Exploring Factors Determine success of Small ICT Enterprises in Egypt

startup-success-845x321

For more than two months, I was working closely with my friend Dr.Ahmed Hussien on a thesis with the same title “Exploring Factors Determine success of Small ICT Enterprises in Egypt”.  If you are a follower of my blog, you may notice my passion of entrepreneurship and startup. I am very close to many startup communities worldwide (USA, EGYPT, KSA, Qatar, …. And more)

Chapter five in the study is the most important one. It includes results and recommendations. Recommendations included advises for Egyptian entrepreneurs, government, ITIDA, and the Egyptian startup eco-system. In addition, the end of chapter 4 includes full picture summary about each factor results, analysis, discussion and recommendations

The study has been done on several stages that included a review for startup community in many countries, interviews with startup owners, and experts from the eco-system.

In the few coming weeks, I will discuss each result separately on my blog. These discussions will be a base for future focused studies. We will depend on people comments and interactions as a base for these future studies, so please follow my blog to be able to see future studies and to interact with it

Download the study1426700201_folder_download

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What kind of business investors seek

high quality revenue

Investors simply like high quality revenue, that is it :)…

In business valuation, high quality revenue—the kind of earnings that investors seek—is defined by three essential characteristics: Predictability, Profitability, and Diversity.

Predictability is the most important, so we will take about it the last.

High Quality revenue2

Profitability:

It defines what is your gross margin, which is (net sales – net cost). investors usually likes business that generates gross margin of 70% and more !!!

Diversity:

When we evaluate companies we look closely at revenue concentration. Investors do not like a business with main revenue stream coming from one product or one customer. It could be accepted for a company in its early stages, but they should have a plan on how to diversify their revenue stream.

Predictability:

This the most critical and important factor, we can define it by the following sentences:

  • How many paying customers you have from the last year.
  • How much cash you can confirm that you going to earn this year or the next year.
  • how many customers you lose each year.

Investors look for the bushiness with recurring revenue.

As an example, if you are in the IT business and have a cloud application where each customer pay 100$ per month. You are at the end of 2014 with 100 customers. You usually lose 10% of your customers each year (churn rate), then we can easily predict that you going to have recurring revenue of 9000$ per month during the next year. If you know your growth rate just like you know your churn rate, then this will be better.

You can count on recurring revenue month over month and year over year. Cash flow is steady and improving all the time. You don’t have to stress about payroll and other expenses, so you can put your energy toward more strategic business-building activities. Having a steady income stream liberates you to take risks and get more aggressive with your business plan. Move into a new market. Go after larger, harder-to-land clients. If you miss a sales target one month, your cash flow remains unaffected.

Recurring revenue builds a valuable legacy for whenever you decide to exit your business. Increasing the amount of monthly recurring revenue coming into your business raises the quality of your earnings and the overall value of your business.

Some professionals estimate that a business with recurring revenue is worth 16 times more than a one-time revenue model (such as rip and replace). Another recent article estimated that an owner can expect to receive 4 to 6 times EBITDA [earnings before interest, taxes, depreciation, and amortization] for a company on a one-time sales model, while owners with recurring revenue can expect a payday of 6 to 8 times EBITDA

Focus on growth and growth alone is always a temporary strategy. Over time, a company’s value becomes a function of both growth and cash flow. Superior earnings eventually lead to superior value creation.

It’s a simple enough framework, but often difficult to achieve. High-quality revenue requires predictability, profitability and diversity. Do you have highly predictable revenue with high gross margins and without revenue concentration? …

Think about it

How to Rock your start-up project Financial plan – Part.3. (Financial decision criterions)

financial decisions

How can you impress your investor if he is not in your business domain and can’t understand your idea… the only way is to talk with the money language. Financial decision criterion’s are the alphabetic of the money language in this area.

Here i will talk about three important criterion’s, Breakeven point, Pay Back period, and Net present value.
In my business plans, i usually go far for more criterion just like the profitability index PI and Internal rate of return IRR. I encourage the reader to take any free course on financing from any MOOC sites like Coursera.

Breakeven point…

This is the point in time when your project revenues start to cover your expenses.
When you start your project, you will cover your expenses from your own personal savings or some kind of investment till the project starts to make revenues that can cover your expenses.

In the template we built together in part.1 and part.2, it is the point in time where your gross profit converts from negative to positive value.

why it is important, simply because it gives a clear message on how much time you need till your project becomes independent of any external financial support.

Pay Back period…

It is the point in time where your project net profits reach a value similar to the amount of money invested.
why it is important, simply because it gives the investor some insights about the time needed to get back his investment.

Net Present Value…

If you have a 1000$ now, and you invested it in a project with interest of 10% per year. Then 1000$ today will be 1100$ after a year. and hence to know the present value of a future value, you should discount it with the same interest rate. So the present value of a 1100$ future value after a year with discount rate 10% is 1000$.

npv1

But in real life, we have projects that extend over time, may be several years, so we need to discount these values over time to have what we name the net present value.

NPV is the value of specific stream of future cash flows presented in today’s dollars

npv2

NPV is based on the concept that money now is more valuable than money later on. … Why, because you can use the money to make more money.

NPV could be the most important decision criteria. it is used to know the approximate value of the project and is also used to compare between two projects.

I will not go in mathematical details on how to calculate the NPV. I Just want you to feel the meaning of it. Rather i will show you how to calculate it using excel on the template we discussed in the Part.1 and Part.2

In part.1 and part.2 we learned together how to build the template and then how to build different scenarios of it. Now i want you to make a summary for each plan you have just like what i did in the figure below:

cash flow summary

Y0: represents the first day in your project.
Accumulated cash: represents the cash in hand at the end of each year after deducting all expenses and taxes. you can say it is the net profit of each year.The accumulated cash at Y0, represent the cash in hand at the project start date which is your finance or investment.

The NPV is calculated with the npv formula in excel as in the figure below:

npv calculation in excel

The question here is how to chose the discount rate… actually there is no certain way to calculate it. It could be affected by many factors such as inflation rate, interest rate of another competing project, interest rate on treasury assets, and so on.

So this will depend on the project nature, and the country you live in.

I just finished my series on how to build a financial plan for a start-up that can rock. if you have any questions or suggestion for any enhancements, please mail me or leave your comments.

In a later article, i will talk about “how to valuate your project” especially if you don’t have any assets and the project will result in an intangible assets.