Wednesday, August 11, 2010

Discussion on Flaws Continued: When Emotions and Finances Mix

I recently resigned from an advisory role to a start-up of consumer goods in the luxury market. The start-up showed promise initially: the founder is a talented designer; the product is innovative and different; people showed great interest in the product. What was the flaw that led to the start-up’s demise? Mingling of emotions and financial decisions.
            A similar product line at a much lower price range by the same designer had been very successful. Customers were asking for more: more in terms of quality and not in terms of quantity, which is a very interesting factor to consider in the luxury goods market. The designer responded with ever more elaborate designs that required different materials. This is a key point that many designers miss: a good rendition of a concept calls for execution via specific materials. The design inherently dictates technique and the technique dictates type of materials. This is not written in stone of course (no pun intended) and the truth is that many designers become famous because they have overcome exactly that very sequence and managed to produce an innovative concept by using different techniques and different materials.
            The designer’s satisfaction with her market’s enthusiastic response to the evolution of her designs convinced her that it was time to completely change course and target the upmost luxury market with a product that her clientele was not in a financial position to acquire. In addition, the designer invested all her savings in acquiring valuable raw material to use in her designs and produced a whole line of products and several collections responding to the wants of the “old” clientele and aiming at the needs of a “new” one, one which she had not yet defined or tested. Finally, she priced her product to compete at the utmost top of the luxury market—albeit as an unknown entity.
            My role in this operation was external, which does not give one a lot of room to make and execute decisions that would change the brand’s strategy, for example. But even so these are the main things that I questioned and have now imprinted in both my head and heart knowing that an emotional approach to a product (whatever the product may be) does not mix well with sound financial decisions:
            Raising capital: The ability to decide how to acquire funds should come only after the market has been tested and after the customers cannot be the sole providers of cash flow for the company. Namely, raising funds should stem from the start-up’s growth and the executives' ability to forecast the need for additional funds that will support a proven strategy.
            Money management: Financial controls are crucial and should come first, especially when the market segment where the company competes is more creative. Creative mistakes that leave the drafting board and literally materialize in a new line of products cost a lot of money. They cost even more when the concept has not been tested. Build your team in a way that the creative force of the firm is accountable to its financial manager and allow plenty of time for discussions. Communication is important when two minds understand one issue from a different point of view. Numbers have the ability to prove a concept right or wrong. Design has exactly the same power. But communication needs to happen within your team in both directions.
            Financial skills: If you happen to be the creative force of the company build your financial skills in anything that concerns cash flow analysis, profit and loss, balance sheet items and return on investment. You will be able to understand what the finance person on your team is trying to tell you or you will be able to supervise the person you hire in that capacity. Whichever the case, financial models have derived from empirical evidence and you should know how to use them to your benefit and before you invest all your savings in a line of product that no one wants. 

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