Earn or Burn-The Avgi Story
We started and conceived Avgi at a time a few years ago, when the era or success of a start-up venture was based on the “idea” or ability of the “idea”, and the pedigree of its founders, to attract initial external investment by way of “Seed funding”. Moving on to start-up, early stage, expansion stage and then finally to very large private equity with external investors waiting for funding Round 1, Round 2, Round 3 etc. All of this was based on perceived value, or “Financial Valuation” or projected valuation and not based on the ability of the business to be able to “stand on its own feet”. Most start up entrepreneurs were creating a business with an “intent to exit”, but not with an intent to make operating profits at the earliest and stay in the business and make it sustainable from an operational profitability standpoint.
Today, when we look back, many ventures that were conceived with an “intent to cash out and exit” have either closed down or are running into losses of millions or billions. Still awaiting a “break-even” and far away from even operational profitability, but based purely on perceived “Valution”, with no clue as to they will be profitable.
One choice we had, was to create “Valuation” and Exit. When you create valuation and exit at 10x or 100x or 1000x market capitalization, you definitely look like successful entrepreneurs who have created “Market-Cap” and exited with millions and in some cases billions. The glaring question we asked ourselves was- are we embarking on a business to create valuation and exit, regardless of the business making profits? Or do we have a clear plan of making an early breakeven and a target date for making early, profitable, operating margins?
Was our business model based on earning cash or burning cash?
Our conviction was clear-Earn rather than burn-We chose to go on a real business model to earn rather than burn however small that was, to have a real balance sheet that projected profitability or break-even within a couple of years, rather than sinking millions or billions of investor funding sinking large sums of investor funds before achieving profitability. And then waiting many years for break-even, and a valuation based on perceived “breakeven”. There is no wrong or right choice but we chose this option and felt for us this was the right option. This was a conscious choice that we made when we founded Avgi. This is based on a fundamental value system and a belief in the way we approached business, based on very fundamental principles of commerce or a simple profitbility oriented school of thought.
We were here to stay and create an operationally sustainable business and not in the valuation game!
Creating a Self-sustainable Business: We ventured into Avgi with a few fundamental beliefs and the most fundamental belief was to create a self-sustainable business in the shortest possible time. We believed that if we had value in our offerings, despite being late entrants or being perceived as a “me too” in the space of “IT Sevices”, there were still many out there, who saw differences and differentiators in the way we operated. The expertise we were able to extend to the market where there were many and varied enterprises willing to be our customers for the value we offered and not our size.
Effort directed towards acquiring customers rather than to get funding: One of the biggest misconceptions with start-ups and entrepreneurs in many cases is that there is a misconception that if one goes out in the market looking for investors for your ideas and that you if your idea gets approved by a Venture Capitalist, it is a consolation and validation to yourself and your co-founders that you are on the right track. It is as though you are seeking external verification and validation of approval of your idea. In doing this the effort is directed more towards getting external endorsement from an established “VC” rather than start a business based upon one’s own beliefs and conviction. As a start-up entrepreneur one has the choice to either direct one’s own effort to acquire customers, or focus their efforts in chasing “investors”. There isn’t a perfect approach. We however believed that if we had the right business model and we consciously chose to direct our effort and energy into acquiring customers in the least, to gain the critical mass to sustain our operations, then we were on the right track
Freedom and Independence and Financial control to operate: As professional corporate CEO’s or non-founder CXO’s will agree, that one of the biggest challenges is that you are answerable to the investors who could be private or a public investors. In our experience, at senior management level, that each decision that is made, which has strategic and financial implications or even major decisions concerning people at CXO level, a large portion of time goes in “Managing” the founder investors and justifying ones decisions with the to key stake holders or “The Board” rather than managing the business. Therefore the whole purpose of venturing on our own, was to get away from those shackles and that freedom from of “reporting & justifying” to the investors at each stage. The moment you went for external funding, that purpose got automatically defeated and compromised. We were clear there would be no compromises in that objective.
Ability to attract and retain talent within your limited means: When one gets funding, the first thing entrepreneurs do, is to occupy swanky offices with the latest Mac books and latest infrastructure without bothering to evaluate whether this kind of investment is needed or not. Because it is not Founder money it is Investor money.
But when you are non-funded not funded, it’s a different ball game all together. Its a game changer when you have to attract talent without swanky offices or swanky laptops, but a pure passion and an urge to make a sustainable business. In this pursuit, even if there is just one believer who is willing to walk that journey, with you without really thinking about financial rewards, but purely because of a fundamental shared belief of freedom, flexibility and a shared dream, that is your first step towards creating an organization. In this sense I was fortunate that there were a set of believers who joined hands with me when we started Avgi. Money and profitability would, we were sure be a natural outcome of our fundamental value system. We did not have a proper office, we operated from a shoddy cheap business centre with the cheapest 2 seats at the cheapest rate like many startups. We had people who were ready to believe in that dream and did not bother or care for the comfort of an IT park or a huge campus with glass facade buildings, golf courses, campuses or real estate facilities.
Ensuring Cash flows match your payment patterns: As a corporate professional or a CXO, while you may know the entire life cycle of a business, there is something no self-made entrepreneur tells you, and that is - how do you manage cash flows? How do you ensure there is no salary default or a vendor payment default? even by a single day. How do you ensure your vendors and suppliers are paid on time? How do you raise money for short term working capital-You have to learn it on your own.
Being aware of the Banking system in India: On the other hand In India, the banking system is so blind to small enterprises, as we have seen and experienced in recent times, that they either have no clue or a proper mechanism and processes to evaluate a potentially and honest client, especially if they fall within the MSME (Micro, Small Medium Enterprise) category. They have nowhere to go nor do banks or their branch managers have any clue or expertise on how to deal with them. If you goto a bank with a Rs 1000 cr or Rs 10,000 cr proposal for Rs 1000 cr or Rs 10,000 cr project about 5-8 years ago, they would happily dish out a loan for obvious reasons, and without a collateral. But if you have a short term cash flow need for Rs. 10L they will require you to mortgage your property as collateral!! The one thing that we decided, after approaching banks with whom we had a couple of years track record of month on month remittances and payment patterns was that we will not approach banks ever. Rather we would manage our customers from our own personal savings and connections, for short term working capital (less than a month’s requirement for working capital) even if we had to pay a higher rate of interest.
In Summary: In summary here are the few things we did differently-
We started with the intent of staying on and not cashing out.
We started with the intent of achieving profitability in the shortest possible time and achieving a self-sustaining business.
We spent our time and effort chasing and acquiring customers rather than VC’s.
And above all we had a passion for the business, not a desire to create an artificially inflated valuation for a VC !!!
What next: We are an IT services company that specializes in building and managing world class software products for our customers and their customers. Whether it be on cloud or on premises! Our pursuit of developing excellent products continues with fundamental business principles with no hype, no perceived valuation but hard factual data that is in black and white and no other color, especially red. The pursuit still continues, but as professionals today we have freedom, satisfaction and above all a meaningful aim of creating operating profitability rather than perceived valuation!