Moving The Problem With Money

Scene: A startup in a large market is growing 5-10% week on week. The startup founder wants to grow faster. For this he needs to convince suppliers beyond the organic pull.

Problem: The suppliers don’t trust him because he is relatively new. Hence, they are asking for a minimum revenue guarantee. The founder is good at creating a product but not very good at selling, so he is not able to convince the potential suppliers.

Potential Solution: The founder thinks if he has enough money in the bank, he can offer minimum revenue guarantee to suppliers and that should be enough to convince them. So he ventures out to raise funds.

Solution or New Problem: Now he is working on convincing an investor instead of the vendors. He will now dilute equity to give advance revenue to suppliers. Is the problem solved or moved? 

Moved Scene: What he doesn’t realise is that the business model has now changed from a zero-inventory marketplace to a high-risk trading, where he has already unwritten the supplier. In the previous model the supplier was working to make sure things on the marketplace sell, now they have no interest in helping drive sales.

Changed habits: The suppliers habit haven’t changed, but the founder and his team is now used to buying inventory instead of convincing anyone. More suppliers are interested in selling to him. Supply chain metrics is measuring number of new suppliers added every month. The team goes berserk and buys any and everything to show better numbers in quarterly reviews.

New Problem: A lot of unsold perishable inventory that has already been paid for. Some of it is not sellable.

New Solution: Sell everything at lower price. Any revenue is better than no revenue. Bad inventory gets bad review, so the team now spends in refurbishing that inventory.

New Problem: Additional investment required to maintain and refurbish inventory.

Side Problem: Suppliers are buying their own inventory at lower price. Real buyers are missing.

End Result: Low equity holding. High inventory holding. Unhappy customers. Suppliers still don’t trust you because they can see the gap in your model and are scared of the bubble bursting. 

Moral: Learn to sell and convince the right person. Don’t move the problem with money.

Over simplistic? I know. But you get the point.

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