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Endeavor Indonesia hosted a local networking gathering for Endeavor entrepreneurs, mentors and network members featuring Geeks On A Plane (GOAP), an invite-only startup and investor tour organized by 500 Startups. The event brought together over […]
August 1st, 2014 — by adminRead more
In the news
Serial entrepreneur and investor Wences Casares, whose success story has been a testament to Endeavor’s model, recently announced the launch of Xapo, an online wallet and vault application for Bitcoin currency. One of the first entrepreneurs selected […]
March 14th, 2014 — by adminRead more
Latest Video(video) Endeavor CEO Linda Rottenberg Featured On Fox Business’ After The Bell
July 15th, 2014
By Hilary Saccomanno
On October 18-19 at the Grand Park City Hall in Singapore, Cindy Ko, a Vice President of International Expansion at Endeavor, will be speaking at the Global Social Innovators Forum 2012. Miss Ko will be amongst the distinguished leaders from various fields invited by GSIForum to share their expertise. Her insights will contribute the forum’s effort to advance the conversation on social innovation by providing a platform of exchange for change-makers from across the public, private and people sectors.
GSIForum 2012, themed Inclusive Innovation: Walk the Talk, aims to align the innovative efforts of world leaders from various sectors with the national narrative put forth by Singapore’s government for addressing complex national and international problems. By encouraging cross-sector collaboration between diverse fields such as technology, enterprise and the arts, GSIForum seeks to harness the potential of each to create inclusive and sustainable social impact by fostering bottom-up change within society. Topics covered by the event range from bottom-of-the-pyramid opportunities in Southeast Asia to the utilization of social media as a tool for social change.
GSIF is the foremost forum on social enterprise and innovation in Asia. The annual forum is the brainchild of Social Innovation Park Ltd, a non-profit organization based in Singapore, whose mission is to empower innovators and enhance their impact by educating the people, public and private sector on the principles of social entrepreneurship and innovation. In addition to GSIForum, Social Innovation Park offers the GSIFestival, which taps on innovative solutions from within the community and is bound to the forum by the i-GSIF online platform.
Fernando Fabre: We call them virtual High-Impact Entrepreneurs because we tend to believe that impact is a bigger word than high growth, high potential. That’s because impact means that entrepreneur is first of all, this particular type of high-impact entrepreneur have the capacity to generate tremendous amount of growth of an economy. They transform an industry, they transform the whole region. They have an amazing ability to create high quality jobs and I think more importantly than that, that’s a direct measurement of the impact that an entrepreneur has.
But much more important, a lot harder to measure is the role model potential that they have on others. You can call it the Bill Gates effect. I firmly believe that Bill Gates has had a bigger impact in the world not because of Microsoft and not because of his foundation, but because there are thousands of people saying, if he could do it from his garage, I can do it from my garage. That power of the role model is huge. Steve Jobs today, Mark Zuckerberg- those are amazing stories that everybody wants to follow I think, not everybody, a lot of people.
By Charlie O’Donnell
Most entrepreneurs aren’t qualified for their jobs–including about 100% of the first timers.
Many times, they get backed just because they’re smart people working in an interesting area. Sure, they had a demo or a prototype or something, but investors know the product will change.
What they’re really betting on is your ability to learn–and that starts with your willingness to admit the following:
“I don’t know what to do.”
At the Northside Festival this year, Dennis Crowley admitted in his session with Jerry Colonna that one of the toughest challenges that he has faced as an entrepreneur was having everyone looking to you, counting on you, investors betting on you–and feeling like you’re supposed to know everything. Sometimes–a lot of times–he said, you have to admit that you don’t know what to do, but that you’re going to find someone smart who knows the answer.
I was talking to an entrepreneur the other day, and I asked, “Do you feel like you have a good idea of how you should be spending your time?”
She looked at me as if I had just asked to take a ton of bricks off her shoulders and told me she didn’t–but she said it with an enormous sigh of relief in that by asking, I was making it ok.
And in fact, it is ok–particularly when you’re not a technical founder, it’s not always clear what your next step is in the early going. Even if you are on the technical side–you may never have managed before, nor been responsible for so many aspects of the product development at one time. The next move isn’t easy for anyone when it’s the first time they’ve ever done something.
The solution? Start asking a lot of questions.
Find people who seem to know what they’re doing–whose companies have acheived success. Ask them if they feel like they spend their time wisely and how they allocate tasks among the founding team. What do they do day in and day out?
One of the best ways to improve how you spend your time is coming up with a routine. Tim Ferriss recently blogged about the power of routines to help focus you on the things that matter, while not getting you bogged down on the things you don’t:
“I’ve always suspected that we start each day with a limited number of decision-making points that, once depleted, leave us cognitively impaired. This is part of the reason that automating minutiae, adopting rituals, and applying creativity only where it’s most valuable (e.g. not deciding what to eat for breakfast) is so important to me.”
Routines, however, come after you’ve defined roles–and for a CEO, that’s sometimes not obvious. Chances are, you have an incomplete team, so you’re doing multiple jobs. How do you handle Product on Tuesday, Hiring on Wednesday, and Fundraising on Thursday–especially when you don’t always have control over your own calendar and find yourself depending on others to make time for you?
The answer to how you in particular should spend your time is twofold:
1. Consult with your investors, advisors, and peers and where they thing you need to focus your energy–and get on the same page about the balance between near term and long term goals. Don’t be afraid to ask, “What am I supposed to do?”
2. Empower and support your team to achieve way more than they thought they were capable of–so that they can take a lot off your plate.
That’s pretty much it, because you really only have two options as a team to finish all the things you need to get done. To close the gap between all you want to do and all you can do, you need to focus on few things, and get better at doing more or them, because time is finite and you can’t make more of it.
How do you get better?
1. Get a mentor or a coach–someone that understands firsthand what you’re doing and ideally has done your job.
2. Be a continuous learner–take classes, and read books and your profession and best practices.
3. Set personal learning goals for yourself so you have some way to measure if you are improving or not.
4. Share your execution problems with others to get feedback on how you can improve.
Remember, it’s never too late to ask. I’ve been there–for the last six months of my startup I really had no idea how to save it. I made random calls to people I thought should buy it, with no success. I tried pitching business development ideas, coming up with marketing ploys. None of it was effective–yet I often worked late nights because I felt like I should, even though I knew what I was doing wasn’t moving the needle. I never thought to tell anyone, “I have no idea what to do right now.”
In hindsight, I feel like I might not have gotten to that point if I said that way at the beginning as well. I certainly think there are a lot of aspirational entrepreneurs that have gotten all excited about the pitch and the upcoming launch and aren’t totally clear what happens after that.
By Pilar Aguilar (Director, Endeavor Mexico): “Move over, Brazil: why Mexico’s entrepreneurs are prime for investment”
By Pilar Aguilar, director of Endeavor Mexico
With daily news reports of drug-related violence on the U.S.-Mexico border, our neighbor to the South may not be the first place most wealth managers think of in search for returns on investment. But in recent years, Mexican businesses have grown at an impressive pace, making the country a new destination for venture capital firms in search of impactful returns.
I have seen it first-hand. For the last 15 years, the nonprofit Endeavor has worked with entrepreneurs in emerging and growth markets around the world to build their companies, with an eye toward improving the sustainable growth of local economies.
With roots in Latin America, Endeavor has built a network of 708 high-growth (or “high-impact”) entrepreneurs, including 98 in Mexico, who are mentored by a volunteer network of 2,500 local and global business executives and investors.
While Endeavor continues to see impressive entrepreneurial talent throughout global markets —from Latin America to Africa, the Middle East to Southeast Asia — many of our star performers hail from Mexico.
Mexican companies in the Endeavor network outgrew, on average, those of every other country in which the organization operates, both last year and from 2008 to 2011; in 2011, the Mexican entrepreneurs saw a 45 percent growth in average revenue. With the growth of these companies came significant impacts on the local job market; these companies grew their workforces by 23 percent in 2011, accounting for an additional 63 new jobs per company, the second largest average growth among the 13 countries in which Endeavor operates.
Investment buzz is growing louder. Now more than ever, we find ourselves fielding requests from global investors interested in Mexico, who previously were solely interested in “hot” emerging markets such as Brazil, Turkey, and South Africa. At the same time, we have also seen the rise of Mexico’s homegrown VC industry, enjoying more investment options than ever.
This enthusiasm is backed up by Endeavor’s own recent experience launching Catalyst, a passive co-investment vehicle—funded by private donations—which automatically invests in Endeavor Entrepreneurs already receiving professional rounds of $5 million or higher. Currently, Mexico has the healthiest pipeline of candidates for imminent investment; of the next 10 planned investments for Catalyst funds, many of the deals are with entrepreneurs located in Mexico.
These are not isolated results. Economists at Nomura Group recently predicted Mexico could overtake Brazil as Latin America’s largest economy in as little as 10 years. The investment firm is telling its clients to expect the country to repeat its relatively strong economic growth from last year; Mexico’s GDP grew by 3.9 percent in 2011, and Nomura expects a figure of 3.7 percent in 2012. This growth compares favorably to the recent slow patch faced by Brazil, which faces higher inflation and a moderating growth rate.
Nomura cites as reasons for Mexico’s performance: the rising cost of labor in China, which has a greater impact on Mexico’s industrial economy than the more commodity-based economy of Brazil, and the impending structural reforms of President-Elect Enrique Pena Nieto and the new Mexican Congress, to be sworn in next month. The country has seen a streak of new factory announcements from the automotive industry, and the new government is widely expected to eschew the recent populist political dominance of the region for more investor-friendly industrial policy.
As mentioned, philanthropic concerns are not the only funds that have begun to take an interest in Mexico. A growing number of venture capital firms have recognized the potential for significant profits in the country’s growing start-up market. Earlier this month, Monterrey-based Alta Ventures finalized a $70 million fund targeting the burgeoning Mexican tech sector. In addition to their own investments, the founders of Alta Ventures are convening a network of regional entrepreneurs and investors interested in Mexico.
The Mexico Venture Capital Conference (MVCC) is intended to provide a space for the sharing of ideas and closing of deals. This November, MVCC will announce the members of E|100, a peer-selected group of the 100 individuals most likely to lead a successful venture in the next few years. These entrepreneurs are building what will likely prove to be the foundation of a strong, profitable Mexican business expansion over the next decade.
More and more investment firms, including those with a purely profit-driven model and those pursuing the triple-bottom-line, are turning to Mexico for results. With one of the fastest growing economies in the region, a healthy start-up culture, and a shift towards a more business-friendly industrial policy and tax structure, the country is poised to take the lead in Latin America. If you have yet to include a Mexican strategy in your portfolio, it is time to take note.
By Knowledge @ Wharton
Jordan has managed to avoid the violence and political upheaval its neighboring countries have experienced with the Arab Spring revolutions. Much of that stability is owed to the rule of King Abdullah II, who still enjoys popular support, but has nudged a slow, steady reform course.
Abdullah has also been a strong proponent for fostering a high tech entrepreneurship culture in the country. It is a policy that has produced dividends, particularly in the information and communications technology (ICT) industry. In just a decade, according to Jordan-based Information and Communications Technology Association (intaj), the ICT sector has come to represent 14% of the country’s GDP.
The country’s industry produced a watershed success for the region — Yahoo’s US$85 million acquisition of Maktoob, an Arabic email service and portal, in 2009. Jordan estimates that over 50% of its startups are now in the ICT field, including telecom, IT, mobile online businesses, and game development. The industry has also attracted foreign investment — roughly US$15 million in foreign direct investment in 2010, according to intaj.
Despite these achievements, ICT entrepreneurs in Jordan face some of the same hurdles for tech startups across the region. According to a recent study of Jordan’s entrepreneurship ecosystem by Fulbright Scholar Jamil Wyne, the country has managed to quickly develop a solid tech infrastructure, but the three main challenges for growth its entrepreneurs contend with include finding the right talent, knowing how to market products, and accessing angel investors.
Wyne notes that the solutions to these issues begin with getting a wider range of Jordanians involved in tech entrepreneurship, and fostering greater industry collaboration. “Finding ways to bring both young and old entrepreneurs into the ecosystem, attracting more female entrepreneurs and identifying mechanisms for fusing ICT with other industries are top priorities,” he writes.
By Chris Gallagher
The similarities between sport and business are well known. In both cases, doing things faster, differently or more efficiently can result in success. Having competed as an althete and now working as a coach, I can see three primary lessons that entrepreneurs can learn from.
1) Identifying your strengths
One of the essential things to know as an athlete is what you are good at. This might sound obvious, but it is remarkable how many athletes do not play to their strengths. This can be a tricky process, but without it, you are putting yourself at a considerable disadvantage. An athlete who is able to accelerate during the last 50m of an 800m race needs to know that they are able to do so, as it is their best way of winning. This applies for mental skills too – some athletes are able to read races. They are able to spot gaps in the race, changes of pace and the behavior of different competitors. This crucial insight can allow you to know when it is best to make a move.
In the same way, an entrepreneur needs to know what they are able to offer that is better, or at least different, from others. Just as an athlete can read a race, an entrepreneur’s advantage could be that they understand the market better. The success of a new bus company in my hometown (Bath, UK) resulted from a crucial key insight. The incumbent company was succeeding because they had little competition. The new company focused on two routes and sold tickets for a cheaper price. This simple (and successful) strategy resulted from the fact that they understood the reality of the situation – and played to it accordingly.
Finally, it is important to gauge how your strengths develop. In some cases, your core strength can change. Steve Ovett, the 800m 1980 Olympic Champion, is a prime example of this. During his junior years he was able to win races purely because of the fact that he was talented enough to be able to out-run his competitors. When he reached a world-class level, this changed; many of the people he raced against were capable of beating him. He then had to learn how to read the race and outsmart them. In the same way, Hotmail founders Sabeer Bhatia and Jack Smith spotted a simple problem – that email wasn’t portable enough – and exploited it. They made it possible to access email from anywhere, at no cost.
2) Growth and change
Growing your business is a process associated with risk. One entrepreneur once described to me the agony of hiring his first employee; he knew he needed to do it, but didn’t want to. Similarly, one of the biggest changes in athletics is going from junior to senior level. Unsurprisingly, it is the stage at which most athletes quit the sport. Having succeeded as a junior, they are unable to do as well as a senior. This is due to a number of key differences. First, the number of people you are competing against grows enormously. Whilst there may have been a dozen people of you caliber as a junior, there may be ten or twenty times more as a senior. Second, many senior athletes will have much more racing experience than you. You may be younger and be physically fitter, but they can still beat you because they know how to race. They can spot crucial gaps during competitions and know the strengths and weaknesses of other athletes. Finally, the competition standards are much tougher. It can take several years to achieve the necessary times and many athletes will drop out of the sport altogether.
An entrepreneur could encounter similar challenges when growing their business. If you decide to set up a new office in a larger city, you will undoubtedly find more competition. Indeed, you may find that they are outright better than you. In some cases, the businesses you are competing against may be as good as yours, but simply know how to market themselves better. With both business and sport, you cannot progress without taking on some form of risk. The athlete may quit against tougher competition and the entrepreneur may run out of money, for example. However, this should not discourage an athlete or entrepreneur from attempting to grow. It is simply a case of getting to know your competition well and working out your competitive advantages.
3) Managing information correctly
Feedback is something that a good athlete needs in order to progress, be it subjective or objective. The trick is not collecting this information, but managing it correctly. Numerous statistics are available – lap times, pulse rates and race results – but incorporating them into your training program properly is essential. One common mistake is to overanalyze a training (something I have done and seen often). The temptation is to change a training session or race tactics based on a few data points. Yet a slow race, or unusually fast session should be taken into account only in context of many months of training and racing. Otherwise, this can lead to minor adjustments being made on a regular basis that ruin the strategy for your whole season. More often than not, it is better to let your plan run its course. If not, you will never know how good it was in the first place. The lesson for entrepreneurs is clear here: once you have devised your strategy, stick to it. Take little changes into account, but allow for some variance in results. Run your strategy for a set period of time and then take stock.
These lessons emphasize the importance of working smarter, not harder, than the competition. Of course, hard work cannot be avoided, but the key is doing work efficiently.
By Ben Horowitz
At Opsware I used to teach a management expectations course because I deeply believed in training. In it, I made it clear that I expected every manager to meet with her people on a regular basis. I even gave instructions on how to conduct a 1:1 meeting so there could be no excuses.
Then one day while I happily went about my job, it came to my attention that one of my managers hadn’t had a 1:1 with any of his employees in over six months. While I knew to “expect what I inspect,” I did not expect this. No 1:1 in over six months? How was it possible for me to invest so much time thinking about management, preparing materials and personally training my managers and then get no 1:1s for six months? Wow, so much for CEO authority. If that’s how the managers listen to me, then why do I even bother coming to work?
I thought that leading by example would be the sure way to get the company to do what I wanted. Lord knows the company picked up all of my bad habits, so why didn’t they pick up my good habits? Had I lost the team? I recalled a conversation I’d had with my father many years ago regarding Tommy Heinsohn, the Boston Celtics basketball coach at the time. Heinsohn had been one of the most successful coaches in the world, including being named “coach of the year” and winning two NBA championships. However, he had gone downhill fast and now had the worst record in the league. I asked my father what happened. He said: “The players stopped paying attention to his temper tantrums. Heinsohn used to yell at the team and they’d respond. Now they just ignore him.” Was the team now ignoring me? Had I yelled at them one time too many?
By Maria Eugenia Hernández Gutiérrez (translated from Spanish by Eunice Kim)
Given that since 2003, Mexico’s stock market value has grown 10% while Brazil’s has only grown 2%, why then has Brazil’s GDP grown 3 times more than Mexico’s during this time?
Global business experts explain that Brazil has implemented initiatives to help small to medium sized companies grow, while Mexico has not been able to implement the growth of small to medium sized enterprises. Brazil also supports the idea of venture capital firms investing in small rising companies, whereas Mexico has neglected to do so.
Creating companies is not enough; learning the tools to successfully grow the companies is what facilitates desired changes to the economy. An entrepreneurial culture that is cutting edge – and is at the forefront of what works and what doesn’t – is needed in order to create successful companies. In fact, 80% of start-ups in the world are likely to fail in the first 5 years, and 90% in 10 years. For Mexico, 75% of start-ups are likely to fail the first year, and 90% within 5 years.
This usually happens due to the lack of capital and official subsidies. The funds for the small to medium sized companies are so sparse, and those funded by the government don’t make enough revenue. With only the help of the government, 9 out of 10 companies would be able to exist but not grow. Another reason why they tend to fail is due to the state’s lack of willingness to reform their infrastructure to be conducive to positive growth of small to medium sized companies.
A solution to such problems would be through a program like Endeavor. Over the past 10 years, the Endeavor program in Mexico has striven to help reduce the high rate of failure for new companies.
Currently operating in 15 countries in Latin America, Africa, Southeast Asia, and the Middle East, Endeavor is an international NGO with a global network of business leaders, academic experts and professionals that selects, mentors, and accelerates the best high impact entrepreneurs around the world. In 15 years, Endeavor has screened and provided feedback to 30,000+ candidates and selected 708 high impact entrepreneurs from 443 companies. Supported and mentored by a growing network of 3,000+ local and global business leaders, these entrepreneurs have created over 180,000 high-value jobs and generate more than $5 billion in annual revenues. Endeavor’s support catalyzes a chain reaction in the larger economy – driving investment, creating role models, and fostering the conditions for the next Silicon Valley in Rio or Cape Town, Cairo or Jakarta. In fact, Thomas Friedman, the author of “The World is Flat 2.0,” journalist, and third time winner of the Pulitzer Prize, has described the Endeavor model as “the best anti-poverty program of all.”
In Mexico, Endeavor has been able to implement numerous projects and establish new offices in different regions of the country, such as Puebla, Yucatan, Baja California, and Distrito Federal. Linda Rottenberg, Co-Founder and CEO of Endeavor, says that the organization’s mission is to encourage public policy initiatives that help the growth of businesses.
In Mexico, Endeavor was the first of its kind to receive resources from the Secretary of Economy to work on specific projects to facilitate the growth of new companies.
Endeavor also helped change operational rules provided by the Secretary of Economy and the fund dedicated to small and medium sized companies so that the high impact, strategic projects can obtain up to 85 percent of the investment necessary to reach the next level of growth. Since 2005, Endeavor has annually received 5 to 6 million pesos from the fund dedicated to small and medium sized companies.
The success of the program can be attributed to the careful selection of the champions: high impact, innovative men and women who risk capital and create jobs. The selection process can be separated into two categories: the nomination of a company and the official decision on an Endeavor entrepreneur. Regional offices nominate companies who can benefit from strategic services in financing and the mentor network and strive for exponential growth. Statistically, the high impact entrepreneurs of Endeavor are able to generate income three times faster than those without the support of Endeavor. The companies promoted by Endeavor have registered annual sales growths of more than 45 percent and incomes of over 11 billion pesos, creating about 20,000 jobs.
Once a company is nominated by Endeavor, they have the opportunity to participate in an International Selection Panel, where they are met by a jury composed of individuals who represent Fortune 500 companies, consulting firms, and the top business schools of the U.S. If the panel comes to a unanimous decision, the nominated companies become promoted to Endeavor Entrepreneurs.
In January, the Endeavor Catalyst fund invested $2 million into Globant, a software developing company whose headquarters are in Argentina. In March, the fund completed a joint investment with Intel Capital to finance the company Minha Vida, a website promoting a culture of health and well-being in Brazil.
At the beginning of this summer in London, the International Selection Panel gathered for the 44th time and discussed the potential of 17 entrepreneurs from Brazil, Colombia, Jordan, Lebanon, Mexico, and Uruguay.
Representing Mexico at the panel, Gabriela León, CEO of Gresmex. introduced a company that produces a line of surgical disinfectants and doctors that are able to cure multiple viruses without the use of highly toxic substances.
Héctor Sepúlveda and Luis de Yturbe attended the panel on behalf of Litebuilt, which revolutionized the construction industry in 2008 with the development of a concrete blog that imitates the LEGO toy piece and provides more efficient, sustainable solutions than the traditional construction methods.
Also attending the panel were Diego Solórzano and Jimena Pardo, founders of Carrot, a company that issues car rentals via a monthly pay that includes rent, gasoline, insurance, service, etc. and can be used for hours or days in specific locations within Mexico.
During the remainder of 2012, there will be two more International Selection Panels, one in Istanbul in October and the other in Miami in December. Representing Mexico will be Marco and Alexandra Gallardo, whose company PowerPet produces snacks without additives or conservatives for pets, along with scientist Alberto Osorio who created the first safe technique to correct farsightedness. Edna Fong created Jaztea, which produces tea ice cream and drinks with natural flavors. Roberto Quintero and José Irigoyen successfully created Cinemagic, a company that brings movie theaters to the most isolated parts of the country, and even succeeded to obtain an international certificate in 2010 at a panel in South Africa. Mauricio Pariente and Alejandro Chiliub have sold canned tuna, using a new packaging that offers consumers with cans with higher quality and no conservatives. The recent discovery of natural gas, including shale gas, in the Gulf of Mexico has motivated the state of Veracruz to conduct studies on the feasibility of starting a regional Endeavor project to contribute to the development of innovative projects in the agriculture, energy, education and technology industries.
By Fred Wilson
Picking up from the accounting post last week, there are two kinds of accounting entries; those that describe money coming into and out of your business, and money that is contained in your business. The P&L deals with the first category.
A profit and loss statement is a report of the changes in the income and expense accounts over a set period of time. The most common periods of time are months, quarters, and years, although you can produce a P&L report for any period.
Here is a profit and loss statement for the past four years for Google. I got it from their annual report (10k). I know it is too small on this page to read, but if you click on the image, it will load much larger in a new tab.
The top line of profit and loss statements is revenue (that’s why you’ll often hear revenue referred to as “the top line”). Revenue is the total amount of money you’ve earned coming into your business over a set period of time. It is NOT the total amount of cash coming into your business. Cash can come into your business for a variety of reasons, like financings, advance payments for services to be rendered in the future, payments of invoices sent months ago.
There is a very important, but highly technical, concept called revenue recognition. Revenue recognition determines how much revenue you will put on your accounting statements in a specific time period. For a startup company, revenue recognition is not normally difficult. If you sell something, your revenue is the price at which you sold the item and it is recognized in the period in which the item was sold. If you sell advertising, revenue is the price at which you sold the advertising and it is recognized in the period in which the advertising actually ran on your media property. If you provide a subscription service, your revenue in any period will be the amount of the subscription that was provided in that period.
This leads to another important concept called “accrual accounting.” When many people start keeping books, they simply record cash received for services rendered as revenue. And they record the bills they pay as expenses. This is called “cash accounting” and is the way most of us keep our personal books and records. But a business is not supposed to keep books this way. It is supposed to use the concept of accrual accounting.
Let’s say you hire a contract developer to build your iPhone app. And your deal with him is you’ll pay him $30,000 to deliver it to you. And let’s say it takes him three months to build it. At the end of the three months you pay him the $30,000. In cash accounting, in month three you would record an expense of $30,000. But in accrual accounting, each month you’d record an expense of $10,000 and because you aren’t actually paying the developer the cash yet, you charge the $10,000 each month to a balance sheet account called Accrued Expenses. Then when you pay the bill, you don’t touch the P&L, its simply a balance sheet entry that reduces Cash and reduces Accrued Expenses by $30,000.
The point of accrual accounting is to perfectly match the revenues and expenses to the time period in which they actually happen, not when the payments are made or received.
With that in mind, let’s look at the second part of the P&L, the expense section. In the Google P&L above, expenses are broken out into several categories; cost of revenues, R&D, sales and marketing, and general and administration. You’ll note that in 2005, there was also a contribution to the Google Foundation, but that only happened once, in 2005.
The presentation Google uses is quite common. One difference you will often see is the cost of revenues applied directly against the revenues and a calculation of a net amount of revenues minus cost of revenues, which is called gross margin. I prefer that gross margin be broken out as it is a really important number. Some businesses have very high costs of revenue and very low gross margins. And example would be a retailer, particularly a low price retailer. The gross margins of a discount retailer could be as low as 25%.
Google’s gross margin in 2009 was roughly $14.9bn (revenue of $23.7bn minus cost of revenues of $8.8bn). The way gross margin is most often shown is as a percent of revenues so in 2009 Google’s gross margin was 63% (14.9bn divided by 23.7). I prefer to invest in high gross margin businesses because they have a lot of money left after making a sale to pay for the other costs of the business, thereby providing resources to grow the business without needing more financing. It is also much easier to get a high gross margin business profitable.
The other reason to break out “cost of revenues” is that it will most likely increase with revenues whereas the other expenses may not. The non cost of revenues expenses are sometimes referred to as “overhead”. They are the costs of operating the business even if you have no revenue. They are also sometimes referred to as the “fixed costs” of the business. But in a startup, they are hardly fixed. These expenses, in Google’s categorization scheme, are R&D, sales and marketing, and general/admin. In layman’s terms, they are the costs of making the product, the costs of selling the product, and the cost of running the business.
The most interesting line in the P&L to me is the next one, “Income From Operations” also known as “Operating Income.” Income From Operations is equal to revenue minus expenses. If “Income From Operations” is a positive number, then your base business is profitable. If it is a negative number, you are losing money. This is a critical number because if you are making money, you can grow your business without needing help from anyone else. Your business is sustainable. If you are not making money, you will need to finance your business in some way to keep it going. Your business is unsustainable on its own.
The line items after “Income From Operations” are the additional expenses that aren’t directly related to your core business. They include interest income (from your cash balances), interest expense (from any debt the business has), and taxes owed (federal, state, local, and possibly international). These expenses are important because they are real costs of the business. But I don’t pay as much attention to them because interest income and expense can be changed by making changes to the balance sheet and taxes are generally only paid when a business is profitable. When you deduct the interest and taxes from Income From Operations, you get to the final number on the P&L, called Net Income.
I started this post off by saying that the P&L is “one of the most important things in business.” I am serious about that. Every business needs to look at its P&L regularly and I am a big fan of sharing the P&L with the entire company. It is a simple snapshot of the health of a business.
I like to look at a “trended P&L” most of all. The Google P&L that I showed above is a “trended P&L” in that it shows the trends in revenues, expenses, and profits over five years. For startup companies, I prefer to look at a trended P&L of monthly statements, usually over a twelve month period. That presentation shows how revenues are increasing (hopefully) and how expenses are increasing (hopefully less than revenues). The trended monthly P&L is a great way to look at a business and see what is going on financially.
I’ll end this post with a nod to everyone who commented last week that numbers don’t tell you everything about a business. That is very true. A P&L can only tell you so much about a business. It won’t tell you if the product is good and getting better. It won’t tell you how the morale of the company is. It won’t tell you if the management team is executing well. And it won’t tell you if the company has the right long term strategy. Actually it will tell you all of that but after it is too late to do anything about it. So as important as the P&L is, it is only one data point you can use in analyzing a business. It’s a good place to start. But you have to get beyond the numbers if you really want to know what is going on.
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