Margins Call: Why Startups Need A Stronger Understanding Of Their Financial Models
In the last half a year while I was helping startups, I had a privilege to build a few financials models and P&L for these new businesses. While doing so I have realized that founders have a profoundly wrong idea of what their business is.
That is, until they see the numbers and how the outputs change when the inputs change.
In doing so, I became profoundly fascinated by the margins. So out of curiosity, and because I’m in Japan and love candy, I started a new company, SUGADADDY シュガーダディ, that supplies a box of obscure and unique Japanese candy anywhere in the world for one low flat fee.
I knew I didn’t want to spend weeks researching the market. I had to quickly test my hypothesis whether or not it’s a viable business. So I asked my friends who wanted candy to order it, promising them to ship them candy at cost. I got a bunch of orders, and in just one weekend had learned more than some learn in months — I simply ran a tally of all my receipts, put them all in a spreadsheet, and by Monday knew what my true costs are.
I got all my marketing research done for free — in fact, it was paid for by my friends, who were happy to get the sweets at cost.
Because there are so few moving parts in this simple business, I also knew straight away where I can lower my costs — buying tax free to save about 5% per order, and when more orders come in, focus on operational efficiencies by buying own boxes, buying wholesale (currently buying at retail with about 40% markup to wholesale), and shipping bulk to a country with most orders and distribute locally.
All this information goes straight into a spreadsheet to test my assumptions and learn about the business without actually investing into it.
After the weekend, I was able to observe competition from a whole different point — I knew when they were “cheating” (i.e. putting cheap heavy items in their boxes), or trying to save up by bundling (i.e. offering boxes that ship once a month, instead of on-demand).
Startups, especially the one’s selling physical goods or providing physical services, live and die by margins.
Knowing how to run and build a business model that makes financial sense takes a clear head, and a business mindset, which is the skill a surprising amount of founders are lacking.
Evgeny Tchebotarev is a founder of 11-million-photographers-strong community 500px, backed by Andreessen Horowitz; and currently helps other companies unlock 10x potential. He is usually based in Taipei, Taiwan.