How to do a “Customer Validation”?

Some concepts can be validated by talking to potential customers/consumers/influencers, but for some concepts entrepreneurs have to take a leap of faith.

For concepts where asking customers/consumers/influencers is unlikely to provide definitive answers, the entrepreneur should rely on getting a deep understanding of the domain, the dynamics of the industry, the pain points, the need & opportunity gaps, the process of decision making, etc. Once you have a deep understanding you build a hypothesis and make some assumptions on how the market would respond to the concept. e.g. what percentage of consumes who you reach would consider buying, how much would they pay, why would they buy, how many will repeat purchase, etc. Once you have your base assumptions ready, discuss it with a number and people to get a sense if they feel that your assumptions are practical. [Note: Just because many people feel that your assumptions are practical is no guarantee of success. However, if many feel that the assumptions are impractical, it could be a warning signal and you may want to revisit your assumptions.].

Once you are comfortable with a set of assumptions, and after those are endorsed by a few people, it is prudent to do multiple versions of the scenario. Some optimistic and some pessimistic scenarios. While the optimistic are largely to give you a feel-good factor, the pessimistic ones are the ones that will give you a feel of how wrong you need to be for your venture to fail.

For concepts that can be tested, talking to enough customers/consumers/influencers to get multiple perspectives is essential. Diversity of audience segments is important to give you a sense of the receptiveness of the concept within a broader audience profile. There are enough qualitative and quantities techniques that you could consider. For most startups, who are keen on getting a first-cut feel of customer/consumer responses, doing basic research through students is a good way to begin.

Any case, there is no better way than for the entrepreneur to have one-on-one conversations with potential customers/consumers.

 

How do we know that we are ready to launch a start up with a product or service?

There is a saying “If you have 10 hours to cut a tree, spend 8 hours sharpening the axe”.

Similarly, launch when you know you have all the competencies and the resources required to run the business. I.e. when you have worked out your business plan, evaluated the business case, spoken to customers and are convinced that the value proposition makes sense to them, when you have tested the product, when you have understood the dynamics of marketing & sales, when you have evaluated the cost of acquiring customers, when you have identified – and some what validated – all the assumptions that you have used in your business plan…. that is the time when you are ready to launch. And of course, you need to ensure that you have the required capital to sustain the business till you either (a) hope to become self-sustaining of (b) when you hope to raise external capital – whether as a loan from banks/family/friends or as risk capital from angel investments/ VC/family & friends.

HOWEVER… despite all this, and even after you are ready, you will have to evaluate what is the best time to launch. E.g. if you are selling something to schools which they will use in their classrooms, launching in the middle of a school term may not be prudent.

 

Facebook apps: How do you estimate market potential?

Revenue projections for a Facebook app should be done like you would for any product, say a refrigerator, or service. Here are a few steps you could consider:

  1. You need to first define your target audience, then estimate how many people from your target audience are there on the platform [in this case Facebook] and in the geography you are targeting [i.e. the markets you are addressing].
  2. Once you have the number, you calculate how many people you CAN reach through your media spends and the activities that you within your control e.g. ads in the press or online and your distribution channels e.g. if the product/app is bundled with another existing brand or sold through app stores, etc. Remember, just because your app is on Facebook does not  mean that your marketing & advertising channel should also be Facebook. E.g. you could put efforts on PR – get a few TV interviews, press articles, etc. – and you could probably reach a much larger audience with your limited budgets.
  3. Then you make some assumptions on how many additional people in your target audience can be reached through means like PR, viral effect, etc.
  4. Once you have these numbers, you make assumptions on the % of people who are likely to buy/download your app.

If your revenue is based on buying/subscriptions, you estimate how many people x how much per download. If your revenue is advertising, you estimate how many impressions, and use existing media rates to estimate your revenues.

 

Now, to extrapolate this to the future, you make various assumptions on the base target audience size. You can use various media reports on where the target audience numbers are likely to go on the platforms you choose to be on.

 

 

Tips for hiring early-employees in a startup

For me, attitude and commitment are the most critical aspects when hiring a person. Everything else can be taught. 

Of course, it depends on what you are hiring for.  When hiring a domain expert, you want to make sure that the attitude is right, the commitment is 100% and that the person does have the expertise in the domain that you want to hire him/her for.

Another thing that I have learnt, sometimes the hard way, is that it is important to ensure that the person you hire is also driven with the excitement of the startup. If a person is not super excited with the concept or opportunity or the startup, no matter how committed the person, and how right the attitude is, he/she may not be able to or be willing to survive the challenging times that most startups invariable go through. Some of the challenges, especially due to lack of resources & capital, make the journey incredibly tough. And only those really driven can go through it with determination.

It is important to clearly communicate to potential hires about the challenges and realities of working in startups. Explain to them the limited resources that they will need to work within, clarify that processes are yet to be defined, explain that most things will be ‘figured out as we go along’, etc. etc.

Ensure that they clearly understand the work environment and work culture before they accept your offer to join.

 

When you have multiple business ideas that you believe in, how do you choose which one to focus on?

It is common for many aspiring entrepreneurs to be excited with a number of ideas or concepts, and they may genuinely believe in the potential for each one of these ideas to be successful.

However, eventually you will have to make a choice and decide to focus on only one of these ideas to build your startup around. Here are a few thoughts on how to make this rather tough decision. Of course, your decision will be a combination of various factors, and often will require revisiting the parameters that you used for your decision making.

 

1) Personal passion is critical

Every startup will go through challenging times. If the startup is not in an area of your personal passion, you are less likely to fight your way through these tough times and are more likely to give up.

On the other hand, if the venture is in your area of personal passion and interest, even if the commercial success seems a distant away than you had originally planned, you probably would be driven enough to keep going.

However, the commercial potential of an idea can sometimes mislead you into believing that you are deeply interested in that domain. It is important therefore to evaluate what you are really, really, deeply and passionately interested in. Here’s how you can possible identify the areas of your interest. Leave the ideas aside, and think of what you would want to do in life if you had enough money and not have to work for a living. That will give you clues on what excites you the most an what your real areas of passion are.

 

2) Evaluate the business case for each idea

Unless you are considering doing a social impact venture, the point of doing a startup is to generate wealth. Thus, it is critical to evaluate the business case around each of your ideas and then take a view on what is likely to generate maximum wealth.

Consider factors like market potential, possibility of scale, what is required to scale – e.g. does the venture require proportionate scaling of resources & capital to scale or would it be possible to scale exponentially, what areas are most likely to receive VC investments, what domains are likely to see higher valuations, etc. i.e. consider all the factors and evaluate how much you would be worth n 10 years if each of these ideas were to succeed as you plan.  You are most likely to get a different figure for each one of your ideas, based on the business case for these concepts.

 

3) Evaluate the external environment for each idea

Things like ‘how important is the problem or how real is the opportunity’ that this concept is addressing, which of these ideas have less competition, which of these concepts address an immediate need and which of these concepts will require hard-selling of the value proposition to potential customers/consumers.

Also, evaluate which of these ideas can be implemented from where you live and which of these concepts may require you to relocate. Then decide on the basis of your personal circumstances and preferences.

Also, while many of these ideas may have a large market in the country where you live, the KEY markets for some of these concept may NOT be the country of your residence. Evaluate if some concepts will require you at some stage to relocate. And then decide on the basis of your personal circumstances and preferences.

 

4) Which of these ideas have an opportunity for you to be a dominant player

What skill sets & competencies and other resources do you have that will give you a higher chance of success in the venture?

While the potential may exist in all categories, some sectors may not be ‘startup friendly’. Evaluate if the some of these concepts are likely to see competition from existing large brands. E.g. “Can Google do this?”.

 

5) Evaluate if you ‘like doing’ what the venture will require you to do

Example: You may be passionate about healthcare. However, creating and managing a chain of clinics requires you to be keen on & good in on-ground & distributed environment operations management, which is different from the operations management required for an ideas about an online medical records platform.

6) Evaluate the risks

While you play for the upside of a venture, also evaluate what the downside is. Some concepts, if they fail, will mean closure of the business. While some concepts, even if they do not become run away successes, may be sustainable as a smaller venture than you originally planned. Evaluate your risk appetite and evaluate which concepts are more aligned to your personal situation.

Finally, after you evaluate all these aspects, you probably should let your intuition lead the decision for which idea to go with.

I will be keen to know more parameters that people may have used to evaluate ideas. Will update this post as I get more responses.

 

 

 

What are the most common mistakes first-time entrepreneurs make?

  • Overestimating the meaningfulness of the value-proposition to the intended target audience
  • Underestimating costs
  • Overestimating execution capabilities (we can do this and that… )
  • Underestimating how much time it takes for funding
  • Overestimating hiring and talent attraction capabilities
  • Changing business model too frequently, without investing enough time and efforts in trying to make things work
  • Taking a top-down approach to market size (Gartner says the market is USD 20 billion) instead of taking a bottoms up approach (how am I going to get my first 1000 users)

Most common mistake: Underestimating the time it taks to build a successful brand and company. Think in years and not in months.

Understanding the concept of a business model

Simply put, if the idea is the ‘what’ part, the business model is the ‘how’ part of your plan. It is a clear statement of how you are going to make money from your venture.

In other words, it reflects your thinking on the following broad parameters. Of course, the parameters will vary by business:

  • Who is your customer
  • What are the revenue stream(s)
  • How much will they pay for the service
  • How much gross margin will you make on each sale

 

To illustrate with an example:

For an online toy store the business model can be as follows:

“We sell & deliver toys to consumers who order online from our website. Our target consumer is the affluent family with children below 7 years. Our average ticket size per transaction is INR 1000 and we expect our target customers to buy 2-3 times a year from our online store.

We have a 50%+ gross margin on our products. Thus, we expect to make about INR 1000 gross per customer per year.”

Note: Once you have your business model detailed out, you will need to check if your concept and business model has a business case. I.e. At the startup stage of low capital-intensive businesses, it will suffice to identify at what phase does the business become operationally profitable.

Business models could vary, even for the same concept different companies could follow different business models. Let us see with another example:

 

Possible business models for an outsourced HR management company:

  • One-time engagement for setting up processes
  • On-going, shared services model
  • On-going embedded employees model
  • Consulting services model

 

 

How to build a startup without angel or VC investments

A lot of entrepreneurs think they need piles of money to make their startup a success, but that’s not always the case.

Know your Speaker:
Shiven Malhotra, Angel investor & mentor for startups
Shiven’s career has spanned three continents having worked with KPMG auditing technology in the US, in Goldman Sachs’s stock trading desk in the UK and in India as part of the start-up team for Kotak Commodities trading desk.

Shiven was born and raised in New Delhi. He finished his schooling from the The Doon School and then studied Economics at the University of California at Santa Cruz.

Shiven is also a semi-professional photographer and an avid trekker. His big plan for the future is to trek to the Everest base camp.

What percent of equity can be shared with a company that develops the prototype of the product?

See if you can pay in cash. Only if it is just not possible to make cash available to pay for prototype, then consider paying in equity. At the prototype stage, when the risk is the highest, the vendor should have a significant upside in case the venture takes off as expected. 

 

If on an equity model, I would suggest you look at the total amount required to build the prototype, and give a 3x – 5x of that in equity value at the time of the 1st round of funding. E.g. if the estimated cost of prototype is $10,000, and if the equity is agreed at a 5x, then if the angel1st round is raised at a valuation of $500,000, then the vendor should get 10% equity at the time of the funding. Ordinary shares.

(The negotiations get complicated and difficult to value if the equity if the basis of returns are for the 2nd round of funding… i.e. if the vendor and you agree that he should get about 5x or 10x of the cost of prototype development in the 2nd round, then the amount of equity will vary significantly based on what the expected valuation of the venture at that stage would be… and that’s a difficult one to agree on… the entrepreneur, naturally, will be super optimistic while the vendor may be a bit more modest in estimating valuation in 2nd round).

However, before you embark on your prototype stage, I would urge you to think hard about the business case, validate the concept with potential customers/users, work out your cash flow and fund flow needs, think of what this is likely to scale to and see what the financial outcomes of this are likely to be for all involved… including the vendor.

What should new entrepreneurs be wary of when it comes to launching a new business?

Well, there are some lessons that I have learnt in my journey…. and as an entrepreneurship evangelist, have had the opportunity to observe many startups start up, and fail. Here are some observations:

  • Don’t underestimate the costs and time that you will require to meet your milestones – often entrepreneurs, enthused by their deep passion and conviction in the concept, expect things to happen sooner than it would, and they usually expect to achieve it in lower resources and costs than it would. Running out of cash is the single biggest horror that a startup or early stage company can face.
  • Plan for the worst-case situation… not the best case. Most entrepreneurs prepare business plan, which look at the most glorious of outcomes. While that is a possibility, it is prudent to think hard about what aspects could go wrong, and think of plan to mitigate those disasters. If the venture does well, enjoy the ride, be sharp and steer it towards success. However, if you have planned well for disasters, you will be able to manage the startup even during times of significant challenges.
  • Ensure that co-founders are aligned on the vision, the pain in the journey and each other’s views on key decision points in the journey (e.g. how would you react if you were to get an offer to sell of for $ 10ms… what will be your decision if the offer was $2mn?)
  • Talk to customers. Don’t plan on the basis of your enthusiasm and conviction. Test the concept with customers/consumers. Even before the product is ready, have conversations with potential customers/consumers to get their feedback and thoughts on what they would like to see in such a product.
  • Be very, very careful about whom you hire as your first employees. Make sure that they are in it with some level of conviction and passion for the concept. Pure commercially inclined employees will not have it in them to pull through the ups and downs, the course correction, and the challenges of the early stages of your journey.
  • Keep your costs low. Be frugal. Plan your cash flow and fund flow requirements well. Make sure you are well funded. Dont assume that you will be able to raise the balance amount as you proceed along in your journey.

What career should I take if I want to be an entrepreneur?

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.

Entrepreneurship – the time is now

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 – a set of assumptions. 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’.

If I have the talents to build an MVP myself, should I hold off on a co-founder to raise capital and make some early hires?

A product is NOT a business … no matter how good that product is. A business has to be built around that product or concept. 

 

So, if you are good at product development, perhaps you need some support on the marketing/sales/commercial side of the venture.

Also, with most investors you are likely to have a better chance of getting funded if you have a co-founder. (Also… entrepreneurship is emotionally draining too, and hence getting a co-founder is a good idea.).

Remember, investors invest in the business case around a concept or product, and the ability of the team to implement that idea in the market. A good product is a good starting point, but neither a necessary condition, and certainly not a sufficient condition for funding. (Why do I say it is not a necessary condition.. because if you have a good product, it is obviously very good. But if you don’t have one, you can easily build one or get one built if you have the right business case that allows you to raise capital to build and market a good product.).

 

How to build a startup without angel or VC investments?

A recording of webinar hosted by Virtual Learning Center of The Hatch Institute on Sept 20, 2012.

About the session
A lot of entrepreneurs think they need piles of money to make their startup a success, but that’s not always the case.

What are the top questions young entrepreneurs should be asking themselves?

From a business point:

  • What are we doing (concept) and why is this important (what need or opportunity does it address)
  • Who will use this
  • Who will pay for this, to whom and how much and how often? (Customer segment and business model)
  • How am I going to do all this (the operating plan)

 

From a personal point:

  • Why am I doing this (motivation – to make money, to change the world, to do ….)
  • Are the people I am doing this with (my co-founders) the ones that I feel really, emotionally close to (if not, won’t last)
  • At what milestones will I say “I am successful”
  • What will be the parameters for me to give up and move on
  • How much time can I pursue this without a salary
  • What alternate opportunities am I giving up to do this… and why am I happy doing that

7 simple steps for writing a business plan:

 

  1. Start with a ‘story’ – ‘See the film in your mind’ about your venture – what do you want to do, how large do you want it to be, what will make you happy, what are your aspirations, etc. Imagine it as a business a few years down. This gives you a good view of ‘what you want to aim for’
  2. Work out rough milestones and goals: Your long-terms goals and aspirations should then be broken into short-term and long-term milestones, which are the stepping stones to your eventual destination.
  3. Think deeply of how you will implement it: This is the critical aspect of planning your implementation. This also gives you a view of the cost structures, the infrastructure & people needs, processes, etc.
  4. Work out the ‘structure’ of an excel sheet: Now, after you have done the thinking, it is time to use an excel sheet to evaluate if there is a business case in what you plan to do. Before you start entering numbers, work out the ‘structure’ detailing every cost head and revenue stream.
  5. Start working in the excel sheet – assumptions are critical: An excel sheet exercise with the wrong assumptions is going to give you a very wrong direction, and perhaps wrong hopes. Be realistic. Be conservative.
  6. Work on multiple ‘scenarios’: Life does not play out the way you plan it. Real life situation will be different than your excel sheet plans. It is therefore essential for entrepreneurs to work out multiple scenarios to see how the business will pan out under different outcomes.
  7. Finally, articulate it into the ‘presentations’: Once your ‘Business plan’ is ready, you then articulate it into different presentations. Even an executive summary is one articulation of the B-plan. You can have an executive summary for introductions, a 8-10 slide ppt for first meetings and more detailed documents and presentations for follow-up meetings where specific details are going to be discussed.

How do I design a startup workspace?

Having a decent office does play a very important role in the early stages of a company.

It is very difficult to recruit talent without a good office Perhaps rightly so, people create perceptions and first opinions about a company by looking at the office.

Ideally, startups should try to co-locate with someone… could be another startup or an early-stage company that has some spare space. More people around makes your team feel like a larger company, and there is learning from others too. Of course, shared pantry, conference rooms and other resources helps save costs.

No cubicles and dividers… one room with everyone sitting on similar sized tables is ideal.

Bright and cheerful places make happy colleagues. Dull and dark places also make it difficult to hire people. Investing in a better office, with better lighting and decor eventually pays out in the form of better people accepting your offer.

Spend as less as possible on things that you do not need – copiers, fax machines, coffee machines, etc… rent ACs if you need it. Keep capex low…

Working out of home in the initial phases is not practical beyond a point. No matter how serious and committed you are to your venture, working out of a ‘non-office environment’ [i.e. home or Cafe Coffee Day type outlet] just cuts down on your productivity. It is not just about inadequate infrastructure and support system, an office environment and the people around you just add to the feeling of being a real company.

Without an office, business plans tend to get restricted by space available Inadequate or no office space and working out of coffee shops does leave you vulnerable to taking decisions based on restrictions of space.

 

 

Hiring technical resource for Startups

Many developers love working for startups and some who will only work for startups. Good startups.

Hiring for a startup is like any hiring: your network is easiest, resumes hardest. You can do a few things to limit the field and attract the right folks if you’re gathering resumes:

  • Find places to post your requirments  frequented by startup types
  • Remember being a startup is major selling point, say it loudly and often, and ask for startup experience.
  • Ask for technology experience popular in startup circles, i.e., not .NET, not JEE.

Elance can work for assembling a programming team, but it’s not a great solution as their contract requires you keep Elance as a middleman for future work between the same two parties

If you’re looking for alternatives for finding outsourcing, try also asking on Quora who are all the great developers that build early product versions for early stage startups.

 

What happens to the shareholding of a founding team member in case he decides to quit the company?

Ideally, the founder’s shares should vest over a 3-4 year period. This is not just in the interest of the investors, but also protects the entrepreneurs in case one of them decides to leave.

In simple terms, if there is a 3-year vesting period, then every month the promoters get 1/36 part of their equity.

For example, if there are 4-founders, and one of them who has 18% equity decides to leave the startup after 15 months because the venture faces significant challenges, then in a 3-year vesting period clause, the leaving founder will get to keep only 7.5% of his 18% equity, with the rest of the equity now available for the company and the board to offer to another person who may be brought in as a co-founder or at a management level to fill in the gap left by the leaving founder.

In case the equity that has not vested to the leaving promoter is not given to a new person, then in the case of an event like a M&A that equity is distributed to all the remaining shareholders, including the promoters in the proportion of their holding in the company.

 

Handling disagreement between founders

One of the common reasons for issues in startups is disagreement 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.

 

How does one address this? Well, one way is to anticipate it and have a philosophical discussion and agreements with the co-founders on how different situations will be handled. This discussion should happen at the beginning of the journey and NOT when the situation arises.

 

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 some of these agreements into the shareholder agreements or articles.

 

Some questions I ask our portfolio companies to discuss among themselves are:

1)    Who among the founders will be the CEO, and why (If you do not decide at the beginning of the journey, this can be a tricky one to settle. If you do not fight over it, your spouses may.). If required, would you be open to a professional CEO.

2)    If someone offers to buy you out for Rs10cr in a year, what would you do…

3)    What will be your measure to say that the venture as ‘failed’ and give up

4)    What is your plan B?

5)    How long can you go without a salary (or survival salary)?

 

One way to protect the venture in case of conflict is to vest the shares of the founders. I.e. 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.

 

 

Selecting your investors

Startups are usually not in a position to be choosy about whom they can accept funding from, and quite often after a number of rejections end up taking money from whoever willing to fund them.

 

However, while signing up your investors, it is critical to check the following:

  • Will you enjoy working with them? While this is a difficult one to take an objective view on when you really, really need their money, it is a critical question to ask. Attitudes to investee companies, style of working, matching of personalities are critical components in ensuring that investor & investees enjoy working with each other. In startups, in my view, it is ideal that the founders and investors can have a friendly relationship. And this does not mean not being professional… but an easy going, non-formal style of working is helpful in a startup stage when things are not going to be as predictable as they are in a growth stage company.

 

  • Is the personality, ethics, value system, aggression, compassion, etc. of the investors in line with the personality of what I want to build. Different people have different styles of operating and if these styles are in conflict, it may lead to disagreements in how you handle the business, especially how you tough situations.

 

  • What’s their outlook to your business and are they willing to wait out the difficult times? While your investors and you may agree with the potential, some investors have a ‘spray and pray’ approach. I.e. they invest in many companies, especially in emerging sectors, and see which ones quickly show signs of success. They are quite happy then to disengage with the slow movers and back the early-successes. In such situations, if your startups does not really take off as expected, and most don’t, you may be left in a corner.

 

  • Do they have experience of working with startups at your stage. There are clearly different investor groups who specialize in different stages of the company. Angel investors will invest in the concept stage, early-stage VCs will invest in the post proof-of-concept stage and VCs/PEs will participate in the scaling-up stage. Different stages of a company require different competencies and therefore different interventions from the investors. Investors who usually deal with growth stage companies may not have the patience or experience in dealing with the nimbleness and direction changes that a startup may have.

 

Of course, it helps to connect with companies that the investors have funded and understand about their experiences with the investors.

 

 

 

 

 

Should you write the executive summary first or last? Why?

The executive summary is a summary of your business plan. Hence, it is to be written last.

 

Here’s my suggestion on working on a ‘business plan’.

  • Start with a ‘story’ – ‘See the film in your mind’ about your venture – what do you want to do, how large do you want it to be, what will make you happy, what are your aspirations, etc. Imagine it as a business a few years down. This gives you a good view of ‘what you want to aim for’
  • Work out rough milestones and goals: Your long-terms goals and aspirations should then be broken into short-term and long-term milestones, which are the stepping-stones to your eventual destination.
  • Think deeply of how you will implement it: This is the critical aspect of planning your implementation. This also gives you a view of the cost structures, the infrastructure & people needs, processes, etc.
  • Work out the ‘structure’ of an excel sheet: Now, after you have done the thinking, it is time to use an excel sheet to evaluate if there is a business case in what you plan to do. Before you start entering numbers, work out the ‘structure’ detailing every cost head and revenue stream.
  • Start working in the excel sheet – assumptions are critical: An excel sheet exercise with the wrong assumptions is going to give you a very wrong direction, and perhaps wrong hopes. Be realistic. Be conservative.
  • Work on multiple ‘scenarios’: Life does not play out the way you plan it. Real life situation will be different than your excel sheet plans. It is therefore essential for entrepreneurs to work out multiple scenarios to see how the business will pan out under different outcomes.
  • Finally, articulate it into the ‘presentations’: Once your ‘Business plan’ is ready, you then articulate it into different presentations. Even an executive summary is one articulation of the B-plan. You can have an executive summary for introductions, a 8-10 slide ppt for first meetings and more detailed documents and presentations for follow-up meetings where specific details are going to be discussed.

 

What should be the answer to “What if Google builds the same product as yours tomorrow”?

The right answer for you is the one that YOU have identified for yourself. If there indeed is a possibility of Google doing what you intend doing, then as a part of your own risk evaluation you need to identify what your response could be.

In a few cases, the answer was “Well, if Google really wants to get into this business, they would be the first one that they should try to buy.”. And that would work well with investors !!!

How do we know that we are ready to launch a start up with a product or service?

There is a saying “If you have 10 hours to cut a tree, spend 8 hours sharpening the axe”.

Similarly, launch when you know you have all the competencies and the resources required to run the business. I.e. when you have worked out your business plan, evaluated the business case, spoken to customers and are convinced that the value proposition makes sense to them, when you have tested the product, when you have understood the dynamics of marketing & sales, when you have evaluated the cost of acquiring customers, when you have identified – and some what validated – all the assumptions that you have used in your business plan…. that is the time when you are ready to launch. And of course, you need to ensure that you have the required capital to sustain the business till you either (a) hope to become self-sustaining of (b) when you hope to raise external capital – whether as a loan from banks/family/friends or as risk capital from angel investments/ VC/family & friends.

HOWEVER… despite all this, and even after you are ready, you will have to evaluate what is the best time to launch. E.g. if you are selling something to schools which they will use in their classrooms, launching in the middle of a school term may not be prudent.

How to analyze why a startup has failed?

Startups could fail for a variety of reasons. I’ve tried to list a few that come to my mind:
  • The Concept was not relevant for the intended target audience i.e. was your targeting wrong? Could the concept have been more meaningful for a different set of customers (e.g. in a different geography, in a different age group, in a different income group, etc.)
  • The Product or service was not good enough or as promised i.e. was there an issue with the quality of the product or service? If customers were signing up but not retained, it indicates that the concept was relevant but the experience with the product or service was not good enough
  • The business model was not right e.g. for a services business could you have done a pay-per-use or pay-per-month basis instead of a one-time license fee?
  • Pricing was not right
  • Implementation was not right
  • Processes were not in place for the startup to scale up
  • The startup was resource starved – e.g. not enough budgets to market, not enough people resources to implement, etc.
  • Was the communication not good enough? Was the media plan not good enough? i.e. was the messaging through your brand communication material relevant, meaningful and compelling for your audience? Was the brand personality in line with what your customers expected?
  • Was the media planning not good or inappropriate? i.e. Media planning has two key components – reach and frequency. Reach is about how many people within your target audience you reach. Frequency is about how many times you reach those folks. E.g. for Rs.10 per CPC, with a budget of Rs.10,000, you could reach a 1000 people once, or you could reach a 100 people 10 times. Some concepts need reinforcing of the message, and hence higher frequency before customers convert. Analyze if your planning of media reach and frequency was right

FailureFeeback2

Analyze your experience on each of these points, or any other that you may think of, and evaluate what could have been done differently.

Market sizing and estimating revenue and growth

Estimating the size of the market, and then predicting how much revenue the startup can achieve and at what growth rate is indeed a tricky exercise. But going wrong on this could either kill your company, or if in a rare case you have underestimated your revenues, you may end up diluting more equity at a funding round than would have been necessary.

Market_share_of_mobile_os_s_2008

It is therefore very, very critical that entrepreneurs focus on working and reworking on the market size and revenue potential based on sound assumptions and with minute detailing.

Many startups make the mistake of taking broad brush reports from large consulting or research firms, and estimate the size of their market on the basis of those reports. Often we hear entrepreneurs mention “According to Gartner, healthcare is a 80 bn USD industry with a 23% growth rate”. Now, while this could be broadly true, for an investor, and even for the startups, these figures have little relevance. Here’s why…

In most market segments, the investors would be broadly aware of the scale potential. At a startup stage, investors will most likely invite a startup for a meeting only AFTER they have assessed that the concept does have a potential to address a large market. Hence, stating the obvious, especially in segments that are very obviously large does not add any value. E.g. For a education domain startup, highlighting in minute details the number of number of schools, number of students and growth rate in India is wasting precious time in the first meeting with investors. Assume that investors who are meeting a startup in the education space know the potential of the opportunities in the domain.

How then do you estimate the market potential? Simply, by being specific about your segment and making some assumptions on the specific segments and the revenues per customer/consumer. E.g. Instead of saying education in India is a USD 18 billion market, for a premium ‘home tuitions startups’ it will be prudent to state “With over 250,000 students in the top 10 cities in schools with fees above Rs.10,000 a month, at Rs.2500 per student, the market potential is roughly over Rs.500 – Rs.600 cr. P.a. At an all India level, the same translates to a market potential of well over Rs.1000 cr.

 

Some points to consider when estimating market potential

  • Clearly define what problem you are solving… and for whom – this will give you a good idea of the number of customers with that problem in the geographies that you plan to be available in.
  • Estimate the practical reach e.g. while there may be a 100,000 people in your target audience spread across 50 cities, you may want to take the top 5 or top 10 cities and see how many people you have within your target audience. This of course gives you the total market potential IF 100% of potential customers were to buy.
  • Now, apply some filters i.e. ability to pay, ability to reach via media, etc. E.g. while there may be 60,000 potential customers in the top 10 cities you identified, and you may be panning to use a combination of media, if the total reach of these media vehicles is 50%, the total potential of the market is really 30,000 customers.

You could also apply some price filters to test the elasticity of the demand in comparison to price. I.e. work up alternate scenarios to reflect the increase / decrease in demand in case the price were to be moved up or down… and then evaluate which scenario makes a better business case. [Note: For different situations you may have very different parameters for a good business case. In some cases, rapidly acquiring customers, even if margins are lower, would be a key criteria… often relevant in new concept that make sense for the first mover to ‘land grab’ and lock in potential customers on whom profitability can be increased later.

  • Now, if the product is of a repeat purchase nature, you would need to make some assumptions on the number of times the customers would buy the product / service in a year. In doing this, it is critical to map the reality or in case of new product categories, to do some qualitative and/or qualitative research to validate your assumptions on the number of repeat purchases within a year.
  • All the above, and perhaps some more as relevant to your category/product/service, will need to be worked and reworked often to arrive at what seems like a practical market estimation.

 

How do you estimate your revenue and growth? This is a rather tough part, and the accuracy of these guestimates is largely dependent on how accurate your assumptions are.

Many entrepreneurs make the mistake of projecting revenues as a % of the market potential. Often we hear entrepreneurs state “Even if we were to capture just 2.5% of a Rs.1000 cr market, we are targeting a revenue of Rs.25cr in year 2”. This is obviously an oversimplification and without any basis for how the sales plan will be implemented.

To prudent way of arriving at a estimation of revenue is to build a business case ground up. I.e. how much revenue are you expecting per customer, how many customers can you get, how much does it cost to get each customer, etc. At the startup stage, it is important to do a month-by-month detailing of how you see the customer base increase based on what specifically you plan to do in your marketing & sales plan. Needless to say that this is not a one-time exercise, and you will keep reworking on this till the business case starts making sense.

While doing month-by-month revenue estimation, if you have multiple revenue streams, then make the revenue estimates for all the revenue streams, which then total up to make the overall revenue for the company. E.g. if you are starting a chain of restaurants, you may want to break up the revenue by breakfast, lunch, snacks and dinner as these would cover different dynamics of your restaurant business. Similarly, if you were doing an ad-supported Freemium product online, you would like to estimate separately your revenues from ads on the free downloads and the subscription from the paid downloads.

Do remember that this is just a guestimate… i.e. a well-thought-out estimate. This is just a reflection of how YOU expect the market and the world around it to behave. And because there are no guarantees that the world will behave as you predict it to, it is prudent to be very, very conservative with the revenue estimates. If you are too optimistic, you are likely to allocate a proportionate marketing investments behind the revenue growth… and if for whatever reason the revenues do not happen as you have predicted, you will have a sufficiently fierce problem on hand.

Note:In many a startup scenarios, revenues may NOT be the key parameter of progress. E.g. in a startup which is establishing a new technology, proving the concept and the business model may be the main objectives in the startup stage.

Do remember that your growth and revenue numbers should be mapped to the marketing plans and marketing investments, and should be rooted in reality. “We are smarter and we know social media marketing really well and hence our customer acquisition cost is much lower than others” is not a statement that investors would be keen to bet on [though if you state that they would be keen that you demonstrate your skills in lower cost customer acquisition 🙂 ].

As one of my mentors had said “See the film in your mind… for a startup, it is critical to be very clear on what specifically is going to happen on the marketing front, product front and sales front in which month and therefore what revenue and customer numbers that will likely translate into”.

 

Some advice:

  • Try to achieve higher conversions than comparable others in the market, but estimate much lower conversion. This way, even if you do not do better than market average, your plans don’t go awry.
  • Validate your assumptions – validate your assumptions – validate your assumptions…. Again and again and with multiple sources. Going wrong in assumptions can be disastrous, even if the rest of the components of your business do well. E.g. if you assume a 0.5% conversion, but it actually turns out to get 0.3% conversions, you may be off by a considerable margin in your profitability and may also run out of cash sooner.
  • Identify the key ratios that you need to measure. E.g. Gross margins, cost of customer acquisition, headcount per ‘unit’ [i.e. could be a set of customers], etc.

Key points to remember

  1. Be conservative in revenue estimates
  2. Validate your assumptions
  3. Detail out the revenue plan on a month-by-month basis, and separately for each revenue stream

Operations planning for startups

You would have often heard VCs and experienced entrepreneurs say “Ideas don’t mean anything. It is the execution of that plan which makes a good business case.”. Hence, often VCs will be willing to invest in a simple concept with high-quality teams with great implementation plan, rather than weak teams even if they have a great plan.

strategy-img

Good execution and operations management is a lot about making sure that the many moving parts of the business are in sync with each other.

Most entrepreneurs underestimate the competencies and skill sets required for a venture to be implemented. They detail out the product/concept/service but do not spend adequate time in detailing out the operations plan. It is critical for the entrepreneurs, or the people planning the operations for the startup, identify, discuss and debate every single aspect that will need to be planned for  good implementation.

For example: A startup planning a chain of coffee shops across the country does not need just great coffee and snacks making skills. In fact, that may be the least of the worries in creating a great coffee shops chain.Creating a coffee shops chain will require the following competencies.
  • Real estate management
  • Franchising
  • Brand identity
  • Pricing strategy
  • Marketing
  • Supply chain
  • HR, legal, finance
  • Training
  • MIS
  • Cash management
  • ROI & capacity utilization
  • Facilities management
  • Processes
  • Standardization
  • Org structure
  • Vendors

Admittedly, startups are unlikely to have the full team to manage operations efficiently. However, planning does not require resources…. Investors invest, based on your PLANS for the future, whilst understanding that your current mode of operating is only due to resource constraints.

Especially for startups with a B2C concept, which could have rapid growth, it is important to plan for scale BEFORE the venture is ready for scale. It is almost always impossible to hack together the resources, processes, infrastructure and other elements to scale up quickly… these have to be built well in advance in most cases to be able to scale up smoothly.

What do you prove in pilot phase?

At the pilot phase, or a concept test phase, it is critical to define very clear what is going to be tested and what the parameters of measurement would be. Many of the parameters could be qualitative as there may not be enough data to do a quantitative analysis. But identifying what and how it is going to be measured is critical.

Below are a few things that are tested in a concept test stage/pilot phase:

  • The concept – the power of the idea itself: One of the key things to evaluate in the pilot phase is whether the idea or concept has appeal among the target audience. While research is one way of gauging customer/consumer acceptance of the concept, customers or consumers actually buying/using is a stronger demonstration of the appeal of the concept e.g. for an e-commerce venture selling real gold & diamonds jewellery online, the pilot phase may want to check if customers actually buy jewellery online
  • The business model: Even if the concept rocks, how good and practical the business is will make or break the business case. In many cases, it may not be possible to check the business model in its entirety in the pilot phase. But at least it would give some indicators. E.g. for a company creating advertising platforms on college campuses, the pilot phase may check on whether the revenue split between the company and the colleges is being accepted as they had anticipated or are colleges asking for more or are they not allowing advertising on the campus. Also, things around the business model could be tested in this phase e.g. ‘How long does it take to close a sale? Who decides the pricing – the college, the advertiser or the company?’
  • The assumptions: How good your business case is and how close to reality it is will be entirely dependent on the quality of your assumptions. One of the critical things to test at pilot phase are the assumptions. e.g. For an e-commerce company, the assumptions around conversions from clicks, cost of customer acquisition, average ticket size, repeat purchase rates, etc. are critical factors to be tested.
  • Understanding operational challenges: Actually implementing on the ground highlights some challenges that you would not have anticipated in your planning. These learnings are critical as they help plan resources, processes and infrastructure that would be required to manage the operations. 
  • Testing processes and operational capabilities: As the startup scales up, the dependence on processes will increase. Else scaling up will either not be possible, or will be inefficient. A pilot phase is a good time to draw some basic processes and observe the operations to understand what these basic processes should evolve to.

How important are processes for a startup?

Processes are important even in a startup. However, many entrepreneurs tend to begin operations without even the basic processes, with the assumption that as they learn the dynamics of the business, processes can be formed. In fact, many entrepreneurs feel that processes are too restrictive and are meant only for larger, complex organizations.

However, process need not be complex. Processes are nothing but a standardized way of doing a particular activity or handling a particular situation. In fact, rather than slowing down an organization, processes actually help the startup become more efficient as the basis of decision making is pre-decided as a process. Once some effort has been put into creating and defining processes, founders or leadership team then does not have to get involved in the day-to-day operational level decision making as these can be easily be delegated to the team and monitored through clear measurable goals, milestones and reviews.

In fact, it is at the beginning of the journey that entrepreneurs are likely to find some time to think through the processes. If the startup starts picking up speed and growing, it is always almost impossible to ‘make’ time to invest in processes as at a growth stage there are too many other tempting aspects of managing growth that seem more important.

When you company is growing is almost always the wrong time to plan for growth. You have to plan for growth to the next level when you are at a level below. Else, you will always be in the operational challenge of managing operations instead of driving growth.

Does having a good office help in the early stages of a company?

In my view, having a decent office does play a very important role in the early stages of a company.

Here are some of my observations on this subject: Working out of home in the initial phases does not help No matter how serious and committed you are to your venture, working out of a ‘non-office environment’ [i.e. home or Cafe Coffee Day type outlet] just cuts down on your productivity. It is not just about inadequate infrastructure and support system, an office environment and the people around you just add to the feeling of being a real company.

It is very difficult to recruit talent without a good office Perhaps rightly so, people create perceptions and first opinions about a company by looking at the office. In our case, we have been particularly lucky to have received the generous support of our ex-bosses who kindly accommodated us in their offices and thus allowed us to attract high-quality talent which perhaps otherwise would have been difficult to do.

Without an office, business plans tend to get restricted by space available Inadequate or no office space and working out of coffee shops does leave you vulnerable to taking decisions based on restrictions of space.

Facebook apps: How do you estimate the market potential?

Revenue projections for a Facebook app should be done like you would for any product, say a refrigerator, or service. Here are a few steps you could consider:
  • You need to first define your target audience, then estimate how many people from your target audience are already active on the platform [e.g. Facebook] and in the geography you are targeting [i.e. the markets you are addressing].
  • Once you have the number, you need to calculate the number of people you CAN reach through your media spends and the activities that are within your control ( e.g – ads in the press or online) and your distribution channels (e.g. if the product/app is bundled with another existing brand or sold through app stores, etc). Remember, just because your app is on Facebook does not  mean that your marketing & advertising channel should also be Facebook. E.g. you could put efforts on PR – get a few TV interviews, press articles, etc. – and you could probably reach a much larger audience with your limited budgets.
  • Then you make some assumptions on how many additional people in your target audience can be reached through means like PR, viral effect, etc.
  • Once you have these numbers, you make assumptions on the percentage of people who are likely to buy/download your app.
  • If your revenue is based on buying/subscriptions, you estimate how many people X how much per download. If your revenue is advertising, you estimate how many impressions, and use existing media rates to estimate your revenues.

Now, to extrapolate this to the future, you make various assumptions on the base target audience size. You can use various media reports on where the target audience numbers are likely to go on the platforms you choose to be on.