Amit Gupta sat morosely contemplating the mug of beer in front of him. He was sitting in a pub in Delhi, looking the picture of dejection. Even the beer tasted flat - and he had spent almost his last few rupees on it.
Now I'm sure you as the reader might be wondering what’s going on, so let’s start at the very beginning………….
About a year ago, while having his weekly bath, Amit had had a bright idea. There were so many, many college students who were studying in not-so-great colleges, with very few placement opportunities. What if he were to evaluate their skills for a specific role, say sales, and then get training partners to conduct training for them. He could then take a percentage of the training fee from each partner, and thereby build a cushy, high volume business (Note : The smart reader may have guessed that this was not the actual case, but its close enough for our purpose right now).
And so, Skillo.com was launched with a lot of fanfare and beating of drums. Angel investors lapped it up and Amit was able to raise a decent round of funding. He took up an office in Saket, an up-market address in Delhi, built a team of twelve people, and created a fancy web site. Three members in his team were technical guys whose job it was to keep enhancing the web site. Two members were into digital marketing, to try and get enquiries from the likes of Facebook. And the rest of them fanned out into colleges, as well as locations where college students would hang out.
Now, those of you who are already into your own start-ups would be aware of a cute term called ‘BURN”. For those of you who are not, it’s the difference between what you spend and what you earn every month – in other words the cash you are burning up every month. Amit had not realized how difficult it would be to convince students to join up. Admittedly, some students were joining up and getting into training programs, but it certainly wasn’t enough to pay for the rent, the salaries, and the marketing costs. And the burn stubbornly refused to come down. So much so, that Amit was down to his last three lakhs in the bank, when he suddenly woke up with a cold sweat one night – he was in imminent danger of running out of money. He tried speaking to a few investors to see if he could raise money, but the response was uniformly negative – too much burn, not enough traction !
Fortunately however, his mentor – a member of Winged Angels, and an investor in Skillo.com –happened to walk into the pub at that moment. And the mentor wasted no time, “Amit you need to cut costs. You’re spending far too much right now.”
Amit nodded dumbly, and the mentor continued, “For a start, why do you need to have six people on the field, selling to college students ? Why can’t you have maybe one person, and engage bright young interns in place of the others.”
‘Yes, but the interns would not be as efficient at conversions”, objected Amit.
“Sure, but what are you paying them ? Why do you need to pay them a hefty fixed salary ? Give them a small stipend and perhaps some amount to cover transport. The rest of what they earn could be commissions – they get a certain amount for each student who registers. Incidentally, Interns take on projects more for learning than to make phenomenal amounts of money. And by the way, this is the whole concept of variable costs versus fixed costs !”
This sounded logical, and Amit nodded. “What about digital marketing ? That too eats away a large chunk of money every month ?”
“Since you do not have funds right now, you cannot afford to spend on digital marketing. So let’s look at an option. Why don’t you use the concept of “Campus Ambassadors? This is how it’ll work – Appoint a few people on each campus as your ambassadors. Their job is to get more and more people from their college to register for your service. These people do not get any fixed amount or even transport allowance, because they do not need to travel. As before, they get some amount for every registration they get. And you could even have prizes for the “Ambassador of the Month” and so on. Plus a certificate for them, which will help them in their placement !”
“As you can see, Amit, you must move away from fixed to variable costs. Fixed costs are incurred whether or not you get business. These are OK when business is flowing in. But you must minimize them when it is not. Instead, focus on variable costs – which are linked to revenues. They are incurred only when a business transaction occurs, and therefore you can afford them.”
Amit was beginning to cheer up. “And I can also consider renting out a few desks in my office as co-working space,” he said excitedly. “That would cut down my fixed costs further.”
“Great,” Said the mentor appreciatively, and ordered another couple of beers. “You see Amit, conventional businesses have always focused on profits and therefore costs. Which is why they are able to survive and grow without external funding every few months. Today’s Start-ups have becomes slaves to funding – if the next round of funding does not come through, they collapse. They only focus on growth and not on costs. Remember, think like the Lalaji who runs a Kirana store – he does not have VCs to fund him every few months, so he ensures that he is profitable. And one of the primary methods he uses is to minimize fixed costs !!!”
By now Amit was chirpy again. As usual he had learnt a valuable lesson from the mentor. “Thanks boss,” he exulted. “Fixed vs Variable costs – I’ll remember that.”
So he walked out with a big grin on his face. On his way to his new-found mentor – Ramesh ji, the local Kirana shop owner !!!!”
Guest Author
Dr Dhruva Nath is Professor and Chairman of the Centre for Entrepreneurship at the Management Development Institute, Gurgaon. He is also an Angel Investor. He can be reached at dhruv@mdi.ac.in.
