SBenegaL

Category: Entrepreneurship

  • The Freemium Business Model: as an affordable loss strategy of founders

    The Freemium business model is one the most commonly used revenue realization streams by the companies offering web-services. The promise of a large user base, and cross-diffusion of free users to the paying customers; makes freemium the most sought after business model in the internet domain. The utility of this model, however, is not without concerns – Ash Maurya  a lean methodology proponent, in his land mark book highlights the drawbacks of using this model by a start-up. In this blog, I extend the conversation on Freemium as a business model beyond the drawbacks suggested to look at it from the lens of effectuation theory, and use the affordable loss principle to explain the wide spread usage of this model in the web-service industry. 

    The term ‘Model’ refers to an abstraction of the a real life phenomenon. The “business model”, is then a abstraction of the way a business operates. Wikipedia[1] defines Business model as: “A business model describes the rationale of how an organization creates, delivers, and captures value”. A business model is simply a plan that the company executes to generate its revenues! There are number of business models that companies could adopt from – I have tried compiling some of these here <<more on business models>>, the explanation of the freemium model elsewhere is here. 

    It is easy to note that one often finds multiple business models being used by a single business. We donot include other models in our discussion but acknowledge the possibility and only introduce a plausible reasons for such an approach: Companies operate in a sea of market uncertainty – and plan to reduce this uncertainty in a sytematic way. The companies always attempt to reduce the uncertainty by actively engaging with the environment, anticipating changes and preparing for the same. In these experiments to understand the organization’s environment – the company creates various business models which that could not just help the company identify its customers but also serve them better. We could think of these business models then as complementary to each other and assisting the business generate a higher revenue than through individual business model.
     
    Returning to our discussion on the “Freemium” business model, we could understand the model as one where  the company gives away a chunk of the offering (product/service – I do not comments on quality) to the users for free and attempt making the larger portion of its revenue through the paid higher end of the services. For example: In a professional networking website like Linkedin, the basic business networking service offered is  for free. Linked in also offers its users are a free access of the – “Linkedin Premium” service for a short duration of time after which the user could return to the free version or cotinue the premium being a paid user.
     
    It is not surprising that the conversion from free users to paid premium services is small, but that is one of the means the company uses to generate revenues. I have only highlighted the premium offering from Linkedin, however this not the only business model that Linkedin uses – there are revenue generation opportunities like the advertisements or analytics or query results etc that could be of significant monetization impact for the company.

    Reiterating the point I made earlier – the widespread usage of the freemium model by web-service companies gets one to think of freemium being a necessity in the web enabled world than one of the options. After all, users would love to try out the website before they begin paying for the same; isn’t it? and, its is but logicall to expect to expect convesion to the paid users category – even if a small portion converts, it would be a significant revenue!     The almost zero cost of reproduction of a web service helps the cause.  
     
    It is this attractiveness of the model that Ash Maurya cautions his readers – the “lean start up” enthusiasts, against. To understand the caution – lets return to analyzing the Linkedin example in greater detail.
     
    Linkedin is a professional networking site – where people connect up with other with the intention of growing in their profession and also engaging professionally others having a similar intent. This professional network has millions of users and without information – finding the connects you might like to engage with would be a herculean task if there is no information about the user is available.  The solution – create your basic profile when you sigh up for the website. The basic information provides to data – that could make networking exciting and useful. To realize the importance of the data – imagine a the website users not update their profile pages! You would not get any “relevant” search results that you could use – If this prolongs for a long duration – the newer sign ups on the website would leave saying – “There is nothing in here that would be of interest to me” and move one…possibly never to come back!
     
    Linkedin leverages the free component of its offering to create a valuable data for itself – which move beyond holding the interest of the group together and create a foundation of sorts for the premium services! The large user base acts as the fuel for growth. The psychological attraction to the “FREE” offering is really creating a wealth of data that could prove to be valuable information for the company’s operation.
     
    Observe here that it is always possible that there are always more unintended and inactive people (lets call these “Noise”) to the active people and further a even small proportion of premium service users (lets call them “Signal”). The signal is what we intend to have, while noise is what we need to decrease – there by improving the signal-to-noise ratio.
     
    The Lean Startup – pushes the entrepreneur to reduce “waste” by eliminating distractions – and getting a niche that the company could eventually build on. The signal-to-noise ratio, thus has to be very high when starting off and the freemium model could be damaging in this regard. Ash Maurya in his book –  “Running Lean” raises few more apprehensions when using this model as start ups [2]:
    • Low or No Converstion
    • Low Validation cycle
    • Focus shifts to the wrong metrics
    • Low signal-to-noise ratio
    • Free users aren’t “free”
    The crux for the lean methodology of starting your venture is – “move from plan A to a plan that works”, before running out of resources.

    The widespread utility of the model would possibily indicating something beyond the risks highlighted by Ash Maurya. I use the Effectuation theory to potentially explain the large scale adoption in the web-services industry. By this, I don’t intend to claim that the drawbacks arent true – it is another way of explaining the phenomenon. 

    Effectuation has been found to be a good answer to manage the Knightian uncertainty that one faces. We have discussed this earlier in here, for more on the topic, you could join the online community at effectuation.org. 

    Most web-service founder have an expertise in technology, and less often ones with a market experience – which makes the product development aspect of their business relatively flexible and agile to experimentation. Their technical strength is a possible afforbale loss in terms of the effort, this is leveraged pretty heavily by these founders. Note, I am not considering the time and monetory affordable losses at this moment – the entrepreneurs might discount this if they are running these in parallel. Also note that the assumption I have made is one of a purely technical co-founder – if a market oriented founder starts the venture, it might not be same scenario. 

    Remember that for a successful business – the technology and market are both mandatory; however the technical founder might trade off the technical provess and patience to gain the market experience here. The othe benefit of the affordable loss approach is that it gets the team going on their venture and not get stuck into the analysis paralysis. They are fighting the real world and picking up the neccessary experience and learning instead of just slogging it out with ideas in the fictious mental space where the assuptions identifications activity become difficult. 

    For example, we could think of the FaceMash as one such experiment (I am not commenting on the intention of the developer in any way – I interpret this as an experiment).  The outcome of the expriment was for sure something that even the founders didn’t anticipate! 

    The early experimentation – help not just identify the underlying current of the business, but also open up enormous opportunities for future growth of the company [Akin to the Corridor Principle]. Recollect here another principle of efffectuation: when life throws lemons at you, make your lemonade.
    We see indications that there are a lot of factors that emerged as a consequence of the experimentation mindset. This may be a the identification of the latent need by someone else, or the lack of exclusivity – which could aid the “stickiness” of the website, or the learning of what territories not to venture into. 

    The learning from the experiment doesn’t limit itself to takeways on features but the interaction with the various elements – which allows identification of new opportunities. Recollect also that the interaction that happen subsequently are equally important – though difficult to estimate apriori the impat of these interactions – they could really mould the direction of the start up. 

    All is not hunky-dowry in the journey there are surprises – call them sour lemons if you like – but the entrepreneur and his attitude help take charge and act more akin to the “pilot-in-the-plane” (the effectual terminology), or a driver handling the streering wheel; rather  than the scientist how tries controlling the rocket sitting remotely. You need to realize – you can smash the lemons, extract the juice to make your lemonade! 

    What I havent highlighted is the entreprenuerial mindset – the essential components of this being reselience and learning. Its not easy to just let go of something you started off because it isn’t functioning as expected. The key is it fix the mind to an affordable loss – instead of optimization of effort (may not work in extreme uncertainty). One has to continuously strive towards sensing the results of an experiment early – fail quickly and learn the most from these experiments. 

    Freemium then could be considered one such experiment with an affordable loss and set of metrics that helps the entrepreneur measure the progress with the expectation.   While the expectation correction  and restrategization is a key for entrepreneurs to work on their idea, it is the variety of the experiments that could be beneficial too – one could over a period of time expect to develop an entpreneurial experitise. 

    To conclude – the use of freemium business model is definitely cautioned against by Ash Maurya, but its utility might be better understood if one applies the afforable loss lense to see the same experiment.  The key is the mindset one has to develop as an entreprenuer who continuously senses, thinks, and acts.
     
    References:
    1. The wikipidea definition: http://en.wikipedia.org/wiki/Business_model (Accessed 10-07-2014)
    2. Running Lean – Ash Maurya – Second Edition – Pg No 181 – 183
    3. effectuation.org

  • Bhaag! by Ganesh V

    I just finished reading “Bhaag!” by a first time author – Ganesh V. I met Ganesh at IIMB-NSRCEL when he mentioned about the book he had written on Student entrepreneurs. I offered to write a review and he was kind enough to send me a copy of the book.

    It has been an interesting attempt to look at bugging entrepreneurs from colleges across India and across different sectors. It is definitely the first of such an attempt in the space of student entrepreneurs in India – kudos! I loved the Bio-tech story in the set the most and     I am a
    bit skeptical of the inclusion of the “Nurturing Green” story as I think
    it doesn’t fit with the remaining set of stories.

    What I liked about the book?
    • The channelization of energy
    • The focus of mentoring by the faculty of colleges
    • The support of various B-Plan programs across the country
    What I could like to see different in the book?
    • Font! Man the font is so small – couldn’t it have been bigger?
    • Some elements of the narration! Looks like the Ganesh also wanted him to be part of the effort (this is my personal opinion: let us focus on the subjects instead of how you went about asking them!)
    • Could have included a set of key pointers for the enterprising students who would seek to go enter entrepreneurship – the how element. (Resources: I am not too sure if these are the only ones – there are many more and some really interesting ones. I guess Ganesh could have done a better job on this)
    What I think could be a good continuation?
    Being one of a research mindset, it would be inapt to think of letting the new set of cases go off without tracking over a longer period of time. This could lead to a lot of interesting insights into entrepreneurship.

  • Effectuation – a theory derived by studying expert entrepreneurs

    Given the form of Uncertainty that entrepreneurs face when building their enterprise, it was often a challenge to explain how enterprises were built. Prof Saras Sarasvathy (currently working at the University of Virginia – Darden School of Business), explored the question of what is teachable and learnable in entrepreneurship and laid the foundation to the – Theory of Effectuation. 

    For those of you who are wondering what effectuation theory is, here is a brief about the theory. But first let’s begin with a couple of examples:

    a. Cooking:
     
    There are two ways you could go about cooking:
    ⦁    In the first case you could decide on a specific dish you would like to prepare, look at the recipe, go to the market, get the ingredients, follow the instructions and cook.
    ⦁    The second case is, you open the refrigerator to see what ingredients are available, think of what you could do with the available means and just begin cooking with the resources currently available.
     
    Both these could turn out to be excellent dishes or could go bad. Without giving much explanation, I would jump the gun and call the first approach described above – a causal approach, and the second approach as an effectual approach to executing things. 

    I shall fall back on the example later on as I explain the various principles of effectuation.
     
    b. Marketing a new product.
     
    Let’s take the scenario of a large corporate intending to launch a new product in the market. The typical approach is to define a specific market – segment the market and decide up on the specific segment to target. Finally you position the product that you intend to sell and thus arrive at the specific customer who would buy your product.
     
    The whole process listed above, involves a lot of thinking expertise and the product hitting the market is only after a long delay and is often after the project has spent all most all its investment.
     
    An alternate approach is to find the first prospective customer, sell the product to him/her, and look if there are more people like the same customer. Once you find a pattern, the segment gets defined automatically, you add in more partners, more segments that could be served and eventually define the market.
     
    The first approach is primarily causal, while the second one is effectual in its approach.
    Principles of Effectuation
     
    The Effectual Theory has 5 principles:
    • Patchwork Quilt
    • Affordable Loss
    • Bird in the Hand
    • Lemonade
    • Pilot in the Plane
    They Dynamic Cycle of effectuation:
     

     
    The above diagram essentially indicates that an entrepreneur could begin with looking at what he/she could do, whom he/she know, and then think of what could be done with the means that are currently available at one’s disposal.
     
    The interactions with the people the network lead one to gain commitment towards the idea that had been suggested. Through the commitments, and addition of stakeholders, the initial idea could transform into a shared goal (which could be extremely different from the initial goal), and also add in new means towards achievement of the goals.

    Thus the starting point of the next iteration of the cycle would – who we are? What we know? And whom we know? Though the various alignments of the commitments, the otherwise unlimited possibilities shrinking to a smaller convergent set of means which could be explored there by creating new markets and new firms to exploit the market.
     
    How is it different from Causation?
     
    Looking at the above mentioned approach, we can easily distinguish it from the classical knowledge being imparted in the causation based approach. Where there is a huge emphasis on prediction, and resource commitment towards achieving the envisioned goal.
    In terms of the principles these two could be distinguished as below:

    For those who are interested in looking for a good resource, visit: http://effectuation.org/ 

    However the suggested guidelines in the effectuation are not without criticism. One of the major criticisms that I find in the theory is essentially the expertise that forms the basis of the theory creation.
     
    In my opinion, the effectuation theory derived through the study of experts – would represent a state when achieved. If I were an entrepreneur who has become an expert over 15 years of entrepreneurial experience, with say more than 2 ventures, 1 IPO experience, 1 failed experience, and I am not talking about being a newbie entrepreneur. Networking, framing the right questions to get the commitments, willingness to modify goals rather than means (aggregating means to achieve the goal) and much more form an essential part of the process suggested. Thus, it is more of a state that would be reached and learning through experience forms the key towards moving towards entrepreneurial expertise.
     
    A newbie entrepreneur has to spend time in building his network, build the phenomenal experience enroute to be able to effectively apply effectuation as a means to starting off a venture. By following the principles, one could definitely create a business with minimal lop side and higher chances of success – I would say this is like giving a surer way of building the business. 

    But, if one has to navigate and the path has been shown, isn’t there some interesting learning that is essential to make an entrepreneur ready missing? I guess it is… What do you say?

  • Business Model – creating a fabric to link the stakeholders

    In the startup context, where survival is primary, entrepreneur’s pursuit is one of finding a business model that would stand their firm in good stead ensuring growth and profitability. One doesn’t have to reiterate the importance of finding the right business model or the long term viability of the company. The term “Business model”, often used in the business community, refers simply to the way the company makes money through a set of activities. I had blogged about some prevalent business models a long time back elsewhere and here is a link to the same:
    http://somanagement.blogspot.in/2011/05/business-model-journey-this-far.html
     
    Given the large number of business models, one could easily believe that finding the right one to suit their business would be easy – however this is not to be.
     
    Creating the business model is akin to building a tower from cards. The cards are all balanced and mutually supported. The flexibility at this stage is the ability to move the cards around and ensure the balance is in place. Only if the balance is created can the attempt grow beyond a specific size. Once the card tower is built, it’s time to build stronger bonds – think of glues that would make it more permanent.
     
    [Note: this glue itself could be a limiting the growth/flexibility, but that’s the game one has to play – You cannot just build a larger tower if you focus on too much flexibility!]

    From my experience of interacting with startups, I clearly notice that – attempting to build a business model relies a lot on finding the right balance between the various stakeholder commitments and then synch their acts to make the complete business engine operate without glitches. It is only over multiple iterations of engagement and testing the various business hypotheses that such a structure could be created and controlled through routines/procedures/policy for the business execution. These sum up the entrepreneurial learning and help guide the business moving ahead. Thus, we could visualize the firm’s business model as a fabric binding the various stakeholders in a specify tension through the binding and dependency of the various activities.
     
    A natural question that arises here: is the claimed complexity of Business Model creation in a start up really hard? Why not just imitate?
     
    Stated differently the question is – there are existing models that have been used, wouldn’t it be just easy to start off by imitating a business model? Here is my argument why this many not be easy:

    Yes, imitation could give you a head way into starting (a map say), but eventually you have to design and use a business model that suits your business needs – your customers define that. The geographical limitations, the economical situation, the capability of the talent available, cultural context, all have an influence on the business model that finally emerges. Even large companies that operate businesses across the globe cannot expect the same audience and therefore need to modify their model!

    Increase the above stated complexity a hundred or thousand times – that is the environment that a start up is dealing with – the haze surrounding the start up is so high that it probably cannot even see a few meters ahead with clarity! The changes of survival for a start up enhance by actively seeking the right partners and steadily creating a business from the idea. The Business model is developed through multiple iterations of this nature.
     
    What role does the entrepreneur’s ingenuity play in the process of building a good Business Model?

    While some of the factors explained above are definitely important – my observation is that the initial mindset of the entrepreneur and the founding team would defines largely the business scale. While business are built to cater to customer demands, and one could often confuse the existing customer segment size to define the scope, I perceive it as a function also a stakeholder relationship (resources) and the innovativeness with which the relationships amongst the various stakeholders(my opinion on this listed in an earlier blog) are created to derive a greater benefit. 

    Recollect: my claim of saying there is definitely an important role the entrepreneur plays and not everything is defined by the customer! The discussion could be extended to other stakeholders like – employees, suppliers, investors etc. (pick up links to older blogs)

    In the context of an established organization, the board  has to be constantly on its toes validating to see if they are living up to the market trends or are they defining the market trends else their lethargy could risk a death changing ecosystem. The business model thus has to constantly evolve.
     
    It is hard to consider a lot of dimensions of business and it would definitely benefit if there is some guidance on the same. How do we ensure that the business model effectively covers all aspects of the business? 

    I feel a very useful tool that most businesses could use is the Business Model Canvas (check this link– http://www.businessmodelgeneration.com/  for a detailed coverage). Here is more pictorial lively representation of the canvas is as blow 🙂
    The various blocks of the canvas help keep in mind the various components of the business in a balanced manner. If the business keeps a constant vigil on these dimensions it would help them identify when business shifts would be needed. The 9 blocks of the canvas:
    1. Customers
    2. Value Proposition
    3. Customer Relationships
    4. Channels
    5. Key Partners
    6. Key Activities
    7. Key Resources
    8. Costs
    9. Revenue
    One clear benefit of the canvas is to emphasize the importance of the various blocks and gets the attention of these towards these and focus on these (lest you miss them). 

    The Business Model Canvas though extremely useful, has some limitations in the startup context. I guess this would be the subject of another blog keep watching the space for more.

  • Customer: Choosing a right customer when possible…

    If there is a first point in the journey of any startup which I believe is worth celebrating, it is – when a customer sale has happens.

    If one is to make an analogy of startups to plants and their growth – this is comparable to the appearance of the first roots from the seed and penetrating the soil – there by enabling the plant to potentially grow utilizing the nutrients from the environment. Everything else, like raising an investment or finding a supportive supplier etc only enhance the likelihood of the possibility of growth – akin to application of fertilizers or support fences etc. The first positive sign a start up venture surviving the harsh environment and growing into a viable initiative is when the first customer sale happens.
     
    The start-up environment is extremely dynamic, and with many different growth avenues available, it is possible that start-ups could easily be confused about the way ahead. The newness of the start-ups enable them be easily mold them for good into a position they might not like to be in. While one could rationalize these as being defined by the market, I also believe there is a sequence which the entrepreneur could try before accepting being molded by market consequences than by organizational choice. I would love to believe that start-ups though liable to these are not as helpless in this pursuit, and there could be a better logic that product start-ups could benefit from.
     
    [A word of caution before I move further: what I say here might be most relevant to the high – technology focused product start up than others. But, I am confident that, over period as startups mature, they would like to get in to a position of advantage, and these suggestions would still hold at that point.]

    Quick and relevant learning is what I would call the Swiss knife that entrepreneurs should possess when they intend to build their venture. The skillful application of the Swiss knife and its various knives plays an important role in the start up’s survival. Given the relevance of learning, it is most apt to focus the start up’s customer acquisition and growth plans with a very strong base of learning embedded in it. This is also the underlying theme that I suggest in this blog, and also forms the source of some of the suggestions I make here. I also assume that most of the companies here are relatively growth oriented and building global products.
     
    Suggestion 1: Customers from a Developed/Advanced Nations
    High-tech product companies from developing countries who are interested in creating global products are better off focusing their efforts on acquiring customers from developed nations like the United States or the European Countries. This approach gets multiple benefits; some of them are listed below:
     
    a. Most developing countries have an ecosystem that is not completely ready for the products that these high tech start ups are offering. In such scenario, the growth oriented entrepreneur who often attempts to create something innovative, could be satisfied by making a product that satisfies the local need. (It is almost like believing that local maxima could possibly be the global maxima!)
     
    Move beyond the boundaries of the developing market and focus on competing in an international market. (Yes! I hear many start ups cry that they are constrained by the funding issues. But that need not be a limitation – you got to take the risk if you intend to really stay ahead of what is going to come). This could mean finding partner for the company in these advanced nations who could potentially make the product that is user ready!
    b. You could lead the change in the local market once you have a good base established – thanks to the difference in the exchange rates between the developed and developing nations. This could give you a head start and resources that help obtain a leadership position in the local market.
     
    One could often be blinded that, what worked in the developed countries could be easily applicable for the home market of the entrepreneur in a developing nation. Often, this assumption is way off mark – and being open to customization for the local market at that stage would be essential.
    Suggestion 2: Customers as co-producers

    Product development in most startups follows the vision of the entrepreneur, and if this doesn’t get aligned with to the realities of the commercial world – the focus could easily shift from having a useful product to just developing a product none could use for years.

    Involving the customer early is definitely a key to being able to break this potential trap and anchor the product development with the active involvement by the customer – almost like a co-producer! (At least some end user inputs would be available and thus provide some of the feedback necessary to develop the product further).
     
    The caveat in here is to realize when you are being completely held hostage to a single client. The startup would do well to being engaging with more clients of similar appetite and need once the product has reached a presentable stage.
     
    Suggestion 3: Create a good lead pipeline
    Quantify your customer goals in numeric terms. Goal setting plays a major part in actively pushing the teams towards listening and inculcating the actionable feedback into the development of the enterprise. 

    Creating a good pipeline that helps you reach the target set for the firm is a crucial for the survival of the firm. The dispersion in the kind of customers too plays an important role – else the experimentation that forms and important role in the early stages to find the apt customer segment and the value offering to the segment could be way off target and potentially lead to the demise of the firm. 

    The mix of leads in the pipeline in some ways should also be reflective of the product – features that you intend to test and validate. Focusing on the most active customer segment, and building a predictable cycle for the segment with good processes and delivery timeliness is the second major milestone after the first mentioned earlier in the blog.
    Last but not the least – always be open to change. At the beginning of this blog, we began by saying entrepreneurs need not be reactive always, they could possibly seek a clear advantage if they are proactive in their pursuit of opportunities – It is always possible that in spite of the efforts one would need to change the plans and get back to what could help survive. 

    Remember: The warrior who survives the day’s war – lives to fight another day!

  • Suppliers: A boon that could be a pain…

    Entrepreneurs starting their ventures often try to build a complete solution themselves. This approach of building the complete product/solution by yourself, has been increasingly debated. While it provides a completely proprietary platform on which you could build your product, it could not just delaying the launch of the product into the market but also potentially distract the entrepreneur from what is to be necessarily pursued. A good search in our surrounding would help us identify many aspects of such an approach might not be needed. 

    With the increasing availability of technology or readymade components/products/services, the need to engineering a technology solution for a market gets be reduced to an intelligent assembly of the available components as a solution that could be taken to the market, and validated for its utility. The focus thus could be more on the business generation dimension than on the technology.

    This necessitates today’s entrepreneurs to work with a numerous of vendors/suppliers and choosing the right supplier/vendor definitely would be essential. It would be important to note that the term vendor/supplier is not only being limited to those who provide goods/services in the traditional sense alone, in the context of a start-up world, I would also add in players like incubators, accelerators etc who come in as a bundle of offerings.
    Here is an example using the incubator/accelerator services that would help set the context better for the points made later on:
    Incubators and Accelerators are an important player in the startup ecosystems (especially in the context of developing countries), in that they provide an isolated ecosystem that offer number of benefits. In addition to the access to physical infrastructure including office furniture, meeting/discussion rooms, they could also make available a lot of tacit benefits like – a peer group of companies, mentoring, legal and accounting services etc. In short, the isolated ecosystem is like nursery where plants are built to be effectively transferred to a new environment later on at growth stage.

    Assuming that incubators/accelerators only provide a basic office set up that could help the entrepreneurs and their team focus on the work rather than being distracted by the daily pressures of utility services, could blind entrepreneurs to look beyond this. Many incubators/accelerators constantly hold reviews about the progress you have made on your idea – this could be a double edges sword. Frequent reviews could give rise to a very precarious situation.

    Entrepreneurs often choose their start ups as a representation of their independence/identity – often to do what they intend to do, and being closely monitoring might push the entrepreneur off comfort of working at a steady pace. Alternatively, there are some other incubators/accelerators that allow the entrepreneurs only access to the resources and it is up to the entrepreneur to make the use of these. 

    The choices made by an entrepreneur would have to be defined by what suits the expected direction of the product/service and the entrepreneurs’ personal working style. Here are some caveats for an entrepreneur when thinking of vendors/suppliers for your firm:
    • What do I want from the vendor’s product/service? 
    A clear understanding of the client space is generally hard when one is starting his/her venture and this emerges only over a period of time. Thus, keeping a tab on the large number of vendor products and choosing one from these would be difficult if an entrepreneur isn’t in a position to identify his/her needs clearly.
    While the clarity of the client is difficult, the entrepreneur would benefit from being specific about the requirements from the product/service that is to be tested in the market, and yet note that flexibility of replacement is important. If the direction of the product development has been positively validated, then tying up with your vendor for a long term commitment would be best – till then, tying up with a supplier deeply could prove a difficult proposition.

    [Note here: Deeply embedding oneself to the vendor product could be a potential pitfall in case you want to revisit the hypothesis of choosing to acquire than build the solution.]

    • Do you think the solution from the vendor has the features I am looking for?
    The outcome of the first question could be a list of features that the product/service could have – the next act is to validate if the vendor/supplier has the components or whole of features that could help build the product/service. In addition finding a vendor who comes in with not just the features but a willingness to work closely with the start up is important. The apt question thus is:
    Is the vendor open to working with you on towards co-creating your product?
    Having a vendor who doesn’t just offer you a set of features that was requested but really adds value in multiple ways would clearly be preferred [yes, the size of the supplier could play an important role here]. In addition to the above, would (s)he support your venture at a minimum with the following:
    • Commitment towards the agreed terms of delivery
    • Technical expertise to extend the current product offering
    • Insights from personal experience that could benefit my start up
    In some exceptional cases, there are instances of vendors who have moved beyond the contractual requirements to not just bear the delays in payment, but also support the entrepreneurs through some sorts of funding.

    [Note: Often, the transactional nature of the vendor could limit the growth of your start ups.]
    • Am I the only client for the vendor?
    If one is to look out for such a vendor, the most common responses would be from people who think they have a spare capacity. The spare capacity could arise from not having anything else to be occupied with rather than the spare capacity being available through an efficient process of management. Thus, there are many people who would try to build their businesses in a necessity oriented manner completely dependent on your business, and not expanding it to include others.

    This aspect in my opinion would be a paramount factor for the entrepreneur to consider. If there is one thing that start-ups need to remember at all times, it is that the vendor whom you engage with is not building his/her business completely on your expectations (you would better hire a full time employee or consultant in such scenarios!).
    The risk that your company takes in such scenario is not limited to that of your business but also compounds with the risk of your vendors’ business, and this could be extremely catastrophic! [Imagine: A contractual vendor breathing down your neck and waiting at your doors step pressing for the payment on the deadline, when you know that waiting for a 2-3 day could ease the complete cash crunch!]

    Past successes of entrepreneurs engaging with a vendor, word of mouth recommendations etc are important indicators that could help choose the right vendor/supplier. Start ups are a risky game – If the choice of the vendor/supplier is not carefully thought through – this could very well increase the odds against you.

    Reading the above points again, it becomes clearer that the entrepreneur would benefit better from calling the supplier/vendor as a partner in the progress and not really be known as a “supplier” or “vendor” in the classical interpretation of the word.  In many ways, an employee too is a vendor isn’t it? How about the investor! I guess looking at all the stakeholders from this perspective of being a partner could be the subject of another blog!

  • Raising Investments? Think about these…

    A significant portion of startup news deals with startups raising investments and clearly we see such news creating positive waves in the entrepreneurial ecosystem. Why do such news create these positive vibes, and what should other entrepreneurs infer from this is subject of another blog, but for this one we shall limit ourselves to what entrepreneurs need to think of when looking for external investments.
    Investment events are a validation in some form of the business potential of the entrepreneur’s idea, but it definitely is not the ultimate state a start-up should reach! The journey from on-boarding an investor to realizing a self-sustaining business with a lot of customers buying the product/service is really the aspiring state for start-up that is just blossoming. Getting an investor thus, is an important but not a necessary milestone in the start-up’s journey.
    External Investment could take many forms, prominent forms include: Seed Capital, Angle Capital, Venture Capital etc. Each one of these investors come in (often not voluntarily, but through an elaborate persuasion by the entrepreneur), at a different state of the start up.

    • Seed Capital is one of the investments coming earliest in the life-cycle of a startup – could often be just after the first investment of the founders. This capital investment is generally acquired when the firm at a stage where there are a lot of experiments going on and the numerous hypotheses on the ideas are still being validated. The buy in by the investor would mostly be based on the entrepreneur’s ability or the belief in the idea itself.
    • The Angle Capital could be next in the series of investments raised, where the experimentation has possibly yielded a limited range of options to venture into and would benefit from an individual who could be more than just an investor – possibly opening up his/her network to allow the product/service be adopted. There is more than just the return expectation; the buy in to the idea is a bit more personal & emotional.
    • The Venture Capital generally comes in at the growth stages of the start-up. At this stage, most of the uncertainties of the business arising from the customer’s side (could be product features, pricing, leads, sales cycle etc) are all negotiated and settled to a large extent. The growth plans of the venture, market size, return on investment etc would be key factors that could get the venture capitalist on-board.

    On-boarding the right investor isn’t just important for a start up, but could really get the help the start up see the list of the day and overcome its survival challenges. Choosing the wrong investor however, could be catastrophic for the venture.
    Start-up investment by its very nature requires a lot of patience and is riskier than debt financing models – where there is periodic return on investment in the form of interest earned. Expecting a start-up to give returns within a year of investment is in most cases unrealistic!
    Very often in the geist to raise the investment early, entrepreneurs raise capital from investors who do not understand the dynamics of the way start-up funding operates. Many entrepreneurs are left with painful experiences and sore relationships with such to such experience.
    These issues are most common amongst fist time individual investors – it is really an expectation difference and communicating early and clearly about the way such an investment would operate is the best way to handle such scenarios. Personality fit is important to ensure that the investor relationship is working well.
    In addition to the financing that an investor gets to the table, following are some of the other issues an entrepreneur would need to think of when raising an investment:

    • Past Track Record of the investments – you could benefit from not just the background understanding of the investor but also the kind of inputs one could expect once on-board.
    • Expectations of returns (may be in percentage terms) on the investment – will you be willing to share the equity asked for given the background?
    • Network of the investor – could be enormously useful not just to gain/extend the product traction, but also hiring the right talent. A lot of feedback on the prospective employee could be learnt about. More about hiring the right employee here.
    • What are the other investments (portfolio) that the investor has? – If this is the only investment made by the investor, then the risk is possibly higher on the start up! The above mentioned scenario could be more realistic

    The entrepreneur when seeking funding should necessarily do the homework on the investor and not just be enamored by the spreadsheet projection! A realistic alignment is better than a dream that is created without solid grounding.
    An experienced investors would have seen a lot of startup issues at close quarters and the suggestions and experience would be of enormous value – investing in choosing the right investor at the right stage and aligning the incentives appropriately would be every important.
    Most importantly, you would always need to remember the following – investors are in the company to primarily support your venture – they share the risks of the venture with you, they would only make money for themselves when they make an exit. So ensure that there are exit opportunities for the investors – not having exit opportunities would not make the deal worthy of interest to the investor.
    Understanding the pressures of the investors would definitely help explain the numerous horror stories that float around in the ecosystem. The investors are also in it to bake the cake, so that they could make some profit, right!
    Note: We haven’t discussed about debt financing here, debt financing should ideally come at a later stage of the venture and if taken up at the wrong time, it would

  • Employee selection in Start ups: A few useful pointers

    Entrepreneurship
    is often considered the pursuit of a goal without being restricted by
    the limitations imposed by resources. The goal could be limited only to
    financial gains, but could also include larger gains. Invariably, each
    of these goals has an end customer who benefits the most from the action
    of the entrepreneur.     Often, if one doesn’t think of the customer right from the beginning as suggested in the earlier post, one realizes this extremely practical learning at a high cost!  
    Translating the idea into a product/service without being restricted by the resources currently under control would imply seeking support from other sources. While co-founder (read about benefits/drawbacks and implications here) is definitely an option considered there are many other who do not like to cede control over their business and attempt going for an employee who could help realize the idea/concept into a product/service on offer.  
    My interactions with the start up ecosystems have helped me find some better approach that some entrepreneurs prefer. Here are a some of the pointers I believe would help lot of other entrepreneurs:

    What role am I hiring the employee for?
    Often the lack of structure could confuse the founder about the skills that one is trying to look out in his employee. Would it be apt to choose an employee for the IT development involves or for the sales side?
    My personal advice in this is to keep the business aspect with the founders always – not because it could be a business secret, but because there could be important decisions that need to be taken on the ground and direct customer interactions could help this process.
    The need to hire an employee begins from the need to accelerate the production to revenue cycle of the business. This gives a complete spectrum of activities and the notion of job-description wouldn’t make any sense here. Recollect the notion of uncertainty again here – would you prefer some one who is a sort of specialist in one area or a person with generic skills adaptable to the surprise scenario that is so common in the entrepreneurial journey.

    Clearly, independent of the dominant role for which you are hiring. looking for some one who is flexible is better – lets call them Jack of All Trades (JoAT). 
    Note:JoATs are better as long as there is no significant specialization that is to be needed in the product/service development. [We are still in the survival phase]. Working would JoATs for too long could in fact begin limit the growth of the business. Switching over to specialists at the right time is important as one navigates the growth stage.
    What am I looking for in the new employee joining?
    Flowing from the above aspect of preferring a JoAT to a specialist what needs to be understood is that ability to learn quickly is important. If you employee is not willing to bend his/her back and put in the effort with you in your pursuit it better stay away from the candidate. Many candidates come in with the notion of a fixed working time – if one are fixated with a notion of rigidity, it definitely an indicator of the inflexibility that is so essential to live through the survival phase.

    And remember to take note of the thumb rule – attitude is more important than aptitude – this is the ground on which any recruitment has to be based. 

    Reading this blog and thinking about it, is surely a precursor to the large issue of organization culture that is often ignored in start ups – this is definitely an issue for another blog!
    ————————————————————————————-
    Do like, comment and share this blog if you find it useful.

  • Co-founder selection

    An entrepreneur when starting off his venture typically tries to on-board a co-founder, and the most co-founders are friends. On-boarding a co-founder is an interesting junction in the start-up’s journey. Here are possible benefits and drawback one would need to think of in choosing co-founders:

    Clear Benefits:
    Having a co-founder is an indication that the
    ideator has been “sold” the
    idea to someone other than himself/herself, and that someone has joined the pursuit – this is an interesting signal to the outside world (primarily investors & employees). Resource pooling clearly emerges out as a very tangible benefit from such an approach – thereby de-risking to a limited extent.  
    – “I am not alone believing in an idea!“

    Teams enable the entrepreneur pool in some essential “factors of production”, in the classical terminology – land, labor, capital. Definitely, this process has added resources as a result of accumulation from more than one of the founders. In the contemporary world we could possibly look at some more dimensions to the classical factors – network, intellectual capital etc. 
    – “I am possibly better off!” 

    For start-ups, whose first challenge is survival this means: on-boarding a stakeholder would enhance the survivability of a start up; a greater breather space, and potentially a greater growth prospect. 
    – “I survive to fight another day!“
    The
    benefit is not just in terms of physical resources the idea sounding, check and balance mechanism, emotional support etc are all packaged into this. 
    Other implications:
     
    In
    addition to selling the concept of idea, the ideator is also responsible for the firm that gets formed. In many ways the identities
    of the two – the firm and the founder overlap when one starts off. However, realizing that
    these two could be separate over a longer period is important – the
    founder mindful of the distinguishing between the firm and the
    founder, the founder would need to make a decision that is beneficial
    for the firm which could continue perpetually. The co-founder decision one makes
    should be thought out in this light, and with the benefits to the firm be predominantly greater than the personal needs of the founder. Ask the question:
    – “Would the person be the right fit for the firm?”

    The
    ideator when on-boarding a co-founder would also have to note that the
    initial idea could also undergo a change. In addition to accessing new
    resources (means) there are new goals that the firm would need to adjust
    itself to. Ask yourself:
    – “Am I willing to change he goal? will the joint effort of the co-founders make the firm better off?“
    Many
    of the co-founders shared personal friendships – this could potentially
    be the source of the on-boarding, rather than the idea.  We are all
    emotional being, and encouraging friends in their entrepreneurial
    pursuit could be but a logical extension of the friendship. The ideator
    would benefit from reflecting on what each individual in his network
    could get to the table and relate it how the potential exploration could
    be helped by the individual.     Ask yourself:
    – “Is it the idea or is it my relationship alone?”
    Few words of caution in selecting friends co-founders:

    If the common interest is not the idea, and only limited to the social relationship – the firm wouldn’t benefit as much from from such an alignment of the founders. An obligation cannot be the source to a long term commitment; periodic incentivization is needed for one to sustain such a relationship.
     
    Last but not the least, co-founder conflicts are extremely common. There are many who do go to the extreme step of saying – be ready to loose friendship if you want to get into a partnership for venturing out into a business. Distinguishing what would form the professional space and what the personal space is important – this ability to separate the issue from the actor would be extremely helpful for founder.

    The call to add on a co-founder is one that could have significant implications on the firm and the ideator. So think through before you on-board your co-foudners.

  • Prioritize Stakeholder Acquisition

    I wrote this blog to highlight a best practice
    approach in starting off and tried rationalizing it. It also answers the question as
    to why dealing with the customer as stakeholders of business before any
    other stakeholder would be a good idea.