1. By Alok Rodinhood Kejriwal

2.  I believe there are 2 approaches to building a
business…
 I think of them as the ‘Balance Sheet (B/S)’
way and the ‘Profit & Loss (P&L)’ way.
 Each approach is unique, with its own
advantages and disadvantages.

3.  A business that:
 Borrows money from Investors.
 Spends that money on building technology,
marketing, R&D, IP creation etc.
 Stuff that consumes money without making
money.
 Spends first, earns much later.

4.  A business that:
 Begins by generating revenues from its
operations almost immediately.
 Spends money on salaries and other
operating costs to generate revenue.
 Earns revenue first, builds assets later.

5. Balance Sheet
Business
•Internet
Platforms like
Twitter, Uber
•Steel Plants
•Dams, Roads
Profit & Loss
Business
•Ad Agencies
•Restaurants
•Taxi Services
•Software
Services

6. Balance Sheet
Business
• Spends first in
buying and
building assets.
• Uses those assets
to generate
revenue.
Profit & Loss
Business
• Generates
revenue first from
minimum assets.
• Uses profits from
the business to
buy more assets.

7. Balance Sheet Business
• Attracts those who can
wait long periods of
time in the hope of
building value.
• These people have the
ability to manage
budgets and project
timelines.
• Those who can RAISE
lots ofVC money!
Profit & Loss Business
• Attracts those who like
to generate revenue
quickly and use the
profits for growth.
• People who don’t like
borrowing too much
money or taking large
risks.
• People who don’t have a
track record of success

8. Balance Sheet Business
• Takes a long time to build
out, with many iterations
in between.
• Needs expert
management of budgets
and project timelines. It’s
complex and demanding.
• As the entrepreneur, you
can’t abandon a venture
in between.You need to
commit 10 years.
Profit & Loss Business
• Quickly gets started.
Provides instant
gratification of owning a
real business.
• Provides lots of operating
experience. Great way to
start a first business.
• Can be closed, or even
abandoned quickly if not
successful fast.

9. Balance Sheet Business
• Owners of Capital – Banks,
Lenders,VCs, HNIs, etc.
• Investors who like large
outcomes and have the
appetite and discipline of
waiting, watching and hoping!
These are folks who can afford
to risk their capitals for higher
rewards.
• People who CAN REFINANCE
you multiple times, as you
build your business.
Profit & Loss Business
• Friends, family & your local
banker.These people are
happy to get you started and
to take back their money when
you can comfortably return it.
• The actual business starts
from existing contacts and ex-
employers, who need your
services immediately and give
you your first orders.

10. Balance Sheet Business
• A big win or nothing.
• VCs don’t like mediocre
returns.They like
spectacular returns.
• Don’t do a B/S venture if
it’s not going to create a
30-50x multiplication of
the original investment.
Profit & Loss Business
• Their capital back, with
interest.
• Later, these financiers
could get special terms
to invest (longer term) in
your business, given
your proven success and
if you are going to build
assets.

11. Balance Sheet
Business
• Any kind of
guarantees of
success.
• No capital back
guarantee.
Profit & Loss
Business
• High interest
rates or fixed
returns.
• No capital back
guarantee.

12. Balance Sheet Business
• The financiers will begin
with a 20-30% stake in
your Company and
progressively increase
their stakes on more
refinancing.
• It’s fair that the
entrepreneur is left with a
10-15% of stake in the
business at exit stage.
Profit & Loss Business
• Short term capital
lenders do not get to own
stakes in P&L businesses.
• They should remain short
term financiers and have
their money returned,
sooner the better.
• At best, give them some
‘goodwill’ shares in your
business, but no defined
stake.

13. Balance Sheet Business
• Even though the money may
be Capital, think of it as a
LOAN.
• Imagine all the time that you
will need to repay it back (via
an exit).
• Do NOT SPEND on assets
(like brand building via ads)
when the benefit is fuzzy.
• Only invest in assets that
some dayWILL generate
revenue.
Profit & Loss Business
• Invest in people and basic
assets that immediately start
generating revenues.
• NEVER SPEND short term
funds on long term assets
(like building a brand or
creating technology that will
take years to yield revenue).
Note – Investing short term
loans to build illiquid assets is
the most common mistake
people make in building P&L
businesses.

14. Balance Sheet Business
• Exit via M&A, Acquisition
or IPO.
• The exit event happens
when the assets built
begin to show signs of
revenue generation (e.g.
facebook IPO).
• The amount of valuation
depends on the potential
to generate revenue.
Profit & Loss Business
• These are easy to exit, and
to IPO, since they have
operating proof of income
generation.
• Valuations are usually
tight, because the
business has proven its
potential and the path of
scale.There is no ‘hidden’
charm to uncover.

15. YouTube founded by
Chad Hurley & others in
2005 to build a video
sharing platform.
(Balance Sheet business)
YouTube getsVenture
funded by Sequoia.
(The financier of Balance
Sheet)
YouTubeVideo platform
scales massively. (The
asset side of the Balance
Sheet grows
disproportionately in
value.)
Google acquires
YouTube in Nov 2006.
Google BUYS A
BALANCE SHEET
business.
Google acquisition filing
declares thatYouTube
revenues are “not
material”.
Clearly ,YouTube has NO
P&L.
YouTube integrated
within the Google
ecosystem.
A Balance Sheet
business goes into the
P&L direction.
Google’s existing ad
platforms and sales
teams begin sales at
YouTube. P&L kickoff of
YouTube begins.
Eric Schmidt – CEO of
Google in Sept 10 says
thatYouTube will break
even and generate $450
mn in revenue! YouTube
becomes a P&L Biz.
A successful Balance
Sheet business becomes
a successful Profit &Loss
business.

16. Balance Sheet Business
• Chad Hurley and team
were the ‘Balance
Sheet’ guys.
• They were good at
building a great asset
with borrowed capital.
• P&L was not their
forte or their interest.
Profit & Loss Business
• Google is a P&L
business.They make
serious money
everyday.
• They acquired a
balance sheet (that
they had missed
building) and clearly
made it P&L worthy.

17. Balance Sheet Business
• If you embark upon a balance
sheet business, then don’t
get confused in generating a
P&L from it.You will most
probably fail at both.
• If your financiers change
their minds and want to
generate P&L from what was
to be a B/S business, then
close the business down.
Profit & Loss Business
• P&L businesses take a long
long time to be spectacularly
cash rich. Hence, investing
surplus money may never be
possible.
• If market forces change and
create disruption e.g. travel
agents (P&L biz) which get
disrupted by Travel Portals
(B/S biz), then you may lose
your business for good.

18. Balance Sheet Business
• If you want to build product,
platforms, IP, disruptive
technologies that may
‘someday’ be useful to
‘someone’.
• If you get the RIGHT financier
to fund you for 5-7 years
before seeing an outcome.
• NEVER attempt to build a B/S
business without sufficient,
deep, committed and
repeatedly available capital.
Profit & Loss Business
• If you want to do your first
venture and get your hands
dirty.
• If you are not sure how
committed you will be as an
entrepreneur – P&L businesses
can be started and shut in
days. B/S businesses need at
least a 10 year commitment.
• If short term, small sums of
money is all that’s available to
you.

19.  I am available on
alok@rodinhood.com /
facebook.com/rodinhood /
@rodinhood /
 Linkedin / therodinhoods.com
 If you have counter arguments,
opinions, views, etc., send them
to me. I will be happy to review
them and add them as
comments/reactions to this ppt!