Entrepreneurship’s second lesson

One of the common mistakes that students in my entrepreneurship classes often make is they focus too much on technology but not pay attention on the financial aspect of making money. They love their ideas and technology that they create and they think money will naturally come. That is the reason why many startups failed in few months of operation after founders ran out of money. For that reason, beside teaching technology it is important that students be taught about the finance too.

Business students are taught about finances such as income statements, balance sheets, cash flow, budgeting, and details on how to operate a company but most technology students do not. They need to learn about where the money come from, how much customers will pay as well as the cost from renting an office, buying equipments to paying salaries to employees etc. To be profitable, entrepreneurs need to make enough money to cover these costs.

Students in my entrepreneurship class start with the identification of opportunities such as issues and problems that customers need to solve. Once opportunities are identified and validated, they begin to develop product solutions. When students told me that they have a product ready, most of them are excited and want to create startup immediately. But I ask the basic question: “Explain to me how you make money?” This is where students feel uncomfortable as they have not thinking about the financial aspect of startup. Many just guessing but do not have real data to back it up and they need to learn the second lesson. What I give them is a list of questions that they must answer in detail: “Who are your customer? What problem that you are solving for customers? What value do you deliver to customers? How do you reach customers? How do you deliver your product or service to customers? How much do you think they will pay? How much do you think you will need? What are your cost for operate a company? What do you think your profit could be?” Unless they answer all questions to my satisfaction, they cannot start the company. They cannot guess the answers but must go out and ask their customers as I require evidences and check references to make sure that they are learning this lesson well.

This is a major lesson where many students come back to class frustrated and disappointed. Last year a student told me: “I have created a product that customers like it but they do not want to pay the price that I ask for.” Many students have similar experiences with products that cannot justify the financial requirement of startup to be profitable. I told them: “You fail in this task but you have not wasted any money yet. You have not borrowed money from your parents or relations to start the company yet so consider this is another lesson that you are learning. You do not start a company until you are sure that you will make money. All the revenues and costs must be balanced. I do not want to see my students start a company then fail. You learn how to fail in my class so you will not fail in real life.”

Even when customers are willing to pay, students must learn how they pay. When customers buy a product or service, they typically have a number of payment options. The common choice is paying the total in cash but many often spread the payment in several monthly installments. Sometime customers only pay as they use and make it more difficult to calculate the financial aspects. Each customer has different opinion on how they pay and that affect the financial of startups. This is where technology students learn the reality of being financial success.

When students who become successful entrepreneurs, they all come back to told me that they really learn something from this exercise. And I always explained: “That is “learning by doing.” You learn by do these things in class so you can learn from mistakes. When you do it in real life, you do not make the same mistake again.”

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University

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