Startup Lessons
When I jumped into startup consulting, my objective was to dive into the world of innovation and ideas where it has not been weighed down by traditional organizational hierarchies.
Coming from the experience of large enterprises, it was not easy trying to scaleup my experience. When I started to fit in my enterprise mind into an entrepreneurial mindset, I realized it does need a scale-up!
Working with startups, analyzing their work, rapid implementation, social media reach etc. took me through the fine-grained challenges that may not seem obvious. I have come to realize that everyone at some point, whether it is the founder or team, will see themselves face-to-face with “whole product thinking” and market rhythms. This journey takes you from MVP (Minimal Viable Product), sales, customer acquisition, through business planning, strategy, resource retention, operational cost and cash flow to name a few! It may not be the same person or role doing it all, but this spectrum of roles will surely touch everyone in the team.
I saw how a young entrepreneur was working though an amalgamation of “mass entrepreneurship” and EdTech. I saw an energetic team of five working on a platform for IoT and fleet management. There was another IP based startup working on personalization for employees and found that its product can also detect anomalies! Then there was a “yet to be announced” unicorn offering AI driven platform for payment collection and financial services.
Here are some key observations that I believe have either had a positive impact or a not so positive impact on the startup and its founder’s journey.
1) Active founder does not take salary: If a founder is working 14 hours a day on product design, sales, customer calls, networking, hiring etc. it does not mean he or she should not take salary! Every effort needs to be accounted for, at least notionally, so you can derive the right “payback period” and ROI for the startup or product. If you were to hire a CEO with all the responsibilities needed, wouldn’t you pay the CEO? Also, when you account for operational expenses, as a founder not taking salary is eventually a “cash negative”. Founder just missed out on both expenses and forecasting not to mention the corporate tax! In the excitement of passion towards the product and to showcase profitability, founder is paying a heavy price on the personal front! Think about the opportunity cost here. If the founder were to be employed elsewhere, wouldn’t he or she get a salary? Always take a salary from your startup, even if it is notional!
2) IP based product and ease of copying: How easy is it for other companies to copy your product or platform? This is the first question I ask when I start analysis on sustainability. I always quote Warren Buffet on economic “moat” where he describes the importance of having a competitive advantage of a product or company over its competitors. When a founder presents the product to potential customers, it is easy to get carried away and provide as much information as possible. One will realize that presenting the product (or idea or the problem being solved) can focus on the “What” and “Why”. If the founder delves too much into the “How”, chances are that another company or enterprise will copy your product!
3) Does agile or SAFe (scaled agile framework) apply for Startups? I get this a lot. More than 90% of founders that I interacted with have said “I don’t care about process; we need more results, more sales, more reach in the market.” Before I answer whether agile is applicable or not, her is an example. This was a startup where development was slower than expected. They tried moving from a 2-week cadence to a 1-week cadence. Iteration planning would be done on a Saturday. Development starts on Monday and by end of Friday we have a demo! This was found to be successful given that it was one agile team. The founders were engaged in sales, product design, customer journey mapping, social media coverage etc. and would instantly provide customer feedback for the next iteration. The startup then wanted to experiment with a 1-day cadence! While this was one example where agile was very effective, I believe, lean-agile mindset is for every team to assimilate. The results may not be apparent immediately, especially if the startup is less than 3 years in the market, but this mindset will guide the startup on a sustainable growth path. Every startup team needs to understand that Scaled Agile Framework (SAFe) is encompassing the best practices from bodies of knowledge including systems thinking, agile development, lean product development and DevOps.
4) Growth and the “startup’s block”: I have heard of a “writer’s block” what is a “startup’s block”? Writers and startups have something in common, they start with an idea! So, when a founder is asking the question — after first 3 years of initial growth why is my startup not growing faster? That is when a startup seems to have hit a threshold. As a founder (or team) do I need to re-think on strategy, sales, business model? Every startup passes through a roller-coaster in terms of managing cash flow and expenses. I have seen startup’s that hire developers temporarily so expenses can be in check. While networking and reach (social media) help in new customer acquisition, founders face the challenge of break-through deals. For example, an IoT based startup had a good clientele in the form of schools (school bus fleet routing and alerting) and was working on tracking mobile and immobile assets for large construction and mining companies. The same IoT platform could also be applied for scalable applications such as smart buildings, smart hospitals, smart airports and so on! The challenge was in getting right contacts so you can pitch your solution to the decision makers! When you have an angel investor or an advisor in the industry it helps with growth and market reach. Once you get an opportunity to pitch, rest is on the ability of founder (and team) in effectively influencing customer and the deal!
5) Pricing and free lunch: Startup sales could be so exciting that the founder tends to give freebies as part of negotiations, assuming it will turn the tide. What if this is a large deal which could make or break my startup? I always quote Serge Godin, one of the founders of CGI Group. For every decision you take, speak to yourself about the decision three times. Once from the perspective of your team (members working in the startup), once from the perspective of your clients and once from the perspective of potential investors (and yourself as a founder/ stakeholder). Wait, if this were applicable for large organizations, does it apply for my startup? Absolutely! What we are building is a balance equation “member-investor-client” and it is a strong foundation for any future decisions that could make or break a deal. I have seen two parts to the pricing strategy. 1) Discount on product, premium on maintenance 2) Premium on the product, discount on maintenance. Both strategies assume that future maintenance be part of the deal! If you only selling the product and not future services/maintenance, you are missing out on pricing and revenue!
6) Social innovation and CSR: Can a startup engage in social innovation and CSR (corporate social responsibility) and do something for the society? This becomes very interesting if the startup itself was founded to help society! There was this startup which was focused on engaging rural students with free classes so you could enhance their employability in this digital age. Now the word “free” tends to make people “care less”. So if your startup is based on rural upliftment via education do think of a nominal fee so students and their parents take interest. If education extends towards entrepreneurial skills, then it adds to rural innovation and self-employment. I believe, mass entrepreneurship targeted right through the schools (and curriculum) causes a positive ripple effect on both rural employment as well as the economy. Hitachi Global Social Innovation is another great example of a large conglomerate making a positive impact to the society. Startup or large enterprise it is never too late to start thinking about the society! Back to the question — can my startup engage in CSR? — yes, every bit from employing rural students, training, weekend classes, it surely makes a positive impact. CSR and social impact do not always need monetary infusion. Startup team’s time and effort are also effective contributions to the society.
7) Do all co-founders have equal share? More than 90% of startups I have observed always go back to re-negotiating their share! Other 10% were either proprietary or family based! Inactive founders who only want to invest and not be part of day-to-day activities may demand an equal share, but this arrangement needs to be considered very cautiously. This goes back to the first point — active founder taking salary! Do the homework on who is performing what role, account for their (notional) salary, and effort to make an objective decision.
8) How much of my share do I give to investors? This is a million (or billion) dollar question when the startup pitches itself for investments. Every founder is passionate about the idea he or she has been nurturing. When the valuation of a company considers a certain number, the founder is looking at a decision regarding retaining future share in the startup. Investors will tend to demand a larger than expected share. If the investor is interested, the founder has the advantage of testing the limits! The founder should not be under pressure to sell if the startup has 1) Competitive advantage 2) Solved technical difficulties in scaling the product 3) Uniqueness of solution and the business problem it is solving 4) Customer base and cash flow and 5) Market size. I always remember the story of Apple and iPhone. Apple’s analysis of known market size at the time of first iPhone launch in 2007 was just a fraction of the market size that got infused later (unknown market share). iPhone created a market at a time when all known technical parameters would have been a pale comparison of what was to come! You can also grow the startup with the motto — “We are not for sale.”
9) Do I need to be under 40 years of age be an entrepreneur? “40 under 40” is a trendy phrase and I have observed that that to become an entrepreneur, starting early helps. When school and college graduates are taught entrepreneurial skills, it helps both in terms of starting early, gaining experience, pitching ideas, and failing! Failing fast and pivoting is a great experience for any entrepreneur regardless of age. The sheer magnitude of increasing (even by a factor) the number of college graduates to entrepreneurs has a ripple effect! Not to mention the self-sufficiency of a career and providing employment to hundreds of thousands and impacting millions indirectly. I have seen many startups where the founder is over 40 years of age. Every startup and founder go through a market experiment phase where you are learning something new regardless of age.
Summary
Some of the key success factors I observed in a founder (or co-founders) include strong passion towards the idea and the business problem being solved, unique IP and product, recruiting a team which shares common goals and providing great customer experience. Almost every decision revolves around customer centricity. I have seen startups shut down due to loss of competitive advantage (others have copied and improvised on your idea), lack of customer base and inability to sustain growth and the team. Successful startups, the ones that have evolved to become unicorns, have been backed up with strong customer base and support from the team. As much as an innovative idea, a strong customer base acts as a “multiplier” for growth. This is due to consistent generation of positive feedback, ecosystem, marketable references etc.
I believe, startup experience is something everyone needs to take. If you are already employed, then volunteer! If you are new to the startup world, then volunteer as part of a startup’s CSR campaign. You are not only gaining experience about a new idea but also contributing to the society!
