A product company can begin earning revenue only after the product is built. Significant upfront investment is required in engineering and sales. As revenue picks up, expenses continue to mount for ongoing development and sales, and for establishing a new support team. It may take years before the company’s monthly receipts exceed the outflow. This is known as becoming cash flow positive. Adequate funding is therefore critical for a product company to survive.
As a rough estimate, a product business may have to invest anywhere from Rs. 50 lacs to 2 crores (USD 100K–400K) before they start selling. This is assuming that founders take very little salary. If this money is available somehow, the founders can concentrate on building and selling the product. If not, the company is forced to adopt non-ideal strategies. The previous chapter discussed options such as working on the product part-time, or generating cash by providing training, consulting or services. If founders have to multitask, it delays the product further, creating a higher risk for the viability of the business.
In the bootstrap phase, every rupee counts. Each aspect of the company’s operation must be optimally managed. At the same time, you cannot afford to compromise on product quality or delay the time to market. The two previous statements appear to be contradictory, but building a successful business is often about prioritising and choosing correctly between the conflicting demands.
The First Mile: Forming the Team and Signing Up Clients 75
For example, if cash in hand is an issue, PCs can be leased with conversion to ownership after 12–18 months. This is effectively like a loan (the interest is built into the lease cost). Hardware and software licensing cost can be reduced by using a common server and thin client for each engineer. You can have two servers to avoid single point of failure. Only servers need to be upgraded over time.
Making progress with limited funds is a struggle, but somehow enough money has to be made available through personal or angel funds, or some side business. With the right product, and after market validation with good customers and revenue, VC funding may become possible.
Can it be done differently? Let’s return to the film industry example. There are mega-budget movies in which producers spend enormous money on stars, sets, foreign locations and publicity. The film must attract a large audience, and earn hundreds of crores of rupees to become a super-hit. When that happens, the director is in great demand, and lead actors become superstars. If it is a flop, it is the producers who lose the most. At the other extreme, you have niche films that arrive relatively unnoticed or play in festivals. Made from a lean budget, the film may have an interesting script, excellent acting and good direction. The audience may initially be restricted to those who appreciate such movies, but it may grow by word of mouth publicity, making the movie a success.
Similarly, some entrepreneurs have conservative goals. For them, it is a lifestyle choice of being independent and having their own company. You will find many such businesses that are self-funded, largely debt-free, reasonably profitable and generating only modest revenue after several years. They usually provide a mix of services and one or two products. They keep adjusting their offerings over time to adapt to the changing market and available cash.
However, if your goal is to build a really successful company that gets acquired or goes public, then outside investment is almost a prerequisite. It is rare to achieve a revenue ramp that is steep enough to provide adequate cash.
A website offering advice and networking to entrepreneurs, StartupNation has designed an ‘Odds of Success Calculator’. The online tool rates a business based on eight risk factors. Interestingly, none map directly to the product idea. Two each are linked to the management team’s experience and market potential. But as many as four relate to finances: invested capital, difficulty in obtaining funds, quality of financial management, and degree of business planning. This indicates the importance of finances to achieve mega success.
There is no right or wrong goal—you just need to be sure about what kind of company you want to build and proceed accordingly. If you are ambitious, and are in fast growth mode with revenue exceeding Rs. 1 crore, then it’s time to approach institutional investors.