I just couldn't sugarcoat it


I had a meeting earlier this week with an entrepreneur. She was referred to me through another entrepreneur I've advised on a few matters, and she sought advice on how to turn her business from a home-based startup to a proper business and career. 

As is the case with almost every entrepreneur I meet, the fire of her passion was roaring. She certainly had the drive, willpower and even the risk appetite to build her business. 

She lacked business skills though, which is not surprising. Most entrepreneurs don't, which is why they often don't end up running their own businesses. 

But in this particular case, I couldn't sugarcoat it: I told her that she shouldn't pursue this further.

She was falling into a common trap: come up with a product and service that people genuinely want to buy, analyze the costs of producing and selling it, add some costs for advertising and admin and "you're good to go".  

So yes, based on such assumptions, you could have a small profitable business: emphasis on "small", not enough to support you or your family, let alone save for retirement. 

In order to turn a small business into something which can support your family, and eventually allow you to monetize it, you have 2 options:

1. Produce high-end items with very high prices and very high margins. Examples include high end jewelry for example: if your "net profit per piece" averages $1,000 (after all expenses), even if you only sell 15 pieces per month, you're "netting" $15,000 to your pocket every month. However it's rare and difficult to create such businesses. 

2. Produce lower-cost items which take advantage of the large consumer base we have in large cities. Such products range from high-end electronics and household goods to food and beverage items. The "net profit per piece" on such items is low, but you make up for it by "volume": selling large quantities. 

HOWEVER, most startups end up falling between these 2 worlds: they create products where the "net profit per piece" is low, but never achieve the "volume" needed to be able to make serious money and grow the business. 

Let's use the practical example of "cupcakes", a common startup theme in Dubai in recent years. If your "net profit per piece" after deducting ALL of your costs (not just cost of the cupcake) is $3 (and I'm being generous), you would have to sell at least 5,000 cupcakes per month to match the $15,000 profit we talked about earlier. That's around 170 cupcakes per day, every day, 7 days a week, 12 months a year. That's a lot of work for $15k/month profit, when you consider that mid-level salaried positions offer that for a lot less stress.  

HOWEVER #2: if that "cupcake" person were to get an investor to put some money and scale up the business into a "big volume" business with distribution agreements with hotels, restaurants, etc then he/she would be able to sell perhaps 15,000 per month, yielding a net profit of $45,000 (a little less at first given the expenses needed). Part of that money can then be used to expand into new products, geographies, etc. the result? SIZE/SCALE!

BOTTOM LINE: whatever your business is, understand how numbers work, whether it's scalable or not, and if so, what will it take to achieve that larger scale. 

A good understanding of finance and the concept of "return on investment" is critical if you want to survive and thrive as an entrepreneur.