Accidental Entrepreneur: Don’t Even Think About Startups without understanding these 5 Financial Fundamentals!

Hi Everyone,

Welcome to my 29th weekly article as this week is called “Don’t Even Think About Startups without understanding these 5 Financial Fundamentals!”.

Understanding the financial implications of any decision whether it’s product pricing, supply/demand is very critical to the success of any company whether it’s a large enterprise or early stage startup.

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“தினற்பொருட்டால் கொல்லாது உலகெனின் யாரும்

விலைப்பொருட்டால் ஊன்றருவா ரில்” — திருக்குறள் (256)

“If people do not consume a product or service, then

there will not be anybody to supply that product or

service for the sake of price”. — Thirukkural (256)

As I look back at my entrepreneurial journey and various experiences I had encountered, there were some areas of influences which helped me achieve my success. Even though my main degree and education was in Engineering, from an early age I had opportunities to learn while contributing in multiple areas. One critical area was finance where I applied my learnings in Economics and real life experiences to extract a few critical principles that I applied through my entrepreneurial journey.

My brothers and I worked at our father’s business (Village Grocery Store with agricultural and construction products) where we learned about basic bookkeeping, product pricing and managing customers. During that time, as part of middle school curriculum, I learned commerce and accounting, where I learned the basics of economics. Later in University, I became fascinated with Micro + Macro economics and took enough classes to obtain a Minor in Economics while learning the principles in academic settings. All these preparations helped set me up for a successful entrepreneurial journey. Here are 5 main takeaways from practical and academic lessons on Finance and Economics which guided me through my startups as well as large corporations.

#1. Supply, Demand and Market Equilibrium: In an open market economy, there are people who supply the product and service at a given price and consumers who create demand for those goods and services. When there is an over supply of products/services over the demand, price fluctuates and normally goes down. Alternatively, when demand exceeds supply, price tends to go up. It is key for creators of these products to understand the demand well when building products to meet the demand and price in such a way it will be profitable.

This is a key learnings from my early life as living through the civil war in Sri Lanka where we had a customer base who had limited means for their earnings. Due to the war and supply issues, we had to pay extra costs to get the goods for our customers. Most of these goods were perishable and we had to delicately manage the acquisition of the goods while maintaining cost to make it affordable by the local people. I applied this lesson during my startup time to build products with low cost which can stand the supply-demand economics as well as competitive pricing schemes.

#2. Game Theory and Its Applications: This is a principle which attracted me to Economics at the University. Game theory is where participants’ decisions or actions affect the final results for all the participants. This could be applied to price negotiation or war strategy or many other fields.

I learned this from a pay to play experimental setting at the University of Minnesota. We were divided into buyers/sellers and had to bid to buy/sell items. Based on our offers and bids, computers would decide the optimal transactions and decide the winners/losers. That experiment taught me about negotiating and finding sweet spots for dealing with stock markets along with the price negotiation for products we purchased/sold and at our startups.

#3. Micro and Macro Economics: Understanding both micro and macro economics principles help navigate the world of finance in a data driven approach. While Microeconomics mostly focuses on individual gains and tradeoffs, macroeconomics helps understand the impact of decisions as a group, country or humanity.

During my University studies, my first class in economics was Microeconomics. Learning how the dynamics of individual decision making and impact of those decisions gave me the foundation for articulating my startup businesses along with the potential effect on our customers/employees. Acquiring such knowledge early helped me hire people with a clear mindset and understanding of the vision of the company.

#4. Opportunity Cost: Direct definition is the loss of potential gain from other alternatives when one choice is selected. This can be applied and should be evaluated in making every key decision. By systematically analyzing pros and cons of decisions in terms of gain/loss with some specific numbers behind each path would help understand the options to ultimately choose the best option.

I could go back from early youth to college education and career and identify a few key decisions which helped me become a successful entrepreneur. For example, if I had stayed in Sri Lanka after high school, I would have had a “fun” life but choosing to leave and migrate to the USA opened up a world of opportunity. Another example is staying in a corporate job vs starting a startup which paid off in longer terms. On the other hand, I had an opportunity to join a startup called Broadcom which would have made me $5million vs staying at a company where I received a $15,000 raise. In this scenario I got negatively impacted by the opportunity cost.

#5. Company Structures: While there are some differences in the company structures from country to country, there are some fundamental organizations which are common. Organizations with individuals, LLCs (Limited Liability Corporations), and Corporations (In USA, S-corp, c-corp) are some examples. There are so many resources available on the internet to read up on these and accountants + lawyers to help choose the right structure for your venture.

Some advice on choosing the right corporate structure is based on two areas. First one is how the venture is going to be funded and who are the investors. Investors would dictate what kind of structure and where to register the company. While people who invest their own money go for LLC to protect their other assets from these particular ventures, founders who are raising money from outside investors would be required to register and bring in board members to oversee the operations.

Having exposure to financial concepts working in the family business at a young age, and through my academic career learning about micro/macro economics provided me with a strong foundation to become successful in my career. My advice to young people and parents of teen children is to make sure these youngsters learn to understand the practicality of these principles. As my mother reminded me this week, when she was widowed at the age of 52 with seven children, she applied many of these principles without any formal education by learning and applying them in our business. She was our foundation and learning those principles from her in addition to academic settings helped me navigate the world of finance and accounting in an effective and successful way.