It depends on what your own goals are. E.g. if your goal is to ‘solve a problem’ or ‘help someone do something’, then you evaluate it on those parameters.
Over the years, I have had the good fortune to have a number of wise and well-meaning folks who supported me and guided me. Here’s a summary of what I learnt from their wisdom and tremendous perspective.
- My dad: Failing to plan is planning to fail. He used to tell me “If you have 10 hours to cut a tree, spend 6 hours sharpening the axe”
- Pravin Gandhi: Its very difficult to do even one thing well. Don’t attempt to do to many things. Focus on one thing and do it well.
- Raj Desai: Do not try to stir an ocean. Find an oasis and build a good eco-system around it.
- Saurabh Srivastava: Assuming that you could do it better than others because you are smarter than them is a weak and dangerous assumption to base your business on.
- Sridar Iyengar: When I had once asked him how is it possible to create differentiation in a crowded space, Sridar pointed to a ceremonial lamp with 8 – 10 wicks burning.. and said “One of these wicks will last longer than others. And it will be because something was different about it. Perhaps it was wound tighter, perhaps it was dipped in the oil differently, perhaps it was a little longer than others, perhaps it was placed differently, or perhaps it was placed shielded from the wind. In your business to, find out what that differentiation will need to be to burn the brightest and longest.”
Prajakt Raut highlights the process and requirements to create a company.
Prajakt Raut discusses how you can evaluate your competition and chart out your unique selling point.
When I tell entrepreneurs that they need to validate their assumptions for their business, they tell me “But we have already done that… we already have a few paying customers… they have paid us $Y for it and are using it.”.
While, having initial customers is good news and sure should be celebrated, that by itself is not sufficient validation of the business case for your venture.
A few customers buying (or even really using it if you have given your product/service free to them) is merely an indicator that at least some people have a need for the solution that you promise to offer for a problem that they feel needs a solution. But that does not tell you (a) how many potential customers exist in a given market (b) how much time it will take to make a sale and what will be the cost of acquiring a customer (c) how much will most customers be willing to pay, (d) does the product/service really solve the customer’s problem and (e) will the customers do a repeat purchase
No. I am not being pessimistic. I am not demeaning the massive effort it requires to get a product up and running and then finding someone to use it and appreciate it. All that is good. But a few initial customers do not give you enough proof to determine how your business will operate at scale.
Below are a few questions about your business that you need to have answers to in order to say with confidence that a concept is validated (and no, none of these questions are answered just by getting a few initial customers):
- Do my potential customers really feel the problem that I am trying to solve? A few initial customers, especially in a B2B sales scenario when the entrepreneurs are selling themselves (and most probably to a bunch of customers they have slightly easier access to) does not give insights into what percentage of the intended target audience feels the problem that you are trying to solve.
Often, in some cases you will find initial customers who are the most frustrated with the problem, and that initial success or quick sales closures may lead you to believe that most customers feel the pain of the problem as much as these customers do.
An example from my personal journey: I was previously the co-founder of a healthcare services company. We managed health & wellness programs for schools. When we announced the concept, 10 -12 schools in our city called us and some of them quickly signed up. We were ecstatic and felt “Wow, this is bigger than we thought!!! Forget trying to sell to customers… customers are calling us!!!”. However, the reality was that the customers who called us were among the few ones who were LOOKING for the solution we were offering. Beyond these very few schools who were actively seeking to outsource their health & wellness management programs, when we tried selling to other schools we realized that they were not keen to take on the additional responsibility of managing health issues in the schools and their policy was to have a quick response mechanism to take the child/teacher to the nearest healthcare facility in case of a medical need (i.e. they did not want medical issues handled on their premises). Selling to schools that were not already looking for a solution that were offering turned out to be a nightmare. (Well, while the company got to a level of self-sustainability but we realized that it will never really scale… and our aspiration was to scale. We shut shop after 3 years of trying the concept… some may say, and perhaps rightly so, that we should have shut shop earlier.).
- What will be my average sales cycle to close a deal? Often in the initial phases the entrepreneurs are the ones making the sale. And with their passion, and perhaps their contacts & relationships, they are able to do a few quick sales. But that is not replicable and scalable. Eventually the business may need to rely on sales persons to make the sale. And a sales person will not have the sale level of passion, insight, experience, stature or skill levels that the founders had when they made the sale. Hence, the sales person’s sales closing time may be several times more than what the founders were able to get away with.
Unless you are able to get a realistic view of how much time it will take to close a sale, the venture is likely to totally underestimate cost structures as well as their cash flow, and thus their funding needs and may run out of money sooner than planned. (Quite a few companies die because the team runs out of money a few quarters earlier than originally planned… )
- How much will my customers pay? Often initial customers either pay too little or are given the product free or pay the full price for a trial set of numbers. And most entrepreneurs showcase those numbers as ‘having proven the pricing strategy’. And as you can imagine, that may not be the case. The pricing of the product/service should be tested in an environment that is replicable at scale.
- What will be the repeat purchase rates? In many businesses repeat purchases (or annuity contracts in B2B customers) are critical to the successes of the venture. A few early adopter customers who experiment with your product are often merely checking if your solution solves their problem. And as with your product, they may be experimenting with a few other options too (including indirect competition to your products). Thus, unless you figure out a way of how the customers are using your product, how much internal resources have they committed to your solution (in the case of B2B ventures), how well is your concept addressing their problem, what does the management think about this approach, do they have the money to do this beyond the pilot, etc. you will be misguided by the initial adoption.
Friends, validate as many assumptions on your business as you possibly can. Even if you do not sell to customers, speaking to MANY to understand their needs & views on your solution is better than a just a handful customers who buy/use.
(This was my response to a question on Quora.. which was qualified with the following additional comments by the person asking the question:
We are 4 guys starting a new company, and we are looking to formalize an agreement that will:
1) Protect all of the co-founders from a non-performing co-founder.
2) Protect a co-founder from being kicked out by the majority of the co-founders without any justified reason.
We’re specifically talking about clauses like vesting, cliff, voting rights on how to fire one of us, etc.
What would be a good mechanism to achieve this?)
Apart from legal contracts and vesting, which of course need to be there, my view is that entrepreneurs need to have a detailed discussion among themselves on a number of what-if scenarios.
I ask my startups to think and debate and discuss about some of the following scenarios and points:
- Agree on what ‘success’ means- typically, when numbers are not discussed and founders go on the basis of passion, the underlying understanding (even if not stated) is that this will be a ‘large’ business. I therefore ask the founders to write down separately what they see as their revenues in 5 years time. Often, there is a 5 – 10x difference between the numbers quoted by two different founders. One founder’s view of ‘large’ is USD 10 million, while the other aspires to be a USD 100mn brand in 5 years time. Obviously, with such differences, the founders satisfaction from the traction is likely to be different, and, in this particular example, even if the company were to be USD 30 mn in revenues in 5 years, we would end up with one disgruntled and dissatisfied founder.
- What if someone were to buy you out for USD 10 mn in 1 year’s time? (often all founders say yes, we will sell)… then I ask what if that number was USD 2 million and not 10.. often at least one of them says he/she will sell out (this person is usually the one who has the least faith in the potential of the business, and hence as a mentor my goal is to help the person see the potential… or understand from him/her why he/she has that perception)
- How much time can they go without a salary in case the story does not play out as planned. Different people will have different answers based on their circumstances… and that’s OK. Just that the rest need to be aware of the choices that the person will make in case of crunch situations.
- How do you handle failure? Will you penalize a founder if he/she does not deliver? Will you be tolerant, supportive and inclusive in case one of them under performs? My view is that often someone will under deliver or fail in their deliverables… and that’s ok AS LONG AS THEIR COMMITMENT AND EFFORT WAS 100%. But that’s just my view. Founders have to decide how they will deal with incompetence or failure. In many cases, founders take on responsibilities based on their perceived areas of interest or what the situation needs them to take ownership of. In most cases where there is no prior experience or interest, this is stressful. My view is that founders need to give each other the space to fail, with adequate processes for early warning signs and course corrections. Of course, this applies if the commitment was 100%, the attempt was honest and there were no integrity issues.
- What happens if one of the founder becomes incapable of performing his/her duties (accident, family circumstances which require him/her to shift to another city, if the startup changes the business model or the concept, etc.). Will he/she continue to get the same privileges, equity and salary as was originally agreed. (there is no right or wrong answer. Founders have to collectively take a philosophical call on these type of issues. Well, to push the point, they also should discuss what will happen to the person’s shares in case he/she were to die… would the shares go to the family or to the founders or go back into an ESOPs pool?)
There are a lot of things that founders should agree on BEFORE starting up. And often these things are not discussed. They should be. If there is prior understanding on who will make what choices under what circumstances, the friction & stress can be avoided (or at least reduced).
Additionally, the founders NEED to decide who the CEO will be (and why) in case the team gets funded. (Lack of agreement on this, and multiple founders with similar aspirations can be a sure shot disaster).
Strategy is about choosing from the may options you have available to choose from, and then aligning the rest of the organization around that decision.
To arrive at an appropriate strategy, it is there fore imperative that you understand the dynamics of the industry, the business environment you are operating in and your own circumstances. You also should have a good idea of ALL the possible choices you could have, and then make a decision to carefully select one of those choices as the direction you want to follow.
This, to my mind, is strategy. A well though of choice after evaluating all the options you had for that decision.
No one thing can guarantee success in a startup. For a startup to succeed, 20 things have to go well. For it to fail, one thing has to break.
A mentor is someone who accepts the responsibility of guiding a mentee on aspects of business, or life, that the mentor may have a longer experience on.
Thus, in the context of a startup, a mentor’s role is to provide perspective on the direction that the venture may take, and providing inputs and advice on how that idea can be converted into a venture.
This means that the mentor should not just give opinion on what he/she feels is right, but should see the venture in the context of the individual mentee’s circumstances and then help the mentee take necessary decisions.
A mentor should not enforce his/her views but provide the inputs that will help the mentee take a better informed decisions.
Apart from strategy and help in decision making, a mentor could also help in the following areas:
- Helping create a business case and business plan – in this, the biggest inputs would be to help the mentee (usually a first-time entrepreneur) understand the complexities of business, the various cost structure, the time taken by companies to stabilize (usually entrepreneurs underestimate the time taken to establish the venture in the marketplace)
- Helping with warm introductions to potential customers, potential employees, potential partners, or even investors
- Providing support during tough times – entrepreneurship can be a lonely journey. And often, the challenges faced can pull a person down. In such times, a mentor can play a crucial role in keeping the motivation level up, reassuring the entrepreneur that the challenges are part of every journey, giving the comfort that his/her support is available, etc.
- Helping take tough calls – including sometimes shutting down or doing a pivot…
- Interviewing senior employees (this is especially useful when the entrepreneurs are young * inexperienced but have to hire someone older and experienced)
Each mentor mentee relationship is unique, and it will be good to hear form you what your experiences with your mentors were.
Here’s a list from my observations of startups:
Overestimating the meaningfulness of the value-proposition to the intended target audience: Often entrepreneurs assume that customers will line up to buy their product or service. They do NOT foresee challenges in acquiring customers or clients. And going wrong on this front shakes the very foundation as the startup, as the rest of the assumptions (on revenues, captal requirements, etc.) are made on this basis.
But when you are starting a new venture, you need to assess various risks. I have listed some below, but each business and each person’s circumstances will throw up different aspects that you would need to consider.
Concept risk: Is the value proposition relevant for the intended target audience? (To assess this, you first need to clearly articulate what your value proposition is. ‘What you do’ is NOT the value proposition. What the users/buyers will get out of what you do is the value proposition. Check with your intended target audience if they feel that this is meaningful for them. If it is not, then evaluate if you need to adjust your value proposition (and therefore sometimes your product/service/concept itself) or you need to check if the value proposition is relevant to a different set of audiences (perhaps different age or income bracket or in a different geography or people in different circumstances than originally intended).
Revenue streams, business model and business case: You have to evaluate if your revenue streams and business model makes a business case that makes the venture worth your while. This is a critical process in your entrepreneurial journey and you need to take a realistic view of the costs and potential revenues.
In e-commerce businesses, you often have a disproportionately higher spend in acquiring the customer and you make monies on that customer only after a number of repeat purchases (or visits if the customer is not going to pay for services and you have alternate ways of making money – e.g. advertising or referrals)
Operational aspects: Evaluate the challenges around procurement, warehousing, logistics, etc. that you will have to deal with, and evaluate whether it is practical for you to overcome those challenges given your resources and circumstances.
People resources: Hiring people in startups is a challenge. You need to have some thoughts on how you are going to assemble your core team and your initial employees. Evaluate whether you will have some of the important functions in-house or outsource or use existing platforms (e.g. technology)
Marketing and customer acquisition costs: Quite often entrepreneurs do not spend enough time to understand the dynamics of customer acquisition. Especially in e-commerce ventures, you need to be able to get a clear sense of what activities you would do, how much they would cost and what conversions you could expect…. and therefore how much it will cost you to acquire customers.
And remember, the cost of customer acquisition is NOT just the cost of marketing. But the cost of all the direct resources that are involved in the marketing process + cost of marketing itself + a portion of cost of the central office and operations.
Understand the ‘unit economics’ and Capital required: While the ‘business as a whole may not be profitable’ for a while due to the overheads of managing the operations (and that is perfectly OK in most cases), you need to evaluate if your per unit economics are healthy. Are you going to make money on each sale. And how much will you make. And therefore, how many units do you need to sell to cover the cost of operations. And how much time will it take for you to ramp up to that scale. Is that possible? And is it possible within your given resources?
E.g. if your ‘central office’ costs (founders salaries, salaries of central office staff, rent, electricity, etc.) is USD 10,000 per month (using simplistic assumptions for easy of discussion). And your revenue per unit (product or service) is USD 20. And your gross margin is 40%. In this case, you are making USD 8 on each order.
Assume that your cost of customer acquisition was USD 50, and that each customer is likely to buy 4 times in a year (when you assume your numbers, make sure you have it validated with some research or understanding of the market… and is not a random number that is assumed based on your own expectations on how the market will behave), in which case your cost of customer acquisition itself is going to be recovered when the customer buys 6 – 7 times from you.
Now, given your view of the numbers you could ramp up this business to, you need to work out whether the USD 8 that you make from each order is sufficient to sustain you through your initial phase when the costs of USD 10,000 will be there every month + you will have to invest in marketing. (In many cases, the low ticket size of the product/service makes the business unviable. If you are going to make a few dollars from each customer, you need a LOT of customers to make the business case meaningful.).
Evaluate how much money you are going to require to startup. In estimating capital required, I urge you to overestimate costs and underestimate revenues. Do not let your enthusiasm guide your excel sheets. Do not assume that you wil multi-task and therefore save costs. (Even if that is possible for you, it cannot be sustained as you scale up when you need to move from ‘doing’ to ‘managing’). Also, many entrepreneurs make the mistake of assuming that they are smarter than others and therefore would be able to do it for a lesser investment than others before them have attempted (and even if that is true, keep that as a buffer rather than assuming that your smartness will be THE reason for you to do it better, faster, cheaper than others).
When you have a view of what kind of capital is required, evaluate different funding options. (Many entrepreneurs make the mistake of assuming that VCs are the first choice of funding for startups. And that need not be so. Understand what parameters VCs use for evaluating deals they invest in. See if you are ready for VC funding. Most likely, you may not be. In which case evaluate alternate ways of funding – boot strapping, family & friends round, advances from customers, debt, etc.).
Yes. Your business case is based on what the potential for your concept/product/core competencies are for the future. You may have a focus on a particular segment/geography/opportunity/problem at the beginning of your journey, however, the if the possibilities of multiple revenue streams and adjacent or parallel opportunities exist, that should be included in the pitch deck.
This can be added in the slide about ‘size of the opportunity’, where you can given an overview of what possible opportunities, including new markets and new customer segments, exist for the concept you are currently proposing.
Remember, the market opportunity is different from your plan for your venture. Think of it this way… if you were working in Accenture or Mckinsey and were to present a report on the size of the opportunity to a large multi national company, what would you say? The opportunity is open to all… the MNC may have a better chance of addressing that opportunity, and your plans may be different. But the opportunity is the same, whether you address it or not.
Accelerators and incubators will help you in two specific areas:
- To build your product/service
- To help you build the business around that product/service
When you are selecting an accelerator or incubator, you should be clear about what you are seeking from the program and what exactly your needs are. Evaluate different accelerators and incubators according to that they bring to the party, and then choose accordingly.
Most accelerators and incubators, at least in India, are designed to provide some assistance in both areas. In some programs, the focus is primarily on helping you build your business (including business case, business plan, operating pan, etc.) while some programs focus on helping you build your product (prototype, MVP, product, etc.). In programs that help build products, the business understanding is generally covered by mentoring sessions, off-hours (visits by successful entrepreneurs and senior professionals), mentoring clinics, expert talks, etc.
Overall, an accelerator of incubator program should provide you the following:
- Comfortable working space (well, there are virtual accelerator programs where you do not have to work out of the accelerator facility)
- Access to mentors and experts who can help you with your business and product/service development needs
- Networking opportunities and access to relevant folks in your eco-system, access to potential customers, potential employees, potential advisors, etc.
- Access to capital
An accelerator program is usually a shorter duration program – usually between 3 months to 6 months, and primarily focuses on getting your startup from a concept/power-point stage into the market with a business plan and a MVP/product. An incubation program is usually longer duration and provides resources (shared office space, etc.) and hand-holding and guidance through the first year or so of your venture’s launch into the market.
- High aspiration: Clearly, unless aspiration to achieve is high, it is difficult to create something that is valuable. High does not necessarily mean high in revenues. It could be high in impact as well.
- Optimism: An entrepreneur must be high on optimism. Simply because they need to believe in the mission, in order to convince others to join them in the journey. However, there is a fine line between optimism and arrogance. An entrepreneur needs to have the humility to test his/her optimism by cross-checking with others.
- Confidence: Without confidence, all ideas will remain just that – ideas. Taking the first few critical steps, going ahead despite being aware of the challenges, and being wise about taking precautions against these challenges, are traits of successful entrepreneurs. Entrepreneurs however should NOT be blind risk takers. Successful entrepreneurs understand the risks and take necessary steps to mitigate those risks. Confidence in their approach is what helps them deal with the challenges and risks better.
- Persistence and resilience: Plans will usually not go as you want them to. Hence, resilience (the ability to try again and again) and persistence in pursuing what you believe to be appropriate will help entrepreneurs sail through tough times.
- Every entrepreneur has to understand ‘sales’: By sales we don’t mean just transactional sales. We mean the ability to convince others about the concept, the value proposition, the plan etc. An entrepreneur does not sell only to customers. He/she has to ‘sell the concept’ to investors, vendors, partners, early employees, parents, early customers etc.
- Equally important is good communication skills. Unless you are able to explain and pitch the concept clearly to the various stake holders, it will be difficult for them to align themselves to your vision.
- An entrepreneur has to be good at implementing ideas. Everyone has ideas. But the trick is to successfully implement those ideas into a thriving business. An entrepreneur must have a deep understanding of the ‘business’ around that idea.
Also, I strongly believe that an entrepreneur must have the courage to face failure and challenges.
The failure of your startup, can teach you many valuable lessons, and actually strengthen you – emotionally and professionally – for yet another entrepreneurial journey.
Here are some things that you could learn, if you introspect deeply and think about why the startup failed:
- About the product/service: Was the product or service relevant to the consumers/customers? Was the experience of using the product/service good? If the answers to these questions are negative, you could learn about what you could have done better in designing the product/service.
- Was the value proposition meaningful: i.e. was the product/service addressing a genuine need? Was it solving a problem for consumers/ customers; was it making their life simpler; or simply offering the product/service at a lower price than competition or was it fulfilling an emotional need (e.g. status in the case of premium products). If the answer to these questions is negative, you need to introspect and figure out whether the consumers really had a need for the product or did you ‘manufacture’ a need because you invented some product/service.
- Was the positioning right: When I was younger, a new brand of packaged burgers was launched under the name ‘Big Bite’. It was an awesome product and priced just right. But, it was actually a mini snack… not actually a big bite. However, consumers, including me, had seen the product being advertised as a ‘BIG BITE’ and expected a ‘BIG BITE”…. and we were disappointed at seeing the actual size of the snack. Now, I feel that if the company had called the snack a ‘Mini Bite’, the product could have been a huge success. This was, to my mind, a big lesson on a great product at a good price-point getting killed because of over-promise and incorrect positioning.
- Was the communication clear: Sometimes, even with a great product which addresses a real need if the brand communication is unclear or in digression with the product, the company just does not get enough sales as it would have, with more appropriate communication. Often companies led by techies, underestimate the power and importance of quality communication.
- Was the price-point right: At the concept test stage, it is critical to test the product/service at different price-points and via customer research surveys (even if not in the actual market place).
- Were the processes appropriate for the venture: Operational issues and their mis-management is one of the most common reasons for startups to fail. Often we see startups do well at the initial phases but falter when it comes to doing the same business at a different scale. Introspecting on whether aspects of operations planning could have been different can teach some very valuable lessons for the future.
- Was the team right: Did the team have competencies that were required for the venture. If they did not, did they know what they did not know and therefore were they able to reach out to advisors, mentors and consultants or experts who could have helped them in their journey. Sometimes despite having a great team, the team dynamics do not work right. It is also important to have one of the founders declared as the CEO. There has to be one person who is calling the shots and where the buck stops. If there are 2-3 or more founders, each one with an equal say in the direction and decision-making, it often leads to chaos. Introspect and see if you went wrong on the people’s front.
- Was the company adequately funded: Many a startups burn out because they run out of funds. The enthusiasm and confidence makes many founders more optimistic than practically possible, and this means they end up raising lesser capital than was necessary for the business. Evaluate if you funded your startup right.
- Changing the business model often: One of the most common mistakes entrepreneurs make is to make changes in strategy and direction too often and without giving enough time for one strategy to be implemented. Often this change is considered as being nimble, and is assumed to be the nature of a startup. However, while it is possible for startups to change direction, it should be a very well debated and a thoroughly considered decision.
Either ways, failure teaches you that you do not have the right to take success for granted. It teaches you that your assumptions and your beliefs may not always be right and that you should validate them. It teaches you the value of being frugal, and that being resource starved actually could lead to more innovation & creativity. It teaches you that planning is important, and failing to plan is planning to fail. Failure makes you stronger. It gives you the confidence to face bigger challenges than you have had previously. It often helps you in gauging who your real supporters & friends are. Failure forces you to introspect and think about what went wrong, and make an attempt to do things differently when you embark on your journey again.
Get up. Dust yourself. Get going.
Happy Restarting !!
The answer to this question depends on the stage of the startup, the nature of the industry, the current team’s capabilities and competencies and the resources available for hiring and retaining the appropriate sales person.
Sales people typically like to work with companies where the processes are well defined, the value proposition has been proven and the marketing material and sales packages are all working smoothly. They usually like to achieve their numbers and targets, measuring themselves against their peers and their own achievements on the basis of how well they have achieved their targets. Hardcore sales folks do NOT typically like to be trapped in working and reworking processes, strategy, pricing, sale packages or even experimenting with different value propositions to different customer segments.
Ideally, you should hire a sales person (senior or junior), when some of the uncertainties of the business have been tested and proven.
In the initial phase of the business, you will not / cannot know what price points will work, which audience segments will respond better or what communication messages will deliver better results. As a result, a new sales team tends to interpret this phase of ‘experimenting’ as “the management is undecided and unclear about what they want to do”, and hence start looking around for more stable opportunities. A sales team or the head of sales, leaving the company soon after joining, sends a wrong signal to the market – not just to other sales folks, but also to other members of the team, customers, vendors and investors.
Also, if you don’t have a challenge big enough for your sales head, he may not enjoy the work. You should therefore start hiring sales folks when the organization is really ready to leverage their skills and competencies, and provide them enough motivation and material to go and win in the market.
However, it’s not always possible to wait for things to settle down, before you hire a sales team.
So, if you really do need a sales person at the early-stages of your journey, make sure that you explain the current stage to the sales person, clearly define what his or her roles and responsibilities will be in this phase (e.g. could be – to help define the marketing and sales packages/programs) and honestly apprise them on the role that they will have to perform in the initial phase. Enlighten them that every startup goes through this phase of discovery, and emphasize the FACT that they will learn a lot from this phase than they would in just any sales management role. Position it as a positive and do not be defensive about it.
Even if you – an entrepreneur, are not a sales person, recognize and appreciate that the sales people are motivated differently and that you need to understand their mindset to be able to challenge them, motivate them, encourage them and reward them.
Happy Hiring !
Finding a co-founder is pretty much like finding a spouse... at least in the sense of the seriousness and the thought that will go into the decision making. And despite all the precaution and thought, there is no guarantee that things will work out well. You can only hope, and give it your best, assuming that the other person gives his/her best too.
Accepting someone as a co-founder is probably going to be one of the most important decisions in your entrepreneurial journey, and often in your life journey too.
A co-founder is NOT just another co-worker. Even if the share-holding is not equal among the founders, a co-founder is going to be an equal partner in the decision making, strategy planning, dealing with the challenges, carrying the load, putting a 100% into the venture, etc. The success or failure of a venture can often depend on the quality of the relationship between the co-founders.
I suggest two major points to ponder on, when accepting someone as a co-founder:
On the functional front :
- Ideally, a person who has complementary skills, that you or the current team do not have, is likely to be more useful for the venture. (e.g. if you are a techie, find someone who is a business person).
- Find someone who has worked in a startup, or clearly understands what working in a startup could be like AND, accepts it happily. Often folks who have worked in larger companies, with well-defined processes, proper infrastructure, an army of people in support functions, super specialization of divisions, etc. are unable to deal with the uncertainties, roll-up-your-sleeves-and-get-it-done style, and the multi-tasking nature of the work environment that startups typically are.
- Find someone who will not need the backing of a great brand name and large resources (e.g. big marketing budget, large sales force, etc), to deliver results. Find someone who is a self-starter and is not likely to look for a ‘boss’ to guide him/her. Believe me, many senior professionals actually perform better when there is someone to guide and drive them… and nothing wrong with that. You just have to find someone who does not depend on someone else to set the agenda and targets.
- Find someone who has the ability to deal with challenges and the maturity and calmness to manage routine stresses and failures, which are manifest in every entrepreneurial journey.
- Find someone who is a team player, someone who is likely to get along with a number of people in a flatter organizational structure. Someone who is secure enough to share the credit for success, and brave enough to accept responsibility for failures.
- Find someone whose measure of success is to increase the size of the pie, and not about increasing his/her share in the pie.
- Find a co-founder who can think AND do. Often senior folks from the industry who want to be entrepreneurs, accept a co-founder position in startups, but may not be happy doing the operational stuff. Some seniors from larger organizations feel that operations is what they used to do when they were junior, and now that they have moved up the ladder, their role is to think and strategize, and delegate operations to juniors. This does not work well in a startup.
On the personal front :
- Ideally, find someone from the same socio-economic background. This is important because when the challenges hit you, people with different financial circumstances may take different views on the situation. E.g. if the startup does not appear to be likely to scale up as much as earlier thought of, a co-founder with substantial wealth may not find it worthwhile to continue while another co-founder with modest means may still find it lucrative to continue. On the other hand, if the startup starts getting into a cash crunch, someone with a weaker financial position may not be able to continue for long with a lower income or no salary. These are practical issues. Either you find someone with similar circumstances/background, or discuss upfront what the response to different situations could be.
- Find a co-founder with similar aspirations and motivations. This is critical, and in my mind, a non-negotiable condition. People with differing levels of aspirations are likely to try and pull the company in different directions, as the startup progresses.
- Find a co-founder with similar professional aggression and drive.
- Find someone with similar views about life.
- Find a co-founder that you will feel comfortable sharing your joys and sorrows with. Find someone who you can count as your friend.
- Find a co-founder that your spouse is comfortable with. Especially if the co-founder is of the opposite sex. Your spouse being uncomfortable with co-founders will not directly impact the company but could cause stress in your personal life. Avoidable.
- Go by your gut feel. See if you feel nice about the person.
Most importantly, do not accept anyone unless you think that he/she is a GOOD HUMAN BEING. Everything else is secondary. If you have heard negatives on ethics, value-system, social behavior, ideologies etc – RED FLAG yourself. Do not get tempted by professional performance.
Happy Co-Foundering !!
In the context of a founder or entrepreneur, sales are not just about selling to customers or consumers. And it is not about just a transaction.
For a founder, ‘selling’ will have many dimensions, and in most cases it will involve selling the vision, aspirations and competencies of the startup to a whole bunch of stakeholders. These stakeholders could be family/spouse or potential investors, employees, landlords, vendors, partners AND customers/consumers.
For example, when you meet potential employees (or when you are interacting with an individual or a group of people who could be potential employees), the entrepreneur should aim to convince the person that what their startup aims to do is compelling and has a large potential, that they have a sensible plan, and the competence and resources to implement that plan in the market. The entrepreneur has to convince the potential employee, that they have the resources to take care of salaries and investments required to get into the market. In other words, the entrepreneur has to ‘sell’ the startup to the employee.
One of the areas in which the sales skills of an entrepreneur will be tested is when they pitch to investors. Primarily because what they present to investors will be largely about the future that they want to create and not just showcase what they have currently done or achieved. This is where fundamentals of selling – understanding the audience, presenting a sharp case, articulating it well, communicating it effectively, exuding confidence without appearing arrogant, giving the comfort of trust and reliability, etc – will all have to be brought into play.
Yes. An entrepreneur must have selling skills.
However, an entrepreneur may not enjoy doing customer/consumer sales, or may not be good at say cold calling, or negotiating, or paper work, etc…. and that’s acceptable. As long as you acknowledge what you can and cannot do, or are not keen to do, an entrepreneur could be excused from the sales function. However, in the initial phases of the startup, there will be none better than the entrepreneur to passionately communicate the value proposition of the product/service, and give the potential customers the confidence that his team will deliver. Hence, in the initial phases, entrepreneurs must lead the sales process, or at least be the face of the organization, even if another employee is leading the sales efforts operationally.
Moreover, whether the entrepreneur does the actual sale process, or has a team that does sales, one of the founders MUST be responsible for meeting the sales numbers.
Happy Selling !!!
(I am assuming that there are no legally binding or even friendly agreements between you and the competitor on poaching from each other).
To begin with, do not hire just because a rock star employee from a competitor is available. Evaluate a few key things before you hire:
- Do you really have a need for a person with that skill set and experience? Sometimes the possibility of getting a rockstar performer from a competitor to work for you can tempt you to hire the person simply because it ‘feels like there could be value’ … and, perhaps, it may give your ego a minor boost. Evaluate if you really need a person with that skill set and experience or, are you tempted to hire just because he/she is available. In some cases, even if you do not have a need for the person just yet, you and your board/investors may take a decision to hire the person simply because that employee may not be available when you need them. If you do not have an immediate need, assess when you are likely to need a person of that competence and caliber and how difficult will it be to find someone else. And then, take a decision based on costs, opportunities and risks. If you have an immediate need, then go ahead and hire (of course after evaluating a number of other parameters… some are mentioned below).
- Even in the same division (e.g. sales), if you have different needs than what the person was working on with the competitor, check if the person you are hiring can deliver on that need: E.g. a head of sales, who has been delivering exceptionally good results in converting customers may not be as effective in designing sales programs and marketing communication material, if that is the key requirement of your organization currently. Also, the person may or may not have a passion or interest in doing different things that they have recently excelled at. Hence, don’t just evaluate his ability, but also his willingness and interest to do different things than in his previous job. In some cases, if the deviation is short-term (e.g. designing sales processes and hiring a sales team and developing sales/marketing material) , the new person and you may agree that he/she would oversee/drive that activity before moving on to do what he/she has been a rock star at doing.
- If you are at a different stage of growth than your competitor is, that rock star employee may not be able to deliver the same results as he/she did for your competitor. E.g. if you are just entering a particular market, whereas the competitor is a well-established player, the dynamics of the on-ground realities may vary. Hence, your rock star employee may or may not be able to deliver on them in the changed circumstances.
- Check if there is a ‘fit’ with your company personality, value-system, aggression (or lack of it), work culture, policies, infrastructure, etc.: People who succeed in one environment may not necessarily be as effective or productive in a different environment. E.g. if your competitor’s work culture was more aggressive or competitive internally than yours, while your company’s work culture is more ‘encouraging rather than pushy’, the person may ‘respond differently’ and may or may not perform as he/she used to in the previous assignment. (In the Indian context, I would use the example of a person, working with let’s say Reliance, not being able to adjust in a TCS or Infosys.)
Also evaluate possible risks
- Would there be any backlash or reaction from the competitor
- Would it have any impact on your existing team (especially among those whose level that rock star employee may come in as)
Of course, there could be a lot of positive side-effects in hiring a rock star employee from a competitor. Here are a few possibilities:
- The most important positives are the information (whatever legally permissible), learnings and industry connections that the person brings to the table
- Often, a rock star employee is able to convince more folks from that company to join in, thus making hiring a bit easier
- It could be a positive signal for customers/partners/investors
We would love to hear your views on this.
Technical knowledge is not a necessary condition, and certainly not a sufficient condition, for starting a venture. A product/solution is an important aspect of any venture. However, it is equally important to have an understanding of the dynamics of the business around that product and the competencies & skills required to implement that business in the market. That will determine the success or failure of your venture.
Of course, if you are technically qualified to build the product or service, it is ideal. However, product development resources can be hired, or the product development part could also be outsourced (depending on how critical it is to keep the product development component in-house). One way to fill in the technical skills gap is to find a co-founder who can lead the product development and product management piece, while you lead the business part of the venture.
It is important for you to think clearly about what problem you are solving or what opportunity you are addressing. Once you have clarity on that, and if that area interests you, then you can start thinking about the right solution to address that opportunity. You can then think about what is the most appropriate way of building that product – outsource, build a competent team or get a co-founder who can build the product for you.
Moreover, a great product is not a guarantee for success of the venture. A moderately good product with a great plan for the business around that venture is likely to lead to better chances of success than a great product with no plan about how to convert that product into a good business.
Think of all the critical components, apart from the product, on which the success or failure of your business will depend. Some of these components – marketing (positioning and how you make your message heard by the appropriate target audiences), sales (how do you convert your customers), business model, revenue streams, operations management, and the overall business case, etc. In ventures like e-commerce, aspects like procurement, supply chain management, warehousing, logistics, etc – become important. In certain domains, partner relationship management, after sales service, customer experience (e.g. in a restaurant business) and customer relationship management (especially in categories where the business case depends on the lifetime value of a customer i.e. repeat purchase). Each business will have its own dynamics and key drivers for success. You must have the ability to think through these, make an assessment of what is critical, prioritize it, determine your focus area and then make a plan to implement it in the market. And of course, you NEED to have the competence of executing that plan well in the marketplace. That is critical.
At the beginning of your entrepreneurial journey set clear priorities on what you want to achieve. Typically for most startups, there are a lot of aspects that are yet to be tested and proven out. The product service is to be validated, the business model is to be evaluated, the price points are to be ascertained, the customer segments are to be evaluated, the communication & positioning is to be evaluated.
At this stage therefore, it is wise to invest ONLY in those aspects that will help validate your concept and the business around it. After you have got a sense of what adjustments you need to make from your original plans, and when there is a certainty about various dynamics of your business, at that stage start investing in aspects that will allow you to move from pilot stage to growth stage. Office, etc. are aspects that you should invest in after your concept and model is proven.
Till then, work out of rented offices or shared spaces. Boot strap (yes, use things from home till your model is proven).
Minimizing costs is also about understanding what is important to invest in at this stage, and then seeing how best to optimize those investments. E.g. even if you need an office, leasing one and furnishing it may not be a good investment till your model is proven. Instead, even if it means a higher monthly outgo, it may be better to use a business center or a rented office which is fully furnished.
Often entrepreneurs attend conferences and industry meetings where they have an opportunity to network with and meet investors. But, often these opportunities are not well utilized and entrepreneurs fail to get the complete attention of the investors.
Through the day, investors are flooded with proposals, calls, mails and face-to-face interactions, where entrepreneurs request for meetings.
It is impractical for investors to accept all requests, and therefore, they end up using some criteria to filter and select, who they would like to meet. And, in the absence of any other criteria during one-on-one interactions in business conferences, the criteria used is the entrepreneur’s ability to clearly articulate the concept and the degree of passion driving that concept. For example, during the brief interactions at conferences, investors tend to seek more information, either through a longer conversation (rather than just giving a card and saying “Send me a mail and we will see” ) or calling for a follow-up meeting, from those who leave them with the feeling “Ah, this seems like a good concept, a good business case and this person seems to be sensible and smart enough to build a business”.
Here’s a list of things you may want to consider, when attending networking meetings where you may meet investors. The key message here is that you need to PREPARE a brief pitch, practice it and deliver it as if it is extempore.
- Keep a 1-line descriptor about your company ready. When someone asks you what you do, rather than going into a long story, you should be ready with a one-line answer. (e.g. the descriptor of The Hub is – we help startups build sharper business plans).
- Convert this statement into an introduction. e.g. “Hi, I am Prajakt, co-founder of The Hub for Startups. We help startups build sharper business plans. We conduct a 3-Day Boot Camp and a 1-Month Business Plan Builder Program”. Pause. Wait for the other person to respond. Add on more information, only if, there is build-up of interest and the conversation continues. Else, it becomes a monologue with just meaningless and disinterested nods. Not all investors attend conferences to seek entrepreneurs and hence, even if your concept is interesting, they may not be receptive at that forum. In such cases, it is best to leave your business card and move on with an email as a follow up.
- At the back of your business card, put a 2-3 line descriptor of what you do. Because investors meet with a number of entrepreneurs, it is difficult for them to remember who you were, especially if the name of your company does not explain your business. e.g. if the name of your company was Travel Guru, you may not need a one line descriptor. But if it were 5 Clove, you will need to put a descriptor, so that the investor later remembers you as that ‘interesting’ person whom they would like to have a follow-up meeting with.
- If there is interest in continuing the conversation, then provide additional information. E.g. “Our programs are quite popular with aspiring and recent entrepreneurs and we have had several success stories. We are now in our expansion phase, and that’s why I am at this conference… to present our business case to potential investors”. From here onwards, see how the conversation goes. But be prepared with the list of things YOU want to discuss and want to highlight.
- Make a list of the key messages and highlight what you want to mention during your conversation e.g.
- Entrepreneurs background (if it is relevant to what you do e.g. If you have worked at e-bay before and are now starting an e-commerce company, it makes sense to state that. However, if you were working with a healthcare company, and now starting an e-commerce venture, that may not be the most important point to state at the first meeting).
- What have you done so far – This could be about the background research you have done, the prototype you have built, the concept validation you may have done, the traction you may have got, the initial feedback or orders from a few initial customers. Essentially, it means, you may want to be prepared in your mind with a list of things that you have done in your entrepreneurial journey. (And remember, the journey begins not from the moment you start your company, but from the moment you decide to be an entrepreneur).
- What are your aspirations and goals – Investors like startups with large aspirations. But when stating your aspirations and goals, be as specific as possible. E.g. Saying “We want to be the leading e-commerce company in the school supplies segment” is not a good enough statement for anyone. You may want to say “In the next 3 years, we aim to be among the top 3 school supplies businesses online. And our plan is to get to about USD 10 million in 3 years, and in the next 10 years or so we aspire to be anywhere upwards of USD 250mn in revenues. We believe the market potential in India itself to be about USD 1 billion”. Sounds better, doesn’t it ?
- How much funding are you looking for and what will the monies be used for – the key to this answer is specificity. Different investors invest in different stages of a venture and hence it is important for them to assess whether your stage is right for them, and if the amount of investment you seek, is within the range that they want to invest in. (Often entrepreneurs end up asking for angel/seed-stage funding sums, which are often much lower, from VCs who typically invest higher sums of money. If you need USD 50,000 to get going, there is no point in seeking that from an investor who typically invests upwards of USD 1 – 2 million. Therefore, do research on different investors so that you are well aware of whom to target.).
Be specific about how much money you need e.g. “We are currently past our concept stage. The model is proven and we are now ready to go beyond the pilot stage. We are now looking for USD 250,000. This will be used for building our team for expanding our reach to 5 more cities and marketing. This money will last us for 18 months, after which we plan to raise another round for growth.”
Most importantly, after attending business conferences and industry events, be disciplined about writing to those you interacted with. Keep the mail message short and personal. DO NOT CUT-AND-PASTE A STANDARD MESSAGE ABOUT YOUR ORGANIZATION. No one reads through that. The intention of the follow-up e-mail is NOT to spread information about your company. It is to gain their attention and establish a relationship, or at least get an opportunity for a follow-up meeting.
Crowd-funding is certainly gaining popularity in certain markets. However, for crowd-funding to work well for all parties, it is important that the entrepreneurial eco-system in that market is mature and has investors & entrepreneurs who have seen some cycles of ups and downs.
Here’s why: Funding startups carries the highest level of risk. The percentage of startups that become successful AND are able to provide a exit and good return to an investor are very low. Hence, unless the ‘crowd’ comprises of folks who understand the underlying risks (or unless the investor group managers educate the investors well in advance), there is likely to be too much friction due to mismatch of expectations of returns on individual deals.
Inexperienced investors who invest because they have ‘heard’ or read in media of sky high valuations for some startups, often are not aware of the risk ratio in investing in startups. They may often not be aware that investors most likely lose money in 6-7 of the 10 companies they invest in. May be one or two out of 10 companies may return the money invested, may be with some modest returns. And, probably one of the 10 may provide a decent return to make up for the losses but also provide the surplus to deliver a decent return on the total capital invested. Given this kind of stacking of successes and failures, over a 4-5 period most investors, if lucky, are not likely to make signinficantly more money than they would have on their overall portfolio of investments (stock markets, commodities, real-estate, etc.). A far cry from the ‘solid valuations and handsome & quick returns’ in startups they read about in the media. (What one sees in media are exceptions and one cannot plan life assuming exceptions to work in your favour… and certainly not consistently).
Now, in many cases, when inexperienced investors are expecting breakout results, and are instead faced with losing capital in a company, they may start getting anxious and therefore pose challenges of investor expectation management for the founders of the startup. They could get interfering and imposing their views. These are real challenges, and certainly an unwanted distraction.
However, that does not mean that crowd-funding per se is not a good option. It just means that you need to take care of a few basics before you accept ‘crowd-funding’:
- Make sure that the investors in your startup understand the underlying risks. If you are accepting money for individual investors (friends & family included), be sure that you draft clear and understandable agreements. Make sure that you explain to them the risks associated. (Do explain to them that they should not invest in startups unless they have an appetite to invest in at least 10 deals over a 12 – 18 month period. AND that they should invest only as much as they are willing & able to lose without losing sleep.)
- Be clear and honest about the plans, milestones and plan B in case the original pans do not work out as planned (they usually don’t). Giving investors the confidence that you are in control even when things are not going right is often comforting for them.
- Keep them posted of all developments – monthly reports and quarterly calls with all investors are good. Inform them about bad news before they ask. Provide them a view of what you plan to do to address the issues. Be transparent. Be direct.
- Define clear proceses for communication between investors & entrepreneurs. Define how and through whom the interaction will be routed. A good option is to agree that one or two members from the investor group represent the group on the board or act as the ONLY communication & interaction point. Individual investors should route their queries or suggestions only through this/these designate individual(s). Only during the quarterly calls should all individual investors be invited to participate in direct interactions with the team. Even then, individual suggestions should not be binding and it should be made clear to the suggestion giving investor that the suggestion will be considered by the management and discussed with the board before taking a decision. This should be the standard procedure.
Hope you have a great experience in crowd funding your startup. Do let me know about your experiences, and any additional suggestions and learnings that you may want to share.
How well you are doing as a company is really not dependent on benchmarking versus how others in the same space/stage are doing. Each company may have chosen a different path towards similar goals, or it is also quite possible that the goals and aspirations of the companies could be very different.
Hence, how well you are doing or not doing, is to be evaluated against what your own plans, goals and milestones were when you started the journey.
Not for one moment am I suggesting that you need to look at your original business plans as THE only road to follow. I have rarely seen any startup or early-stage company come even close to what their original milestones were in their business plans. Your original plans are merely a roadmap that you define to think through the different aspects of your startups journey. Once you hit the road, you have to make adjustments according to the weather conditions i.e. market realities. In some cases, the direction itself may have to be altered or changed all together. And it is perfectly all right to do that as long as it is a well-thought out plan, after taking into consideration all factors that may help you take a good and informed decision.
Therefore, if you have a well-defined business plan with your goals and milestones towards those goals well laid out, it should give you an indication of whether you are going in the right direction and at the right pace.
For your business, you need to identify what the key drivers are and that will give you leads on what you should measure your progress or success against. Each business will have its own set of key drivers or aspects on which success or failure will depend. Sales/revenues is usually just one of the indicators to measure the progress of a success of a startup. Other factors could be things like gross margins, employee efficiency, brand equity & brand familiarity within the relevant audiences, cost of customer acquisition, maturity of processes, proving of the business model, organization structure in place (or getting into place), key people on board, attrition rate, quality of contracts and respect of partners/vendors, etc. are all examples of indicators of what can be tracked to check if you are doing well as a business.
March 5, 2012 By Prajakt Raut
In my view, easier availability of early-stage capital than ever before, public celebration & adulation of entrepreneurial heroes, a well-deserved respect for entrepreneurism and also society’s willingness to accept failures in entrepreneurial ventures make it easier for younger people to consider entrepreneurship as a career.
I share below some observations that will hopefully provide some food for thought before you embark on your entrepreneurial journey.
Enterprises have to be built around a concept that has a meaningful value proposition to your potential customers and around which you can build a strong, sustainable business model. Entrepreneurs tend to overlook the challenges when they are driven either by a desire to be an entrepreneur or when a concept stokes their interest.
Often, entrepreneurs assume that a business plan is to be written only when you seek venture capital or debt. However, a business plan is nothing but your plan for your business and in order to manage your enterprise you need to be able to create a document using some framework that helps you think through the steps you need to take in your entrepreneurial journey.
Don’t focus on the excel sheet. Focus on the business model. A 5-year excel sheet projection is just that – an excel sheet exercise. It is neither a reflection of the potential nor a reflection of your ability to meet that milestone. However, an excel sheet exercise provides you a reference point to consider different possibilities of scale and help you plan the intermediate steps in reaching those milestones. I.e. it is not important to detail the calculation for a Rs.98.74 cr revenue by 2012 as it is important to be able to state “We believe we can be around a Rs.75 cr to a Rs.100 cr. enterprise by the 3rd year of operation and here is how we plan to go towards those milestones”.
It is ideal to gain experience about building and managing businesses before you create your own enterprise. Most successful entrepreneurs have built businesses after gaining significant experience across functions in different organizations. Though often celebrated, entrepreneurial successes of people with no prior work experience are a rarity.
One of the most common observations of investors, both domestic and foreign, is that entrepreneurs in India are afraid of thinking big. They tend to think it is prudent to be very conservative in your projections, especially if you have no past record to prove your scaling-up capabilities. However, unless you are creating a life-style concept, it will be important to provide a true picture of the potential and your aspirations, especially if you are seeking venture capital. Of course, the aspiration to scale has to be based on a validated assessment of the potential and backed by a strong, sustainable plan to deliver on that potential.
Your ability to scale should be restricted only by your aspiration and not by capital. In today’s environment, it is far easier to raise early-stage capital than ever before. If your concept is right, if the market potential is large and if you have the capacity and capabilities to deliver on that potential, you will find the capital to fund your dream.
On the other hand, if a number of investors reject your proposal, it should be a signal for you to consider what aspects of the model seem to worry investors – relevance of value proposition, market potential, business model or your ability to deliver on the potential. Once you have identified the issue or issues, you need to revisit that in your plan and see what changes you may want to make in order to address any flaws in your plan.
Just because you do not get funded does not mean it is a bad idea or your plan is wrong. Often, especially with new concept, it is difficult for investors to take a bold step. It is therefore also important for you to find investors who have a strong belief in the domain that you wish to be in and convince them about your ability to deliver on that potential. If you still do not get funded and do believe it is a concept worth fighting for, you need to find innovative ways of building a proof of concept.
Importantly, don’t be a lone ranger. Connect with other entrepreneurs. Seek guidance. Ask those ahead in the entrepreneurial journey to share their experiences. Organizations like TiE and NEN offer excellent opportunities to network and seek mentoring from accomplished and successful entrepreneurs.
To end, I would like to clarity that entrepreneurship to my mind is not just about starting or owning an enterprise. It is about an entrepreneurial spirit that inspires individuals to take ownership of an assignment of area of responsibility. It does not matter whether it is in your own enterprise or whether in an organization where you work or whether the organization is a commercial enterprise or a not-for-profit entity. Do well in whatever you choose to do. Do it diligently, honestly, ethically and with enthusiasm and commitment. And THINK BIG.
As the advertisement of a spirits brand says ‘Its your life, make it large’.
By Sean Wise, Managing Director of Wise Mentor Capital- http://www.WiseMentorCapital.com and www. SeanWise.com.
There is a famous maxim that says “The shortest distance between two points is a straight line” and while no doubt a truism, the shortest distance is not always the best route to take. The same can be said for sales roll- outs with regard to the decision between building an internal sales force, and leveraging a pre-existing group of resellers.
Every entrepreneur dreams of the day when their sales rocket up from $500,000 to $35,000,000. Along the way however, every entrepreneur is faced with a key strategic sales decision: ramping up firm sales by building an internal sales force (the Direct Sales Model), v. leveraging third-party market intermediaries to sell on your behalf (the Channel Sales Model). In pondering this decision, founders need to ask themselves several key questions, including:
- On what criteria should you base that decision? When does one approach beat the other?
- If I choose one, do I have to stick with it, or does it evolve over time?
- When do you need to make that decision?
To tackle some of these issues, I sat down with Les Hansen, Vice-President of Sales & Marketing for Gavel & Gown Software, a venture capital-backed software firm selling enterprise solutions to the legal profession. Since joining Gavel & Gown, Les has managed to triple G&G’s customer base to over 20,000 law firms in over 50 countries around the world. G&G have sold more than 250,000 licenses through a well- managed sales and distribution program, which leverages both a small dedicated internal sales team, and a small army of resellers around the globe. Les shared with me “The 5 C’s” – which he believes entrepreneurs need to consider when pondering the Direct v. Channel sales decision.
1: Cost: What’s the best way to spend your money?
The cost of building a direct sales force internally can be daunting. Not only do you have to hire, train, and support them, you also have to allocate additional funds for draws, employee benefits, and sales support. In addition, you must do all of this before a single unit of product is sold. Giving up a percentage of future sales revenue in the form of reseller margin may seem cheap in comparison, but “you must think this through,” cautions Hansen.
“You need to first calculate the breakeven point on the direct cost of a sales force vs. the margin cost of the channel,” says this experienced sales strategist. “Remember that, for the most part, direct sales costs are fixed (apart from the commission component), and channel costs are variable. This also means that direct sales costs can be leveraged while channel margin costs cannot.”
In this way, you need to be able to look at the long-term picture; seeing not only the short-term sales costs, but also the long-term revenue potential. You also need to allocate fixed costs to areas where you can get the highest ROI.
2: Customer: How much customer interaction do you need?
Finding a customer that is willing to buy is hard. Building a relationship that will ensure they continue to buy – much more so. Channel partners provide your venture with a much larger reach, but you need to balance the channel’s ability to leverage pre-existing relationships, with your need to access direct customer feedback – especially in the early days of product development and beta testing, when customer feedback is vital to ensure long-term viability of the product. However, in the end, you need to weigh the long-term impact of keeping your customers at arms’ length vs the ability to have a larger number of feet on the street hawking your product.
3: Calendar: How long do you have?
Building an internal sales force takes time. Even once you have them hired and trained raring to go, it will take still more time for them to go out, meet customers, qualify targets, build leverageable relationships, and establish enough customer credibility to actually close a sale. Do you as a start-up have that much time, or do you need to leverage a channel that is already selling similar products to your target audience?
Investors want scalability (the ability to ramp up revenue fast, and to do so without proportionately ramping up costs) and maximizing scalability often means deploying a channel sales force.
“Without those extra feet on the street, most VC’s will have a lot harder time believing in a venture’s ability to scale up to $35M+ in 3-5 years. It just takes too long to scale up internally, and without scalability, the VC will have a hard time getting their head around an investment,” confirms Phil Reddon, a VP with Covington Capital, a venture capital fund with more than $500-million under management.
The more complex the product is, the harder it will be to drive sales through a channel, or so one might think. “There’s a myth out there that if your product is complex, you have to sell it direct. But that simply isn’t an absolute truth,” says Hansen. “In many cases, when the product is complex, you need channel partners to not only sell the product, but also to integrate the product into the client’s existing infrastructure, to service and update the product on an ongoing basis and to provide end-user training on functionality.”
This makes sense to me, as a direct sales force, which just makes commissions on moving sales units, may not focus on after-sale support. “In complex sales, you may need your channel to not only sell your product, but to also sell additional products and services that, when packaged with your product, create a complete solution offering for the customer,” Les shares: “This can be a real advantage for you. Many channel resellers will make 5 to 10 times as much money on the consulting services they sell alongside your product as they do on the margin you give them. This means that they will have significant incentive to sell your product, and it can save you margin dollars. It also allows you to focus on your core competency. If you are not an integrator you shouldn’t try to be one. You should partner with someone who is.”
5: Control: Who owns the Customer?
Another key sales maxim is: “He who is closest to the customer owns the customer.” This means that down the road, your channel partners may own your customers and therefore, if they walk, so may some of your customers. So you need to consider the impact of this. Is this a business risk that you can live with? While customer poaching does happen when internal sales reps switch to a competing firm, the terms of most employment contracts can mitigate this significantly. Accept that you will have much less control over your channel partners than you would over a direct sales force, which can be a challenge. Will you be able to exert enough influence over your channel partners, to comfortably achieve your business objectives? If not, can you live with this?
Control also addresses your ability to make adjustments on the fly and to influence the sales messaging quickly when needed, according to Hansen. “In start-up software sales, you may not get your go to Market plan and message perfect right out of the gate, so you need to be flexible and be able to respond quickly. It is a lot easier to control your external communication through a sales team that reports directly to you, than through a channel with which you have an arm’s length relationship. Managing a message through a channel can sometimes be a lot like that game ‘broken telephone’. You need to be concise and clear, or the message may get distorted as it disseminates.”
So, there you have it – “Hansen’s 5 C’s” – which outline the key matters you should consider before choosing a go to market strategy; but what about the timing of the decision?
Evolving the Approach
In the venture capital world, where scalability and rapid growth are prerequisites for investment, the channel sales model seems to be preferred. “From a VC perspective, I like to see companies which can leverage other people’s sales forces to grow. Yes, your company will give up some points in margin and also lose some control over customer relationships, but will hopefully make up for it in terms of more volume,” posts Ed Sim, Managing Director at New York City’s Dawntrender Ventures, in his blog BEYOND VC.
Stephen Pollack, CEO of the Toronto based venture backed PlateSpin and an IT Veteran with a wealth of experience in creating and delivering software and software service, agrees with Sim: “We found that establishing a global business model was only possible through a channel approach. That was a main driver for us along with the desire to work through trusted sources (that) the customer can rely on instead of a ‘startup in some far away place’. We now have 1000 customers spread all over the world through our channel model”
Therefore, if you decide on building channels, the question then becomes when to focus on such. Covington’s Reddon comments: “Companies need to land, usually via direct- initiatives, commercial reference-able customers first. Then once they have enough proof of concept installs, they can turn to channelizing the process.” Mike Green, President, Greenco Investments Corp. (and former Chair of the Toronto Angel Group who now works closely with several young software companies on issues including sales rollouts), echoes this notion: “There is no point in moving to an indirect channel until AFTER you have got it right with your own direct sales efforts. Once you understand what it takes to sell, can communicate the typical sales cycle, your key selling points, and … handle the standard sales objections, then you are ready to give the indirect sales channel the ammunition they need to be successful…but not before!”
Tips for Managing Channel Sales:
Once you’ve got the ammunition and information from those first 20+ reference-able customers, you are ready to start building out your channels. To do this, Les says that the fastest way is to find a group of like-minded individuals who are already in deep with your target customer base. The best way to do that? “Ride someone else’s channel. Never build when you can borrow,” Hansen comments. “Take a look at the products that your target customers are already buying, and find out who they’re buying them from. Chances are that someone has an established distribution channel into the market segment you want to get to.” Remember – if you have a product and are looking for a channel, somebody out there probably has a channel and they are looking to push more products through that existing channel. Even better – if you can establish integration between your product and theirs you can improve the revenue generating capability of a single sales call, allowing the sales reps to ‘double-dip’ their commissions.
However, channel management does not end here. Once you have the channel, you not only need to maintain it – you need to motivate it. Hansen gives three pieces of advice to future channel managers: “Be fair – your channel partners expect it. Be consistent – your channel partners will talk to each other, so accept it. Be friendly – relationships go a long way, so invest in them.”
The Bottom Line
There are definitely pros and cons on both sides of the Direct v. Channel debate. A direct sales force allows you more customer interactivity, but may cost more (in terms of both time and money). Harnessing a channel sales approach allows you to leverage on pre-existing relationships, but does not offer up as much control. Neither model is perfect, nor can either be applied in all cases. The shortest distance between two points may be a straight line, but the shortest distance is not the only route to take – and it certainly is not the best route to pursue under all circumstances.
My advice to aspiring entrepreneurs is “Fall in love with a problem, not with an idea”. Here’s why.
If you get excited about an idea and decide to start a venture around that idea, that concept and the business around that concept may or may not work in the market place. Success of the idea and the business depends on a lot of factors apart from the quality of the idea.
However, if on the other hand if you focus on a problem or an opportunity (Facebook is not necessarily addressing a problem.. it was addressing an opportunity to connect people meaningfully), then it allows you to address that problem or opportunity in multiple ways and allows you to explore different ideas and concepts. I.e. your success or failure does not depend on the success or failure of that one idea.
Let me illustrate with an example. If you were excited with the idea of creating healthy but tasty fast food counters in colleges, it seems like a reasonably sensible idea which may have a good business case. The success of this will depend, as with many other ideas, on the quality of the execution, pricing, brand personality, the quality of the snacks, competitive environment, the team’s ability to execute in a multi-location set up, etc. However, if instead of healthy but tasty fast food outlets in colleges, you were to own the problem/opportunity of “making fast food healthy” or “making healthy food tasty and appealing to young people”, you could have many more concepts and ideas to choose from… you could do one or some of the following:
- Of course you can start food outlets in colleges
- You could supply pre-packaged meals (to colleges and hostels, even offices or paying guest accommodations, etc. on monthly contracts)
- You could create a brand of cooking classes to teach young people how to make healthy food tasty
- You could create an online portal for healthy but tasty food
- You could create a brand of healthy fast food that is retailed
- You could do a catering service for birthdays and parties that serves healthy and nutritious meals
In short, when you take a step back from the idea and think about the problem or opportunity that that idea was solving, it expands the scope of what you can do and gives you a variety of choices to execute on. And your success or failure does not depend on that one idea that you originally had in mind.
If you are clear that you want to be an entrepreneur, I would recommend you to take up a sales job. Any company, any where… take a job that requires you to go out in the field, meet customers, pitch your product, negotiate and sell.
Selling teaches you many things about the practicalities of business life. Rejection by customers teaches you to be modest about your assumptions on conversions. Dealing with rejection teaches you to deal with failure and challenges.
The accuracy of your assumptions on revenues and costs will determine the business case for your startup. Hence, it is critical that all cost elements are identified, and the accompanying costs are estimated and accounted for.
In the initial phase of the startup, it is important for the entrepreneur to create an excel sheet with all possible cost categories. This should be done on a month-to-month basis to get a better view on the month-by-month cash flow needs.
Costs should be marked broadly into the following categories:
- Capital costs [e.g. computers, servers, furniture, etc.[
- Operating expenses or opex
- Fixed opex [e.g. rent, salaries, etc.]
- Variable opex [printing, marketing, travel, etc]
- Before starting to estimate costs, invest time in developing a good excel sheet with all possible cost heads identified. Instead of using absolute numbers, put formulae so that one change in the base figure can reflect accurately across the entire plan.
- Break costs into as granular level as possible. E.g. while estimating capital costs, under ‘Servers’ instead of putting a number for that month, break it into “number of servers’ in one row and ‘cost per server’ into another row, with the result of that calculation into the third row. This way, you can make adjustments to the cost per unit or the number of unit without having to worry about making the change everywhere.
Once you start writing down the different cost heads under these three categories, often you will realize that there are many more cost heads than you had thought without putting them down in an excel sheet. Once you start putting things down on an excel sheet, you are able to get a good view of how things are going to progress. E.g. in the excel sheet once you realize that the number of people is increasing, you may realize that the office space may be inadequate and hence you may need to budget for not just new & bigger office rent but also for capital costs like brokerage, furniture, etc.
One of the highest cost units is likely to be salaries. While estimating salaries, it is important to account for hiring costs [usually I month salary or 8.33%]. If the attrition rate in your industry is high, you should account for more hiring costs.
Most entrepreneurs go wrong in estimating their people needs, and assuming that they would be able to manage the business with lesser people than practically required.
While estimating people needs, rather than putting down an amount, put down first all the designations on which you are likely to need people at the growth stage. Then in the column section, put the number of people you would need in each designation and at what stage. E.g. while you may have identified ‘Chief Procurement Officer or CPO’ as a designation for an e-comemrce company you may not have plans for such a person for the first 18 months, in which case enter ‘0’ in the number of people column against the CPO.
In a row below each designation, enter the per month CTC or gross salary. And below that row would be the result of multiplying the number of people for that designation by the monthly salary for that person. See example below:
|Customer support manager||1||1||1||2|
|Important: In the initial phase you will be resource starved and will therefore manage with very few people than ideally needed. Even if you are able to multi-task and manage the operations with very few people, it is often not scalable beyond a point. Any case, the business case is to be made with the full cost structures as they would apply when the business is at scale.
To explain this further… your business plan should take into account all possible cost structures, even if you are not currently spending them. E.g. you may be working out of your home, or in some cases not even taking a salary. But operating without a salary or operating without an office is not really a long-term option. Hence, for getting a realistic picture of your business case and profitability, it is important to account for all possible cost structures.
Separately, when you work out your operating plan for the first phase you will eliminate or reduce the expenses as they would be actually applicable.
In some businesses the cost of unsold inventory, damaged goods, etc. also need to be accounted for as they can significantly impact the business case.
Every entrepreneur aspires to grow his company to a significant scale. However, many startups fail to scale, beyond a certain level.
For scaling up, it is essential that the startup upgrade the company’s capabilities and resources on all relevant fronts – people, technology, processes, funds, etc.
Surprisingly, operational inefficiencies is just one of the reasons for not being able to scale. Many of the other reasons are quite within the control of the entrepreneur.
Here are some reasons why entrepreneurs fail to scale their startups:
- Low aspirations: Often many entrepreneurs lose their initial drive on reaching a certain level of success and are not then as driven to scale up to the next level. Sometimes, they tend to take lesser risks and are less hungry for glory than when they were starting out.
Suggestions: Aim higher, keep the bigger goal always in view, keep reminding yourself and the team about the bigger goal.
- Fallout between the founders: One of the common reasons for issues in startups is disagreement between founders on the way forward. These issues and disagreements come up typically at two inflection points – (a) either when the startup is doing very badly and tough decisions are to be taken e.g. to further reduce the already low salary or (b) when the startup is doing really well and tough decisions are to be taken e.g. to sell out and take the cash or to stay on and grow even more.
Suggestions: Have a philosophical discussion and agreements with the co-founders on how different situations will be handled. What will be the decision in case of difficulties? What will be the decision in case there is an option to sell out? It is possible to build these agreements into the shareholder agreements or articles.
E.g. If there are 4 founders in a company with 25% shares each, they may decide that this 25% will ‘vest’ over a 5 year period. This means that if one of them leaves at the end of the 3rd year, he/she will get only 15% equity and the rest will be shared between the remaining founders. This can be documented and formalized.
- No back-up team: As the startup grows, the founders have to switch roles from doers to managers. Their focus has to change from managing the day-to-day tasks to hiring the right persons to do the job. Often startups fail to do this and therefore are unable to manage the growth. They either stagnate or become inefficient and wither away.
Suggestions: Keep looking for good people. Plan for growth before you reach the growth phase. Let go. Delegate.
- Absence of processes: At the startup stage, there may be no processes or some processes, which eventually will have to get firmed up. However as the team grows, the absence of processes creates inefficiencies and chaos as each team or person attempts to manage their part of the operations in a manner that they feel appropriate. Even with the most honest intentions, such chaos is never good for the organisation.
Suggestions: Once the initial challenges are out of the way, the CEO has to focus on creating the processes. It has to be someone’s key responsibility area.
Also, inadequate funding can be a significant hindrance. We have noticed some entrepreneurs shy away from raising capital for growth and attempt to scale up with the meager resources by applying the same ‘wear-many-hats’ approach during the starting up days. This is counter-productive. To scale up the organization, it needs to scale up the capabilities and competencies and hence need adequate resources, and capital.
Delegating is one of the most difficult things to do for many entrepreneurs. However inability or unwillingness to delegate can almost always become the most crucial stumbling block in scaling up the venture.
It is a fact that others may not be able to do the task as well as you yourself do. But that’s the way it is. You just have to learn to accept it and learn to live with it, and manage by creating processes and systems for measurements and improvements.
Unless the entrepreneur makes the switch from ‘doer’ to manager, the startup will find it difficult to scale up.
Your most important role as the entrepreneur is to identify, excite, hire and retain the smartest people to do the job.
Smaller size of the team as well as a flatter organization allows startups to be nimble and make adjustments to their business plans as required. Flatter org structure makes it easier to decide and implement changes fast.
However, many startups run into the dangerous temptation of changing direction and strategy too often.
Often, at the first signs of the existing strategy is not working enough, entrepreneurs tend to get carried away and impatient and attempt too many different things without giving enough time for one direction/strategy to mature. In many cases it is a case of throwing the baby along with the bath water.
The danger in this is that while it seems like a lot of progress and course correction, the business, and more importantly the team, starts loosing focus and direction.
Hence, while it is possible to do course corrections, it is important that startups consider change in strategy and direction only after adequate deliberations and after discussions with the board, advisors and other stakeholders. I.e. A change in strategy or direction or customer segment or pricing is a serious change and should be treated as such. Just because the stage allows you the flexibility to change direction does not mean you should use that option enough.
Before changing strategy or direction, it is critical to evaluate what learnings have from the existing strategy and the basis for deciding to pursue an alternate strategy.
There are several reasons why startups may fail. Some are specific to a venture, and hence would vary from situation to situation and startup to startup. One of the most common reasons of course is poor execution or lack of execution capabilities.
However, even with high quality teams there are some common hurdles that startups face and which can be fatal. While the list is not exhaustive, the following are some of the areas you might want to watch out for.
Overestimating the value of the value proposition – going wrong in the assumtions
Entrepreneurs are passionate about their concepts and products/services. Sometimes this enthusiasm manifests itself as unrealistic optimism, with overestimation of revenue projections being the most common mistake.
It is important to that you share your assumptions on conversions, revenues, repeat purchases, sales cycles, etc. with a few people who are not directly involved with the venture and see if their views conform your enthusiasm and optimism.
If many people do not share your optimism about revenue projections, it is prudent to budget for a lower number. You may continue to aspiring for higher numbers as per your view, however plan and make your financials work with lower numbers.
Changing the business model often
One of the most common mistakes entrepreneurs make is to make changes in strategy and direction too often and without giving enough time for one strategy to be implemented. Often this change is considered as being nimble, and is assumed to be the nature of being a startup. However, while it is possible for startups to change direction, when you do so should be a very well debated and considered decision.
Quite a few startups fail because they run out of money to continue, even if they are doing well. Underestimating costs and overestimating revenues can sometimes leave even good ventures cash strapped.
Not having a clear plan
Often many entrepreneurs start with a broad understanding of what they plan to do, bootstrap to get started and assume that as they grow they will figure out a way to scale. Trying to find direction when you are growing can be dangerous. It is important to plan well ahead to ensure that you have a smoother ride as you grow.
The success of failure of a startup is largely dependent on the quality of the founding team. Most investors would therefore make their decisions on investing depending on how confident they are about the team implementing the idea well.
Size of the founding team
While there is no ideal size of a founding team, 2 -3 founders is generally considered to be a good number for a variety of reasons.
Well, starting a venture on your own without a founding team is certainly possible. But it sure does get lonely. You need someone to give you company, especially during the stressful times which all startups will go through in some stage of their journey.
On the other hand, having more than 4 founders can often lead to chaos and overlap of competencies. [Though there are great examples of companies like Infosys which had 7 co-founders.]
Composition of a founding team
The ideal composition of a founding team is when the founders bring complementary skills to the venture. E.g. someone from marketing/brand management, someone from technology and someone from operations management/procurement will make an ideal founding team for an B2C e-commerce startup.
In my view, it is critical to find co-founders who have the same passion for the concept, and ideally who come from the same socio-economic background. This is necessary because when the startup is going through challenging times, it is most tempting with someone who is less passionate about the subject to step out. Also, if the founders come from different socio-economic background, the challenging times can be quite stressful too. Someone from a wealthy background my quit because the challenge is not worth the effort, and the returns. On the other hand, someone who is financially challenged may not have the ability to continue in a resource-constrained mode for longer than originally planned.
Founding Team members are different from founders
Remember, not everyone who joins at the beginning of your journey needs to be a founder. They can be called ‘Founding Team Member’, and it does carry some weight in a person’s profile.
Founding team members are often the ones who are willing to take a bet with you, and hence expect to be rewarded with some equity so that they also get to benefit from the upside when the startup succeeds. Often founding team members are the ones who would are passionate about the domain, or some folks you know and who join you because of their belief in you as a person and as a professional. Founding team members are special and need to be treated as such. They are the ones who help you define the culture, and to the external world, the personality of the organization.
Be very selective about whom you involve as part of the ‘founding team’ and who are just early employees. My suggestion is that only when you are confident that someone is as passionate about the opportunity as you are should you give the person the status of ‘founding team member’.
Things that founders should discuss before teaming up
- Most startups go through challenging times. Founders should therefore have an open-minded discussion beforehand about how to ride rough times. Ideally, these discussions at the beginning of the journey help set the guidelines on handling potentially stressful situations.
- Time commitment that each person brings to the venture and what limitations or constraints some of these commitments could carry e.g. someone may not be able to travel to outstation locations or someone may not be able to relocate to another city if required or someone may be doing a part-time course, etc.
Often, the remuneration and equity holding is linked to the commitment of the founders.
- What is the equity holding of each founder: While most teams usually split the equity equally between the founders, there are enough examples of teams dividing equity based on the value that each founder gets. E.g. someone with the domain experience or someone who has more work experience could own a larger portion of the equity than others.
- What is the role of each individual? Unless you clearly define the roles and responsibilities, there will be chaos. It is also for this reason that it is important.
- Discuss and ensure that all founders are ‘seeing the same film’ in their mind. I often ask founders to write separately how much revenue their company would do in 5 years, and I often get very, very different answers from each founder of the venture. I am often surprised to note how different each founders views on the opportunity, goals, etc. can be …. just because founders have not had a detailed discussion among themselves on these things.
Most critical decision for founders
One of the most critical decisions that startups need to make, and most find it difficult, especially when it is a group of friends coming together is on who will be the CEO of the company.
For most investors, and also for the good of the company, clarity on who is the captain of the team is critical. [Also, investors worry that even if the friends don’t fight about who is the CEO, their spouses could !!!].
Also for employees, it is necessary to have a clear view on where the buck stops and who the leader is. Ambiguity on that front almost always leads to chaos and unclear plans.
Creating a strong advisory board is one practical way of filling in the competencies gap that a startup may have.
Most startups are resource-starved and hence not in a position to employ people for the various skill sets required for building the business. This often means that the entrepreneurs end up doing the thinking on the most critical aspects about the business EVEN IF THEY ARE NOT THE EXPERTS ON THAT PARTICULAR SUBJECT OR AREA OF ACTIVITY. E.g. a team of two founders with experience in technology and marketing respectively would also ATTEMPT to think on their own, perhaps with some amount of research and talking to experts, about areas like production, procurement, logistics, supply-chain, customer support, etc. Each of these is a specialized area and would require someone with years of experience to provide a perspective on the opportunities and challenges.
This is obviously not going to work in most cases. Think of it this way… If you were starting a cardiac care hospital, and because you are a startup and cannot afford a good surgeon, would you go ahead and operate on a patient if you were not a cardiac surgeon? Well, you won’t because that would be a dangerous thing to do!!! Exactly for the same reason, like cardiac surgery requires a surgeon with specialized expertise, different aspects of a business like supply chain, marketing, sales, technology, etc. should be ideally thought through by some folks with some experience in those areas.
Creating an advisory board allows the founders to get the brain-power, guidance and insights from senior function/domain experts, without having to actually hire senior resources to handle those functions. E.g. a startup may require some serious help on the supply-chain or sourcing side, which the founding team may lack. In such a scenario, getting someone with 15 – 20 years experience in the domain and skill-set as an advisory board member would work well for the startup.
This is a tool that is not used effectively in India, though you would observe many startups in places like Silicon Valley and Israel – the hotbeds of entrepreneurial activity – having strong advisory boards which help them think through their businesses.
Why would someone accept to be on the advisory board of a startup? Well, this is where the ability of the founders to sell the vision of the company comes in handy. Of course, you should have a large, aspirational vision to begin with. No one is going to be excited with someone trying to build a company which does not even aspire to be a market leader.
If you have a large vision and if you aspire for your company to have a large impact on that industry, and if you communicate that with passion, the right people would often consider being on the advisory board. If you come across as THE team which can do it well, many of the people you approach for an advisory board position would not want to take the risk of turning you down as they may regret later in case you become super successful. Because if you become super successful, they would like to have the bragging rights to say that they were an advisor to your company.
Of course, it is good to compensate the advisory board members with some equity as you are not likely to have the resources to remunerate them monetarily.
An advisory board member can be someone who provides the deep domain expertise of function experience to a startup, and fill in the competency gap that the founding team currently lacks.
Before creating an advisory board, the founders should make a list of the skill-sets that would be required for building a company around your concept/idea. E.g. in an e-commerce venture, areas like supply-chain, procurement, logistics, customer support, marketing, customer acquisition, digital communication, etc. would be critical, of course in addition to technology & GUI and of-course the expertise about the domain in which you are planning your venture.
Once you have identified the skill sets required, you should identify the competencies that the current team has, or could tap from among those you can regularly tap into e.g. a senior friend or a relative who has agreed to help you. That leaves you with the competencies which you would need to seek external advice and assistance on.
You should then identify the folks who you think could be ideal as advisory board members for your startup.
Point 1: Engage the folks for ‘what they can do for you’ and not for ‘who they are’. I.e. even if your uncle is the chairman of a large corporation, it makes no sense to have him on the advisory board if he is not from a relevant domain. In other words, you do not need a ‘show & tell’ board but an advisory board who can assist you with specific things.
When you approach someone to join your advisory board, plan well in advance what you are going to pitch to him.
Point 2: Understand what their motivations and drivers are going to be and then see if there is something that you can excite them with. In many cases, the excitement of assisting a startup is interesting enough for people to sign up… of course, if the startup comes across as ‘high-potential’.
Point 3: Set the expectations right and get their commitments up front. Be clear in communicating what you plan to do and what you expect them to contribute with. Be transparent about the challenges and honest about the roadblocks.
Point 4: Define the interaction frequency and process of interaction. Clarify what the preferred mode, time and day of interaction would be. Some people may prefer on-mail interactions with infrequent in-person meetings, while some may prefer face-to-face meetings. Some may prefer meeting on weekdays, while some over weekends.
Point 5: Once they accept, offer some equity. While many may not seek and some may not even accept, it is appropriate to offer nominal equity to your advisory board members.
Point 6: Formalize the relationship. Document the engagement. Set a formal advisory board meeting date, even if on a conference call. Set a clear annual calendar of engagement and interactions. Provide monthly reports with at least a quarterly conference call with all advisory board members together, even if you meet / interact with them i
Well, there is no standard on this one. But often the number ranges between 0.25% to 1%, usually depending on the level of involvement, the value that the person brings to the startup, etc.
The important point is NOT to make it transaction and to keep it as an honorarium. This ensures that the engagement is for the right reasons i.e. because the person like you and is excited about what you are doing. And because the aspiration should be to build a large company, if you are super-successful, even a 0.25% equity will offer substantial upside to an investor.
Some things to consider when distributing equity to advisory board members:
- Provide a vesting clause i.e. the equity should vest – i.e. be due – after a period of 6 months. This allows both – the startup as well as the advisor – to test the relationship and see if they are both enjoying the interactions and are seeing value in continuing the relationship.
- Treat all advisory board members as equals. Even if someone is more senior or accomplished than others, as your advisory board member, they are equals.
Apart from guiding you on areas in which they have a competence and experience in, advisory board members can assist startup in the following ways:
- Make introductions to the relevant folks in your industry. E.g. vendors, customers, media, and other stake holders. One way to leverage your advisory board members connections is to request them to mention your company on their LinkedIn profile.
- Bring the domain expertise – advise you on strategy, validate your plans and challenge your assumptions
- Help you interview staff. This can be especially useful when younger founders have to interview senior folks who are older than them.
- Speak on your behalf at events
- Monitor your progress – provide early warning signals when things are not going right
Here’s my list
- Passion about a concept
- A willingness and ability to commit to building a business around that passion, including willingness to ride out the rough patches
- Ability to plan well and take decisions – strategy is about making a chose to focus on one thing from among the many choices available
- Ability to articulate your vision and plans, and convince others to join you in the journey – others could be investors, co-founders, early employees, early customers, vendors, etc.
- Ability to learn quickly – being street-smart, being nimble about adjusting the strategy and plan based on what the in-market experiences tell you
- Being flexible and willing to change from original plans – plans don’t work out as planned – they do give you a direction but you have to make changes and adjustments as you implement
- Being structured with your thoughts and plans – being process oriented, though processes may not exist or will be flexible at the early stages
- Being ‘aware’, if not an expert, about the economics of business & finances
- Being a smart and enthusiastic sales person
- Being brave and with the ability to take failures in your stride – failure is a part of many an entrepreneurial journey – failure just means that the rewards and success is delayed and somewhat further away than originally planned
- Leadership: Being able to lead a team, and having the confidence of hiring people smarter than yourself is the sign of a good entrepreneur
- Ethics, value-system, sense of fairness and responsibility are important, as with any other profession
It depends on whether the tech component is core to the venture or it is a support to the venture. If it is core, then obviously it is critical to have the tech person as part of the core team.
Investors do not like part-timers. And that’s because, if someone who is core to the project is not willing to dive in fully, why should someone else accept the risks associated with the venture. Also, all businesses have challenges and require the founders to do the fire-fighting on an on-going basis. In the case of a part time resource who is also involved in some other venture, if there is a challenge in both ventures simultaneously, which venture will he/she focus on?
However, there have been instances where a core team member needs some income to take care of life’s expenses, and therefore needs to continue with another job while in parallel working with the startup. In such situations, investors would be OK with the CURRENT arrangement provided the person is committed to leaving the job and focus fully on the venture.
If the tech component is not core to the venture, there may be a bit of tolerance to a part-timer.
Of course, it all depends on what equity you are offering that person as a ‘co-founder’. In some cases, people have given a ‘vendor’ or an expert very nominal, ESOP level equity… but called them a ‘co-founder’ to allow them the bragging rights of the same.
You need to also recognize that shareholding and co-founder status or co-ownership as the promoter are entirely different concepts. A vendor who is offering a service or advice, which is not fully paid by cash but is partly compensated by equity, need not get co-founder status.
Investors will be interested because you have a plan to address an opportunity well, and not just because you have identified an opportunity that is interesting.
The success of an entrepreneurial venture depends entirely on the quality of execution. While ideas are important, just having a good idea is not good enough to start a company. Many companies fail to implement their ideas well.
That’s why while having a good idea is certainly a good starting point, and will be of interest to investors, they will eventually invest only if you have a good plan to implement the idea. And of course, that plan has to have an underlying business potential and business case.
On the other hand, you may have a strong plan around a concept that has already been implemented in the market by some others. If there is a business case, and if they believe you have the capability to implement a sensible plan well, investors will be interested.
In the Indian market, take the case of online travel agencies. After the success of Make My Trip, who was an established leader, investors did back brands like Clear Trip, Yatra.com and Travelguru.com, each of whom had a strong team with a plan to create space for themselves in a growing segment.
A ‘pilot program’ is an activity planned as a test or a trial. In the context of startups, a pilot is done to test the untested dynamics of the business.
In any business, especially in a startup stage, entrepreneurs have to start with certain assumptions. These assumptions could be about percentage conversations, cost of customer acquisition, repeat purchase rates, etc. They could be about processes and competencies e.g. ‘one person can handle 25 transactions in an hour’. Or the assumptions could be about the business case. E.g. We will make a gross margin of 35%. The objective of a pilot phase is to test and validate some of these assumptions, so that the final go-to-market business plan can be adjusted on the basis of validated assumptions.
Below are a few things that are tested in a concept test stage/pilot phase:
- The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer?
- The business model: A business model is about ‘who will pay how much and to whom’. Each element of this should be tested in the pilot phase. i.e. are the consumers/customers seeing the value proposition as you meant it to be, how much are they willing to pay – is there price sensitivity, and if so, how much.
- The assumptions for your business case: As mentioned above, list all the possible assumptions you have made in your business plan and see if there is a way to validate those in your pilot. In a pilot, some of the operational outcomes may NOT be as per your plan. However, it is expected that in the initial phase your operations will be inefficient and that cost and operational efficiencies will improve as your business matures.
- Understanding operational challenges: Entrepreneurs often tend to underestimate the operational complexities and challenges of managing a business. While startups often manage operations with a limited number of people who are stretching themselves beyond practical limits, it is often not sustainable in the long run. A long-term business case cannot be made on the basis of the enthusiasm and give-it-all commitment of the founding team. A business case has to be based on what is practical and sustainable with an average set of people managing your larger teams.
- Testing processes and operational capabilities: Processes help organizations scale up. Processes are nothing but just a set of guidelines on managing activity and handling situations. Processes are usually centrally planned and locally implemented. Processes. They reduce the dependence of individual brilliance, and instill a discipline that results in operational efficiencies and consistency of experience. It also allows individuals to be clear on how a certain activity/situation is to be handled. The quality of processes can make or break an organization. Not only should processes be implemented, but they should also be measured and evaluated periodically to ensure that inefficiencies and redundancies are eliminated. In a startup, it is critical to define some processes, but yet be flexible to adjust processes quickly as soon as you see some processes becoming bottlenecks or inefficient. It is therefore important for startups to test these in the pilot phase.
If you plan to raise funds from investors, then you will need to have a private limited company. That is because angel investors or VCs will have to be given equity i.e. shares in the company.
In a partnership, the partners ‘share’ determines the ratio of profit sharing between partners. However, angel investors and VCs do not invest to get returns through increase in valuation of the company i.e. so that they can sell their portion of the equity to another investor, company or, if the company goes IPO, then on the stock market.
By Erica Virtue, Co-founder, Vitogo.com
I originally wrote this post for my blog – http://unsolicitedadvice.org/2012/03/28/startup-book-club/, but I thought it might be helpful if I also posted it here.
Here is my collection of essential startup reading. Although many of these books cover an array of topics related to entrepreneurship, I’ve organized them based on their primary theme.
Founders at Work – Jessica Livingston
Founders at Work is a collection of interviews with founders of famous technology companies about what happened in the very earliest days. Includes stories from founders like Steve Wozniak (Apple), Caterina Fake (Flickr), Mitch Kapor (Lotus), Max Levchin (PayPal), and Sabeer Bhatia (Hotmail).
This is a great book to read if you are thinking about founding a startup, or if you already have, and want to hear some advice and words of encouragement from entrepreneurs who made it. Here are a few of my favorite quotes from the book:
“I’m a big believer that constraints inspire creativity. The less money you have, the fewer people and resources you have, the more creative you have to become … There were times when we were really broke before we had our angel investment, when only one guy who had children was getting paid.” – Caterina Fake (Cofounder, Flickr).
“First we built the audience and then we figured out a product” – David Heinemeier Hansson (Cofounder, 37signals).
“If you want to shoot a duck, you have to shoot where the duck is going to be, not where the duck is. It’s the same with introducing technology.” – Charles Geschke (Cofounder, Adobe Systems).
Art of the Start – Guy Kawasaki
The Art of the Start focuses on how to get anything (business, event or any idea) up and running. It’s a practical and useful guide based on Guy Kawasaki’s years of experience working in Silicon Valley as a startup founder, evangelist at Apple, a VC, and a writer.
In the book, Kawasaki encourages entrepreneurs to make meaning, make mantra, and get going. His FAQ sections address the questions that people starting a company are most likely to have. Overall, it’s a great book, and it comes highly recommended.
If you want to get an idea of what it’s about, you can read the Art of the Start Manifesto.
Good to Great – Jim Collins
Over five years, Jim Collins and his team analyzed the histories of eleven companies to uncover the key determinants of greatness – why some companies make the leap from mediocre to great and others don’t.
Collins discovered that at the root of these companies’ successes is something called the “Hedgehog Concept” – a product or service that leads a company to outshine all worldwide competitors.
Some people question Collins’ research methods for being unsystematic and biased, and his conclusions may be a bit too general to be that immediately useful. You can read a review of why Good to Great isn’t Very Good on Business Pundit.
However, if you are looking for interesting ideas on how to improve your business, thenGood to Great might be worth reading. It won’t give you the secret recipe for success, but it will give you some food for thought!
Ideas and Product/Market Fit
The Four Steps to the Epiphany – Steve Blank
Based on Steve Blank’s class at Berkeley’s Haas school of business, The Four Steps to the Epiphany lays out a customer development process that complements a startup’s product development process. Blank gives his step-by-step strategy of how to successfully organize sales, marketing and business development for a new product or company.
Touted by some as required reading for anyone starting a business, there is no doubt that there is some useful info in this book. However, it’s also very difficult to read. A better option might be to skip the book and head straight to Venture Hacks’ summary, which includes slides and videos. Eric Ries also has a nice post that pulls out the main points of the book.
The Lean Startup – Eric Ries
In The Lean Startup, Eric Ries describes his “Lean Startup” methodology, which advocates for the creation of rapid prototypes designed to test market assumptions, and uses customer feedback to evolve them much faster than via more traditional product development practices. Ries was inspired by the lean manufacturing process, which focuses on eliminating any work or investment that doesn’t produce value for customers.
The Lean Startup methodology has been criticized by some. Marc Andreessen, a co-founder of Netscape and now a VC, says that some entrepreneurs have misinterpreted the Lean Startup methodology as a reason to remain small and not go for big opportunities. Others have complained that the book is a bit too self-promotional.
However, there is no denying that The Lean Startup has had a big impact on the startup community and the way that many entrepreneurs approach their companies. Many of Ries’ ideas are timeless and applicable to companies of any size – reduce waste, learn quickly, make data driven decisions, focus on customer value, and pivot when needed.
Made to Stick – Chip and Dan Heath
Made to Stick examines why some ideas thrive while others die. The Heaths explain what makes an idea sticky and how you can make your startup stickier by using the “human scale principle,” the “Velcro Theory of Memory,” and creating “curiosity gaps.”
The book is easy to read, simple, and well researched. Definitely a good resource for anyone trying to gain traction for their product.
Delivering Happiness – Tony Hsieh
In Delivering Happiness, Zappos CEO, Tony Hsieh, chronicles his entrepreneurial life and shares how he built most successful online retailers by focusing on stellar customer service and company culture.
“I wanted to write a book to talk about the journey that I took in life in terms of what would bring myself long-term happiness, and what I accidentally discovered is that you can actually take concepts from happiness and apply it to businesses,” says Hsieh.
If you are looking for a great review of Delivering Happiness, mixed with some musings on startup customer service, check out Wells Riley’s blog.
The Thank You Economy – Gary Vaynerchuk
In The Thank You Economy, serial entrepreneur, Gary Vaynerchuk, shares how any company can scale old-time, personal, one-on-one attention to its entire customer base using the same social media platforms that carry consumer word of mouth.
According to Vaynerchuck, social media isn’t a new way of doing business, rather, it’s a tool to get us back to a time when “[b]usinesses lived and died by what was said via word of mouth and by the influence people had with one another. That meant every person who walked through the door had to feel like he or she mattered.”
The Thank You Economy demonstrates how sincerely engaging with customers through social media can create brand loyalty, and includes detailed and recent examples like Zagat and Yelp.
Venture Deals – Brad Feld and Jason Mendelson
Inspired by a series of blog posts by the managing directors atFoundry Group, Venture Deals demystifies the process of VC financing. This is a great book to refer back to as you progress through the different stages of fundraising and it can help you avoid some rookie mistakes.
The book includes a breakdown of the mechanics of a Term Sheet, how valuations are set, and even contains examples of standard documents that are used in VC transactions. It’s a must read if you’re thinking about fundraising or are currently fundraising.
Mastering the VC Game – Jeffrey Bussgang
Jeffrey Bussgang offers his high-level insights, colorful stories, and practical advice gathered from his own experience as well as from interviews with dozens of successful entrepreneurs and venture capitalists, including Twitter’s Jack Dorsey and LinkedIn’s Reid Hoffman. He reveals how to get noticed, perfect a pitch, and negotiate a partnership that works for everyone.
Mastering the VC Game is a great introduction and general overview of how venture capital works and what to expect, but it is by no means a complete resource. If you are looking for more detailed and practical information about raising venture capital, there are a lot of great blogs out there, like Venture Hacks, AVC, and Both Sides of the Table.
Design and Usability
Don’t Make Me Think! – Steve Krug
Don’t Make Me Think! concisely explains everything that you need to know about getting started with web usability. In this book, usability expert, Steve Krug, explains how to design pages for scanning, not reading and how to write for the web. “When I wrote Don’t Make Me Think, my intent was to help people learn to think like a usability expert: to ask the same questions that were in my head when I did a usability review.”
Don’t Make Me Think! is a short and engaging read. It’s a great resource for designers or for anyone involved in making things for the web.
Above the Fold – Brian Miller
“Above the fold” is a design concept that refers to the location of an important news story or a visually appealing photograph on the upper half of the front page of a newspaper (or for webpages, the part of a page that’s visible without scrolling).
Above the Fold (the book) covers the fundamentals of effective graphic communication in web design. The book is broken into three sections that focus on site design, planning and usability, and SEO and other marketing issues. If you’re just starting out, reading Above the Fold will give you a solid foundation in all aspects of the web design process.
ReWork – 37 Signals
ReWork is basically just Signal vs. Noise, the design and usability blog by 37signals, in book format. If you’ve already read the blog, then it’s probably not worth also picking up the book.
If you haven’t heard of the blog, and you want all the best info in a compact format, then this book is for you! The authors share the philosophies at the core of 37signals’ success and push you to rethink everything that you thought you knew about strategy, customers, and getting things done.
Purple Cow – Seth Godin
Depending on who you talk to, there might be four, five, seven, or more “P”s of marketing – pricing, product, promotion, publicity, packaging, place, process, physical evidence, and people. According to Seth Godin, marketers have been ignoring the most important “P” of all: the Purple Cow.
Cows are boring. But a Purple Cow is anything phenomenal, counterintuitive, exciting, or remarkable. Every day, consumers ignore a lot of brown cows, but you can bet they won’t ignore a Purple Cow.
Not ready to commit? Read an excerpt from Purple Cow in Fast Company.
Crossing the Chasm – Geoffrey Moore
Geoffrey Moore argues that high-tech products require marketing strategies that differ from those in other industries. Early adopters of a technology are not necessarily the same as the mainstream market, which is why some high-tech products see initial sales that level off.
The book is long-winded and wordy, so be prepared to skim. Or, you could just read this review.
Steve Jobs – Walter Isaacson
This is one of my favorite books of all time (not just out of the startup books). You probably already own a copy of Steve Jobs, but if you don’t, then you probably know someone who can lend you their copy.
The book covers every phase of Steve Jobs’ life – from his adoption, to college, Apple, NeXt, Pixar, and Apple again. It’s extremely comprehensive and objective – Walter Isaacson doesn’t sugar coat Jobs’ personality or quirks.
Even though it’s long, it’s very well-written and a compelling read.
… and the Ones that Didn’t Make the Cut
There’s nothing wrong with these books, necessarily … I just wasn’t feeling them (or I thought they repeated concepts available in one of the books above). Let me know if you disagree and maybe I’ll give them a second chance.
The 4-Hour Workweek – Tim Ferriss (Unrealistic, unethical, and the only guy who ever recommended it to me was a real piece of work).
Crush It! – Gary Vaynerchuck (Came highly recommended, but I just liked The Thank You Economy better).
Do More Faster – Brad Feld and David Cohen (This just seemed like a 352 page marketing brochure).
Getting Real – 37 Signals (Similar content to ReWork, which is a newer book from 37Signals).
Built to Last – Jim Collins (I already included Good to Great … can anyone tell me why you would read both?)
The Accidental Billionaires – Ben Mezrich (There’s this movie that came out a while ago that you should watch. Maybe you’ve heard of it?)
Where Good Ideas Come From – Steven Johnson (Just watch this illustrated talk).
Check out this post on my blog, Unsolicited Advice: http://unsolicitedadvice.org/2012/03/28/startup-book-club/
Note: This question was answered on 1st May, 2012
E-commerce in India address some needs that are specific to the Indian context:
- Choice: There are quite a few places in India where consumers do not have a wide choice. Companies like http://www.allschoolstuff.com have orders from folks in smaller towns, only because stuff like Ben10 pencil boxes are not available in their town.
- Savings: Indian consumers seek value, and online models allow e-tailers some cost advantages over physical store distributed goods.
- Convenience: In major cities in India, driving or traveling to a market, finding parking space, etc. is quite a stressful experience.
My view is that many more categories will open up to online retailing. People on Quora have already started talking about motor spare parts online, car accessories online, etc. However, the niche categories will start seeing action after the wider appeal categories start becoming saturated. There are 100s of categories that can consider being online.
There will perhaps also be business models wherein the physical store is not to stock and dispense goods, but only to display and try, with the purchase being logged online at the store and delivered from a central warehouse [as this can reduce cost of goods sold due to lower inventory holding costs, lower dead-stock and lower unsold stock situations].
As financial inclusion becomes a reality across India, and as ‘safer’ payment options like virtual credit cards, etc. become more prevalent, electronic commerce can only increase. We are, in my view, seeing only the beginning of the journey.
Whether you should implement an idea should depend on whether that idea has the potential to meet what YOUR objectives are. If your goal is wealth creation, you will have to check if the business case is strong and if this is what will create wealth for you. If not, you will evaluate other opportunities.
On the other hand, if your goal is NOT wealth creation but ‘social impact’, then you will evaluate if this idea is providing the scale of impact that you wish to create.
And if your goal is to ‘enjoy what I do’, then you have to evaluate if this idea is what will give you the greatest joy.
If your goal is wealth creation, you will have to evaluate things like what is the scale of the opportunity, what is the competitive environment, why do I have an opportunity to be a dominant player, what is the scale that I can reach with this venture, what are the resources that I will need and can I gather the, what are the competencies that I will need and do I have them or do I have the ability to engage others who have those competencies, what are my exit options, etc.
An ideal founding team is one that covers all the important components of the ‘business’ around the idea or concept that the startup is working on.
In most cases, people start ventures with others who have a passion for similar concepts or opportunities. And that’s a great starting point. However, whenever possible, complementarity of skills is better than all co-founders with similar skill sets and experiences – one engineer + one marketing person + one designer.
As you start building a larger team (you take in more co-founders or members of your early management team), you need to identify the various areas that your startup will need to deliver on and then identify the team requirements.
Focus on the critical areas. Get people who can multi-task. Get people with some experience in different aspects of business, and not just their immediate area of expertise.
Passion and commitment is critical at a startup. When finding a co-founder or early team members, also evaluate ‘why they want to join you’ rather than just ‘what are their qualifications and experiences and what do they know that will be useful to my startup.’
When testing the viability of a product/service concept, you should aim to get answers to the following:
- Does this concept address a customer need or want
- Are customers excited about the value proposition offered by the product/service
- Is there a business case in this concept
For the first point, you should check with customer is the problem that you are addressing is relevant. Concepts which address real and important problems have a better chance of succeeding.
Once the customer has accepted that they indeed are looking for a solution to the problem you address, then explain your concept and check if they feel that this addresses the problem well and that the price-point at which it does is fine too. You may need to test this with a few customer segments to understand which group has the highest potential for you. Be careful to check that the value proposition and your concept is easy for customers to understand. In many cases, showing them a one-page concept note is closer to how they would see / know about the product in real life. It is unlikely that they would get a chance to hear about the product from someone like you.
After the product is ready, it will be important to get customers to use it to ensure that the product, according to them, delivers on the promise. In concepts that may require repeat purchase, it will be important to test if they purchase it again. There are some interesting ways of doing research on concepts and products, including qualitative techniques and quantitative research.
From a venture creating point of view, it is important to understand if there is a real business case underlying this concept. This will mean working out a fairly detailed business plan, costing the concept right, pricing it right and then seeing if it makes commercial sense to get this product out in the market.
Plan B is already built into a good B Plan.
When you are thinking about your venture, you are going to think about multiple scenarios, including very pessimistic ones and what you would do to mitigate the risks and the challenges in the journey. This should include what matrices you would use to track progress, and at stage you would take corrective action, including aborting the journey. It will be important to have an advisory board, or a real board, which will guide you through your decision making in good times as well as tough times.
Anyway, a business plan should take into account possibilities of failure, and hopefully the course correction that you might take in case the journey is not as you plan it to be.
In planning your business, including plan B, it is important to ensure that your assumptions are closer to reality. Wrong assumptions are more likely to kill a business than poor implementation.
A business plan is nothing but a plan for your business. While there are fancy templates, a business plan is nothing more than a story about
(a) what you are going to do i.e. concept
(b) how you are going to do it i.e. operations planning
(c) how you will make money i.e. business model
Of course, each has to be very detailed when thinking through a business plan. The excel sheet is nothing more than a summary of costs and revenues associated with your story. The power-point version of this story includes context i.e. why is there a need for this concept, who is your competition, the team who is doing this, etc.
Also remember that a business plan is a ‘process’ and not a product. And hence, while it provides direction, the route has to be constantly adjusted according to how the venture progresses. This process of evolving the B Plan is in a way also about working on Plan B.