Search Results for: money

The financial purpose of a business is to generate over its lifetime a higher return for its shareholders than what they would have gotten by investing in risk-free options (such as government bonds).

Imagine there is an entrepreneur with a business proposal and she requires $100 as the initial investment. She reaches out to you and pitches her idea to seek your investment. To make a decision, you’ll probably analyze and estimate how much return you’d get in return for the money you give to her. If you usually get 6% interest annually in a savings bank account (which happens in India), you would expect a higher return than that from the entrepreneur (especially since there’s a risk of losing your entire $100 while your money in the bank is virtually risk-free).  ...  Read the entire post →

It’s easy to get bewildered by the billion-dollar valuations of startups that are operating under heavy losses. If you’ve ever wondered why would anyone pay for a company that’s not making any money, you’re not alone.

Early in a company’s life when there is much uncertainty about its future, the valuation process is more of an art than a science. However, it’s not a blind science. No venture capitalist will just hand over money to you because they like you.

Valuation, even when it’s an art, is grounded on a very simple financial principle that an asset is worth discounted profits it is expected to produce over its lifetime. The term discounted means that the cash in the near term is more valuable than the cash in the long term. It’s easy to can find the exact formula for calculating the discounted cashflow.  ...  Read the entire post →

A recruitment strategy should be indistinguishable from a marketing strategy. Entrepreneurs end up spending a lot of time understanding the market, talking to customers, building personas, and customizing their marketing messages to customer segments. However, they often fail to realize that recruiting people to work for you is no different from recruiting customers to use your product.

It’s true that the key difference is that you’re asking for money from customers while you’re offering to pay money to prospective employees. However, for exceptional people, the money offered is a commodity because many other companies are offering them the same or higher money. Exceptional people never look for jobs; jobs look for them. ...  Read the entire post →

Fundraising is an exercise in demonstrating how your company can generate financial returns for the investor.

Different types of investors have different risk-reward expectations and that’s why they end up specializing. For example, a bank as an institution is risk-averse. They’re okay with a relatively smaller return (marginally more than the risk-free return) but they want to make sure that such return is guaranteed.

On the other hand, funds specializing in seed-stage funding know that most of their investments will fail, and hence to cover for those duds, they expect to fund only the opportunities which can generate 100x returns. The few 100x returning opportunities and most of the others not returning anything means that on average they end up generating a decent financial return on their entire fund. ...  Read the entire post →

Journalists don’t get excited about new products and features the same way an entrepreneur gets.

This is because:

• First, a journalist gets hundreds of pitches every day and a particular product launch announcement is no different than the many hundreds of launch announcements sitting her inbox.
• Second, aliens visiting Earth is news but your product’s new feature is certainly not news. 

News is something that caters to basic human curiosity about the new and surprising. There is a reason why one death in a tragic car accident gets covered as news but thousands of deaths every day due to preventable diseases in poor countries don’t make it into the news. The former is surprising. People want to know how that particular accident happened. The latter is a statistic, a daily occurrence that people are familiar with and after a while becomes pretty boring to read. ...  Read the entire post →

Most consumers at any given moment are more or less satisfied with what they have. Since we’re creatures of habit, we tend to go to the same restaurants that we like, buy the same stuff as we’ve always done and live our days without significant deviations. We’re less exploratory than we’d like to think.

This is because there’s a cost of change. Whenever we are trying a new product, we’re incurring a cost (of effort, time, or money). And, we go to great lengths for avoiding these costs.  ...  Read the entire post →

Businesses don’t exist to make revenue, they exist to make profits. But the lure of revenue is hard to resist. It’s natural to admire the billions of dollars that big US retailers such as Guess, Macy’s, Radioshack and Toys R Us generate every year but it’s difficult to digest that they are in terrible shape because they’re not making any profit. These retailers are expected to close thousands of stores and fire many tens of thousands of employees. What went wrong?

You may have heard of this before, but a sure-shot way of making revenue is to offer $110 for $100. If you open this business, you’ll have no problem attracting customers and you’ll not even need to do any marketing (except when a new competitor springs up who offers $120 for $100). This example may seem worthy of nothing more than a chuckle but this business model is actually very common. Large eCommerce players in India (Flipkart, Snapdeal, and PayTM) grew by essentially handing out money to customers (in the form of discounts and cashbacks). ...  Read the entire post →

There’s typically an information asymmetry between what sellers know about their products and what buyers know. From buyers’ perspective, while engaging in a potential purchase, they never have enough information to know whether what they’re getting is worth the cost (in time, money, effort) that has been asked from them. Even when the seller gives information about the value the buyer will get, buyers suspect because both honest and dishonest sellers say similar things. 

So for new products, as buyers can’t tell good products from bad products, they typically end up wanting to pay (in time, money, effort) much less than what the seller demands. In many markets, this drives away good, honest sellers leaving only dishonest sellers (which further aggravates the mistrust). The most famous example of this is used cars market, but some version of this plays in all markets. ...  Read the entire post →