Category Archives: StartUp

What’s Around the Bend?

I have been fateful to be in the midst of an unnerving pattern. A pattern which is not only an eye-opener, but highly intriguing as well.

There are these aspects to this pattern:

  • Perceived Disruption
  • Disruption Momentum
  • Reality Check
  • Regression
  • Coexistence

Perceived Disruption: These are the startups who make waves in the market by scoring giant funding rounds. They essentially start positioning themselves as major disruptors, before even they have fared a decent revenue and profitability bull run.

Disruption Momentum: The startups are now funded. I mean, they are now fat with funds. They plough their money into getting expensive offices, lead acquisition, over-blown marketing campaigns. All in the name of staying ahead of everyone else. Gaining the oh-so elusive market share, overnight.

Reality Check: The funders realize that they have burnt too much money in too many bets. They plan to curtail the outflow. They stop participating in follow-on rounds. This not only happens in one, but across most venture capital funds. Thereby, creating a domino effect. The fund crunch gives rise to mark-downs, office space consolidation/contraction, job losses and finally shutting down failed startup enterprises.

Regression: The so-called traditional, archaic companies that were fearing disruption with the advent of startups and their burgeoning funding cycle, now breathe relief. With the fund crunch and tepid investor confidence, these companies start taking advantage of the situation, by better preparing themselves for the future onslaught. With no option left but to perform, they start innovating as well. They become more proactive.

Coexistence: The startups which survive the reality check will slowly become large enterprises in the near future. Essentially, they will coexist with the traditional enterprises. They will become leaner, smarter, and be experienced enough to ascertain the ebb and flow of the market to better prepare themselves. Similarly, the traditional companies rapidly innovates to not get caught like last time, when the startups made serious dent in their businesses.

The ultimate winners are the customers who get to view this epic battle between the startups and traditional companies from their box seats, while the market provides a level-playing field where no one controls monopoly, and is driven by competition. Poor service, complacency becomes feedbacks of the past. Due to the fight for the customer’s wallet-share, the customers end up getting superior products and services.

Feeding the Cattle

 

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Way back in time when there were no farming machinery and automobiles, there was Arnold, who was a crop and cattle farmer. He just survived through the worst drought imaginable. It was tough going for him.  But, then the gods finally answered his prayers and showered with rain.

During the period of drought, Arnold had stored enough fodder to feed his cattle, which kept them in shape. The water for irrigation was managed from a nearby canal. The cattle’s job entailed – ploughing the fields, carrying heavy loads and water, and sowing seeds.

When drought was over and rain had dawned, Arnold started flourishing in farming, with record produce. He fed excessive fodder to his cattle, as an incentive. His cattle gained weight, due to the excessive fodder intake, and they became lazy. This negatively impacted Arnold. He meted out harsh treatments to them, and even took them to the nearby hills to get them out of their slumber. But, all his efforts went in vain, as they slouched even more, making it impossible for him to sustain the steady run of profitability.

He finally arrived at the conclusion that if he had fed the same quantity of fodder to his cattle, like in the drought, then he wouldn’t have had to face this day. So, he sold off his cattle to butchers, and with the money bought a new fleet. This time, he didn’t make the same mistake. He fed them enough fodder that kept them going, while utilizing every possible opportunity of profiting from the flourishing season, before drought stared upon them.

Now, put the above in context with the present day Startup ecosystem. Think about Arnold being the Startup, fodder being the Funding, the flourishing season being the VC Funding Momentum, the cattle being the Operations, and finally, the cattle’s laziness being the Cash Burn.

The bottom line is, spend enough, which would increase sustainability, safeguarding your startup’s operations during the rainy days (‘Drought’ in the case of Arnold). The market, talent, and customers are always going to be there, but it is you, who should be there to service and profit from them.

The race to market-share cannot be won by discounts, and pumping money into nonsensical marketing campaigns. Capturing market-share is a time-consuming affair. It has been only achieved, when models make way for revenues, and not your funding milestones. It’s the unit economics, the CLTV (Customer LifeTime Value) that should be the primary goals. Rest will follow automatically. As a startup entrepreneur myself, I have taken my oath to support my business expansion through internal accruals. Yes, Internal Accruals – funds generated from the business.

For the next few years, coffee shops would be my stand-in offices, cloud would be the go-to infrastructure, and growth hacks through informative insights and social media connect, would be my marketing apparatus. I will launch products and platforms, way before I gain critical mass. I will look forward to building an ecosystem by collaborating with partners for growth. I will plough back 65% of my profits into business expansion (‘Internal Accruals’ as I referred above) and also free up liquidity for my colleagues through stock option plans. I am sure, if I do this right, the media would find me, and I wouldn’t have to find them.

Do Startup… but Build to Last

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Other than the investors, you don’t want your Employees, Vendors, Landlords and everyone who you write a check, lose confidence over your startup. One needs to understand that member acquisition costs cannot exceed customer lifetime value. Conversion ratios (from users to paying customers) have to be aggressively pursued from the outset. Training, motivating and incentivizing the sales team has to be the number one priority from day one. Look at unique partnerships that would complement revenue growth. Take a leaf out of the early stage growths of Oracle, Microsoft & Apple. Though, burning cash is the buzz word, which has increased the risk appetite of startups, but it should not overshadow maintaining a healthy bottom-line. We should not look at the Valley to try and emulate their success mantra. Our consumer behavior is way different than theirs. Building a brand doesn’t happen overnight, it is a process, which entails building a great work culture, continuous customer engagement, superior customer service, continuous innovation, industry tie-ups, making payments on-time (credibility) and so forth.

We live in the world of week-on-week growth, this takes away the fact that businesses are built and endured over time. Therefore, the startup ecosystem is happy with the thumb rule that 99% startups fail. Why can’t investors look at this percentage as a challenge and reduce the failure rate? Investors need to get out of their portfolio building mindset. The yardstick for measuring startup success has been, who gets the highest paper valuation. This has to change, market shares have to be defined from the point of real revenues and not from aggregating non-paying customers (user count), unless a startup is chasing revenues from advertising.

With the growing need for targeted marketing, advertisers are keener on engagement ratios than impressions. Only the newbies would take to this service, as it would lower the brand awareness cost. Reliance on this form would lower as we move ahead.

Apart from all of the above, the timing has to be perfect. If the startup dies young because of increased cash burn, then it is not giving itself enough time to grow into a matured market, over time. Be nimble at the beginning. Think about this, if Apple introduced iPhone in the late 90s when broadband internet was still in its nascent phase, let alone mobile internet, what would have happened to them. iPhone’s success is not by its own, it is also due to the fact that telecom companies innovated as well. That’s why ecosystems are so important.

My humble request, please don’t kill the ecosystem, by going after mindless growth. Understand and implement a better revenue to cost ratio. This is the only way for success. The only way for the ecosystem to thrive. We might need your services one day, so please don’t die by going after paper valuations.