KoiTip #20 - Do the numbers!
I've been spending lots of time with new startups over the past two weeks, from pro bono mentoring at a Startup Weekend to judging pitches at the eKasi conference in Khayelitsha. Lots of the ideas sounded plausible but suffered from a fatal flaw - the numbers had not been done.
Now let's be frank, most of us would prefer root canal surgery to spending a day drawing up a discounted-cashflow spreadsheet. And so we don't do any numbers at all...
Fortunately I have a patent-pending high tech tool for this. That's it above. Yes, it's the back of a envelope. Let's see it in action:
Claire (cough*not her real name*cough) came to me recently with the idea of launching a line of organic baby food. She said she wanted to start small, perhaps just from her kitchen and that of a neighbour. She had spent several months thinking about this, coming up with a name, researching the competition, etc.
My first question was "Have you done some numbers ?". Claire admitted that she still "needed to spend a weekend drawing up a full financial plan".
"No need to spend a weekend", I said, reaching for an envelope, "let's just do some rough numbers". We started with establishing that she needed to clear R20k per month. I asked what a typical bottle of the baby food would sell for - R12, and then took a guess that clearing a gross profit of R2 on this would be excellent. A quick sum, and we can see she has to sell 10,000 items a month to cover her salary, and this before covering marketing and other fixed costs. So she probably needs to sell more than 20,000 items a month...
Her face fell. Clearly this would require a scale of operation that would go far beyond starting in a couple of kitchens, and would need a full-blown factory - and a lot of capital. She had spent months working on an idea that in a few minutes we could see would only work on a massive scale. Sadly she recognised this was too ambitious, and we turned to looking at other ideas in the baby space (one of which is a thriving business today!)
And this is what I see over and over - entrepreneurs who have not done their numbers right from the beginning. Do the back of the envelope first!
The best entrepreneurs know all the key numbers for their business down flat. From the beginning they do rough numbers, and never stop doing this. They identify and map all the key numbers involved in their venture, and test all their assumptions over and over.
Not convinced? If you want to succeed at any venture, I strongly suggest that you study this fascinating article by Tim O'Reilly, the famed publisher of the O'Reilly books, and see the vital role the numbers played in ensuring his survival.
Doing the numbers is an essential part of working...