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Operating Investment Plan in Start-ups

By Girish Kharosekar, Senior Finance Controller, Cisco Systems India

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Girish Kharosekar, Senior Finance Controller, Cisco Systems India

"Planning is the substitution of chaos by errors- By anonymous"

It is a funny quote but dangerous as well. If taken too literally, it hints at planning being a futile exercise, particularly when it comes to the dynamic world of 21st century start-ups. Founders and investors sometime tend to discard the planning and believe that there are only two priorities for the new business – Product development and Customer acquisition. As a result, efforts (and $$) are aligned only to strike these two goals. Undoubtedly, they are most critical for any organization and more so for start-ups keen on getting out in market place.

My point, however, is as start-ups transit through different stages of life cycle, there are differing priorities.  A successful start-up must show discipline and processes maturity that guides expense allocations not only to meet today’s priorities but also to start allocating for tomorrows needs. Those with a philosophy of “growth always and at any cost” would be soon forced to realize the importance of say, building a strong expense management practices, or, having that due diligence process on deals, or forging alliances with ecosystem partners. Having a balanced portfolio of expenses would be key enabler for meeting business priorities at all stages. Those without such practice will get stuck in meeting today’s priorities without providing for tomorrow’s needs. 

This is where Operating Investment Plan is critical. The plan- at its minimum- will lay out expenses over next 4 quarters and flag them in terms of critical business priorities. The priorities could vary but invariably include among others: -

 (a) Product readiness

 (b) Customer acquisitions

 (c) Go-To market investments 

 (d) Operational Excellence and                                                                                                                                                                    

 (e) Routine expenses to keep the business running. 

Again, the priorities change depending upon business realities and also stage at which start-up is operating, the over-arching objective remains to establish an investment plan that aligns to business priorities and enable transition to next stage as it unfolds.  There are two major benefits of Operating investment plan-

1. It provides management visibility on portfolio of operating investment details for focus areas and desired business outcomes
- key inputs for bringing in accountability to business results within the organization.

2. Equally, if not more important, is an ability it provides to look ahead and align the investments to emerging focus areas so critical for start-up’s survival and growth.

A strong process and discipline coupled with management focus that keeps operating investment plans in front and center would separate successful start-ups from those caught in spiral of valuation markdowns and down funding.

 

Early Stage-

Any venture at this stage is focused on developing its offerings and a successful proof of concept followed by the first customer shipment. Throughout this stage, offerings and customer segments will be fine-tuned and new learning’s incorporated into the strategy and go to market plans. 

Operating investment plans have to be aligned with these priorities. Ball park allocations of expenses across the priorities could be -

· Product readiness builds features, ensure quality, (70 percent)

· New Market / New technology Explore and see relevance (10 percent)

· Operational Excellence / Enablers for next stageBuild org capabilities (10 percent)

· Overheads - Keep the lights on (10 percent)

Investments into Operational Excellence are activities that build a strong foundation.  Regulatory compliances and internal controls & processes that support the growth are two major items here.   These foundational capabilities help management understand and respond effectively to the business and regulatory risks that are inherent in next stages.

 

Mid stage venture -

This stage arrives as business ramps up, more number of customers are signed up and order pipeline is promising. There is also a better understanding of target market and a plan exists to emerge as a key player. Version 1.0 of offerings is stabilized and customers have started getting value out of using it.

Priorities at this stage are Sales enablement, Go-to-market initiatives and Building a credible after- sales service and customer support. Equally important at this stage is to build readiness to scale and manage the growth round the corner. It would entail internal as well external investments.  Internally, it would mean building strong support functions and procedures/processes that act as guard rails. These guard rails are critical for creating sustainable business through effective growth management. Investing into channel partnerships and supply chain are examples of external investments.

Of total expense outlay, allocations could go into:

·  Go to market investments and customer acquisitions (50 percent)

·  Build delivery and post sales support (20 percent)

·  Ongoing product development – new features, new products in adjacent markets (10 percent)

·  Operational Excellence / Enablers for next stage (20 percent)

 

Growth stage

At this stage, company turnover and scale of operations are significantly higher compared to previous stages. Focus invariably turns to managing supply chain, fulfillment, quote to cash, sales incentives, management of contractual liabilities and more importantly cash flow optimization. If company runs out of cash, accounting profits would not matter- not to mention gross revenue and matrices like merchandised value!  Hence, significant investments need to happen in ensuring scalability of the business. Investments already made in Operational Excellence / Enablers at prior stages will come very handy. This is the payback time for these cumulative investments made earlier.  

Of total expense outlay, allocations could go into be

· Customer acquisition, order fulfillments (70 percent)

· New product/segment development (20 percent)

· Maintain/Continue to build on next generation of operational excellence (10 percent).

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