Mentoring startups gives one a ring-side view of the way entrepreneurs think.
I have often been in a situation where an aspiring entrepreneur wants to pitch me their idea and hear what I wish to think about it. Travelling across the country and meeting thousands of entrepreneurs also means that I hear more than my fair share of ideas.
Often I come across situations where somebody comes around to pitch an idea, and my immediate response is ‘There is someone does something similar’ or ‘Is this not the same as XYZ?’
What typically happens at this point is this ‘aspiring entrepreneur’ will go back and research the hell out of this supposed competitor and read everything written about them. If this supposed similar company is doing well they get all bent out of shape that there is a strong incumbent and if they are struggling, read about all of their struggles and get depressed!
When you are starting a venture, you need not worry about a competitor, or someone doing something similar. If at all anything, you need to be worried about the absence of competition. If a real opportunity exists, why is nobody else seeing it?
You need to avoid being flustered by competition because:
You need to focus on your own strengths and find the best way to showcase that strength. Also, there is more than one way to do a thing or solve a problem. You need to focus and make sure you are solving it.
The market is large. In a country like India, there is always enough market to go around amongst several competitors. Can you think of any industry where there is only one player? This also means that there is enough diversity and nuance in the market for the problem to be solved in different ways and see adoption.
If you are introducing a new concept, you want many people popularizing the idea rather than you alone. Orange County, Coorg spent crores in advertising popularizing the idea of vacationing in Coorg. No sooner was the location recognized, hundreds of players moved in. It would have been nice to have had some competition in the early days.
The best way to learn is from watching others make mistakes. The other way to learn is to make those mistakes yourself. Having competition is the cheapest way to learn.
If there is no competition in the market even real or is this all a figment of your imagination?
Finally, I would like to leave you with this thought – Google was not the first search engine, neither did they enter a market without competition. Facebook was not the first social network, neither did they enter a market without competition. iPhone was not the first smartphone, neither did they enter a market without competition.
SpaceX is not the first private rocket maker and their competitors where all governments!
Embrace competition and seek it out. Watch them carefully. Ultimately your success or failure is down to your execution.
Last year was when most of the non-nerdy world woke up to Crypto-Currency and Blockchain. For the most part this was thanks to the fact that Bitcoin was on a tear and was doubling in value every few weeks!
Blockchain is the fundamental technology which makes crypto-currencies possible. Blockchain essentially stores all data in the form of blocks. These blocks are connected in the form of a chain. These blockchains are further stored on every computer on the network. This makes it near impossible to fake a transaction. The primary reason for this being that the fake transaction would have to be entered into every system on the network! These are called distributed ledgers.
While crypto-currencies seem like a great application of blockchain, there are fundamental issues in there. It is great that the ledger is distributed but what if I am able to get hold of your password? I can steal everything that is in your wallet and there is complete anonymity. So apart from knowing that the currency has been stolen and to which address it was transferred you would know nothing.
This just makes crypto-currencies a poor application in their current form. But blockchain has a lot more to it. It can be used to store any kind of data that needs to be immutable such as property documents, certificates, shares, etc.
The trouble has been that all of these solutions need to be implemented at a systemic level.
It is heartening to see some of these implementations take root in different parts of the world.
A blockchain company called Coinfirm has announced a partnership with PKO BP, a major Polish bank, to provide blockchain-based document verification using a tool called Trudatum. The project is a an actual implementation of one of the primary benefits of blockchain-based tools, namely its ability to permanently and immutably store data. This announcement brings blockchain implementations out of the realm of proof-of-concept and into the real world.
Blockchain boosters rejoice: A major bank is using the distributed-ledger technology that makes bitcoin possible for international payments of fiat currency. Santander, which had been testing it internally among its staff, launched the service today, making the Spanish banking giant among the few major financial institutions to go live with the extraordinarily hyped technology.
Venezuela, the world’s second-largest crude oil producer, is learnt to have offered a 30% discount on India’s petroleum imports from there—but only if payments are made using the cryptocurrency backed by that country’s government.
We tend to often assume that things are a lot more expensive now than they used to be and our parents/grandparents would have us completely convinced of the same.
I saw the chart below a few weeks back.
To think that the first digital watch would be $12,000 dollars today. People lost their shit when Apple launched the Apple Watch gold edition which was similarly priced. Some of the most recent products are actually a fraction of the cost.
There is another side to this story. A product launched today can confidently expect a global distribution chain to be available at its service. This was not true even 30 years back. To scale a product across a country would take months IF you had all the cash at your disposal.
Puts the iPhone X launch price of USD 1,000 in perspective does it not.
As humankind evolved, so did our curiosity. Curiosity led us to question. The process of answering any question often begins from what we already know. The trouble with most things we know is that, every one of those things are based on certain assumptions.
Knowledge is often passed on in the form of frameworks. This make it easier for people to understand and assimilate what is being passed on. Most frameworks have gaps and holes. The implicit assumptions are not always (almost never) spelt out. What we know for a fact today can be completely undone by a discovery tomorrow. We have always got to be prepared for this.
There was a time when the brightest men in the world thought that the Earth was flat. They had sufficient evidence to back it up!
Have you seen anything stick on a round object? Their belief in the flat earth was so strong that they were willing to behead those who claimed otherwise. Giordano Bruno was burnt at a stake in Rome in 1600 for claiming the Earth went around the Sun. Galileo was imprisoned, threatened of torture and forced to recant his claims.
These people at the time, thought they knew better; and were willing to bet on their knowledge.
Their assumed knowledge led them to a place of inflated egos.
I often see this in action in startups.
Let us assume there are two co-founders in a company; one specialising in marketing, while the other in Finance. In the event that the marketing specialist came up with some ideas with regards to finance, would the same be readily embraced? There tends to be a certain amount of prejudice that tends to creep in when such a situation normally arises. The knowledge of the knowledge makes the finance specialist assume that he/she knows better.
There can always be a different perspective.
I was thinking about co-founder conflicts and the methods to resolve them. Often the kind of conflicts that become impossible to resolve are the ones where ego is involved. More often than not, when one of the founders feels that he/she is armed with some knowledge which the other is not, their ability to put ego aside becomes greatly diminished.
The ability of the one armed with facts to listen to the one proposing without, is the cornerstone of great co-founding teams. Incidentally, it also the greatest trait most successful leaders possess. Listening.
Irrespective of what you know and what you may have experienced; always listen. Perspectives make a great difference, none of us know everything. And even within the things we think we know, newer perspectives, or discoveries can emerge. So always keep an open mind. Don’t assume that you know everything that there is to know.
The real challenge often is to keep knowledge from turning into belief.
There is an excessive amount of focus on speed, when it comes to building startups. One of the advices that is often provided to startups is to get out of the blocks really fast.
The #FailFast philosophy has probably pushed more startups towards failure than towards success.
If you were building a house, would you want the foundation to be laid really fast? Or might you prefer that time is taken to ensure that the foundation is really solid?
A business is a marathon, not a sprint.
You can get out of the blocks fast; but then, what is going to keep the customers coming back to you? Continuously making yourself better is critical; that is what keeps them coming back. Customers will stay with you when you delight them, keep offering them something better and better to look forward to.
You get paid for showing up and making the product/experience better everyday.
A fast start is like a spark, continuous improvement and delivery is the fire.
A lot of ink has been spilt on the many mistakes made by Yahoo. How the company refused to buy Google or Facebook when the opportunity existed. Yahoo might in fact be a story of many missed opportunities. But those misses did not really define the failure. Yahoo failed because of a series of poor decisions and a company culture that did not permit it to move forward.
The implicit assumption in all of the criticism is that Google would have certainly gone on to become the company that we know today. Yes, perhaps there would have been one less competitor to deal with.
Those of us who adopted and started using Google did so because its simplicity and precision. Do you really imagine that Yahoo! which was always a portal, would have purchased Google and retained a blank white page with a box?
Yahoo failed because of the things that made it successful to begin with. It was launched as a directory service and then went on to adopt the portal model. For whatever it is worth, it worked very well for them in the late 90’s.
The linked post on stratechery which talks about the development of culture.
Culture does not beget success but it is the product of it
When a company does something and it works out for the company, it becomes a formula. The people who join the company hear the same stories and do the same things.
An employee who joins Marriott hears stories of awesome customer service which helped them retain customers, got someone promoted. The formula to get ahead becomes, providing awesome customer service.
Yahoo was a portal and wanted to continue to survive in that paradigm. It was just much easier to sell the idea to advertisers and generate revenues through multiple channels. Google went with income from ‘Search’ only. Honestly, the good boys at Google did not want to do even that! Eric Schmidt had to wrestled them into advertising.
Yahoo’s culture did not allow them to adjust to the changing nature of the web. Much like Google finds it hard to adjust ‘search’ to the demands of smartphones. Facebook by comparison found it extremely comfortable adapting to mobile.
Mergers and Acquisitions
Yahoo may not have bought Google or Facebook, but they bought often and bought a lot. Here is a list of all of the M&A that Yahoo has been engaged in over the years. You may notice that there are a list of 114 companies there. In the space of 18 years, that is an average of 6 per year; or one every alternate month! Number deceive in the absence of context; they made 23 off those in 2013 alone. An additional 19 were acquired in 2014.
Yahoo made big acquisitions in the 90’s that did not pay off. GeoCities, Broadcast.com (founded by Mark Cuban) and Overture Services were all multi-billion dollar acquisitions which went nowhere. Flickr still survives and could have easily been Instagram, but is not.
I am sure had they acquired Google and Facebook, they would have been equally lost in the quagmire that was Yahoo. Throwing everything into a portal and melding it into one was not what was needed, but Yahoo could not help but do that.
Marissa Mayer kept deflecting criticism by acquiring one company after another. She closed 5 deals in Jan 2014 alone. When Steve Jobs went back to Apple he figured out the soul of the company and let go of everything else. Marisa Mayer did exactly the reverse in the case of Yahoo, kept everything and added more garbage.
So what is the upside?
For starters thank Yahoo that they did not acquire Google for $1 Million, you would probably be using bing today! Also, you might have been using Google+ had they ended up acquiring Facebook.
Yahoo redistributed 10’s of Billions of dollars to many startup founders through acquisitions. These founders went on to invest in other startups and created the startup eco-system that exists today. This is by far the most critical contribution that Yahoo made. This alone contributed significantly towards changing the trajectory of investments in startups.
Yahoo by itself might not have been a hugely successful business. A combination of cultural undercurrent and poor leadership ran the company into the ground. Having said that, Yahoo has made contributions that are valuable.
Not buying Google and Facebook are one amongst them.
In the startup journey one of the hardest and by far the most critical things is to get sales for the company. Sales is what finally drives the engine and brings the income that is required to prove that the business being pursued, is worth being pursued.
When a startup embarks on sales, it is important to be focused on how they go about the process. They need to be able to describe their dream customers who would not have any hesitation in purchasing the product or service that they are looking to sell. Once this ideal customer is defined, it is very important to go ‘Narrow’ and ‘Deep’. Addressing a specific customer is easier than addressing a mass market with a wide variety of customers who have a variety of needs to be addressed.
The temptation at the beginning is to start selling the product or service to the entire market. There is no surer way of failing. I wrote a post about this earlier here.
A startup thrives on building relationships. Early customers of the company not only patronise the startup but also provide a great deal of feedback to improve the product to better meet customer requirements. These individuals also play the part of marketers on behalf of the startups. It is hence extremely important to cultivate a great relationship with these customers.
When you feel personally invested in something, you want to see it succeed. You want your customer to be in this position. This is precisely the reason you need a very specific customer with whom you can have one shared interest – your business.
Going narrow allows the startup to focus on the individuals who best suite the dream customer profile and makes sure that the conversion can be quickly achieved. Going deep allows for a lot of feedback to filter through as well as enables strong relationships which the business can depend on. Such customers would not abandon the startup to move to another (let us say a competitor) very easily.
All of this put together makes it possible to truly delight your customers.
Marketing is broad and shallow, it tries to address the mass. As a consequence it does not enable relationship building, which is very critical for a startup. Also, the cost of marketing tends to be much higher and the returns on the same much lower than selling directly to a specific customer.
Sales is about relationships and even if you are a larger entity, the relationships need to be nurtured and grown. A larger entity needs to look at sales like a long distance relationship. You might not be able to meet or spend as much time, as regularly. Nevertheless, you can always keep the channels of communication open and communicate regularly.
When engaging in sales, it is also very important to look at the product or service from the perspective of the customer who is being sold to. Most often one of the biggest mistake that most entrepreneurs make is to try and enforce their perspective on the customer rather than, get around to seeing the customer’s perspective.
If you look at the image above; at first sight, it seems like the image is one, of an old man. But a closer look makes it clear that there are two different people, one old man and a woman. Similarly what your customer sees or what you see might not be the same. Hence it is important to look at the frame of reference of the other person in order to convince them. This is easy, again, if a narrow and deep approach is taken.
Fundamentally, sales is a reflection of how well you understand the customer you are targeting. By going after a narrow subset of customers, startups can ensure that they know their customers well. When you know your customer well, your ability to see their perspective deepens and you are well positioned to close the sale.
Large market size is important; but a startup invariably starts niche and then grows. When I try to explain this to entrepreneurs, I find that most people walking down the path of entrepreneurship find it very hard to understand the need to start niche. Everyone can use this product is the usual answer I get. Most entrepreneurs I come across, who are working on tech products or online businesses expect a million customers to show up in 6 months!
Starting a business is a marathon, not a sprint. It will most likely take 10 years of your life. It is in very rare cases that someone gets a Billion dollar exit in 3 years.
The larger goals and the larger market is important; but when you are starting out, the here and now matters more. You probably do not have the money or the capabilities to serve the larger market to begin with. What is most important is to keep moving forward a step at a time.
When starting a business the first few customers are by far the most important and the most critical. They are important because they put their trust in your product/service and decide to patronise you, at the same time, these are the people who provide you some of the most critical feedback which help shape your product/service. Also, it is probably the only time in your startup journey that you can spend time listening to each customer and understanding the qualitative richness of what they are saying.
Since it is cricket season, I am going to use that example. You might want to be the best national player, but you cannot say, you will play directly at the national level. You have to try to excel at club level, then get into smaller regional teams, and progress thereon. The greater goal of reaching the pinnacle motivates you but nevertheless you focus on the here and now. You try to score the century in the small matches that you are a part of. Shine at the opportunities provided to you. Make people realise and say that this player has got real talent. This probably helps a talent scout spot you and move you up into a higher level of the game, where you should be able to excel again to move forward.
Just because your product is online, does not mean that the world is your canvas. Start with the immediate; the people that you can reach out easily. Convince them to use it; take feedback. Find people who love what you are doing. They may be few, but that is fine. They will be the people who will make others patronise you. Keep growing the circle of people who love your product. As it keeps growing bigger and bigger, you will have a real opportunity to get into the big leagues.
Rome was not built in a day, it was not built in week or months. It was built over decades. That, most often, is also the case with businesses. Very few of them ever are built in a very short period of time. Have patience and build it one brick at a time.
All too often I come across young entrepreneurs, who are just starting a business through which they intend to hawk their skills. Starting a business does not necessarily make it a startup. It makes you an entrepreneur certainly, but not a startup.
Anybody, who engages in any kind of business is an entrepreneur but only a few among them can be deemed startups. I can’t go around saying, I have a startup just because I setup a Dhaba on NH7!
Unless… the business meets certain conditions; I shall list them below.
Attack a problem that has not already been solved
When you attack a problem that has not already been solved, you are creating a market for yourself. The kind of solution that you offer cannot be bought off the shelf and hence it makes the offering compelling.
I know web development and hence I started a web development company. Well, sure you did! But the problem with that is, you are not solving anything new, you are invariably going to compete with the many thousands of web development agencies that are out there already. You lack experience and most certainly the manpower that some of the more established peers have. From that point forward, it is an uphill climb. Besides, since this is a well-worn path, many entrepreneurs have tested and tried all kinds of permutations and combinations of selling the product or service. I do not deem such a business a startup.
Unless… you have found a way of doing the business differently.
Building a business model which breaks convention
Take a company like Uber; it is able to get into a business that is as old as the motor vehicle and able to find scale like no other business has been able to, till date. Many companies have tried running a taxi business. Invariably the biggest problem with running the business successfully has been that the incentive of the owners and the drivers has been misaligned. This has meant that there is no global taxi business; until, Uber.
Uber used a mix of technology coupled with a business model, which is unlike any that existed till then. Most importantly, the company does not own any inventory of vehicles unlike every other cab business prior to it. They own the platform through which they are able to generate demand and they manage to match that with individual taxi owners who are able to deliver a standard product quality.
Uber is just one of the examples of how an old world business has found a new avatar through an innovative business model.
Examples of such companies include Airbnb, HotelsTonight, Google, Spotify, Pandora
The success of each of these businesses hinges on the fact that they did things differently. They changed the way the business was done in the past. Before Google, all search engines used to push the sponsored listing up on the search results without informing the users; precisely why the ‘Don’t be evil’ motto was coined. Spotify and Pandora changed how music was consumed and thereby changed how users pay for them as well. Airbnb changed the ad-hoc renting market forever; not only for home-owners who wished to rent out their houses/rooms as holiday accommodation but also for travellers who seek for cheaper stay options. Each of them have been able to change the way business used to be done, which brought them leadership role in the market and helped them get recognised.
Ability to grow across geographies and scale, providing exponential returns
Most of the businesses established prior to the onset of computers usually consisted of certain assets, which cost a lot to replicate across countries, which in turn slowed down the growth of the business. In the case of most startups, one of the defining features is that they are easy to replicate in different geographies and hence lead to rapid expansion across not only domestic but also international geographies. [Caveat: Certain problems are country specific and therefore cannot be scaled in a similar manner internationally]
In all of the cases mentioned above the companies were able to quickly spread the same model across boundaries and ensure rapid growth of their businesses. The increase in scale means exponential returns for any investment that has been made in such businesses.
Despite being restricted by copyrights, companies like Spotify and Pandora have been able to expand to tens of countries resulting in very high turnovers for them.
Scale is by far the greatest defining attribute of a startup. Companies that can cater to a relatively large market can scale continuously and therefore generate greater value for the investors in the long run by unlocking value in untapped markets. Squeezing more money out of the same set of customers often proves challenging and also results in companies acting in a manner which is seem to be contrary to the interests of the consumer.
These three attributes are by far, the most important for the business to be classified as a startup.
In a commerce class in school, I was taught that the point of a business is to earn a profit. Online retail startups have certainly caused me to question this notion.
Money, money everywhere; not a cent to be earned!
I find it quite amazing that there is immense investor confidence in a business that is unable to turn a profit even with millions of users on board. The best (perhaps the only) analogy for the current online retail scenario would be the airline industry.
When airlines started flying people in the 40’s; there was a lot of excitement about growth opportunities, and the loss-making nature meant that governments owned most airlines – more as status symbols rather than viable businesses. Eventually, private companies got into the game and operating running airlines as well. At the time, it was believed that with increasing connectivity between several cities as well as an increasing number of people using airlines, it was expected to become a viable business and a profitable business. But, as time progresses, we can see that this expectation has not been met. On every occasion, other reasons have been blamed for the lack of profitability in the sector: SARS, 9/11, hijacking, disappearing planes, and so on. Nonetheless, airlines have not been able to consistently turn a profit. This has resulted in many mergers and acquisitions, amalgamations, and even bankruptcy.
The only type of airlines that have been successful are the ones which have specialised in a very specific segment (corporate/business customers) or geographical region. The sad consequence is that one of the bigger airlines always acquires the profitable operation and tries to scale it, resulting in its inevitable decline.
Online retail, by comparison, is a far more recent phenomenon. Ideally, it should be compared with retail, which is what it promises to replace. To date, the success (in turnover) of online retail has relied on discounting. Walmart also relies on discounting, and by relying on any means necessary (paying extremely low wages, providing hard terms to manufacturers, etc.), they have managed to run a business that is highly profitable.
With Flipkart securing a funding of $1 billion, followed instantly by Amazon announcing to pump $2 billion, there has been a lot of commentary about online retail and the opportunities that lie ahead.
I think the point of a business is to create value, and that value creation results in profits. A retailer makes it easier for you to explore a multitude of products, compare brands and buy them. The online retail industry provides nearly the same service offering, along with the added convenience of being able to shop from home. The only difference is that the retailer sources the goods at a lower price than the one at which it is sold to you. Unfortunately, the selling price of products on online retail platforms is lower than their purchase price.
Is it not amazing how similar the profitability trends seem? Essentially, there is none.
US Airways Vs. Amazon
Different industries, same struggle.
Now, I understand that for certain businesses, in order to be profitable, you need to have a minimum base of customers. Social Networks are shining examples of how that works. Having said that, if you cannot make something work profitably with 20 million customers, how will ramping that number up to 100 million make any difference? Even if you do make a profit, the margins are going to be in the low single digit percentages. I find it hard to justify investing billions of dollars to generate a profit in the millions (and most likely tens of millions, and not hundreds).
This chart sourced from an IATA’s 2013 report shows how well the returns have worked out for the airline industry. Investor value destruction!
I believe the online retail industry is headed the same way, at least from the point of view of “all-under-one-roof” retailers.
Similar to the case of airlines, there is some oasis of hope. There are online retail firms, not unlike the airline industry, which specialise in a very narrow segment of product offerings. DollarShaveClub, Bonobos, NastyGal, Diapers.com, and closer home, Myntra.com, are examples of models that work well. Unfortunately, similar to the airline industry, these smaller firms, which will never have very high turnovers, are acquired by larger players, since it makes for a nice press release and helps keep investors at bay. At the time of acquisition, the larger firm tries to “integrate the business” and benefit from the “synergies”, and end up running the business to the ground. If they leave it alone, it may just work – it has shown success in its current form after all! This has happened time and again in the airline industry; it remains to be seen how it plays out in online retail.
So why the investments? Well, if we come back to Flipkart, the investors invest a large sum of money into the company because it furthers the company’s chances of an IPO. If the company is sitting on $500 million in cash in 12 months’ time and files for IPO, they will certainly be able to sell through the IPO and exit neatly. The CEO, on behalf of the investors, made clear the hopes that would be sold to IPO investors – A $100 billion valuation. So, even if they project a $20 billion valuation at the time of listing, which would be close to three times the valuation at which the funds were raised (if rumours are to be believed); as compared to $100 billion, it will still appear as though there is still more value to be unlocked. And as far the current investors are concerned, 300% in 12 months is not too bad a deal, is it?
If Amazon were to be used as a benchmark, the possibility of running an online retail business with decent profit margins seems remote. To add to that, Amazon itself has always been ready to enter into a price war with anyone who strays into its territory, since its investors seem quite satisfied even if the company posts a loss. Therefore, if profits ever exist, they will always be extremely low.
Will Flipkart be able to keep hopes up without turning a profit? Well, only time will tell!