports thereby effectively holding the country’s GDP for a ransom.
2) If US tried to pull something similar with china(being a more powerful economy) It would be able to resist the coercion and will create a strategic lose-lose situation which will be a stale mate. This is why china and india have such bargaining power with the US.

3) Distribution of profits: The capitalist economy always tries to increase the margin of profits and the distribution of profits to make the rich richer while at the same time the growth in the profits of the working class is not proportional.
Eg:1)If nike is making profits of 5 million a year producing shoes in malasiya and finds that it can make profits of 10 million a year doing the same in india, then without loss of a beat the entire operation will be shifted. The problem that clearly emerges is that the corporation is global but the union of workers it employs is not. Hence this lends to their exploitation.

If this were a mixed economy all the above and many more traits of the capitalist economy can be discounted by strict government regulations that hinder productivity at the cost of loosing moral ground. But the absence of such regulations at a global scale means the weak are open to exploitation by the strong. As one can see every feature of the above discussion cries out imperialism, except that this is a new kind of imperialism where miltary muscle is replaced by economic strength. Even covert operations are being used by the CIA to protect their interests abroad. For the latest example look at the coup it planned to displace chavez as the president of venuzuela, who has been very vocal against globalization.
The only defense against this imperialism is to grow economically as fast and as strong as possible, while at the same time obtaining a strategic position within the world economy as an irreplacable entity. This is because a strong economy alone does not garuntee a country’s survival, It has much more to do with how well we can merge ourselves with the economy of the powerful such that any attempt at a manipulation “politcal” or otherwise would mean loss of productivity in both the long and the short term.

Globalisation is slowly but surely happening since the last 3 decades and is accelerating. The best way to be strategically placed in this movement, to protect a nation’s moral, political and economic values is to grow economically and specifically be a part of growth of other economies. Trying to make ourselves indispensible when we are intact is our main aim if we are to avoid being exploited.

PS: this is a repost from one of my other blogs.

-Suman

Startup valuation for geeks

Valuation is the process of coming up with the market value of a company. This means that any investor who is on the right side of sane will see the valuation of the company before he even sneezes in your direction. Yet to most techies and geeks ‘valuation of a company’ looks like ‘?%&*#$@!?%&*#$@!?%&*#$@!'(martian symbols). Me being the philanthropist(ego maniac) I am, could not let those ‘money types’ blabber away about stuff like valuations, return on investments and discounted cash flow. Instead i decided to put my ‘amature quack’ status to good use by preaching my own brand of geek friendly finance. Anyway im all set to venture into the deepest darkest corners of the universe where few geeks have ever been before for your benifit. In case i fail miserably be kind and point my mistakes(Then you can be rutheless and point and laugh(comeon where is the fun when not kicking somedboy who is down) ).Anyway let me start by telling you why geeks(startup geeks) should understand valuations.

Reason 1: Stop kidding yourself(Know Thyself)

Most startup founders tend to believe that their brilliant idea is worth millions. As it turns out most of the time a brilliant idea is just that an idea. One of the best things to do for a startup is to stay grounded in reality instead of fantasy. Dont get me wrong, dreams should and do drive you but what you should be worried about are illusions. Valuation of your company forces you to deal with the reality of what your value is based on for the most part solid data and for some part conservative estimates. Hence a valuation of your startup can give you a clear picture of how “valuble” your company is which is much more relevant to you as you are investing your precious time in it. If you feel that your not getting good return on your investment then its time to reasses your companies goals and policies. Hence valuation can serve as a good tool of introspection for your company.

Reason 2: Bullshit Filter

Know that the value of your company can act as a filter against all the bullshit figures others(investors) will come up with. It is always the investor’s imperative to undervalue your company, i’ll explain why. Suppose your scouring the market for a company to buy and come across the company ‘SuckersAreUs’. Well as it tutns out the founders of the company are all suckers and dont really know how much their company is worth. What do you do? well you say “Aaaah! your company isnt so gr8(even though you know it is) no one is going to pay 5 million for it.” The suckers not knowing their own value agree to be bought out at 3million dollars. What you have just bought a 5 million dollar company for 3 million dollars. Im not suggesting that all investors try to take you for a ride, but its good to know the approximate value of your company so that you will be protected against people trying to hussle you out of what is rightfully yours. On the flipside you must also take your valuation of the company with a pinch of salt as some of your assumptions might be off. Look at the friendster story. Its living proof of how wrong valuation assumptions by the company can spell doom. As they say valuation is more art than science and sometime ur art can really suck.

Reason 3: Makes you look cool

nuff said.

And now presenting to the world, “suman’s framework for startup valuations”(trumpets in the background playing pompous tunes). Before we start with the framework though let me explain what my reasoning behind this kind of a framework is so that you could point out some obvious blunder i committed and i could correct it.

Value of a company

How can one quantify the value of a company? Well in financial terms there are many ways to do this but let us try to approach this from the logical point of view. Let us begin by asking ourselves the simple question…

Q) What does a company do?

A) A company or business in general acquires resources or materials at price ‘x’ produces product ‘A’ and sells it at a price ‘y’. The company makes a profit when ‘y’>’x’. Where the price of both ‘y’ and ‘x’ are decided by their supply and demand in a normal market environment.

Value Addition

From the above we see that ‘x’ is the value of the resources which are input into the company and ‘y’ is the value of the product which is the output of the company. The value discrepancy(Y>X) can be taken as the quantification of the value added by the company. Hence value addition of the company and consequently the value of the company can be determined using this approach. Here one has to take note that the value or the price of the input resources are taken individually for each resource. This is done because any possible integration of the resources can add value or make the resources more costly. For example google’s 1600 strong research team is worth more than the same 1600 researchers existing independently out in the market. Here the value of sum of all parts is definitely higher than the value of the parts. So you might be thinking how can one quantify something like “myspace”. Well you just assign a value(price) to each user, page hit or content unit and the cumulative value of all these units is the value of the products produced. And if your company is a startup without any customers yet, then look at your competition and make a conservative estimate looking at their sales and projecting what your sale might be. worse still if you are a high ip startup with zero customers and zero competition then you have to find some way to gauge the latent demand for your product in the market, without which you might as well be randomly picking a number as the value of your company at this point.
In the above diagram and paragraph we were able to quantify the value of the company only in one product they produced. In order to determine the value of the company let us extrapolate the above to say the following. The value of the company is

Value of products over a period ‘T'(VOP) – Value of resources over period ‘T'(VOR) = Value of the company over a period ‘T’

here ‘T’ is usually one year. Yeeeeeeeeeeeeey we have the value of the company finally! Not so fast skippy, we still have a lot to go through. You see the value of an investment is slightly more complicated than that. The purpose of investing money is to make more money. Which means it doesnt just matter what the value of your company is today, of more importance is what the projected value of what the company is a few years down the line. Let me explain this in detail.

There are 2 companies, company ‘GoGetters’ Company ‘Slackers’

Company ‘slackers’ is a multi million dollar company with huge assets

Today’s net assets 12 million dollars………………………………Projected net assets in 5 years 15million

Company ‘GoGetters’ is a small company

Today’s net assets is 1 million dollars……………………………..Projected net assets in 5 years 5 million

Now given 500,000$ to invest, which company would you invest in? If you said the ‘slackers’ u are one and if you said ‘GoGetters’ u are correcto. As you can see the second company gives higher returns on my investment than the first one. Hence if i was an investor i would also asses the value of the company not just with today’s cash flow but also the cash flow that is expected in the future.
So now the formula morphs into

value = (VOP1 – VOR1) + (VOP2 – VOR2) + (VOP3 – VOR3) ……

here 1,2,3 .. represent the years where 1 is now and 2 is over the next year so on and so forth.

But there is another problem here, you see 1$ today is more than 1$ tomorrow. Similarly 100$ today is more than 100$ 5 years from now. This is called inflation where the money today is worth more than money tomorrow. There is also a certain risk here because except the first year all the other years are projections of what the value might be. Hence if it is a high risk industry where either demand or supply of both product and resources can fluctuate then this risk needs to be taken into account. Another thing that also needs to be discounted for is the value of no risk investment, which means if you put your money in a bank instead of in the company you’ll be getting 5% or 6% return on your investment every year and this needs to be taken into accound when discounting projected future values.

So we need to discount

i = inflation

r = risk

n = rate of returns for no risk investment

Now the formula morphs into……..

value = (VOP1 – VOR1) + (VOP2 – VOR2)/(1+(i+r+n)) + (VOP3 – VOR3)/(1+(i+r+n))*(1+(i+r+n)) ……

Note here that we did not discount for the present year this is because our investment is at the current inflation, with no risk and no interest. Now let us see how this works with an example.

First and foremost we need to assign values to the variables

i = 2% rate of inflation.

r = 3% risk.

n = 5% rate of no risk return.

vop1 = 200, vor1 = 100

vop2 = 300, vor2 = 200

vop3 = 250, vor2 = 200

when we substitute in the above formula we get ( i left the calculation to you, check wether im right)
value = 232.22

So if you float 100 shares of your company each is worth 2.3222 after the valuation. One must make conservative estimates of all the above variables and that too only projected to 4 to 5 years in the future. Beyond which such assumptions are not meaningfully possible. The above framework can also be viewed as a different take on discounted cash flow method check it out for more info. And another thing since this is for startups im taking year 1 as the first year of operation. If this is not the case with you then you have to add Net Present Value to the above equations.

Net Present Value = value of the company before the earnings of this year(VOP1 – VOR1), Which could mean the earnings of the previous years of operation. So the entire formulat will be……

value = NPV + (VOP1 – VOR1) + (VOP2 – VOR2)/(1+(i+r+n)) + (VOP3 – VOR3)/(1+(i+r+n))*(1+(i+r+n)) ……

And that’s that for today boys and girls. I’ve been sleeping on the keyboard for the past hour so all the above could be random key strokes. Bye

-Suman

Product Pricing For Hitech Startups: The stuff nightmares are made of

Pricing is an issue that haunts the marketing departments at the biggest of corporations. High tehcnology startups usually have enough critical issues to deal without adding subtle implications of pricing to the mix. Ultimately product or service pricing is one of those things that can effectively make or break the future of a startup. One of the most dangerous things about pricing is it kind of tends to sneak up on you. Bootstrapped software startups cannot afford professional marketing executives or teams, and usually asking a typical hacker or software geek what price they should charge for their peice of code would evoke the following response….

Kernel Panic – System Failure: Memory access violation, system rebooting…….

For the uninitiated joel spolsky’s article on pricing Camels and rubber duckies will serve as a good intro to the complexities of pricing(btw joel is a genius not because of any ground breaking material but because of his ability to explain something as complex as pricing to a 6 year old retarded dog (exaaaaaaaageration)).

This article will be much more focused on highlighting the nature, importance and perils of pricing in the context of a Hitech startup. Here the importance of right pricing for a startup cannot be emphasized enough, an improper pricing is one of the surest ways to you nailing your own coffin shut. The delicate art of getting the price right is complicated even more by the feedback effect pricing has on your venture. Pricing is affected by and effects many other variables like costs, sales, product and company placement, growth….. and the list goes on and on. But these things are for another day and another article, lets put them at the back of our heads for now(on the program stack for now in geek lingo). If the title is at all suggestive what follows ought to make some of you curl up and cry for mommy(i’ll try my best to scare the s**t out of you).
Pricing in a virgin niche market

Two things that are common to most high technology startups is a niche and a virgin market. These are attractive to startups because of the non competitive environment in which a bootstrapped startup has more room to breathe and develop without worrying about getting muscled out by a better funded competitor. Price wars are not advisable for burgeoning startup and hence the adage: niche thyself. Often times a niche also ends up being a virgin market. In other words people who are supposed to buy your product or service are….

  • Not aware of it.
  • Don’t know how beneficial it is.
  • Don’t know how reliable it is.

Guess your marketing team has its work cut out for it. Let us not even get into the nightmares of product creation and management and promotion those deserve their own long articles once again. So getting to the pricing assuming that the product has already been built we start to see the difficulties. You see pricing in a virgin market is not like pricing in an established market. That’s because in an established market the pricing and price positioning is usually driven by established forces of demand and supply. For example if a company called “Beauty and yeast” is making a brand new anti dandruff shampoo, it has the luxury of observing the current market for…

  • Segments (Rich, Middle class, poor people)
  • Demographics(children, teens, oldies)
  • Trends(conditioner based shampoos, natural shampoos)……………..

and then placing their product with a competitive pricing for their niche. But in case of a startup trying to establish itself in a virgin market the equation becomes lopsided. You have the supply side of the equation but are also tasked to create the demand side of the equation. So there is no established price range in the market, there are no segments in the market, infact there is no market until you create one. Scratching your head yet, well we are just scratching the surface. So how the hell do you decide if your ‘laser emitting robot dog’ must cost 450 bucks or 4500 bucks? I can hear some smart alec in the back whispering “Well we’ll just build the damn thing and if it costs 3000 per unit we’ll sell it at 4000 per unit, its that simple heheheheheh how smart am I.” To the smarty(all others ignore) Hey dumbass it doesn’t matter how much it cost you to build it, it only matters at what price people are willing to buy it for. So if parents think a robot dog is too costly for a kid at 600bucks what’s the point of you building one for 3000 bucks let alone selling it for 4000. So i ask you again how much should the ‘laser emitting robot dog with a gps receiver’ cost? Take a guess, i dare ya…

The Pricing Game

If you haven’t heard of it this is a game startups and their customers play. Startups hate it and their customers stay up all night unable to contain their excitement and giggling at the prospect of tormenting the poor little guys from ‘HackersInc’. Its a game of chicken except the fact that the customer can never loose and the startup can loose bigtime(read ‘go out of business’) irrespective of whether they made the sale to the customer or not. Let’s take a look at the contestants shall we…

The Startup: These guys are desperate to make a sale, they are eager to bag their first customer. They have the look of the little kid who wants the candy so bad he can taste it. Making a profitable sale to them is much more important than great margin(good profit) from the sale. They usually think “If it cost us X to build the unit lets charge X+Y, where Y is really low so that we don’t risk loosing the customer. Anyway even then we’ll be making a profit cause the suckers don’t know it only cost us X to build the unit.”

The Customer: These are guys who get their kicks by getting poor kids jump through hoops for them and then not giving them the candy you promised. They want the product cheaper than a bowl of wood shavings. They know the startup guys need them more than they need the startup guys. Even if they need the product badly not even god can spy the fact beyond their poker faces. They are in control and they know it.

Scenario 1: This is scenario one of how the pricing discussions might progress….

Startup: We want to charge you 12000 for the product.(even though it only took 4000 to build)

Customer: 12000!!! with a look signifying you’ve uttered the most ridiculous price in the universe(they are ready to buy at 10000). Ok we’ll get back to you.

Next meeting

Customer: we cannot buy it for 12000 sorry.

Startup: (reduces the price drastically to less than 10000 and are happy)

Scenario 2: This is scenario two of how the pricing discussions might progress….

Startup: We want to charge you 6000 for the product.(even though it only took 4000 to build)

Customer: 6000!!! with a look signifying you’ve uttered the most ridiculous price in the universe(they are ready to buy at 10000). Ok we’ll get back to you.

Next meeting

Customer: we cannot buy it for 6000 sorry.

Startup: (reduces the price drastically to less than 6000 and are happy)

So the moral of the story is u’ll get screwed either way.

The Sales Cycle:

You might be wondering why the sales cycle showed up in an article about pricing. Well it came up so that i can show one of the many ways in which improper pricing can kill you. The sales cycle is the repetitive process of making a sale from the instance a Lead is generated to the moment the customer buys the product. When you are a startup in a virgin market you have no idea what your sales cycle is going to be(though u hope its going to be a short one). Things are made all the more complicated because of the fact that you are a startup and have no track record or credibility. So once again the customer makes you jumps through all kinds of hoops before he decides to ditch you after you are 3 months into your sales cycle. So initially you have no estimate of your sales cycle but have to come up with the right pricing. It’s this pricing in a vacuum that results in a lot of headaches for the startup.
Pricing is the .50 caliber rifle pointed at your foot :

Ok so you built your product and even managed to make your first sale so you think you can just relax and let the barrels of money roll in. Well let me save you the suspense they wont come rolling in, “So what” you say “l’ll make more sales, after all this is a software product and its produced once and can be sold a million times eliminating the per unit production cost“. Well not so fast mr. Big shot unless you are selling activeX controls over the internet you still have an active burn rate. Burn rate is the rate of your capital expenditure, in other words it’s the money you’ll have to spend every month on those people called employees, on that space called an office and any other expenditure that goes with running a company. So your liquid capital or cash in the bank is always being used to pay for expenses and these expenses as your sales grow and the resources for support and maintenance need to grow as well. This is the perfect setup to make a pricing blunder.

Misaligned Sales cycle and pricing:

A bootstrapped company by its very essence means more often than not its walking on the tight rope between success and bankruptcy. It is often low on liquid cash and lives in a day to day manner. When you add a pricing blunder to this volatile situation I’m guessing it wont be a pretty picture. Let us for example imagine a startup ‘PricingBlundersInc’ starts out with a liquid capital of about 10,000 bucks. The company had a burn rate of 150 bucks per month. It estimated a sales cycle for their product ‘Badly priced product’ of about 2 months. And hence it priced its product at 400 bucks. But as it turned out their sales cycle turned out to be 3 months. So they end up spending 450 bucks while they can only earn 400 bucks in 3 months. Guess you can see where ‘PricingBlundersInc’ is going huh! Straight into the gutter all it needs is for 1 or 2 sales to get botched and that’ll hasten its inevitable doom. It can be clearly seen in the plot of the liquid capital of this company across a period of 2 years.

Misaligned Pricing and Sales Cycles

Well Aligned Sales Cycle and Pricing:

Unlike at ‘PricingBlundersInc’ the people at a similar startup ‘GreyMatterInc’ were wary of their sales cycle as it was never before tested and had no precedent so they made a conservative estimate of 2 months too. But they decided that 2 months might be a wrong estimate and that their pricing must accommodate for errors in the sales cycle estimate to some extent so they increased the initial pricing estimate for their product from 400 to 460 a very conservative 15% increase. This startup started out with 10,000 bucks of liquid capital and a burn rate of 150. And as it turned out their fears about their sales cycle turned out to be true and their sales cycle stabilized at 3 months. So what do you think happened to them? Well you have the data, Calculate! Turns out that increase of 15% saved their skin. Checkout their capital reserves across a 2 year period.

Well Aligned Pricing and Sales Cycles

It has to be understood that all the issues that were raised here were grossly over simplified and was designed to demonstrate the perils of improper pricing decisions. Anyway entire libraries can be filled with stuff about pricing but i guess this should be enough for now. Btw i have fixed the rss2 feed on the blog so subscribe to eat from the link at the header. And for pete’s sake leave some comments, if i don’t see any comments after i learned to use the charting tool in excel, i’ll just beat myself silly.

-Suman

PS: gr8 Scott adams article. i did not want to waste another blog entry for this link. http://dilbertblog.typepad.com/the_dilbert_blog/2006/10/in_over_my_head.html