Profit Driver #2: ASSETS

If I collected all the diamonds in the world, I'd have no 'income' but I'd have a lot of 'assets'. Would my company be worth nothing because I have no income? A lot of Net companies are collecting assets. They have to be measured with a new set of metrics.
~Vinod Khosla

Such is the case with a start-up. More specifically, a lean start-up collects a lot of diamonds: these are the nuggets of insights, knowledge and wisdom that are the main outcome of the experiments conducted on their business model.

Everything, in a lean start-up, is targeted at maximizing learning:
- formulation of falsifiable hypotheses
- splitting into problem team / solution team (same thing for the interviews)

The lean stack promoted by Ash Maurya is a very useful tool by which the knowledge gathering process is managed.

Knowledge may be the most important asset in this stage, but there are others too:
- the recruiting process is not merely important, but fundamentally vital - it can literally make or break the start-up;
- the ability to pivot the business model, to continuously weed out potential waste.


One more thing
You may have noticed that I have not included in here the "classic" assets: IT infrastructure, patents, products already designed / built etc.

That is because I believe that, at a start-up stage, such "hard" assets are actually liabilities - they hinder innovation, they are a trap of past thinking and habits, they entice you to reuse sunk (and maybe failed) efforts, they force your solution into an already existing mold.

This is the innovator's dilemma applied to start-ups: you may become captive not to your existing market (because you don't have one yet), but to your existing asset base.

You have to keep pivoting your asset base and you best do this when your asset base is intangible. Your "hard" asset base should, for the time being, stay on your P&L (as a rental cost), not on your Balance Sheet.

Next week, on Profit Driver #3: Functions!

A Lean Start-up Perspective On Profit Drivers

Profitability is what makes a company real.
~Elon Musk



When I was still a relatively junior Finance Manager, I have learned from my dearest mentor that, for a business to be profitable, it must have a combination of three key drivers:

RISK
Any business needs to venture in the unknown. There is no money left where the markets have already priced in all the information, opportunities and events. Conceptually, the more risk you take, the greater the return you should expect.

ASSETS
By definition, an asset is something of a long-term value that is held by a business with an implied expectation that the asset will accrue future benefits to the business. Again, theoretically, the more assets you can leverage (and think of assets in the broadest way possible), the more profits you should expect as an entrepreneur.

FUNCTIONS
It also matters what type of activities the business undertakes. The more sophisticated the activities, the greater the likely return. For example - engaging in basic web design will earn you far less than creating a web platform with an embedded network effect.

I will tackle, in the next few posts, some opinions on how to maximize the combination of the three drivers to reach profit as a lean start-up.

By the way, the 3-driver concept is now a major methodology used in international tax planning.