Some Tips For Startups Presenting In B-Plan Competitions

I was part of the jury at Conquest 2015, the annual startup fest and B-Plan competition of BITS Pilani. Conquest is perhaps, one of the most meaningful Business Plan competitions in the country. The Conquest team makes efforts to provide mentoring support to shortlisted teams, so that their plans are refined by the time they get to the finals. The program is designed and executed entirely by students.

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11 components that make up a good business plan

Investors will be interested because you have a plan to address an opportunity well, not just because you have identified an opportunity that is interesting. That’s why, while having a good idea is certainly a good starting point, it is not enough for investors to invest.

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Most entrepreneurs make the mistake of detailing out their product or service or concept. What most investors are looking for is your plan for building a strong, profitable, scalable, defensible business around that product or concept.

The success of an entrepreneurial venture depends entirely on the quality of execution. Many companies fail to implement their ideas well. Hence what investors seek in the plans they review is evidence that this team will be able to execute well on a concept that appears to address a potentially large market.

What should a business plan cover?

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ESOPs – a powerful tool and valuable currency for startups

Employee Stock Options (ESOPs) is a powerful tool available to startups to attract as well as retain talent. However, often I have seen it being undervalued or under-utilised by startups.

ESOPs are shares that are given to employees so that they can enjoy significant monetary benefits if the startup is successful. Since the monetary value of selling equity of a successful startup can be several times higher than the salary, ESOPs alter the risk-reward equation and makes it attractive for potential employees to consider joining a startups, which otherwise at just salary levels may not be such a lucrative option.

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ESOPs are especially useful when startups or early-growth stage companies have to hire senior talent with experience, and they don’t have monies to pay full market salaries.

In fact, investors too encourage founders to carve out an ESOPs pool – often between 5 – 20% of the equity depending on how well balanced the existing founding team is. If the team has gaps that need to be filled in, it is important to carve out a higher percentage of equity, as that will allow you to hire the right resources to complete the team.

As an entrepreneur, it is important for you to communicate the ‘value’ that your enterprise is likely to create and thus explain to potential employees the potential value of the stock they are getting under the ESOP. If the company is successful, the stock can provide a significant upside to employees.

Not just in hiring, but ESOPs can also be a very useful retention tool. That is because a well-structured ESOPs plan ensures that the equity is vested over a period of time (i.e. it is given to the individual in instalments spread over a period of time), and if the startup is successful, the individual is incentivized to stay on even if there is a matching salary offer from another company.

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Converting an idea into a business

I often get asked this question: “I have an idea. But I just don’t know what to do next. How do I start implementing it?”

It is not unusual to get stuck with the idea without knowing how to take it forward. Often the fear of having to manage operations, finances and staff is what stops people from getting started on their idea.

Having an idea is a good starting point. The first thing to do is to let that idea rest for a few days. Think about it every day. But don’t act on it. Think through all the positives AND all the negatives. Think of how great it can be. And also think about what could go wrong and how worse can it get. You will start seeing different aspects about the idea. Not all will be good. And that’s OK.

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How is “proof of concept” different from “minimum viable product”?

test-concept‘Proof of concept’ and ‘Minimum Viable Product’ are two very different things.

When testing the proof of concept, you could be testing not just the product itself but also a few other assumptions about the business around that product. I.e. Product testing is just one of the aspects that could be tested during a proof of concept test phase. Within this, a MVP is an early version of the product, finished enough to get a few early customers to try the product and give you some useful feedback which can be incorporated into the final product.

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

  1. The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer?
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Wrong assumptions kill more startups than bad products.

This is a summary of my talk at the Startup Weekend Next pre-accelerator program on the topic: Why customer discovery is critical to a venture

(For the purpose of this article I am using the word customer very broadly – for this article by customers I mean all entities that will either use, or pay for or influence the purchase of your product or service).

Wrong assumptions kill more companies than bad products.

Continue reading “Wrong assumptions kill more startups than bad products.”

My Notes from TC/1

I spent this weekend (15th and 16th of March 2014) at the first conference organized for creative entrepreneurs by The Coalition. Great initiative, awesome experience.  Check out www.thecoalition.in.

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Here’s a para from their website about what this initiative is about. The Coalition is a new platform to support creative entrepreneurs in India. Whether it’s music, film, design, fashion, arts, creative technology or something completely radical, The Coalition gets young creative thinkers together with the people, skills and money that can turn their passion into successful businesses – and connects them to the resources that can help their business grow.

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What are the most common reasons for startups to fail?

In my observation startups fail because of any one, or a combination of some of the factors below:

  • Poor implementation (usually due to poor planning of operational aspects of converting the idea into a business on the ground)
  • Assumptions on costs, adoption rates, revenues, operational efficienc, etc. prove to be wrong
  • Value proposition not as meaningful to users as hoped by the founders
  • Founder disagreements
  • Company running out of money… or founders unable to sustain low take home for much longer than they had estimated
  • Failure to get funding or follow-on funding
  • Poor product-market fit
  • Poor product / service (though I have rarely seen companies die because the product or service was bad)
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More often than not, it is either because of poor quality implementation or because the team’s assumptions on costs and revenues and other factors were inaccurate, which meant that they either run of out money a lot quicker, or the business case becomes weaker and as a result they run out of energy, enthusiasm… and eventually capital to sustain the operations.
I therefore always recommend to teams to overestimate on costs and underestimate on revenues in their excel sheets. When working on your excel sheets, try to work out the worst case scenarios (as those may turn out to be true as well) and build your foundation to deal with the worst case scenarios too. Think of what your response and plan is going to be in different scenarios – the very optimistic, optimal as well as the very worst case. Either of these scenarios could play out, and if you are not adequately prepared for any one of them, the end result will be a disaster. (Even if you have planned for sub-optimal scenario, and the in-market response is phenomenal, unless you are able to quickly adjust your plans and create resources, infrastructure, processes and people to deal with the growth, the business will flounder).
Entrepreneurs tend to be unrealistically optimistic on their own and their team’s implementation capabilities and often tend to understaff and underestimate the time and costs required to make the business work. (At least that’s my observation from the Indian startup eco-system). And that’s why I recommend to startups to talk to a lot of people. Advisors, mentors, investors, customers, other entrepreneurs… anyone with a more experienced perspective on that subject. Get a realistic view of how things work and what challenges you are likely to face as you start implementing your concept in the market.

Does traction trump revenue (in the short-term)?

Naval Ravikant‘s definition of traction is: ‘Quantitative evidence of market demand.’

Traction,  in my view, is not just about users. It is about users using your product at the price-point that you eventually want them to buy at. Everything else is about users taking advantage of an ‘offer’ with no guarantees that ‘usage during offer’ will translate into ‘traction’.

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But the answer to the question above is that it depends on a variety of factors.

If you are in a business where there is precedence of the revenue model, business model, price-points, etc. working well for others, then there will be less tolerance to, you not having adequate revenues with whatever traction you have.

However, if you are in a category where getting to a reasonable scale to use that as a competitive advantage, then focusing on tactics to get traction, even if that means at the cost of revenues, could be acceptable to some.

Testing processes during the pilot phase

Processes help organizations scale up. Processes are nothing but just a set of guidelines for managing activity and handling situations.

Processes are usually centrally planned and locally implemented. They reduce dependence on individual brilliance, and instill a discipline that results in operational efficiencies and consistency of experience. They also allow 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, yet be flexible enough to adjust them,as soon as you see some processes becoming bottlenecks or inefficient.

During a pilot phase, the startup could test multiple processes and then decide which ones seem to be working better and adopt them for the organization. However, what is important is the focus on establishing processes BEFORE the company needs the processes to scale up. The pilot phase allows processes to be tested, as some of them are bound to fail. The smaller scale of a pilot allows the outcome of failed processes to be handled or damage to be contained quickly. But it does require closer monitoring and planning.

Nett: Be process-oriented during the pilot-phase too. But be nimble and flexible, and be ready to make quick adjustments.

How can an entrepreneur can master the art of execution?

(This was my answer to a question on Quora)

Execution or good quality implementation of a concept in the marketplace is not something that you can learn in books. It is something that will have to be done on the ground in the marketplace.

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The key to good execution is to first be able to have a very, very clear and comprehensive view on what all needs to be done. I ask my startups to ‘see the film in their mind’ … to visualise every activity, every process.

When you visualise it and see it as a film playing in your mind, you will be able to get a clear view of the complexities that will be involved in managing that process. It will give you clues on the resources, infrastructure, processes and people that will be required to implement that well. And as you estimate the infrastructure, people and resources well, the better the quality of the execution will be if you have a process that is planned well and has built into it the tools for feedback, measurement, analytics, tracking and adjustment.

Let me illustrate with an example. : If your startup is selling something to schools, then don’t just make assumptions that “my sales person will be able to convert 3 schools in a month”. Even if that is an accurate assessment, how you arrive at that number is critical in panning the operations so that the on-ground execution is flawless because it was designed practically.

In this example, I would imagine the following scenarios:

  • So, schools are closed for holidays say 2-3 months in a year (in some schools while the students are off, the staff may be available during some vacations too).
  • I would imagine that one sales person will spend 1-2 hours in each school, including waiting time outside the procurement person’s office or the principal’s office.
  • Hence, I would imagine that at best the sales person can meet no more than 2-3 schools a day… assuming that he goes on a sales call 5 days a week, then the sales person could meet 10-15 visits a week, and therefore about 40 – 60 visits a month
  • Assuming that the success rate to proceed to next level of discussions is 10%, the sales person is likely to have 4-6 hot leads in a month.
  • Even if the principal likes your solution, he/she is usually not the decision maker… and you may need to meet a committee (i.e. if you miss this month’s committee meeting, it may be a month before you get an audience)
  • If the committee approves it, then the cost negotiations may be done again by the chairman/owner or someone representing the chairman/owner. And for this negotiation, the sales person may need to also take along someone more senior in the company.
  • If it takes 4-5 meetings to convince different layers of decision makers, given the difficulty in getting meeting times coordinated, this may be a 1 – 3 month long process, depending on how much the client is interested in the solution.
  • Given all of this, in the initial period, the sales person may be able to close barely one client in the initial months till such time where more hot leads are getting added…. and at that stage the company may need a two-tiered sales process – one to generate leads and the other to follow-up on and close hot leads
  • In this situation, apart from the sales person planning his target customers, the startup may need someone in the office to collect a database, perhaps it may be more efficient for someone in the office to centrally call up different schools and set up meetings for the sales persons, the startup will need someone to do the sales report collation activity….. and certainly someone to track leads so that follow-ups with warm and hot leads are happening regularly.

Startups falter in execution primarily because the fail to assess the complexities that are involved in rolling out their concept in the market place. There is an enthusiasm that makes entrepreneurs believe a more rosier outcome than that is likely to be the case. They assume more efficiencies in people, they estimate that they can stretch their infrastructure more than others can, they believe that they are smarter than others and hence can do it with limited resources… and because they are fighting different wars everyday, they usually tend to ignore processes. As a result many startups end up delivering on ‘current situations’ without planning processes for scale and growth.

At the startup stage there may be no processes or some loose 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 cannot be good for the company.

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.

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, 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 then stagnate or become inefficient and whither away.

Suggestions: Keep looking for good people. Plan for growth before you reach the growth phase. Let go. Delegate.

What are some important questions to ask, in a focus group research for evaluating an idea?

(This was my answer to a question on Quora)

In a focus group, for evaluating the potential of an idea, your goal should be to test all the assumptions that you have for your venture. Apart from the concept itself, there will be several assumptions on the ‘business’ around that idea that you will need to validate (e.g. pricing, availability, brand personality, etc.)

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Here are a few things that come to mind, that you could consider testing (of course the more you share your idea, the more specific our answers can be).
  1. How deeply does the consumer/customer feel about  the problem that your idea is solving : The more pressing the problem, the more relevant your idea is likely to be for consumers.
  2. The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer?
  3. Do people like the way your idea delivers the solution: I.e. does the product work for the consumers/customers as you had expected it to?
  4. Look for insights: Listen to what people are telling you about the problem that your idea is solving. See if your product does a good job or a great job at delivering the solution. See if the response is a ‘nice’ or a ‘wow’ as these subtle differences will determine factors like conversion rates, adoption rates, usage patterns, etc.
  5. 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 concept test. 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. (In the case of fremium products, this may not be relevant.)
Concept tests help you validate your assumptions with qualitative inputs from the conversations with relevant groups. (You have to be super careful to ensure that your group selection is accurate. Else you may get an inaccurate reading. E.g. if a particular profile of respondents do not respond well to the concept, should you try the concept with another segment –  is a call that you may need to take depending on what you are doing.)
But when you want to quantify the concept and potential, you will have to rely on a broader quantitative research that covers a larger sample that is representative of the audience you eventually intend to address.

“I have a good business idea but am very confused how and where to start up?”

This post is my answer to a question on Quora

The idea/concept and the business around that idea are two different things. 

It appears to me that you have an idea that you are excited about. And that’s a good starting point. Now, it is important to think about how that idea translates into a product/service, how do you get users/customers, who is your user, who is your customer i.e. who pays, how much do they pay, how much money will you make out of what they pay i.e. what is your margin, what are the costs… and as a result of all this thinking through, you will get a sense of whether this makes sense for you commercially.

Once you have done that, start thinking in details about all the cost structures, the time gap between when your expenses start and when your revenues start coming in, and the gap between your costs and your WORST CASE estimates on revenues. That will give you an indication of the kind of monies you may require to get your concept into the market.

Then think of what the relevant funding sources for this concept are at this stage (and VCs are NOT the only option… often it could be alternates like getting advances from customers or a family & friends round, or a small loan from a bank, or plain bootstrapping).

Start talking to customers and other stakeholders – distributors, intermediaries, influencers, other founders (to get their perspective on your plans), media folks, vendors, etc. Conversations with different folks give you diverse perspectives on the BUSINESS dynamics around your concept.

Parallely, start thinking very, very hard about how you are going to implement it… for the first few quarters you should have a week-by-week plan on what the milestones and goals should be, and how you will go about meeting those. i.e. it is not very useful to say “we will have 5000 registered users by end of month 1″… it is important to nail it down to “To get 5000 customers registered by end of month 1, we will have to reach 500,000 potential users. We aim to do this by online marketing in Gurgaon area, and through posters in housing complexes.” (In fact, in your operating plan, it will be important to nail down the specific housing complexes that you will be approaching to get your posters on their notice boards). When you start planning to this granularity, you will notice that a lot of things become more apparent e.g. how many visits will you have to make to a housing colony before the poster gets on their wall, who will put it up, how much will it cost, how will you monitors, etc.

As you immerse yourself into the operational aspects, you will start understanding the complexity and the multi-dimensional aspect of business that founders need to think deeply about. And this is the fun and the challenging part, which gives entrepreneurs the adrenaline rush – in understanding the challenges, the clarity that one keeps on getting as you immerse yourself more into the domain, the tweaks that you make in your plan as you learn… and the decisions that you have to make based on whatever data you have.

As you start seeing the various dots that need to be connected, you start realizing that this is much bigger than what you had originally thought it to be… and that is fun. (Well, often scary too… but in a nice, ‘keeps you awake at night but gets you raring to start your day’ type of scary way.

Keep walking.

Is it considered a pivot when a startup changes it’s customer segments?

This was my answer to a question on Quora

Don’t worry about definitions. Do what is needed to be done for the business. 
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At the early stages of a venture there are several things that will need to be thought of and several things that will need tweaking and you will need to adjust your business plan a few times. E.g. you may have to tweak your product or value proposition or pricing or communication or target market or target audience or positioning or business model or business process …

The point is that there are several aspects of business that are variables that could need adjustment to make the business work.

As a startup, you have to be nimble to respond to what the market situations tells you. As a founder, you need to be alert and street smart to read the signals on what the market is telling you (market meaning not just customers… but any stakeholder that may be able to provide an educated perspective i.e. perhaps a vendor).

However, there is also the danger of changing direction too often and without adequate thought. 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.

While it is possible to do course corrections, it is important that startups consider change in strategy and direction only after adequate deliberations.

Why winning a few customers is not proof of concept

 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.”.

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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.

What are the most common mistakes start ups make in the first year of their operations? How can that be avoided?

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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.

The only way to address this is to validate your value proposition and price points, and take a realistic view of how the market will react to your concept. (How the market will react is usually a lot different than the entrepreneur’s assumptions, which is based on enthusiasm about their own idea).
Underestimating costs: How many times have we seen startups run out of funding, simply because they had completely underestimated costs.
The way to address this is to make a very, very, very detailed estimation of MONTH-BY-MONTH costs, categories by ‘capital expenses’ and ‘operating expenses’ (this is further broken down into fixed e.g. rent, electricity and variable  e.g. marketing). Doing an annual cost estimation without drilling down to the month-by-month level usually gives a wrong picture on finances.
Overestimating execution capabilities (we can do this and that… ): While enthusiasm and drive can make you do work that 2-3 people may otherwise do, it is not possible to do everything that is required. Often entrepreneurs, especially in India, assume that they will be able to do a lot more than they actually can.
The way to address this is to clearly break out each activity into smaller tasks and estimate the time for each. E.g. sales process – estimate how much time you will spend in a day in calling customers, how much time will it take to travel to a customer, how much time you may have to wait to get a meeting, how many meeting you would need to do, how much time will the negotiations take, etc., etc.
Underestimating how much time it takes for funding: Often entrepreneurs start looking for funding a month or two before they run out of cash. funding rounds (especially institutional rounds) typically take 3-6 months for the transaction to get completed.
Not recognising that it is not easy to attract and retain talent.. and that a CEO needs to spend a whole lot of time in building a team.
Not having process discipline, including financial discipline: Measuring progress (or lack of it) provides early warning signs.
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What should you think about before starting a new venture (especially an e-commerce venture).

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.

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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.).

 

 

What are the benefits of joining a startup accelerator or incubator?

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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.

 

How can i minimize the starting cost of a startup?

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.

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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.

How do I assess if my startup is doing well?

 

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.

 

What should pre-seed money be spent on?

Generally, the reason for raising funds at any stage is to be able to take the company to the next ‘phase’ of its evolution.

Most startups would go through the following phases in their journey:

  1. Concept stage – i.e. when the idea is not yet developed into a product or service, but the founders may have done a fair bit of thinking on the concept and understanding the business dynamics surrounding that idea. This is the stage where the business case is being evaluated and assumptions are made and validated – hopefully by understanding the market and speaking to customers, etc.
  2. Prototype development stage – when the concept – either a product or service – is ready for testing with a limited audience – the startup may have a few initial employees.
  3. Early-stage – when the product or service has started gaining some traction – there are a few early customers/consumers, the product and processes are being refined and fine-tuned and the building blocks for growth are being built – a small team is getting formed
  4. Growth stage – when the startup has started getting more customers, processes are getting developed, an organization structure is getting into place and the company is in an expansion mode – this is probably the time when most companies would start getting profitable

Pre-seed money would typically be raised at concept stage, and should ideally last a little beyond the prototype stage. In most cases, pre-seed stage money is used for the things that will prepare the company to attract seed capital from angel investors or from early-stage VCs i.e.

  • Understanding the business case by validating assumptions
  • In building the prototype or the first version of the product – what is called the MVP or Minimum Viable Product which will allow you to test your assumptions in the market i.e. check if your customers find the value proposition meaningful, if they feel that this product / service does fulfill their needs, etc.

At pre-seed funding stage, a startup should keep capital expenses very low – i.e. rent ACs, furniture, etc. rather than buying. Operating expenses should also be kept low – take lower salaries, work out of a shared office, multi-task, etc. This is also in your interest because the valuations are likely be very low at this stage, and hence the lower the amount you raise, the lesser your equity dilution at this stge.

 

 

Understanding cost structures

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:

  1. Capital costs [e.g. computers, servers, furniture, etc.[
  2. Operating expenses or opex
    1. Fixed opex [e.g. rent, salaries, etc.]
    2. Variable opex [printing, marketing, travel, etc]

 

Suggestions:

  • 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:

  January February March April
Customer support manager 1 1 1 2
CTC pm 25000 25000 25000 25000
Total 25000 25000 25000 50000

 

 

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.

 

Why many startups fail to scale?

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.

What should startups focus on in pilot phase?

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:

  1. The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer? 
  2. 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.
  3. 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.
  4. 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.
  5. 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.

What to ask customers when testing the viability of product idea?

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.

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

 

 

Understanding pricing or revenue models

How much to charge your customers is a critical decision for entrepreneurs. I.e. pricing is a critical component of your business strategy. While getting your pricing strategy right is no guarantee of success, getting is wrong is one sure shot route for failure. Obviously, how much consumers are willing to pay is dependent on the value they see in the solution you offer, be it a product or a service.

 

There are quite a few Revenue Models available for startups to consider:

 

Cost Plus mode: where the seller decides the price of the product based on the cost of the product. This is usually done for physical goods e.g. shoes, garments, computers, pens, etc. Doing this model for online services is not feasible because there is no real cost of the physical goods. How much premium you can charge over the cost is dependent on a number of factors including competition, alternate options, the overall value-proposition that the customers see in your offering, and often, also the personality & equity of the brand.

Value based model: For products or services that do not have an individual unit price [e.g. Microsoft Office software], the seller decides the price based on what they believe is possible to be charged from the consumer. This is the toughest part and may require some experimentation and in-market tests to arrive at the price point that you could charge.

Distribute the product free but customers pay for services: In some markets telecom companies follow this model where they give away the telephone instrument for free, and people pay for the usage. In some cases, e.g. printers, the base product is not given free but is offered at a very low price, often lower than the cost price, with the hope of recovering it through sale of related products and services e.g. cartridges and printer servicing.

Free for consumers – ad supported model: E.g. Angry Birds

Freemium: Free for basic, paid for premium services. E.g. sugarsync.com, linkedin, gmail, etc.

Portfolio pricing or package price: This strategy is applicable when the seller has a range of products and/or services and may want to engage the consumer for the entire portfolio. E.g. Insurance companies which offer for corporates a portfolio comprising of life insurance + car insurance + fire insurance + health insurance

Subscription model i.e. users pay a per month/per year e.g. book libraries, dropbox and other online storage sites, SAAS platforms, etc.

Pay-per-use model i.e. users pay as they use it e.g. Platforms like Webex have a pay per use model

One-time payment i.e. users buy a license to use e.g. Microsoft Office

Tiered or volume pricing: Typically used to group buying benefits. E.g. an enterprise software where the license fee per user reduces as more licenses get bought. The pricing in this model is often defined in slabs as relevant to the category.

 

Webinar by The Hatch Institute on MVP – Manish Singhal

According to Start up Genome report‚ almost half the start–ups do not celebrate their first birthdays. Once they are past that hurdle‚ almost 90% of the ventures fail while scaling up!

As an entrepreneur, with limited time & resources at your hand‚ you feel like a pilot trying to take off before you outrun the runway! You have to find who you are as a business & who your customer is quickly and with minimal investments. That is what will give you a significant advantage in the marketplace.

This webinar explores how to use MVP (Minimum Viable Products) as a strategy to ensure your venture’s smooth and safe take–off!

Take aways from the workshop :
1. Concept of MVPs
2. How to apply MVP strategy on your business
3. Fine Tune your MVPs

 

 

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.

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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.