The cost of doing new business
This is a story of how I got the idea for my new endeavor. While it seems I might have started a new company on a whim, just because I wanted something new, I recently explained to one of my friends why I started the start-up I’m currently working on.
This is a story of how I got the idea for my new endeavor.
The only reason I’m writing this down, is because I think there is a fundamental risk (and cost) of doing new business. For obvious reasons I will not disclose all parties involved, I have changed some company names. Rest assured, the experience is real.
It was only a few years ago when I was Managing Director at Incentro (that one is real!). I was in charge, amongst other things, of doing new business and thus creating new opportunities for my colleagues.
While I was leading a consultancy firm, we had two revenue streams:
- Revenue on consultancy, basically time & material based
- Revenue on software licenses of the software we implemented at companies
The second stream was always a by-catch of the first one. We needed to sell software licenses to get a revenue stream based on consultancy.
Opportunities
Now a great opportunity came along to implement software from a vendor called Hooli (fake!) at a large multinational. Let’s call that company Acme. There was a large amount of money involved for us. We had to purchase the software licenses from Hooli and could resell them to Acme. One major prerequisite for that deal to go through though was that we were supposed to buy the licenses in December, but could only invoice/sell them 5 months later.
Commercially this is a minor problem: you’re basically financing the licenses for your end customer and as long as there is a fee or extra margin attached to it, you’ll be fine.
And then it struck me: what if my customer goes bankrupt before paying us?
The reason I thought this was a risk was twofold. I didn’t really know Acme, as they were a new customer to me. Secondly, the business Acme operated in was under a lot of pressure. In my mind there was a real risk of doing this deal. But I wanted it! It would grow my business, I’d have a new customer and there were new opportunities for my colleagues to work with.
And then it struck me: what if my customer goes bankrupt before paying us?
What to do?
There are a few ways to mitigate this risk of non payment. One of them is credit insurance. Basically an insurance against non payment by your customer (accounts receivable) at a small fee. “Small”, because there were a few problems with getting such an insurance:
- I needed to insure my entire revenue. Not just the one with Acme. No, everything. Even though the fee percentage was reasonable, it would also insure 70% of my revenue that I didn’t need to insure at all.
- I wasn’t even sure the insurers would insure Acme. If they thought it was too risky as well, they’d just remove that customer from the insured list. Instead of raising the fee / premium.
- I did not understand all the terms, slang and rules around credit insurance. That particular financial service is hard to grasp for someone that knows his own business: IT consultancy.
Long story short: I broke off the deal. We couldn’t run the risk. No new customer (Acme is still very much alive) and no new opportunities.
Long story short: I broke off the deal.
How does this relate to my new endeavor? I’m going to solve those exact problems in the credit insurance market I described above. I want a free marketplace where business owners can insure non payment of single transactions. In a way everyone understands. This will give business owners a chance to grow, do something different. It will also open up the market for credit insurers, a better way to find and serve their customers that fits modern times.
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