Article

Kalam: A Sustainable Gift? Asian Journal of Management Cases

13(2) 95–107
© 2016 Lahore University of
Management Sciences
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0972820116653670
http://ajc.sagepub.com

Salman Khan1

Abstract
The case primarily deals with an enterprising young entrepreneur who faces an unexpected situation.
He has recently launched a startup which produces gifts using calligraphic art. He receives an offer of
investment of Pakistani Rupees (PKR) 3 million for his new business; however, he does not know how
much money he actually needs to take his startup to a whole new level against how much ownership he
is willing to give up. The decision revolves around the issue of control and business ownership versus
being rich.

Keywords
Entrepreneurship, Entrepreneurial Finance, Startup Valuation, Venture Deal, Art and Culture, Business
Cycle

Discussion Questions
1. Evaluate the different business components of Kalam?
2. Does Kalam need external funding? Discuss various financing possibilities.
3. What terms should Saad Sahil offer to the CEO in case he intends to secure external funding?
Please analyze the assumptions underlying these terms.

Saad Sahil (batch of MBA 2015, Lahore University of Management Sciences) was returning to Lahore
on the evening of 14 December 2014. As the plane started taxiing, he looked from the window with
mingled feelings of excitement and apprehension. Earlier in the day, he sat through a job interview with

Author’s Note: The case is written on a startup in an emerging market and; therefore, the students are expected to under-
stand the specifics of a developing market with regard to data availability, business environment, and economic and political
uncertainties, etc.
1
Suleman Dawood School of Business, Lahore University of Management Sciences, Pakistan.

Corresponding author:
Salman Khan, Suleman Dawood School of Business, Lahore University of Management Sciences, Pakistan.
E-mail: salman.khan@lums.edu.pk
96 Asian Journal of Management Cases 13(2)

the chief executive officer (CEO) of a multinational company, which turned out to be an investment
opportunity instead. The CEO was interested in investing PKR 3 million in Sahil’s six-month-old
part-time start-up, named Kalam. During takeoff, numerous questions flashed through his mind. For
instance, how much equity should he sell in his start-up and at what value, provided the fact that he had
one week to make the decision? Upon pondering, he realized that it would not be an easy decision.

Kalam: The Idea

Sahil started working on Kalam in July 2014 when he got a chance to visit some of his former students.
After finishing their diploma in arts (calligraphy), they could not find a reasonable job. They were instead
working for someone to repairing shoes and selling and vegetables or wallpapers. After seeing this, Sahil
knew he had to help them.

I was teaching at Naqsh School of Arts in Bhatti Gate, the cultural heart of Lahore. During my time there, I was
impressed by the things that the students could do and the different mediums of art that they could work in. While
teaching them communication skills, I realized that they were great in creating art, but they could not market it.
This was primarily the key driver behind the idea of Kalam.

Sahil started Kalam Cultural Arts (Kalam) in September 2014. The firm was expected to provide
cultural art products that were used as gifts and decoration items. Their offerings included a portfolio of
customized and some standardized artworks, which embodied the culture of Pakistan. Some of the
products were calligraphy, ceramics, woodwork, glass work, fabrics, etc. (refer to Exhibits 1, 2 and 3).
Sahil was certain that his idea was well positioned in the market because of his unique access to the
calligraphists as well as the ability to market the product to the right people.
Sahil (see Exhibit 8 for career details) could see the business potential of Kalam. However, his father,
who strongly supported his social initiative, rarely thought of it as a potential replacement for a full-
time job.

My father was very supportive when I wanted to help the artists. He is also a firm believer in the LUMS MBA
programme. He thought that Kalam should remain a part-time social initiative, and I should not turn it into a
full-time business venture. He advised me to go for a safe and steady job.

He knew his father had a substantial point given the country’s volatile economic and political situa-
tion. A job, in this environment, would be a safe bet. His father further argued that he should get some
proper returns after the huge investment in his MBA programme. Sahil felt restricted when he thought
of taking a job because he wanted to pursue his business full-time.

Kalam: The Foundation

It was August 2014, and he had already prepared a business plan and was leading the venture as its CEO.
He appointed Iqra Noman (CV provided as Exhibit 9), who was in-charge of a small art school and was
an artist herself (Exhibit 4 shows the organizational structure of Kalam). Sahil recalled,
Khan 97

There was no talk of equity, but we assumed that we were fifty-fifty partners.2 I became the CEO and took the
role in sales, marketing, and procurement. She took the position of a co-founder and managed the business and
the production side. We divided the work in half, and we did our part to make the business successful.

Sahil started his part-time venture in September 2014 along with his full-time MBA and continued
with the same arrangement until May 2015. Later in March 2015, he registered the firm as a sole
proprietorship and was then eligible to pay tax. He started his research to develop a product that the
market would be willing to buy.
The firm identified tughra as their first key product. The tughra is a calligraphic rendering of a
person or an organization’s name in the traditional style of the Ottoman Empire. Sahil made the
first sale without borrowing a single rupee. However, after the sale, he realized that he would require a
working capital of at least PKR 500,000 in order to fund the production sale cycle. He had the choice to
borrow money from a bank. Later, he decided to borrow the funds from his father essentially in the form
of an interest-free loan. Sahil elaborated the financial model, ‘I will borrow from my father what I need
to pay for rendered services and I will pay him back when I make sales. I usually work on cash-on-
delivery (COD) basis so this borrowing time should be very small.’

Kalam Operations
Kalam’s current product line consists of the tughra which was a calligraphic rendering of a name. By
using research and development (R&D), the firm made variations in size, paper and design within this
product. Future product lines included tile collages and miniature paintings. Pottery and ceramics were
planned for the long term.
The firm hired various interns to carry out the sales, keeping in view the associated low fixed
costs. However, the attempt failed miserably. In April 2015, the firm hired a full-time sales executive.
Sales were carried out through two main channels: Individuals (Facebook and referrals) and corporate
(multinational companies, event management companies, pharmaceuticals, etc.). The customers could
belong to any age group, but they usually had an inclination towards the culture of Pakistan and an appre-
ciation for art. The receivers of tughras ranged from the age of eight all the way to eighty years. The gift
provider’s role was also imperative as they knew the receivers.
Given the firm had a rather high variable cost and low fixed cost, it was expected that with the growth
of the business, more part-time workers on salary would be hired. The firm tried its best to mimic a
COD model. All individuals and some of their corporate clients paid according to the COD model. The
larger institutions such as LUMS continued to tie up their investment for thirty days or more as per their
organizations’ payment policies.
Sahil looked at the business cycle of Pakistan which was developed in a course on macroeconomics
at LUMS (see Exhibit 7). He wanted to understand that in the absence of industrial comparatives, most
of his projections, especially the sales revenue, would traditionally be based on the six month’s average
growth rate. He murmured, whether such a rate was optimistic or a conservative estimate given the fact
that Kalam sold eighty-five tughras in the last six months. Essentially, it showed that there was demand
for their product. The financial details are shown in Exhibits 5 and 6.
Sahil was also looking into the issue of risk that the firm was facing,
98 Asian Journal of Management Cases 13(2)

There is always the fear that the business will fail. The fear multiplies in the recession compared to the expan-
sionary phase of the business cycle. For instance, if the business cycle is in a recessionary phase or approach-
ing the trough then the probability of failure for Kalam falls between 5–10 per cent (average 7.5 per cent) and
in case of expansion or approaching the peak, the probability of failure falls between 1–5 per cent (average
3 per cent) with an average of 5.25 per cent over the whole cycle.

Competition and Growth

Kalam fell under two industries: the art industry and the industry of gifts/corporate giveaways. The art
industry was a stagnant industry with only a few hundred exhibitions happening each year. The existing
(two or three) major art schools had not brought more than a handful of artists to the limelight. The art
that Kalam offered had to be revived since it had been discontinued in the status quo and only a small
group practiced it. The firm offered cultural and personalized giveaways that would generate prestige
for the gift providers. He remembered his reflection on Kalam’s positioning,

It should make more sense that the business must be rightly positioned within the business cycle. If you know
where your firm stands the least one can do is to find out in which direction it will go. You will not receive the
same growth rate in recession as in expansion. In a recession, the times are tough, and it becomes even tougher
if you are producing something that does not solve a critical problem. In short, your product is not needed,
and the customer can wait for good times to buy it.

However, Sahil knew that the gifts/corporate giveaway industry had seen phenomenal growth in the
last few decades. Deciphering the competition was rather difficult especially in the absence of industry
specific data. According to a rough estimate, the companies that sell corporate giveaways grew by more
than 30 per cent annually.
Due to lack of competition and demand, the calligraphy market had dwindled in the last decade, and
only a few calligraphists were left with the required skill set. Kalam had access to these calligraphists
and artists, which made it a unique business strength. In the near future, Kalam planned to introduce a
comprehensive growth strategy, which would help the firm offer strong competition to new entrants.
Kalam growth strategy was two-pronged:

1. Product development: Kalam planned to move into products other than calligraphy
(see Exhibit 3). This wide product variety, as well as associated customization, would appeal
to a wider audience.
2. Market development: Kalam was predominantly selling the tughras in Lahore. Even in Lahore,
the firm had barely scratched the surface of the gift-giving industry. The firm planned to develop
the Lahore market and move towards Karachi, the business hub of Pakistan.

The growth strategy was expected to bring the firm in competition with gift shops, art stores and deco-
rative items. The firm would still be able to sustain its competitive advantage by providing customization
services and giving the customer control of the outlook of the product.
Khan 99

Future Funding Needs

After a successful running phase of six months with consistent growth in sales, Sahil started thinking
about the expansion of firm operations. He estimated that the firm would require 3 million PKR for
setting up an office and a workshop at 50,000 PKR per month, research and development (2 artists at
PKR 50,000 per month), and market development for the city of Karachi at PKR 1.2 million for one year.
He still needed to refine his idea and the estimates regarding investment to enter into Karachi’s market
when the market of Lahore was still unexplored. He already held 1 million shares at PKR 0.5 per share.
He was wondering whether to ask angel investors for investment or avail loan from a bank. He
quickly abandoned the idea to avail a bank loan as the firm still lacked fixed assets which could be used
as collateral. In the absence of collateral, the cost of financing would be higher if at all approved. In addi-
tion, the banks would evaluate his case based on the ability of the firm to pay back, which in turn, would
be based on the credit history, which did not exist. Angel investors remained at the centre of his funding
approach. Sahil was critical of giving up equity. He was wondering whether it was optimal to sell equity
at that stage and if required to do so, how much equity should be sold and at what value?
Meanwhile, he met the managing director of a large multinational pharmaceutical company. He
wanted to invest in Kalam as he saw the potential of the idea on a national as well as international scale.
Sahil said that their views differed on many things except the PKR 3 million investment. He recalled the
following:

We differed in opinion regarding the future of Kalam. He wanted to sell standardized products on a large
scale with lower margins. I wanted to offer customized service to a limited clientele with higher margins. There
was no evidence of due diligence, on his part, about my business. He wanted to invest only after seeing my
business plan.

As the airplane descended, Sahil’s mind kept thinking about the questions, how much investment was
required and at what value, if the exit period was 4.5 years, etc.

Assignment Questions
1. Evaluate different business components of Kalam?
2. Does Kalam need external funding? Discuss various financing possibilities.
3. What terms should Saad Sahil offer to the CEO in case he intends to secure external funding?
Please analyze the assumptions underlying these terms.
100 Asian Journal of Management Cases 13(2)

Exhibit 1. The Products

Current Product Offerings:

Calligraphy
Tughra Calligraphic rendering of a person, or an organization’s name,
in the traditional Ottoman Empire style.
Expected Line of Products (2015 onwards):
Calligraphy
Tughra Calligraphic rendering of a person, or an organization’s name,
in the traditional style of the Ottoman Empire.
Quranic Verses Calligraphic writing of Quranic verses used for decoration.
Tiles
Historical Tiles Hand-painted replicas of tiles from historical places of
Pakistan, for example, tiles from the Badshahi Mosque,
Wazir Khan Mosque, Multani and Sindhi designs, etc.
Mughal Miniature Tiles Hand-painted Mughal paintings on tiles.
Customized Tiles Tiles with a border of historical design with a tughra in
the centre.
Ceramics
Mugs Hand-painted mugs with a tughra on one side and the gift
giver’s name and logo on the other.
Plates Hand-painted plates with a tughra in the centre and the
sides decorated with traditional designs.
Paintings
Oil Paintings Replicas of Mughal paintings done in oil paints.
Mughal Miniatures Replicas of Mughal paintings done in traditional
miniature watercolours.
Fabric
T-shirts Shirts with Tughras and Mughal designs.
Wood
Paintings Traditional Mughal designs hand painted onto wood.
Metal, Stone, Glass, etc.
Memorabilia Pendants, coins, trophies, etc.
Source: Company documents.
Khan 101

Exhibit 2. Current Products

10 x 12 tughra made on hand-made paper with shamsa. This is a tughra of Iqra Saad Sahil.

20 x 20 tughra made on white paper.

Source: Company documents.

102 Asian Journal of Management Cases 13(2)

Exhibit 3. Future Products

Source: Company documents.

Khan 103

Exhibit 4. Organization’s Structure

Management Co-Founders

Tier 2 Artists Sales & Delivery

Tier 3 Full Time Part Time Full Time Part Time

Source: Company documents.

Exhibit 5. Financials
Revenues
Sales in Units Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015
Tughra - small 0 0  0  1  5  5
Tughra 6 7 11 12 13 20
Tughra - big 0 0  0  0  0  5
Sales in PKR Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015
Tughra - small – – –  1,500  7,500  7,500
Tughra 12,000 14,000 22,000 24,000 26,000 40,000
Tughra - big – – – – – 25,000
Total Revenue 12,000 14,000 22,000 25,500 33,500 72,500

Costs
Units Produced Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015
Tughra - small 0 0  0  1  5  5
Tughra 6 7 11 12 13 20
Tughra - big 0 0  0  0  0  5
Cost in PKR Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015
Tughra - small – – –  1,200  6,000  6,000
Tughra 10,200 11,900 18,700 20,400 22,100 34,000
Tughra - big – – – – – 20,000
Total Costs 10,200 11,900 18,700 21,600 28,100 60,000

Cost-Price Matrix Size Price Cost of Writing Materials Framing Margin

Tughra - small    6 x 6 1,500   800 200  200 20.00%
Tughra   8 x 10 2,000 1,000 350  350 15.00%
Tughra - big 20 x 20 5,000 2,500 500 1,000 20.00%
Source: Company documents.
104 Asian Journal of Management Cases 13(2)

Forecast Assumptions: The projected revenue and cost will be 1.3 times the average historical revenue
growth rate.

Exhibit 6. Financials (cash flows)

Cash Flows
  Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15
Sales 12,000 14,000 22,000 25,500 33,500 72,500
COGS 10,200 11,900 18,700 21,600 28,100 60,000
Gross Margin 1,800 2,100 3,300 3,900 5,400 12,500
Expenses  
Advertisement – – 800 1,300 2,000 –
Fuel and Transport – 1,000 1,000 2,000 3,000 3,000
Communication 500 500 500 500 500 500
R&D 20,000 10,000 5,000 5,000 5,000 5,000
Total Expenses 20,500 11,500 7,300 8,800 10,500 8,500
Net Profit (18,700) (9,400) (4,000) (4,900) (5,100) 4,000
Inventory
Frames 5,000 5,000 5,000 25,000 50,000 50,000
Papers, Ink, etc. 20,000 20,000 20,000 20,000 50,000 50,000
Expenditure (25,000) (25,000) (25,000) (45,000) (100,000) (100,000)
Total Outflow (43,700) (34,400) (29,000) (49,900) (105,100) (96,000)
Source: Company documents.

Forecast Assumptions:

• First, the respective expense is taken in proportion to the sales revenue in that period. It is assumed
that the proportional share of respective expense will remain the same over the entire forecast
period.
Advertisement   0.05% of the sales revenue
Fuel and Transport   1.50% of the sales revenue
Communication   0.05% of the sales revenue
R&D       2.00% of the sales revenue
• Inventory: The Frames and Paper will be the target of 10% of the sales until the end of year, that
is, 2015. The inventories will be further targeted to 3% of the Sales from 2016 to 2019.
Khan 105

Exhibit 7. Business Cycle

Pakistan’s Business Cycle Phases (HP Filter)

Average GDP Business Cycle
Date Partial Cycle Full Cycle Growth (LCU) Component Phase Max/Min
1961–1972 11 Years 6.23 0.09 Recession Trough (1972)
1973–1983
1984–1996
10 Years
12 Years } 22 Years 5.93
5.05
–0.05
–0.01
Expansion
Recession
Peak (1983)
Trough (1996)
1997–2005
2006–2010
08 Years
4 Years }12 Years 4.64
3.48
0.37
–0.57
Expansion
Recession
Peak (2005)
Trough (2010)
2011 Onwards 4.16 0.23 Expansion –
Source: GDP Growth Data, World Bank. (Business Cycle Calculations by the Author).
Note: *Long-run discount rate is 12% (State Bank of Pakistan).

Exhibit 8. Curriculum Vitae

SAAD SAHIL
Lahore University of Management Sciences May 2015
MBA
Lahore School of Economics 2013
BBA (Hons.)
Exp e rie nce
Growth Consultants Jan 15 - To Date
Consultant–General Management
  •  Sales and Marketing Consultant for SMEs in various sectors (Real Estate,
Renewable Energy, Automotive Repair, etc.)
106 Asian Journal of Management Cases 13(2)

Kalam Cultural Arts Sep 14 - To Date

Co-Founder–CEO
  •  Management, Sales, Marketing, Procurement, Training and Development
Tetra Pak Pakistan Jun 14 - Jul 14
Intern–Procurement and Finance
  •  Groundwork for FTCP transition(Out Sourcing of accounts payables)
Naqsh School of Arts Dec 12 - Jul 13
Teacher–Education
  •  Taught ‘Communication Skills & Professional Development’ for 1st and 2nd year
students.
Ali Institute of Education Nov 12 - May 13
Teaching and Research Assistant - CPDC
  •  Marketing Campaign of AIE. Managing the Annual Summer School. Gave workshops
on various subjects.
Lahore University of Management Sciences Aug 12 - Aug 12
Intern–Marketing and Alumni Affairs
  •  Improvement of the LUMS website. Coverage of on-campus events and wrote
write-ups for the website. Updating the Alumni database.
Tetra Pak Pakistan Jul 11 - Aug 11
Intern–Marketing and Environment
  •  Worked in collaboration with WWF for Green Office Project implementation in
Tetra Pak.
Packages Lanka (Pvt.) Ltd. Jun 08 - Jul 08
Foreign Intern–Marketing, Finance, Sales and HR
  •  Finance: Entries using Peachtree, HR: Understanding Management Training, Sales:
Visit to the various customers and their factories
Together Strategic & Development Consultants Aug 07 - Aug 07
Intern–Development
  •  Wrote various articles for newsletters of various NPOs. These included Jinnah
Hospital, Pink Ribbon Campaign, Rising Sun Institute, Mayo Hospital,
General Hospital, etc.
Proje cts
Business Plan for ‘Modern School System’
  •  Final Project for SME Course.
Implementation of International Baccalaureate in Pakistan
  •  Thesis submitted to Lahore School of Economics
Additional Skills and Exp e rie nce
  •  Director Finance of LUMS MBA HR Club 2014–2015
  Government Primary School Hera Singh Wala (April 2011 - May 2012) Operated and
Managed the whole school.
Inte re sts
Teaching, Writing Articles and Stories, Playing Table Tennis, Horse Riding
Khan 107

Exhibit 9. Curriculum Vitae

IQRA NOMAN
EDUCATION: BACHELORS IN SCIENCE (BSc) from University of Karachi, 2012
Majors: Biochemistry, Chemistry, and Bio-Statistics
Subsidiaries: English, Urdu, Islamic Studies, Pakistan Studies
INTERMEDIATE IN SCIENCE (Pre-Medical) from Board of Higher Education, Karachi, 2010
Majors: Chemistry, Physics, Biology
Subsidiaries: English, Urdu, Pakistan Studies.
MATRICULATION (Science) from Board of Secondary Education, Karachi, 2008
Majors: Physics, Chemistry, Biology
Subsidiaries: English, Urdu, Maths, Islamic Studies
EXPERIENCE: Naqsh School of Arts, Lahore, 2014
In-charge of Naqsh Gurmani Centre, located in Gulberg. I was responsible for their intakes,
marketing and the day-to-day running of the art school.
Liaqat National Hospital, Karachi, 2013
Intern in Haematology and Microbiology departments.
Intek Education System, Karachi, 2010
Taught children of Grade 5, for 3 months at Intek Education System.
HOBBIES: Sketching, Drawing, Painting
AWARDS: Received the ‘Pakistan Day Celebration’ Award, 2012.

Note
1. For legal partnership, an application for registration by filling out Form No. 1 of the Partnership Act 1932 has to
be submitted to the Registrar of Firms, Securities and Exchange Commission of Pakistan.