Why startups need more than just investors

12th Feb 2018
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The title is not intended to draw up a laundry list of all that is needed to nurture a startup culture, but what I would like to share are some of the intrinsic factors that startups can focus on to improve their chances of survival and get a shot at building a scaled-up and profitable business.

 Are you aiming to solve a difficult problem?

A peculiar affliction of the Indian startup environment is that many founding teams (and investors) are happy to start ventures that are either a variation of an existing theme or a copy of an already-proven model in the US or China. My experience of looking at the fintech space has been that if you lift the hood of these companies many are just clones with a different name and founding team. There is nothing wrong in this per se and, in fact, you could argue that if we don’t have imitators, the market advances slowly. However, what begs the question is how can a startup justify the amount of effort and funding if it is just a me-too mode?. Given the already initial low probability of success in a startup, one should really look to have an outsized impact so that the expected value returns are quite good.

What many entrepreneurs end up doing is choosing a more modest outcome which, by definition, will not lead to satisfactory weighted returns.

Start with understanding the “jobs the customer wants to do” (h/t Clayton Christensen); figure out where the existing supply structure is broken; test out your thesis; learn and iterate and so on. This, in VC parlance, is usually referred to as the Product-Market fit (‘PM’). And you do not need to acquire a large distribution very early to succeed – get your PM right first and then scale. You may actually end up having a better product and hopefully not have to waste a lot of capital getting scale on a half-proven idea.

India is different

The irony is that even as we have many startups vying for the limited online revenue, many of them miss out on the larger opportunity of building modern businesses for the many Indias (as my friend Haresh Chawla calls it ‘India 1, 2 and 3’). Avoid extrapolating from what has succeeded in China or the US. The “we are the X equivalent of China” maybe a good catchphrase to establish recognition and valuation, it is hardly a successful recipe for all such Xs. China/US startups have flourished in very different demand, internet penetration and competitive markets. The historical anchoring of these markets too is very different. India is many markets, at different stages of internet adoption and perhaps quite rich in terms of nuances – a “one size fits all” approach and spending large amounts of capital to justify scale does not always end up in startup success.

In fact, my belief is that India has many dislocated markets that can be fertile ground for startups that are trying to prove their PM for a small market. And as the market expands, they have already paid their learning costs to scale up faster.

The challenge here is that VC investing cycles often push the startup to expand the market at much faster rates and at negative unit economics.

Mind your cash!

In many startups, the death knell is not just the lack of PM fit but also not focusing enough on cash management. The glorification of “burn rates” often seduces the founding team to think that they must be doing something right and throw financial discipline to the wind. Every business should have at its centre not only the core customer promise but also a financial process that enforces a culture of disciplined capital allocation and spending. This lengthens the runway for the startup to survive and succeed and going back to the expected value equation, improves the probability of success.

Do you have enough grey hair?

Building a startup is about energy, passion and a certain sense of missionary zeal that propels you forward in spite of headwinds. In our setup, this often equates to youth. But very often you need the young to be tempered by the experiences of the more battle-hardened. Founders would do well to bring on board at an early stage mentors and investors who have experiences of building businesses in their areas. Also, often choosing a VC becomes an exercise of weighing just pedigree and valuation. In and of itself there’s nothing wrong with that as long as the VCs can effectively bring a set of people that can be a sounding board for the founding team, challenge their assumptions and encourage them to evaluate alternatives.

Image : shutterstock

A related issue is, how do you scale up at an organizational level i.e. team building?

The journey from 2-3 co-founders to 500-1000 employees is not an easy one to plan. Having these set of mentors can help the founding team address the unique challenges of each stage of growth.

The biology of cooperation

A lesson we learned at a very early stage in the transformation of RBL Bank was that if we had to compete with the more established banks, we had to build partnerships to create new businesses. This belief strengthened further when we started appreciating the scale of digital transformation that was happening in India. Our conclusion was that it would be impossible for us, however well-intentioned we might be, to have the capacity and speed to address the rapidly changing financial services environment. Over the last few years, our partnership with fintech startups has given us greater agility, a better understanding of unique customer needs and an appreciation of data-driven business strategies. In a reverse manner, startups can often lower their cost of innovation by partnering with players that can bring them back-end infrastructure, renting offline distribution channels, customer base etc. This was not always easy in India where larger incumbents often looked at startups with suspicion and the startups themselves often came with a mindset of disrupting the incumbent (a zero-sum game in their view).

However, as digital transformation has become an agenda at the board of most large established players, we are discovering a greater level of cooperation in both directions.

In conclusion, we view India as one of the more exciting markets for use of technology to reinvent decades of under-investment in core areas such as financial services, healthcare, education, agriculture etc. The journey on this road has just begun and what is needed is a vibrant startup ecosystem, strong partnerships, and an appreciation of many areas of organisation building which can collectively push the boundaries of what can be imagined and executed.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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