In his second feature in the series, Recipe for Revival, Shyam Sekar, founder of Chennai-based Startup Xperts, a business growth and consulting company, discusses the ways to start a startup.
He begins with a question. Will an innovative idea alone guarantee success in the marketplace? An innovative idea is absolutely necessary to establish a startup. It is true that an innovative idea is the most important seed for a startup. It is also true that it can bring about a significant change in the way a product or service is adopted by the customer. But there are a host of other factors that come into play to make the idea a working business proposition.
What turns an idea into a successful business venture?
While an idea by itself may be innovative, the real challenge for the originator of the idea lies in:
- Stitching the idea into a profitable business model: In this context, a business model essentially refers to (a) how the idea (or a product/service based on that idea) will deliver value to the end-user; (b) how it can be monetized, and (c) how scalable it is.
- Evolving a go-to-market strategy that takes the business model to the market: Having conceived an idea, how will it be taken to the end-user? The first question a budding entrepreneur with an innovative idea has to ask is this: what will be the profile of an ideal customer for me? Will it be, for instance, an online user from the general population looking for a specific service, or will it be a corporate entity looking to address a specific business need?
Among other questions, the GTM strategy has to, at the minimum, answer the following questions:
- What is the profile of my typical customer? This question helps segment the market into various categories
- Where is my ideal customer located? This question helps segment the market into various territories/geographies
- What problem does it solve for my customer, and how critical is that problem? This question helps draw up the ‘sales and marketing pitch’ for the customer
- What are the typical expectations my ideal customer would have from my product/service? This helps to identify whether there exists a similar product/service in the market, and how your idea can be differentiated from existing offerings
- How much would my customer be willing to pay for my product or service? Am I able to offer my product/service at a particular cost, or should it be high or low?
- Managing funds/bringing investments during incubation: Working capital requirements are one of the most important aspects to be factored in while establishing a startup. Entrepreneurs at times have a heady conviction behind their product/service, making them unintentionally overlook the fact that employees have to be paid their salaries, and that rentals and utility bills are a monthly occurrence!
The best way to kick-start a venture is through boot-strapping. Self-generated funds or funds sought/borrowed from friends and relatives have been the widely used avenue in raising initial capital to set the venture in motion. If this option is not feasible, or when additional funds are required, investments can be brought in through other options too; loans towards working capital or equity infusion from the investor community. Both options have their own merits (or demerits depending on the perspective!) depending on which stage of the business lifecycle the startup is at the time.
The main advantage of a loan is that it keeps management control of the startup with the entrepreneurs themselves. This enables the entrepreneur to take operational decisions on organisational strategy, product/service roadmap, etc. based on market conditions, and while doing so, stays in sync with the vision with which he started off.
Equity infusion is a double-edged sword. While it gives the entrepreneur access to the potentially vast network of contacts held by the investors, he has to concede a certain extent of management control. Equity infusion is ideal when the startup has started to yield revenue (perhaps not profits yet!); such infusion is required to take the startup to the next higher orbit of revenue and profitability.
Whatever the investment route the entrepreneur takes, it has to be aligned with the merit of the idea, the business model, the GTM strategy and the long-term plans for the venture.
- The people perspective: Having conceived a brilliant idea, a robust business model to go with it, and a GTM strategy that addresses the needs of all possible market segments, how well is it going to be executed? Having the right people on the right seat. It is important to bring on board people who have a shared passion and vision about the idea/product/service.
Working in startups is characterised by the absence of role clarity – every role in the company becomes multi-faceted! The CEO could find himself making a pitch for funding during an investor meeting, at the end of which he would need to pick up the telephone to cold call a potential client! These situations will be the norm rather than the exception; hence it is imperative that the people who form the core team do not bring any bureaucratic baggage about hierarchy, role-compartmentalisation and other related aspects.
The ‘people perspective’ covers not only employees; it also covers external consultants, professional mentors, advisors, partners, vendors/suppliers and others who are equally critical to the success of the startup; they bring the much-required view from an external perspective, and along with it, an honest assessment of any shortcomings in execution.
- Managing growth after establishing the business model: The issues, challenges and priorities will start to change; from the time of business start and when it reaches a certain stage.
Managing growth could also involve the exit strategy for the founders. When does a startup cease to be a startup? At what stage will the founders reduce their stake in the venture? Is it the vision of the founders to make the startup a global organisation? Alternatively, is it the vision of the founders to have the startup acquired by a larger organisation which sees the idea to complement their business. It is not surprising to see examples of startups working in niche areas, eventually getting acquired by larger enterprises.
The aspects captured above are just the tip of the iceberg. It is wise that these are best approached by having a clear vision, goals, and backed by a robust execution strategy.