KE Dubai

KE Dubai
Location : Dubai

Challenges of Building and Running a Successful Enterprise

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by Ivan Fernandes

Ivan Fernandes is the Chairman of KE Global and promoter and Managing Director of Ducont. Ivan has successfully built start-ups into successful brands through his innovative approach to business plans, team management and seizing market opportunity. His companies have been acquired by reputed international organizations for the value of his products, customers and opportunities to cross-sell in the global market. Ivan shares his experiences to promote and inspire entrepreneurs. KE Global is a global, non-profit, mutual-benefit corporation founded by successful entrepreneurs to encourage, support and nurture entrepreneurship in individuals originating from the Kanara region.

November 21, 2010

We are turned on seeing someone successful whether it’s a famous singer, sports person or a business person. Most of the time, we witness the laurels poured on them, see the positive sides of their life style and want to emulate them. We also want to be like them as everything we see in them is rosy. Is it all rosy and even if it is so, what were the challenges they had to go through to be where they are today?

I have come across several of our youngsters who want to be successful entrepreneurs. However, when I sit with them and ask them specific questions, their answers clearly indicate that they have not given it a clear thought on what it takes to be a entrepreneur, what are the likely challenges they have to encounter and what would happen if it does not go their way? Most of them say that they want to emulate other successful entrepreneurs, make some quick money and be rich and famous without knowing how and where to start.

As an entrepreneur who has gone through the rigor of building two start-ups into well accepted brands, I can safely say that life of an entrepreneur is like living on a boat. Before you get on to the boat, you need to learn how to swim, how to stay afloat and more importantly on how to effectively load your boat with essentials that you require without overloading it, otherwise it will sink. Once you start sailing, you are left to fend for yourselves with very little help in case of danger. Ask an expert on what is the most important ingredient to start a business and he will say ‘your business plan’.

It is as good as saying you need a degree to apply for a particular job. Only once you are on the job do you know the challenges of executing it. As an employee, if you do not like it you can always quit or switch to something else that you find more suiting or appealing. However, that’s not the case for an entrepreneur. Before he starts with his business, he needs to invest heavily on the infrastructure required to run his business, hire the required staff and spend significant money on promoting it. His outgoings continue on day one – pay rent, utilities, loans, salaries, settle with creditors, debt repayments etc. However, it takes a lot of time and patience before you start receiving money into your account for your sales and services and more importantly, much more time when your inflows to exceed your outflows. Your critical element at this stage is how to manage your monthly outflows and more importantly retain your best employees. Your employees will always weigh their risks of continuing with you, their opportunity in the market and accordingly put forward their demands. You need to balance their demands in such a way that they are not only comfortable continuing with you but work whole heartedly for the success of your business.

The most critical aspect is for your key employees to believe in your business as if it is theirs and to achieve this you may even have to make them part of the company with some equity options such that they gain in the future when the company does well for the risks and loss of initial rewards. Payments from your customer will always take more time than what you expect making your cash flow management tougher. Follow the effective cash management principle - ‘Get your payments as early as possible and delay your payments as late as possible’. Hence the most important threshold of a business is this milestone i.e. when you can continuously ensure that your monthly inflows are in excess of your monthly outflows (including debt payments due). When you reach this point, you have a big sigh of relief and this in my opinion is the most critical point in an entrepreneur’s career. So your business plan must have this point clearly defined and it is imperative that you do not miss this milestone by a large margin.

The reason I say this is that if you do not turn cash flow positive as per your original plan, then you will get into a crunch situation where you are running out of cash and although you think you are nearly there and it is just one or two new deals before you are positive, your company may not exist for this to happen. When you are burning and on negative cash, you cannot expect any new investment – whether it is from a bank, venture capital or for that manner even from friends and family. Your friends and family are more likely to support you at the start of your venture but when you are short of cash and desperate – even they will not have the confidence in you. If you already have investors, then your life will be miserable as they will be more nervous than you and put in new restrictions on you such that you no longer have a free hand in running your business. Moreover, if you are single and planning to get married this is definitely not the time. Nobody wants to have a struggling son-in-law plus our society still does not recognize entrepreneurship as a profession at this stage of their venture.

Once you have passed this test, the next challenge is in building up your company. What does this mean? Now that you have setup your company and it is stable from an operations perspective, you need to look at building up your sales and improving your sales margins. Increasing sales requires a complex sales plan which looks at the actual opportunity for your product or service in your home market, your current market share, your competition, your product positioning compared to your competition and the corresponding pricing. It takes a team, time, regular monitoring and iterating of your sales plan for this to happen. Also you will run into a chicken and egg situation where you cannot drastically increase your sales operation costs until such time that you really see sales increasing constantly to bear these additional expenses. Ultimately, for you to enjoy the success of your efforts you have to make a profit as this is what is yours after taking all direct and indirect expenses into account. The more the profit, the better is your income and this determines how well your business is performing and also your lifestyle. Also do not forget that most of the time, it is very difficult to take out the profit as you need it to be invested to grow your business further – to open a new market, on R&D to improve your product or implement technology to improve your business and sales process to make it more efficient and reliable.

Whatever the implications, the second critical milestone for an entrepreneur is ‘Generate Profit’. This not only makes you feel comfortable and secure, it gives you a free hand to look at moving forward rather than being bogged down by daily chores.

The next critical milestone for an entrepreneur is achieving an ‘exit’. While this is barely thought of by majority of our entrepreneurs, this is important and vital. In a number of ways, running a business enterprise is like investing in a stock market. When the economy is performing well, the stock market is bullish and obviously the stock that you invested has increased its value. Unless you sell this stock you do not realize this increased value. So if the market turns around and the stock market crashes, you may end up with a penny stock that is worthless which was worth a lot a few days or months back. So it is very important when you convert the value into cash. The same goes with your enterprise. There are several external factors why your business may be doing well today in addition to you running a professional organization, having the right team, excellent marketing strategy and so on.

The external factors could be that there is a shortage of your product and services today, you are early in the market and there are no big players yet to pull you down or there is a short term opportunity that will not last forever. Whatever the case may be, when you are doing well – look at how you can convert the asset that you built into cash at a premium and compare the impact of that cash to the yield that you will generate if you continue to run your business conservatively for the next 3 – 5 years. For example, you generate $10 million in sales today and generate $1 million net profit. Considering that you need half of the profit as cash flow to continue, you are able to derive $500 K as dividends during the year. As per your plan, in 3 years time you are able to increase this to $ 20 million in sales and $ 2 million profit. What if another business sees better future value in your business and comes forward and values you at $ 2 million in cash today. Possibly, you have built an asset value of $ 1 million as of today. Is it worthwhile for you to just ignore this offer and continue with your original plan? I would say relook at it as you now have $2 million in cash instead of $500K plus you do not have to manage the risks of this business any more. More importantly, you have the cash to start something else better and smarter based on the experience that you have gained over these years.

Hence, exit plays an important milestone in an entrepreneur’s success. It is not necessary for you to exit completely, if you think you still have a role to play, then dilute your holdings such that your risks are minimized and you have some decent returns for all the efforts that you have put to date. Obviously, if your business value is significant (in excess of $ 50 M), then you can even look at the opportunity to file for an IPO (initial public offering). Sometimes, your existing investors may have a time bound exit in their investment documents. So it may become imperative on you to provide them an exit within the time frame defined in the initial investment agreement.

So before you look at the other guy driving his Mercedes Benz, flying business class and staying in a luxurious villa, think how he started – what were his opportunities and timing, what were his pitfalls and how did he overcome them. You may not be facing the same challenges nor will you be able to apply the same solutions, but going thru their experience you will be able to come up with solutions to your challenges as you go around building your business. And how do you do it? The easiest option is through networking. There is nothing better than meeting such people and building strong bonds with them. One of the best ways to network is join the entrepreneur groups where you can openly interact with these successful entrepreneurs but at the same time discuss about your plans, challenges and get some solid perspectives from their experience.

So if you want to be an entrepreneur – go ahead but do not assume that you will have a short cut to make some quick bucks. You have to climb the ladder to fetch the elusive pot of gold but the steps on the ladder are slippery than you think.