Above: John Lim, ARA Asset Management (photo credit: DealStreetAsia)
We packed our bags and headed to clean and pristine Singapore to meet with and hear from leading regional investors and founders at the DealstreetAsia™ PE-VC Summit 2019. Arriving at the conference, we quickly noticed that we were in a very select minority of investors from Myanmar – an indication of the country’s early frontier status. People were curious about Myanmar and excited to hear about our work and our incredible portfolio companies. Over copious coffees and one or two beers, we shared, listened and learnt. This short post summarises some of the key insights from the presentations, conversations and gentle persuasions of the event. Underlying each of the following points are three core values we observed from the summit: know your customers and put them first, work hard and smart, and lastly, find an investor you can build a relationship with.
Lesson 1: Don’t Try to Make Money
One thing we weren’t necessarily expecting to hear at an event where the total assets under management of all parties was over $100bn was “don’t try to make money”. However, founder and CEO of Deskera, Shashank Dixit told a roomful of investors and founders to focus on building great companies that serve customers and let the money follow. We see value in this sentiment: startups need to deliver outstanding value to their customers - with scaleable unit economics - and if they succeed then exponential growth will happen. Once your product or service is too good to be without, you’re on set on a course for scale; so long as you scale with the right unit economics, the riches will come. Focussing on making money, on the other hand, isn’t putting your customer first and introduces short-termism that could prevent you from building something great. Indeed, EME’s permanent capital approach (rather than a fund with an exit deadline), means that we can work with entrepreneurs to build great companies and take a long-term view with founders.
Lesson 2: The Importance of Trust
One of our favourite one-on-one on-stage discussions was the interview with John Lim. Son of a schoolteacher, John Lim is the cofounder of ARA Asset Management which has $58 billion in assets under management. Lim spoke about how crucial trust was in long-term business relationships, citing that he had a long-term multi-billion-dollar arrangement based purely on a handshake. This introduces an interesting thought experiment: would you trust your partner to honour the agreement purely on a handshake? Often the answer is “no”, which is why we have contracts and may be fine for short-term transactions. When it comes to investing, though, we want to be able to treat contracts as a formality, understanding that there is an enduring trust between us and those we invest in. This approach forces transparency, accountability and integrity on all parties, which can only be a good thing. Keep this in mind next time you review a term sheet.
Lesson 3: 007, not James Bond
China’s growth has been built in part upon the 996 model: people working diligently from 9am until 9pm, six days a week. This might feel quite gruelling for the employed, but for founders John Lim says they should be following the 007 model. 007, in case you haven’t worked it out yet, is 12am-12am, seven days a week (i.e. 24/7). Of course, even Elon Musk sleeps (a little), but the sentiment is that to build something great, founders must commit and put in the work. In fact, when asked about the secret sauce for founders, Lim offered: there’s no secret sauce for startups or CEOs. They must be passionate, know their stuff, be patient and work hard. He added: “Don’t open a restaurant because you love food. If you want to start a restaurant, work in one, understand the customers, the supply chain and the problems; after a couple of years, only then might you be ready.”
Lesson 4: Vision Without Execution is Hallucination
Southeast Asia is creating more and more unicorns (startups valued >$1bn), but these companies are coming from great execution more than they are fresh innovation. Given that SEA is quickly developing, there is significant scope to take models born in Silicon Valley or elsewhere and transplant them into these markets. Investors and founders at the event agreed: SEA is an execution game. This is as true in Myanmar as anywhere else and perhaps even more so given the country’s only very recent emergence from military rule. In Myanmar, there are plenty of opportunities to disrupt traditional business with nimble ideas from other markets. How to execute? This requires excellent founders who can deliver on their strategies, who can roll up their sleeves and make things happen, who have a drive and determination to ensure dreams become reality. Decisions might happen in the boardroom, but the real work takes place on the ground.
Lesson 5: The days of investing and taking a backseat are over
Investing in startups is becoming increasingly competitive. With a challenging global economy and more funds available for a greater array of startups, investors are reflecting on the role they play. Across many conversations and panels, a theme emerged that simply betting on a founder and walking away, hoping they succeed, is a dying strategy. Founders expect their investors to become partners, not just cheque books. In Myanmar, there is less capital than most markets in SEA but this doesn’t mean founders need to be happy just accepting cash. In fact, EME’s model is based on investing capital and significant time into our portfolio companies – helping them to overcome their challenges and find a pathway to scale.
Agree, disagree or have additional lessons to share? Drop us a line at email@example.com!
A good financial model is a little bit like magic. You can gaze into the future and compare how decisions you make today affect what happens for years to come. Of course, even the best financial model is only a representative of what could happen. None of us can truly see into the future, try as we might. What makes a “good” financial model? A financial model is just a business tool, so a good one is one that gets the job done. It should be error-free, clear to use and provide results that are easy to interpret. Similarly, you need a different tool for different jobs; the financial modelling requirements of a listed company are going to outweigh those of a young startup.
When we planned this post, we were intending to share a financial model template that we’d found online and provide some usage notes / pro tips. However, it turns out that there is a dearth of appropriate models that are ready to use by reasonably inexperienced people. The models we came across were either overcomplicated or very limited, so we decided to create our own! You can download our subscription model template at the bottom of this post, and below you’ll find some good modelling principles to help you make your own.
Garbage in, garbage out
The first rule when creating projections of any sort is: garbage in, garbage out (GIGO). This simply means that if you make wild or erroneous (or both) assumptions when putting information in, you can only expect to get wild or erroneous results out. If my model says I can take 10% of the total addressable market, but I get the market size wrong, my model will be wrong. This means that the initial research behind your figures is crucial. Research your inputs and check your assumptions as much as possible before entering them into any financial model. You can be sure that investors will ask, “how did you get to this number?”, so be ready to defend your projections.
Top down vs bottom up
Check out our recent post on top-down vs bottom-up approaches to market sizing. With financial modelling, we also want to start at the bottom and work back. For instance, if you simply estimate your sales are growing at 10% month on month, you can quickly miss the underlying details. Your sales are unlikely to grow for no reason. More likely, you have marketing and sales expenses that together help drive sales. At the very least, you need to consider in detail how your HR, marketing and related costs are going to contribute to increased sales. Rather than assume sales grow at 10% and sales staff expense grows at +1 person a year, ask how many sales one salesperson can make in a month then multiply this out to the year, then work up to sales output.
Keep it simple, stupid (KISS) is a design principle that is clear to understand: keep things as simple as possible, so that they’re easier to use. This goes for financial models too: separate your inputs clearly, build your model logically and add notes wherever necessary. Adding usage notes is not only good practice for any spreadsheet design, but it'll help you understand what you've done so far, in case you start to get stuck with your model. If you make a good pitch to an investor, there's every chance they're going to want to see your financial model - so it's good for it to be clean and easy to read.
Use charts effectively
Don’t rely on people to read hundreds of lines of your model. If your model requires complex calculations that’s fine, but these rows shouldn’t be used to present information. In our template, there are “inputs” and “outputs” plus some charts. This is to keep things straightforward (and our outputs are only 100 lines or so). Another approach is to model sales and revenues separately to costs and then to present the outputs of these sheets in a summary sheet. Whichever you do, it’s advisable to add some charts to show what’s going on in the model. If you haven’t seen it yet, check out our quick guide on what makes a good chart.
Build what you need, then stop
Think about building your financial model like building a ladder. You need enough information (rungs) for your purpose. You might even add a few extra rungs, to make it easier to get on and off the ladder at the top. But if you keep adding rungs, you’re going to have a very large ladder that’s cumbersome to move around and doesn’t offer much beyond the much smaller one that suits your need. Financial models can go on and on, but there comes a point where adding more variables isn’t necessarily making your model any more accurate. If the model represents key costs, how you acquire customers and how you generate income and adapts to show different outputs based on your input assumptions, it’s probably all you need to begin with. Remember, the more complex something is, the easier it is for errors to hide. It’s better to have a simple and correct model than a complex and wrong one.
You can download our basic subscription financial model here. Our intention isn’t to provide a one-size-fits-all model (does such a thing exist?) but rather to guide founders on how to go about representing their business model in spreadsheets. The best financial model in the world won’t grow your business, but clearly laying out how your business makes money should help you make better decisions. Good luck!
Above: the EME team (after we escaped)
Last Friday the EME team headed out to Xcape Squad, one of Yangon’s escape room venues (they’re not sponsoring this blog). After we escaped, we reflected on some lessons that also apply to founders and startup teams. For those that aren’t familiar with the escape room format: a small group of people is locked inside a room and must solve several clues to unlock the door all within an hour. The time pressure and limited information forces a need for communication and collaboration, something that startups will appreciate as they face pressure to grow / raise before the money runs out.
Here’s what we learnt:
#1: Map Your Surroundings
Before starting off in the wrong direction, it’s important to understand your surroundings – your market, competition, customers. You might have what feels like a great idea, but until you’ve spent time checking your assumptions, your great idea is unqualified. When we got into the room, we found several long sticks and immediately started seeing where they would fit – but there was a very big clue that we missed for a while because we hadn’t properly assessed our surroundings. Startups sometimes make this same mistake by missing crucial elements that affect the viability of their model. To avoid this, ensure you’re consciously aware of who your company is serving, why it’s serving them and why they would use your service over any other.
#2 Don’t Forget Fundamentals
Escape rooms force you to solve clues in order, but before we learnt this, we were flailing around trying to solve several clues at once. Startups should be fast and nimble, able to race ahead. But, even the fastest startup needs some key fundamentals in place and missing these is going to cause severe growing pains later down the line. Yes, we’re talking about clear financial reporting, sales tracking, customer management, staff management, etc. It’s important that there are at least basic and functional systems in place as a foundation to grow upon. Whether its simple spreadsheets or free / freemium software, it’s also important to keep track of what you’re doing. How else are you going to show your achievements? How can you ensure you’re making the right pivot without a clear record of what’s happened so far?
#3 Have a Plan and Embrace Horizontal Structures
When there’s just three of you, it’s a good idea to ensure that anyone with a smart idea can bring it to the fore. This is as true for the escape room as it is for business, and it’s not just limited to three people. In a startup you’ll have a small number of people (at least to begin with) with different skillsets and in different positions. Firstly, everyone should understand what the company is working towards and how to get there. Second, this plan should be changeable if new information is presented – by staff at any level. Sales people know why customers are or aren’t buying, the customer service team knows what customers like or dislike about your products / services, the marketing team knows how to advertise key messages, and so on. While the CEO should be plugged into these things, it’s also the CEO’s role to ensure that all staff have a voice and can contribute to achieving or altering company goals.
#4 Get Advice
To quote one famous sports coach, “In life, you need many more things than talent. Things like good advice and common sense”. We had three opportunities to get help with clues and we used every one. Getting hints to solve clues helped us move faster when we hit a roadblock. This is the role that mentors, advisors and board members (we’ll call them all mentors for now) should play for startups. It’s the founder(s)’ role to find good mentors and “good” is going to be different depending on the startup need or company stage: it could be someone from the industry that brings connections and technical knowhow, or a venture capitalist with ability to help raise additional funding, or simply someone with experience to help bounce ideas off of.
#5 Celebrate Wins, But Keep Going
When we solved a clue, we high-fived and patted ourselves on the back but as we were against the clock, we soon moved on. Startups should do the same. It’s going to be hard to scale your business and all the odds are against you, so celebrate wins even when they’re small. Celebrate big wins too but – and this especially relates to what you might see as big wins – celebrate then keep going. It is not the role of the startup to get comfortable. Comfort is for the slow-moving corporates. If you’ve raised money, it’s time to work double as hard to ensure you deliver to investors and have them re-invest or help you find investment to scale further. There might not be a clock ticking down to zero in your office, but be sure: you are against the clock, if you don’t move fast enough then someone else will.
A couple of weeks ago, we wrote a blog about Metrics that Matter, which among other things warned of using cumulative revenue charts. This got us thinking about other charts and graphs that we’ve seen in pitch decks and presentations. Some have been excellent, while others have been distracting and confusing (two things you don’t want your pitch to be!). Therefore, we decided to share some thoughts and recommendations on the types of charts you should and shouldn’t use.
First, a very quick introduction to data visualisation (i.e. charts, graphs, tables, etc.). We use visual aids to make it easier to show a trend or phenomenon. If you’ve made a super complex chart that takes more than a few seconds to understand, you’ve failed at data visualisation. This is a comforting thing to be aware of: if you struggle to understand a chart, it’s not you, it’s the chart’s design. Let’s add some rules to what makes a good chart:
1. Efficient- this is like “easier”, it should be easy to read and more efficient than the alternative of writing it out (i.e. a table);
2. Meaningful- pick data that means something, just as investors care more about how much revenue you’ve generated rather than the average time of bathroom breaks your employees take;
3. Unambiguous- if it’s not clear what the data is, then it probably needs a label or shouldn’t be there!
Now that we have the rules mapped out, let’s look at some bad charts. What’s wrong with the chart below? For a start, try guessing what the value is for Sagaing in 2003. If that’s not hard enough, try to then compare that to the value of Mandalay in 2010. Now, quickly glance and say which is higher overall, Shan or Kayin. All in all, this graph is impossible to read because the 3D design hides things, colours of series are the same (or very similar) and there’s just too many datapoints. This chart fails all three rules.
Let’s take a look at the chart below for another example of bad charts. We’ll let you decide why this one is bad (if you need a hint, just time yourself while you try to work out what’s going on).
Not all charts will be so terrible that you recognise them as “bad charts” from the beginning. While it’s pretty easy to avoid making charts that look like those above, there’s a long way between not making those and making good charts. We try to keep our blogs to around 500-600 words, so in the next 150, we’ll set some rules to make life even easier when representing data.
A) Don’t use pie charts
Simplest rule is don’t use them. If you must, don’t include more than 4 segments. Never compare a pie chart to another pie chart and never, ever, use 3D pie charts. If you’re not sure, revert to the title of this rule.
B) Order your data
Annual data should typically be presented chronologically, but other data should be presented in a structured way: smaller numbers running to larger numbers, or vice versa – this makes patterns much easier to spot.
C) Forget grid lines, use data labels (and bigger fonts)
Remember, the idea is to make it easier to read a chart than a table. Looking for the biggest column / bar then checking the axis value and running your eyes along to see the column / bar value is a lot of looking around; instead, use well placed, easy to read data labels.
If you want to learn more about good and bad charts, you’re in luck. There are two wonderful resources on the subject we would highly recommend:
We helped Bagan Innovation Technology estimate the Myanmar market size for fortune telling and now we’re sharing how we did that.
It’s a common sight at startup pitch events all over the world (including here in Myanmar): a founder talks about their product and traction and then claims the market size for their product is hundreds of millions (or billions, especially in larger markets). If the entrepreneur can access just a tiny percent of the total market, they can achieve revenues of $2-3m in the next two years, even though revenues today are non-existent. We can’t blame entrepreneurs for this: with a few minutes to impress, they need to use big numbers and we’re always telling entrepreneurs to think big. But things can often fall apart when the entrepreneur is questioned about their assumptions behind the market figures.
Market sizing is the process of estimating the total dollar potential of a market. Simply put, how much money is spent in total in your target market? Example: we estimate that the total amount of money spent on fortune telling services in Myanmar is around $200m. You’ve probably heard about TAM, SAM and maybe SOM. These are Total Addressable Market (TAM), Serviceable Addressable Market (SAM) and Serviceable Obtainable Market (SOM). There’s plenty of definitions for these elsewhere so we’ll skip over them today, just know we’re talking about how to estimate the Total Addressable Market, which is total annual revenues in a market – this is the first number you’ll need before estimating anything else.
Top down or Bottom Up
There are two approaches to estimating market size: top down and bottom up. Top down approaches start with a big number and – you guessed it – work down. If we know the total amount people spend on grocery shopping, we can make some assumptions about how much people spend on particular products (i.e. 5% of their shopping basket is onions, so the market size for onions is 5% of the grocery shopping market). However, in Myanmar good data points can be hard to come by. What we often do, therefore, is look for a comparison country and work back. In our example, we saw that The Economist (a reputable newspaper) claimed the market for fortune telling in South Korea will soon be $3.7bn.
Now, Korea has a similar size population to Myanmar, but incomes are much higher. Therefore, we want to find a way to apply the Korea results to Myanmar. Here’s how we did it: we worked out how much % of their income Koreans adults spent on fortune telling and applied this to Myanmar adults. The result was that people spend around 0.28% of their annual income on fortune telling. In Myanmar, that’s a $168m market.
Bottom up approaches start from the smallest number and work up. If we’re talking about onions, we’d find the price of one onion, then estimate how many onions people bought on average each time they shopped, how many times a year they shop, etc. until we got to the total market value for onions. For fortune telling, we did the same: take the average price for fortune telling in Myanmar, how many times would people go to a fortune teller in a year, and how much of the population uses a fortune teller. This approach gives us a total market of $222m.
Which approach to use?
The simple answer is both. But we like bottom up approaches as it shows you’ve thought about the actual occurrences required to build the market size (rather than abstract numbers without much real-life meaning). Taking the time to go through both approaches helps you triangulate your results. In the top down approach, the only assumption we make is that people in Myanmar spend the same share of wallet on fortune telling as people in Korea, but this is a huge and hard to test assumption. In fact, when we do our bottom up approach, we estimate people spend on average around 10,000 MMK ($6.6) which is closer to 0.5% of income (this highlights the abstract nature of top-down approaches). Also in bottom up, we assume 40% of the population uses fortune telling services - this feels right to us based on our market knowledge and is a number we’d happily defend.
In our case, as the discrepancy between the top down and bottom up approaches was rather small, we decided to take the average: $194m (hence the “around $200m” at the start of this post). Taking the average lets us not be too bullish and allows us to better defend our estimations. However, as you can see the bottom up approach just makes a lot more sense and is easier to understand. In all likelihood, the fortune telling market in Myanmar is more than $200m.
Note: $194m is a huge, huge market for Myanmar. Fortune telling is a fundamental part of culture and something people are already consuming. We would not recommend trying to come up with a number, but instead following these processes to get to a result. Don’t worry, we’ve invested in markets as small as $20m. Yes, large markets are good, but it all depends how much of the market you can take and how fast the market is growing. Our advice is to be honest with yourself (and others) about market size and use this to guide your market strategy.
Stuck on market-sizing? Get in touch with us at firstname.lastname@example.org and let us know where you’re up to. We’d be happy to share some ideas!
Above: BiT CEO, Ricky Thet (centre) with CTO Soe Khine Win (left) and CMO, Win Hlaing.
This week we interviewed our good friend and EME mentor, Ricky Thet, CEO of Bagan Innovation Technology (BiT) to bring some insights from a Myanmar startup that’s truly succeeded. BiT’s Android keyboards (Bagan Keyboard, Frozen Keyboard) have more than 20m downloads and 15m active users. Their bookstore (Wun Zinn) and fortune-telling app (Min Thien Kha) are both market leaders. From starting in 2012, BIT now has well over 100 staff and is continually bringing new products and services to the mass market.
What was the founding strategy behind starting BiT?
Before BiT, I was a software architect in Singapore specialising in mobile solutions. Most of the projects were not from a mobile-first approach, but rather extensions of existing non-mobile services to mobile. That was back in 2007. After working for a year or so within this new mobile solutions trend, I realised that mobile was going to be big, especially in a country like Myanmar.
So in 2010, I started a small software firm specialised in mobile projects. Then in early 2012, I started BiT with my two co-founders. At the time, there was no clear strategy, just the belief that mobile would be the centre of everything. That shared belief was the beginning of a vision that would drive BIT. We spent the next two years researching the market; at the end of 2013, we set our strategy to focus on building a user-base through cool apps and digital content because we love tech and reading and we saw an opportunity to bring this to Myanmar.
How did you win the android keyboard market?
Bagan Keyboard is the baby of our CTO, Ko Soe. It started as his part-time project and he did all the heavy lifting almost single-handedly. After seeing the product, we decided to back it and put the whole team behind it. The success of Bagan Keyboard mainly comes from our commitment to R&D, constant listening to users’ feedback, and of course timing (first-mover advantage at a time when mobile phones were scaling like crazy). We have released over one hundred versions of Bagan Keyboard. That simply shows our commitment to the product. When talking about a software keyboard, a lot of people only see the UI and UX but there is so much that goes on behind the scenes. We continue to put more resources into our keyboard even today.
What is your secret to customer acquisition?
The key to customer acquisition is the product itself. If the product provides value to users, then it is much easier to achieve massive customer acquisition. Our main strategy for customer acquisition is delivering true value with the product itself and understanding the users’ ever-changing expectations. If people aren’t buying or engaging with your product, you have to ask yourself: is it my go-to-market strategy or is it my product? Lots of founders think their product is great, but it doesn’t matter what they think: it only matters what users think.
What advice would you give new founders today?
I have to repeat a message from Steve Jobs – you’ve got to find what you love, and you have to love what you do. You don’t have to love daily tasks, but you have to love and believe in your product / service / strategy. Don’t start a startup for the sake of starting a startup, if you expect to succeed. Starting something from nothing is hard. If you’re not in love with your startup, how will you justify the sleepless nights and effort required to grow it? Are you ready to spend a decade of your life doing any tasks which you might like or hate every single day to accomplish your startup’s missions? Would-be founders must be able to say “yes” to that before founding the startup.
What advice would you give yourself if you could go back in time to founding BiT?
Go for it and dream big. Time is precious so get the most value from it. You’re about to spend the next ten and more years putting everything you have into this business so think about it in the biggest ways possible. If it doesn’t feel too big or unachievable, you’re not thinking big enough.
We’ve met more than 150 startups in Yangon and Mandalay and we continue to meet more every week as we seek the most promising early-stage companies in Myanmar. Over the course of these meetings, we’ve seen and heard some excellent pitches as well as some more confusing ones. We’ve noticed on a few occasions some confusion over certain terms when it comes to startup company metrics. Therefore, we thought it would be useful to clear up some terminology on business and finance metrics for startups.
This isn’t a list of the only metrics you should be measuring. It is a list of things we know people get wrong sometimes. It’s also a list of the metrics that we like to see at first glance. These metrics tell us about the company and market potential and provide enough information to get us interested to learn more (assuming the numbers are good!).
If anything remains unclear after reading, or prompts a question, contact us at email@example.com.
Revenue or Bookings?
Revenue is recognised once a service or product has been provided. Bookings is the value of the contract between the company and the customer. Let’s say you subscribe to receive a monthly milkshake for $5/month, you sign a twelve-month subscription for $60. The $60 represents the bookings for the milkshake seller. The milkshake sellers will then recognise revenues of $5 each month until the end of the contract. Now, if you bought twelve milkshakes at once and took them home, then the seller would have provided the goods and therefore would recognise the $60 revenue. Getting these things mixed up can appear misleading so ensure you’re clear with investors. Bookings = contract value. Revenue = money for the service or product that has been provided.
Gross Merchandise Value or Revenue?
Gross Merchandise Value (GMV) is the total value of the transactions going across a marketplace. Revenue in this case is the amount that the company takes from a transaction - the commission, either flat-rate or percentage. If I have a marketplace for bringing together buyers and sellers of shoes, and 100 pairs of shoes are sold at $25 each then the GMV is $2,500 (sales price x number of sales). If in the next month the 200 pairs of shoes are sold at $25, clearly the GMV is $5,000. GMV therefore shows the activity of the marketplace and helps investors understand the market size. If the company charges 10% on transactions, then revenue would be $250 and then $500 on the above examples. GMV is not revenue, it’s about the market not the money your company is making. Revenue is the amount your company makes by providing a service - in this example the service is bringing together a buyer and seller and facilitating a transaction.
Monthly Figures or Cumulative Figures?
If you sell three items in month one, two in month two and one item in month three, your sales are clearly declining, but if you show a cumulative chart - it’ll still show an increase, from 3 to 5 and then 6. Investors do not like cumulative charts because they are misleading. We want to see your monthly users / sales increasing and at what rate. Therefore, while it may be tempting to use cumulative charts, don’t. Show your monthly activity and your month on month (MoM) growth. If your product is right and you’re reaching your customers, your users / sales should be increasing every month. If they aren’t you need to question why; and then make changes that drive growth. Once you have some solid month on month growth, then you have an interesting chart to show investors.
Downloads or Active Users?
Downloads is the number of people who have downloaded your app, while active users is those users that are still using it. Active users would tend to be quarterly, monthly, weekly or daily - it depends on what your app / service is. Pick one that works and use it. You might have 500,000 downloads, but active users is where the value lies as these are the people actually engaging with your product. We would recommend breaking your active users into groups (i.e. paying, not paying) to help show if your business is managing to increase users who are paying for your services. Also consider if your active users are carrying out behaviours which you want to tell potential investors - such as recommending new users, providing positive feedback or enquiring for additional services.
Operating Expense or Costs of Goods Sold?
Costs of Goods Sold (COGS) relates to the costs required to produce a product. Operating Expenses are expenses that are not directly related to producing a product. Let’s say I sell a banana milkshake for $5; I paid a total of $2 for the milk, ice cream and bananas so my COGS were $2 (or 40%). The milkshake was made by my staff member who receives a salary, in my cafe where I pay rent using electricity which I pay a utility bill for; each of these items is an operating expense. With a software-as-a-service (SaaS) business, COGS tend to refer to the costs involved with providing the software: hosting fees, third-party products involved in delivery, and employee costs for keeping things running. It’s worth being clear what you’re including in SaaS COGS as some investors may have slightly different interpretations. Why is it important to define COGS properly? Because revenue minus COGS is equal to gross margin; and dividing gross margin by sales revenue gives you gross margin percent which tells you (and investors) how much the company retains from every dollar (or Kyat) sold.
Update 9th July 2019:
Comment from Sam Glatman, Founder of "Zingo" a startup in Myanmar providing oral care products for betel nut chewers:
The metrics that matter article is great and raises an issue that we have been working on internally recently. In our case, we have been differentiating between “sell in” and “sell out”. “Sell in” is a sale on credit to a distributor. “Sell out” is a sale either by us directly or by a distributor to a betel vendor who pays hard cash. We realised that while “sell in” is where our top line revenues come from, the only relevant metric for us is “sell out” because it’s leads to hard cash, and demonstrates real consumer demand. For us (and many start ups), cashflow is a far more relevant success (& survival) metric than P&L, and top line revenues are not as indicative of cashflow as might be expected.
Pay Rises and Hostage Situations
When did you last negotiate? Probably, it was sooner that you realise. Negotiation isn’t all pay rises and hostage situations, it’s the process of agreeing on an outcome. If you want to leave work early today, you might offer to stay an hour later tomorrow. If you picked what to eat last night, perhaps you told your friend / partner that they could pick next time or explained that you knew the best place to go. These are negotiations in our daily lives. We negotiate every day to some degree, but if we don’t even realise we’re doing it, how do we know if we’re getting enough in the agreement?
In his book, Getting More, Stuart Diamond teaches how with some simple core principles it’s possible to become more effective negotiators, both at work and in our day-to-day lives. Diamond is an American Pulitzer Prize-winning journalist, professor, attorney, entrepreneur, and author who has taught negotiation for more than 20 years. But, he claims, the lessons in his book can be implemented by anyone. Sounds too good to be true? I gave Diamond’s lessons a try and got a big discount at a local gym - not life-changing, but many little discounts add up. On a more relevant topic, investors and founders will hold hundreds of negotiations between one another. Of course, valuation is often a negotiation, but think about term sheets, CEO salary, budgets, future capital raises or even small things like requesting support, asking for introductions or agreeing on where your board meeting will be held. Diamond is clear in his book: if both parties understand negotiation, both can come out with more.
Diamond's 12 Strategies
Don't be Hard, be Smart
How can both parties get more? It depends how you define “more”. One thing Diamond teaches is being very clear about what you and the other party want. First, ask three questions: What are my goals? Who are “they”? What will it take to persuade them? Next, ask yourself these same questions for the other person (or persons). Then, try to trade things of unequal value. I wanted to go to the gym in the morning, not the evening; mornings are not busy at the gym so I asked if I could have an off-peak discount. I traded “peak hours” which had zero value to me, while the gym could still improve their income by selling a product of lesser value to them “off-peak hours”. All that was necessary was understanding what each party wanted. I didn’t want “gym membership” but rather “access to the gym early in the morning.”. If you’re raising capital, do you want “$100,000” or “funds to help you scale”? Does the investor want “as much equity as possible” or “equity enough to balance their risk”? If it’s about balancing risk, how else could you reassure the investor?
The key is once you have a clear picture in your head of what you want, you need to get that picture into the head of the other person. To do this, Diamond recommends role playing the negotiation - taking the role of the other person. Think about what they want, how they would respond and have a friend help you go through the motions. If you can understand the picture in the other person’s head, you’ll have more chance of discovering how to show them the picture in yours.
Borrow the Book from EME
There’s a lot more to discover in Diamond’s book - if you’re interested, we have a copy at EME we’d gladly lend to you. Diamond can be a bit self-congratulatory, but it's worth persevering through at least the first half of the book. Before we finish, let me leave you with some key points that echo throughout his book:
Following on from our previous post on startup ideas in Myanmar, we’re releasing a second list. This list focuses on more technology-intensive, speculative ideas, particularly for the B2B sector. B2B startups typically face higher barriers to entry than B2C ones, but can be rewarded with stickier customers. Businesses aren’t easy to win and it can take months to get one client, but once onboard they tend to need a reason to switch provider, rather than to stay. Consumers, on the other hand find it much easier to try new solutions and are therefore often harder to keep hold of.
In neighbouring India, there has been a huge rise in B2B startups, a lot of which have focussed on enterprise software, such as Freshworks which last year made unicorn status when it raised $100m at a $1.5bn valuation. Myanmar is still a way from seeing its first unicorn, as we discussed in an earlier blog, but we’re definitely seeing innovation in the B2B space - such as Mote Poh, which is redefining ways in which companies recognise and reward their staff.
So without further ado, here are our top five speculative B2B tech startup ideas. Same caveat as last time we wrote one of these posts: we haven’t tested or researched these ideas beyond lunch chats and a cursory Google, so try them at your own risk (but if you do try any of them, tell us!).
Think we missed something, or our ideas are genius, or completely mad? Write us at firstname.lastname@example.org and tell us why.
The Innovation Blind Spot – Why we back the wrong ideas and what to do about it
By Ross Baird
In recent years, Ross Baird has built quite the reputation for himself. Entrepreneur, investor and now author. In 2009 Baird founded Village Capital, a VC with a unique peer-selection approach, and has since worked with hundreds of entrepreneurs and investors in more than fifty countries, including EME in Myanmar.
The hypothesis of his book is that innovation today suffers from three major blind spots – blind spots that negatively affect how we do business, innovate and invest. The first blind spots has to do with how we, as investors, choose new ideas; the second with where we find new ideas; and the third with why – why we invest in new ideas to begin with. These blind spots result in investors overlooking untapped companies, untapped markets and untapped industries.
How we invest: One size does not fit all.
Innovation breaks moulds, it doesn’t fit them. Baird urges investors to look beyond traditional ways of identifying and selecting startups. Investors rarely make decisions about their next investment at a pitch event. Let’s face it, people who are looking for money are going to tell the people with money what they want to hear, and most investors know that. And not all great founders are pitch wizards. This is one reason EME uses an adaptation of Village Capital’s VIRAL scorecard (see our recent blog) to give founder and investor the chance to have an in-depth discussion. Also, while many VCs prefer to hear about companies through their networks and are closed off to enquiry, our door is open and we’re very happy to meet and discuss with founders who reach out to us.
Baird pushes investors to consider their ecosystem. Myanmar isn’t Silicon Valley. Spray and pray (making lots of investments, hoping one or two make it big) doesn’t fit the same metrics here as there and expecting entrepreneurs to model themselves on Brian Chesky (Airbnb CEO) is pretty pointless. The innate diversity of Myanmar forces us to think outside the box, playing to the strengths and uniqueness of individuals, companies and new ideas. True innovation, not copy-paste from outside, takes time and committed investors.
Where we invest: looking beyond (a) location.
Fun fact: in US, more than 75% of startup investments flows to only three States – California, New York and Massachusetts – the Big Three. Baird points out that, similar to patterns known from real estate, market frenzies over specific locations can cause prices to rise rapidly, and force investors to pay a premium, for no other apparent reason than location. Does this lead to a location price premium for startups? The Myanmar Times recently wrote that Myanmar had a burgeoning entrepreneurial ecosystem. But, while the ecosystem is certainly developing, it’s a Yangon phenomenon, not Myanmar-wide. Is Myanmar on the path of building a Big One like the US has a Big Three? The laws of supply and demand show us that if demand outgrows supply, prices increase, allowing startups to demand a higher price for equity. On the other hand, if there are a lot of startups looking for funding and the demand is limited, prices decrease.
As rational investors, one of the things we fear the most is something called, “irrational exuberance.” Irrational exuberance is, simply put, a state of mania. In the (stock) market, it's when investors are so confident that the price of an asset will keep going up, that they lose sight of its underlying value. Investors egg each other on and greedy for profits overlook deteriorating economic fundamentals. Baird urges us to search out opportunities where others are not looking, targeting industries ripe for disruption, and where irrational behaviour is nowhere to be seen. Mark Twain summed this up nicely by saying, “Whenever you find yourself on the side of the majority, it is time to pause and reflect”.
Why we invest: between money and meaning.
Baird’s investment philosophy is thoroughly rooted in the impact investment tradition, and he is very much a one-pocket thinker. One-pocket thinking recognises that what’s good for society and what’s good for business does not have to be mutually exclusive. The book offers valuable insights into the rise of impact investing, mapping out its development from the start of the micro finance movement to legendary Ben & Jerry’s, and the growing field of large international venture funds devoted to one-pocket thinking. EME is not an impact investor per se, but we do seek out investments that have positive impact. We are positioned in the intersection between money and meaning, strongly committed to Myanmar’s sustainable development.
The book is riddled with interesting statistics, and thought-provoking narratives. Did you know that 50 percent of the Fortune 500 in 2000 were no longer on the list 15 years later? And that female founders are more likely to succeed than male founders? Baird is articulate and knowledgeable which makes a strong foundation for a stimulating read. This is a book well worth reading and will perhaps illuminate your very own blind spots.