Scaling up your Business – My presentation at The Coalition

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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.