How much would you pay to "valuate your idea"

Recently an email request touched a raw nerve, perhaps more than it should have. Reproduced here for you to form your own opinion is the email exchange in its entirety - save for the name and details of the sender.

Notes: 

a) in the discussion below it is taken for granted that "the idea" is a tangible idea that can be commercialized;

b) it should also be noted that I do have high regard for this person - am noting this as some may believe my responses to reflect otherwise;

c) a lakh is 100,000; a crore is 10 million or a 100 lakhs.

The seemingly innocuous request

"Hope you are doing good. From the last 1 year i have traveled a lot and have been to a lot of people with various hats at different levels ( I mean founders who made millions, successful Startup teams, listed to investor talks, met people who have great ideas, etc,.)

And recently i have met an interesting person and made me to think of this -> " How much an entrepreneur would like to spend money to valuate his idea(a Million Dollar idea of an Entrepreneur) from a Real Expert, an expert who has great experience in Building Business". I would love to listen to your opinion

Please answer thinking of your own scenario."

My opinionated response (he was asking for an opinion!)

I think that the question you asked is a wrong question. Presumably the question is deemed relevant because an entrepreneur does not know if the investor is valuing the company fairly. 

No one knows the future and no one can therefore come up with a correct value - except by complete chance and that too only time can tell!

The better question would be: "how much would you pay someone to help you understand the parameters that will determine the value of the company".

An even better question would be: "how much would you pay someone to help you understand the parameters that will determine the value of the company and give you advice on how best you can optimize those parameters".

That said, how much one can pay would be a percent of perceived value - in other words a business whose valuation range is in lakhs would be willing to get an "unbiased opinion" for much less than someone whose valuation range is in 100's of crores!!!

Best thing for an entrepreneur is to come up with his/her own valuation and valuation range under various scenarios (good/bad/ugly etc.) based on as good an understanding of the product, client, competition and resource availability as possible.

Once that is arrived at, the entrepreneur has to be honest with himself/herself as to their ability to execute plans and strategies under various scenarios and factor that self-assessment in to the valuation.

Remember also that it is an iterative process. Should an investor be interested in your idea and not be put off by unrealistic valuations, chances are that if they believe you have to factor in some issues you have not considered, they will allow you to "run your numbers" again.

Another attempt by the sender

Hi Vishnu Thanks for your analysis and time spent on this, what i really wanted is not to valuate the value of the company rather i asked if the Entrepreneur would like to spend money to valuate the idea and the scalability of his product in market. There is a need for every 1 to evaluate his/her idea before they jump into the market.

..... but I am not having any of it!

The answer remains the same. There is no value to the idea if the idea is not in the market. If it is in the market, it is commercialized. If it is commercialized it is a business.

Of course there are ideas that are valuable but poorly executed and then one can argue that the idea had a different valuation than the business.

Yes, in hindsight, but not at the time of the valuation.

Even if given for free (i.e. you give away the product) all that it means is the value was not got by the person who commercialized it!

Some comments that were not a part of the emails

1) Perhaps I should explain the last sentence. The person who emailed implied (in my opinion) that the value of an idea is distinct from the value of that idea as a viable business. I therefore brought in the zero revenue aspect.

Should a valuable product be given for free, there is obviously no revenue, only cost. The value would then need to be measured on a basis other than revenue - but the cost and risk parameters would still need to understood and evaluated should the idea be sustainable.

2) Am I being unfair? You judge.

I believe that if you outsourced the evaluation and then some things changed,  you would very likely need to go back to an external agency to help you figure out your own business. Far better for you to get help on "how to value" rather than to outsource the valuation. 

3) I am fully aware that at the ideation stage, risks are higher because the unknowns are higher, and that therefore the valuation range could be wide. That is also precisely why, the ability to sense and make sense of, the parameters that will impact the value of the idea as a business becomes important. Far better to understand that, than to not.

All this reminds me of a quote that was made by some famous investor (forget who) which goes something like this: "I never buy a stock on somebody else's recommendation because then I would have to call them to know when to sell it."

Don't do it if you do not understand it (as well as you can!).

Stay true.

Vishnu.

The color of the t-shirt

In a recent conversation I was told by the founder of a failing firm that the only difference between his firm and that of a major competitor was "the color of the t-shirt".

Did you wince? I did.

This post is to use that failing firm as an example to point out some pitfalls that should have been avoided - in business analysis, business models, and business modeling - in the hope that others can avoid similar pitfalls.

As you read this, you may think: "basic mistake"; "common sense" etc., and you would be right. That said, this post is not to shame but to inform, for sadly many young firms do not think things through. Many large firms also make some very basic and similar mistakes though often for different reasons (organizational silo's, ego, too many "yes men" etc.).

I also do not want to shame because I found the entrepreneur to be a likable person, who gamely pursued an idea that he thought was good and I believe that he has learnt a few lessons from his ventures (this was the second one that failed). He also called a spade a spade and closed the business down when he realized that the venture was not viable. It takes courage to admit when you are wrong. Also commendable was the comment he made about feeling bad for those employees that had stuck with him. The entrepreneur in question will not be named nor will the type of business be mentioned.

So back to the beginning ..... and let's call the entrepreneur in question "E".

E came across my blog and wrote in asking for the link to the position papers and followed that up with a request to meet. We also discovered that we had a firm/client relationship. The meeting was to discuss E's business.

I started by asking E a few questions about his business and began listing out thoughts and ideas as E filled me in on his business (I already knew the product offering as a client) model i.e. purchase products on demand from low cost suppliers and charge clients typical retail rates. The product would also be delivered for free.

After this introduction but before exploring cost and revenue aspects I pointed out to E that essentially he was taking on what other businesses avoided i.e. "the last mile". As one can imagine, it is possible to build scale efficiencies before the last mile via distribution hubs, inventory management and so on. The last mile however is by definition distributed and costly to serve. An analogy would be that the process before the last mile is "mass production", while the last mile is a "custom" product. Businesses that have to be engaged in the last mile typically do so by having the customers pay for it and/or outsourcing the last mile delivery.

Given that E was taking on the last mile, he had scaling issues unless he found alternatives. Therefore the hope was that he was at least making money on the value chain before the last mile.

It turns out he was not. He had only one supplier who would not discount the goods purchased, and had (albeit small) working capital costs to boot because there could be a day or two between when E paid the supplier and when he collected from his clients.

At this point in the conversation I already had a sinking feeling. I pressed ahead with some cost and revenue aspects hoping to hear of cost efficiencies and pricing based on value. At a minimum, the hope was that the difference between the low cost supplier and typical retail price would allow for a sufficient net margin.

The opposite happened to be true. E had played the "lower cost to you" rather than the "value to you" card. He started off by offering a 20% discount on the delivered product thinking that it would be an investment (the difference between the discount supplier and "typical retail" being much less than 20% E was clearly buying customers) and build his customer book. It did build his customer book but it also hurt him badly when customers took up the offer en masse and overwhelmed the fledgling system he had resulting in his inability to deliver products to some customers; and it hurt him because clients now used him to simply get the discount, and left as soon as the discount stopped i.e. the customers were loyal to the discount, not to the firm.

My point here is that that thinking should have occurred before the business was launched. It took me about 15 minutes to get to the crux of it and by experience, E had learned his lesson. The point here is that one should model their businesses before they start it. Had E modelled his costs, and noted that he had no wiggle room on the supplier side, and that he had transportation and operating costs he would have come up with a simple revenue less costs equation that would have given him a clear picture as to the viability of the business model.

It would also have led him down the path of exploring whether he could price on value to start with. Having gauged the competition, and there was one large competitor that was getting investor funds and competing on price to customer, E concluded that the only way to compete with the larger competitor was on lower price to the customer i.e. to do exactly what the larger competitor was doing. As an aside, apparently this competitor has stated that it was losing money too but hoped to turn things around.

Again, had E modelled that aspect (i.e. low price) it would only have confirmed to him that he should not be entering into that business in the first place - unless of course he used a different approach/strategy, and had viable means of getting market share or extracting more value from the very start.

Yet, when I asked E what the difference was between him and his competitor he said that it was pretty much "the color of the t-shirt". It was actually a lot more. Some examples: they had a brand of sorts; they had some scale efficiencies in comparison; they give clients the option to pay before receiving the product (reduces working capital).

The writing was on the wall for E. He shared some of his numbers with me and then confided that he had already decided to shut down and had only wanted to convince himself that he had not left any viable avenue open (he owed that much to himself and his loyal employees in his opinion).

My suggestion to him was to either re-launch using a value strategy and building in (higher value) bespoke services while outsourcing delivery; or to shut down. Given that he felt he had explored some of the bespoke services I mentioned as examples, and his belief that customers would not pay for value as soon as the first cheaper competitor arrived on the scene, he really did have only one option.

Shut down.

I am now, because the service was so useful, a client of the competition.

A sad story because it could have been avoided. Sadder still because it is not the only such story.

Here is to hoping that entrepreneurs will take the time to think some of the basics through, and use realistic assumptions and different scenarios to do so.

Stay well. Stay true.

Vishnu.

Are you a socialist?

As noted in an earlier post I hosted a dinner to try and see if a group of entrepreneurs could come up with a straw man strategy to encourage entrepreneurs and entrepreneurship.

As a moderator/facilitator, I first framed the issues and the need to "connect the dots". During the course of the discussion (which I could have moderated better), I was guilty of making comments about what I believed in, i.e. the need to enable what I call the broad middle. In doing so I said such things as: "does anyone know what happened to people who came 5th to 10th in business plan or venture competitions?"; "nobody really cares about the middle, everyone is looking for the next big winner"; "we need to start a movement" and so on.

At the end of the evening, minutes before he left, one of the people asked me: "are you a socialist?". Taken aback (due apologies to socialists - so much of a bad rap in so many things has to do with poor execution, inability to evolve, the-other-way-is-wrong thinking etc.), I replied: "I am a capitalist. But it is strange you ask that because when I was a young MBA student, a friend asked me what I would do with a 100 million USD, and on hearing my reply said" "oh, so you are a socialist!"" (Note: History has shown that I had neither the luck nor the skill to be worth a 100 million USD!!). There was no time to discuss the point further as the person left.

After he left, I asked another invitee, for whom I have great respect, and who is familiar with my objectives and way of thinking, if he had heard the question and if he thought I was a socialist. This friend told me that there was nothing that even smelt of socialism about me and that there is often quite a bit wrong with labels anyway.

I reckon I am about socialist as Bill Gates or any other philanthropist who has made his/her money (except that in my case the funds are very limited and I deny myself many luxuries to do what I am doing). That you reach a point in your life when you have the luxury of stepping off of the job treadmill and doing something for society (whether society asks for it or not!!) does not necessarily make one a socialist.

I am not egoistic enough to believe that readers have any interest in knowing whether I am a socialist or not, or what my reasons may or may not be.

The point I did want to make is that what the question (possibly) implied was wrong. I got the impression that one implication of the question was that you cannot be a capitalist if you are trying to get an advantage for the "average" entrepreneur (i.e. the "best should win" theory). Another possible implication was that you cannot be capitalist if you do some good for the possible benefit of others without any benefit to yourself.

For one, I have long held with deep distrust anyone who is so sure that they can pick a (business/investment) winner. However expensive their suits and whatever their pedigree. On the other hand, I do believe that there are some who are far better able than others to make a winner given the same playing field.

One reason I want to help the "broad middle" (the "average" entrepreneur) is primarily because I feel that many of them are there (at least in this country) in the middle because of the environment. If that environment was more supportive, they would then be competing on a more level field and then the best business should win.

A second reason is that I do believe that not every entrepreneur has to become a  big player. Its OK to be "average" - so long as they are socially responsible and run their businesses efficiently and well, the economy cannot be worse off. They just do not need the hassles that currently come with the territory, and neither does the economy!

A third reason is that there are many Venture Capitalists (VC) and Angel Investors (AI) chasing the next firm that is going to be a runaway winner. Should the "broad middle" be more successful, they would only widen the investment pipeline for the VC's and AI's (and possibly even make feasible a small business exchange that would give VC's etc better exits and so on - see the dots do connect!)

Stay well, stay true.
Vishnu.

Useful actions .... worth emulating by other similar groups/organizations

Back in Mid-March this year at the Hyderabad Entrepreneurship Society (HES) meeting, a number of entrepreneurs expressed their need for functional knowledge and labor resources.

In response two things occurred. Both commendable. Here is what happened and some of my thoughts.

1) Vivek Anand, a busy entrepreneur who puts in the extra hours as organizer of the HES Meetup Group because he believes in Entrepreneurship, came up with the idea of an internship drive.

Rather than talk about it, he did some ground work, got some 150 interns to send their resumes and posted a date and time when HES members could come and interview the candidates. Another member kindly made his office space available (on Saturday and Sunday!) as a venue to conduct the interviews - free of cost!

The disappointing aspect was that very few entrepreneurs took the opportunity to interview the candidates. On Saturday, when I attended, there were 5 potential employers and about 50 candidates. The charitable view is that all the other 900+ members were busy and/or had all their manpower needs met. The less charitable view, and one that I hold, is that the charitable view accounts for only some of the members, while the rest simply did not bother. You can take a horse  to the trough but you cannot make it drink. Another argument for low attendance by Entrepreneurs could be that the approach taken was "build it and they will come" i.e. demand push as opposed to supply pull where Entrepreneurs state what they need and candidates are selected on that basis.

Here is why I would have thought that entrepreneurs would support the Internship Drive.  Entrepreneurs complain about the lack of resources and of having to compete with bigger, more established businesses. Picking a bright youngster as an intern would allow them to try and get that intern - if found to be good - to join them as an employee.

The interns seemed to sense the opportunity better than those entrepreneurs who did not attend. I got the sense that quite a few may not have been able to get better placements so were willing to try with smaller firms. That said there were also some who thought that the experience would hold them in good stead as they themselves were toying with the idea of becoming entrepreneurs; and there were others who clearly believed that they would be able to make a meaningful contribution. The latter may not even know what happens to quite a few interns at larger firms - they typically spend most of their time at the copy machine! (Oh I know there are exceptions ...)

As to the pool of interns, at first I thought that I had noticed a flaw - most of the interns were "techies". The event was not restricted to techies though there was a bias in that some of the colleges approached were engineering colleges. Then it occurred to me that an entrepreneur is unlikely to have much time to train an intern and would want someone with specific skills to do meaningful work. While limiting in one aspect, the positive implication is that the "techie" intern is likely to get meaningful experience. Was this what had motivated the "techies" to apply? If so, they were smart to do so.

On the other hand, it would also be useful to think how we can get more students from humanities and other fields to get useful internships with entrepreneurs. The problem needs more thinking (and some of us have agreed to meet on this) but my initial thought is that the solution lies in connecting two dots (educational institutions and entrepreneurs) better.

One other point. In the first hour, about 5 interns turned up. All male. Vivek got up, looked out, then sat down and said: "sad to see that its male dominated. Would have been encouraging to see some women try as well.". About 15 minutes later the intern flood gates opened and some 40 to 50 turned up almost at once, with women outnumbering men 2 to 1! ;)

2) Manoj Surya, an HES member who started a new Meetup group called StartUp Talks, sent out a request for a "financial expert". Just one day later he had a confirmed speaker, Nikhil Beheti, himself a Chartered Accountant and entrepreneur.

The event is to be held on May 04 and I do hope the speaker is good, the topic relevant and the audience both sizable and engaged. It will encourage more such information sessions. As of today, 24 people (excluding the speaker) have signed up. The Start Up Group has some 84 members.

My thoughts.

It will be interesting to see how the venue suits such a presentation and the format of the talk.
I had also requested that such information as could be shared before the presentation be shared so that the folks attending could do their homework and spend more time at the meeting discussing aspects that cannot just be read up. A recipe for example, can read and acted on, as can a grocery list. That type of content does not need a presentation.
It would I think have been good to have had entrepreneurs specify certain aspects they wanted to focus on so that the speaker could address that.

Stay well. Stay true.

Vishnu.