Top-line vs Bottom-line: Uber’s Historic Losses

Uber’s frantic chase for a market grab and top line growth has meant a negative bottom line of a whopping $1.2 billion in the first half of 2016. This, indeed, is an extreme case of the bottom line sacrifice for an impressive top-line growth of 18% in a quarter.  And all this seems like a great strategy as its valuation reaches $69 billion.

But this strategy has its critics, too. Some experts feel that Uber’s indirect subsidizing its users (drivers and riders) can create a temporary shift in its favor but may not guarantee a long-term customer loyalty. When subsidies are withdrawn, the value Uber offers can easily be replicated by others (including traditional taxi services) and Uber may quickly loose its charm!

This is a conundrum that almost all businesses go through to some degree or the other. It can present not just a choice between top-line growth and bottom-line but also a choice between long term investment in soft assets such as people/ systems and chasing an attractive short-term EBITDA. Current market valuation techniques do not take non-GAAP assets not captured by accounting books into account. Valuation models taught in business schools assume long-term cost of capital as well as long term growth. Many a times, positive cash flow and growth shown in distant future year on and around the plan horizon can translate in to a very high valuation at present value terms based on a “terminal value”.

Given these market realities, corporate decisions would always be guided by the desire to achieve a high valuation by “projecting” a bright future – be it by projecting high growth at the expense of present profitability or by projecting healthy short-term EBITDA at the expense of building a sustainable infrastructure. It is up to the investors to kick the tires and make sure that the company has a sustainable business model and has built a good infrastructure in terms of its people and systems, for it to travel the distance to reach that projected bright future!

7 Tips on How to Predict A Newborn’s Graduate School Transcript: Of course, A New Venture Business Forecast!

Grad_babyHave you ever wondered the prudence of a VC asking a start-up founder for a five-year (or even a three-year) financial forecast? Creating a START-UP BUSINESS PLAN & FORECAST is like writing a newborn baby’s future graduate school transcript … in the world infested with very high infant mortality rate! Well, then here are some tips that to do precisely that:

1.  Logic – not numbers: While creating a start-up business forecast, journey is more important than the destination! Ask yourselves if you have considered every driver that impacts 4 financial quadrants – revenue, costs, assets, and liabilities. Test the underlying logic while projecting the famous (notorious) J-curve. Don’t forget to factor in all required costs and capital expenditure required to achieve those fabulous revenue projections! Accuracy of logic is more important than the precision of numbers!

2. Decide on a single business trajectory: Do not forecast every possible trajectory that your business can possibly take. Decide on a clear focus and chart out a business forecast for only those activities that you would undertake in initial years. Do you want to build a product business or a service business, will you be a wholesaler or a retailer, will you sell directly or through distributors, etc. Decide on the dominant path and model that path alone.

3.  Address break-even and scalability: Readers of a start-up business plan look for guidance about the economic promise and risks that the venture offers. Understanding regarding entrepreneur’s plan to reach self-sustainable state (a financial break-even) is a key risk measure. How many months would a start-up take to break even, what are the management’s plans to make that happen, and how much fuel will it burn to reach that stage are the key questions that readers would seek answers to. Once they are comfortable with the answers that the plan provides, the next question would address the potential upside offered by the venture and that depends on how fast the venture can scale its revenue model?

4. Err on the “negative side”: It is OK to have ultimately overestimated your cash needs. In fact, it is better to do so rather than showing a Supercalifragilisticexpialidocious forecast to please potential investors, only to run out of money before achieving targeted milestones. In later case, the entrepreneur invariably ends up losing his or her company! This business forecast is about planning your business and not about convincing the investors.

5. Market is not a “thing” … it is a live beast!: Recently, I met an entrepreneur who was advised by some pundit to price his offering in a manner that will result in super-normal gross margin to attract investments. I am not sure how many investors would buy such a pricing scheme. First, such pricing is possible only in a monopolistic situation and monopolies are rear to find now a days. But even if sit was feasible in short-run (say, due to the product being of unique value), it is naïve to believe that no competitor will ever chase such attractive business proposition in long run. Never think of competition as a static force. It is a live beast that will react to your decisions!

6. Make customers the focal point of your plan: If you can convince a customer to buy your product, you can convince an investor to invest in your business. A business plan that is built on the basis of an early engagement with “anchor customers” becomes way more defensible than one built on theoretical assumptions.

7. Do not turn your sail with every breeze: Business forecast is the entrepreneur’s plan … not of a prospective investor. One should, of course, take all relevant inputs from experts (especially, from other entrepreneurs who have ‘been there, done that’) before you finalize the business plan. However, once you freeze it, do not keep modifying it with every suggestion that you may receive. Revisions should be well thought-out and done only to reflect strategic changes in direction of your venture.

Related content:

The Big Lie of Strategic Planning by Roger L. Martin in Harvard Business Review (may require registration for full access)

“Focus your energy on the key choices that influence revenue decision makers—that is, customers. They will decide to spend their money with your company if your value proposition is superior to competitors’. Two choices determine success: the where-to-play decision (which specific customers to target) and the how-to-win decision (how to create a compelling value proposition for those customers).”

[ORIGINAL IMAGE COURTESY IMAGERYMAJESTIC/ FREEDIGITALPHOTOS.NET]

Business Model Innovation

Here is an interesting article:
The Three Most Innovative Companies of 2013 logo1
“Business model innovation is the ticket to explosive growth”

In a world where 1,000 new patents are granted every day in US alone, I see gross over-emphasis on the physical aspect of innovation  with scant regard to the business model innovation. Indeed, Intellectual Property Rights are viewed as a key to the riches by investors, executives, and entrepreneurs alike. However, in the ever-shifting (and rapidly shifting) sands of  technology, the state-of-art quickly becomes “irrelevant” unless accompanied by business model innovation. This applies to businesses irrespective of their size or age. Look around and you would see plenty of examples of extinction due to lack of business model innovation – Polaroid, Blockbuster, Kodak, Blackberry, Nokia, Yahoo, Dell and many more!

Challenge to innovate business model is equally pertinent to new and established ventures. Technology companies need to be alert and agile in inspecting their proposed business model on the basis of market feedback. In fact, one needs to proactively seek critic of the business plan in order to search for cracks that may develop due to shifts in underlying assumptions.

In case of a start-up, source of its power to disrupt industries dominated by large players lies in the ability to be quick on its feet. But many lose this power due to adamant attachment to a predetermined business model. In case of a corporate entrepreneur, this rigidity can come from organizational inertia – especially when the corporate objectives are to do same things better than doing better things!

Is your business model in need if a Business Model Innovation?

Can Groupon Save Its Business Model?

Can Groupon Save Its Business Model?

If there is a conflict, whose needs should a b2b service offering address – those of the customer or of the customer’s customer? Groupon removed time-restricted discounting to attract more users – their customer’s customers. But, as a consequence, businesses whose main intention in offering discount is to generate an off-peak demand, aren’t getting much value by offering such unrestricted discounts.

Is this a flaw inherent in Groupon’s business?

I think, not. Groupon needs to identify its customer as its customers’ off-peak customers (and not all of their customers’ customers) and build an offering that generates value for them. Such value can be social in nature (such as sharing of product information) or economic ( such as gifting).