START-UPS (& DOWNS. BUT MOSTLY UPS) – part two
Eight years after having graduated at Vlerick Business School, I was asked to share my thoughts and experiences with the students. It was nice to walk through memory lane.
It took me eight years to understand and eight hours to write down the ten ‘lessons learned’ along the way. It will take you three times eight minutes or so to read. Here is part two: lessons 5, 6 and 7.
5. You can sell a share only once… (angels and devils)
… And you always sell too cheap, too soon. As a start-up, you are in need of money. So you look for help from your friends, or family members, or business angels. The thing with business angels is: you have to make sure they are angels and not devils in disguise. And you don’t know it upfront.
If you sell your shares too soon, you lose control over your company. It’s that simple. Even if you think you don’t have a choice, you always do. Governments love start-ups. Plenty of tools available. You just might not have heard of them (go back to lesson 4: listen, listen, listen).
If your idea is great, you will find the money without losing the shares. And if your business works fine, you will have to go through so many rounds of equity raising (and dilution), that you don’t want to distribute your shares already on day one. Because once they are sold, forget getting them back. It just doesn’t work like that.
Far too many entrepreneurs start a successful company and end up empty handed. They put their trust in ‘business angels’ which turned out to be ‘business devils’ once they saw the money coming in. Avoid them as long as you can. Talk to government agencies instead. It makes your life much simpler.
6. Cash cash cash cash cash cash cash cash cash
Management books always tell you that ‘cash is king’. Yeah, whatever, I thought. Cash can never be more important than profit. Well, it is. It always is.
In order to really understand it, just take this example: you set-up a company to develop your idea for a new product. You and your friends, the other founders, bring in all your savings, let’s say EUR60,000. A bank gives you another EUR60,000 as a loan. And you get some turnover, another EUR60,000. That’s your cash coming in. On the other hand, you have some fixed costs – EUR1,500 per month, so EUR18,000 per year (you don’t pay yourself a salary yet. Start-up spirit, right!). And in order to turn your idea into a prototype and then into a real product, you need to invest some substantial amounts in R&D: EUR170,000.
This is how you would look at it:
+ EUR60,000 bank loan
+ EUR60,000 turnover
– EUR18,000 fixed costs
-EUR170,000 R&D investment
Result: cash shortage of EUR8,000.
What you say: Oh god!
That is because you look at your cash statement. Of course you do – that’s what comes in and goes out. And now, your product is ready but your pockets are empty. You can’t pay next month’s bills anymore.
Now, the funny thing is: this is how government looks at the very same figures, in a P/L statement:
– EUR18,000 fixed costs
– EUR17,000 depreciation on R&D investment (that’s right, R&D is an investment, not a cost)
Gross profit: EUR25,000
– Tax (34%):EUR 8,500
Net profit: EUR16,500
What the government says: Congratulations! You are profitable in year 1. Now please pay us EUR8,500.
When you are there, with empty pockets and a tax letter on your doormat, that’s the moment when you really understand the difference between profit and cash. That’s when you understand: yeah, cash is king and queen and everything else. Never forget!
7. People, people, people!
All good things come from people. They change the world. They surely change a company. I had the privilege of being able to work (first at EcoNation, and now at EnergyVision) with some of the greatest people I know. Their taste for music might suck (who on earth would hate U2 or would know the lyrics of the Flemish song called ‘Toverdrank’ by heart…) but their drive is great. As an entrepreneur, a team does not work for you. You work with them, you are part of the team and you love it. It’s one of the differences between being a start-up entrepreneur and being a manager in a big conglomerate, I guess.
If you can handle it, the ‘start-up culture’ is a great thing to experience. You really become one, united, a team with common goals and common values. You spend so much time together, have so much fun, put yourself on the line, and get so much energy from each other. It just didn’t blow my mind, it opened my mind.
Online by Dec 15
8. Think big – spend small
9. Misery vs. dream (get some sleep)
10. Sales. Fixes. Everything.
by Maarten Michielssens
Founder and CEO