The Covid-19 pandemic has upset the world in unimaginable ways, making the norms of business turn topsy-turvy. Now the question arises, Is it good time to take the plunge and build your own startup? Has setting up a startup changed with the advent of the ‘new normal?’
Starting a company from scratch is not as easy as it sounds. Building one in the middle of a raging pandemic could be even more difficult. But some facts appear to be quite opposite!
Indian startups bagged about $6.5 billion in funding in the April-June 2021 quarter, while eleven of them gained unicorn status. As per a report from Nasscom-PGA Labs, 160 funding deals were closed during the second quarter—up 2% from the January-March period. This clearly proves the saying, “The brave get going when the going gets tough!”
“I don’t think there is a bad time to start. There are many successful companies that started during a financial crisis when there was virtually no funding available and the entire market economy was collapsing,” says Suresh Jayaraju, Founder and CEO, Nova Varsity.
However, there have been some subtle and some not-so-subtle changes in market dynamics, which are expected to continue evolving as the world slowly settles down. And clearly, the process of building a startup needs to evolve too.
A robust product
There have been instances when startups set up during a market crisis ended up hitting the jackpot. An economic downturn is, however, not an assurance for the success of a startup. Though it does help in giving founders a tunnel vision where they focus solely on the quality of the product and how it can solve the customers’ problem.
Ramashish Ray, Managing Director & Chief Executive Officer, Intartic, says, “This kind of situation provides a lot of opportunities as it provides less of an entry barrier, since many of your bigger competitors are busy solving other problems.”
The start of a venture still requires a lot of work that needs to be done. Jayaraju advises, “I think it is a great period to be focused on inwardly developing your product, or your solution matrix, and actually testing it out. This sort of gives you a cocoon where you can stay away from market dynamics or distractions and be absolutely focused.”
Building a startup takes enormous amount of time, energy, and resources, which is why the process of self-validating the seemingly remarkable idea is crucial. “The purpose of self-validation is to come to a decision of should I go ahead or not,” says Jayaraju.
Self-validating your idea before fully investing in your startup can help you make the right choices. During self-validation, the idea may not seem fit to be taken forward. This could be due to bigger competitors, the economics which do not seem to work, or the product suits only a niche market. Proper analysis could compel you to not to go ahead with your idea or change it to improve its chances.
Validation of the product needs to come from the end-users rather than just family members or close friends. Various mentors, tools, and techniques are available to validate a product but, ultimately, the real test is whether the customer is willing to pay for your product.
Figuring out how well your idea, product, or solution fits the overall market demand is a crucial step, called the product-market fit. As per Jayaraju, “Product-market fit is very simple. The user of your product, whether it is a business or the end-consumer, should start missing your product on a daily basis. That is when you can say that you are getting a huge demand which is unlimited.”
Shastry adds, “You should have the ability and gumption to create something on your own rather than just relying on receiving funds. If you get twenty customers to pay you in advance, you create a product of resources.”
For self-validation, Jayaraju suggests the simple method of showing the product to at least fifty people from various industries/demographics and taking their feedback. He insists that keeping this as a fairly sacrosanct number is important, particularly because the kind of response you may get from just five people could be completely different from what you might receive from fifty people. He says, “Confusion arises if the number is less, as some people may or may not like your idea. But the moment you move to fifty, you will have an accumulation of so many views. The aggregation of those views helps you know what points to pick up and what not to.”
Once you have gathered a clearer picture of what may work for the people, it is time to create a prototype, or a minimum viable product (MVP).The prototype is not the final product, and at best can be considered as a preliminary version of what it could be. It is advised that you spend minimum time and resources on building it.
Jayaraju comments, “One of the biggest mistakes that startups end up making is that they fall in love with the product and not the solution and spend months in building the product. Instead, I think they should be very scrappy about building the first version and ideally aim to finish it within a maximum of thirty days. You can build your second, third, or fourth version based on the users’ advice, and give it to them for free, even if you think your product is going to be highly-priced, so that they can try it and provide their feedback. This is a really important step after self-validation.”
This helps you track which version of your product has the maximum potential. The feedback given for the product is valuable as it helps you understand what a customer finds useful and what aspects of the product need to be changed. According to Jayaraju, this is a foolproof way to understand what value your final product provides to the customer.
Finding the ideal team
The people involved in starting a startup can also be called the founding team. It is critical to choose the right people in the team who understand your vision for the company and the product. No one person has all the skills required to build a startup, which is why choosing people with varied skill-sets helps to a great extent.
But that’s not all. It is also important that the founding team members have the right chemistry with each other. There needs to be a clear understanding between the founders of their competencies and their role in building the startup.
If you are working full-time as an employee in another company, there is no way you can put in your full effort into the startup. In such a case, a team can help share efforts and time. Jayaraju opines, “Cultural mingling of teams and how they get along is very important. The willingness to sweat it out and not sleep is the sort of passion that breeds a very different level of startups.”
Competencies and skill-sets to look for in a team can vary based on the vertical under which the product functions. For a tech startup, it is important to have someone with a broad technical background and someone with a broad business development background.
The Chief Technical Officer should be one who understands the mechanics of the product being built. Having a group or an expert for business development is equally important for figuring out a suitable business model and scaling the startup to next level. Overall, it can be said that stronger the foundation, the higher the fortress goes.
The first 500 days
The initial days of a startup are a deciding factor of how its journey would look like. With much to figure out while building a company, the learning really has no end—no matter how big it gets.
Notably, the initial days pass by in figuring out and having a stable business model in place. You try to have a steady cash flow from a stable customer base and try to keep your input and output in sync. Ray says, “A clear balance sheet should start emerging because 500 days is more than a year and, by that time, you should have a balance sheet that speaks for itself. It’s not the scale of the balance sheet, or how large the balance sheet is, but how robust it is.”
By this time, the founding team members must also be clear about their role and where they should aim to take the company. Ticking off boxes of some of the goals that a startup should hit in a stipulated time can provide a clearer and better picture of how the future would look like for the company. While not achieving them doesn’t mean the startup is doomed, it shows how well the benchmark is set.
Ray adds, “There must be some predictability that if you do this particular task then the probability of hitting this goal is high. A lot of people talk about success, but if you do not have the right parameters, then it is difficult. You need to be very clear about what you’re looking for because if you miss that, the test board itself is wrong and you will keep thinking you are going the right way even when you aren’t.”
Ray notes that after the first 500 days, a startup should be essentially ready to scale up. But to reach that stage, it is important to have a sufficient cash flow that will help it survive the initial 500 days.
However, scaling up a startup is easier said than done. A startup usually begins and survives its initial stage through bootstrapping and the founders’ own capital. Scaling up usually requires funds on a much larger scale. “The game of scaling up is very different from the game of starting up and proving your product’s worth,” notes Ray. Here is where the knowledge of a mentor or incubator comes in handy.
Accelerators and incubators
Investors, venture capitalists (VCs), accelerators, and incubators play a significant and influential role in startup ecosystem. They are the backbone of startups, providing a lot of grounding and mentoring to get access to the market.
Investors have an undoubtedly wide network, definitely much wider than any budding entrepreneur can boast of. They get exposed to various VCs, embassies, and government projects that gives them access to awards, funding, and grants, and opportunities to showcase the product. Their access to various trade commissions and embassies helps in showcasing startup projects in those countries and enter those geographies.
Creating a perfect proposal for investors can be tricky, but it need not be. Shastry wants the startups to remember regarding the investors, “If they see that the team is strong and the credentials of the team are relevant to what is being solved, then that is something that they definitely look for. The moment the investors see that both the team and the ability for execution and pivoting towards the problem solution is strong, they fall in love with such types of startups.”
In spite of all this, there are very few startups that actually end up getting funds from VCs and incubators, and the competition has become even more rigid post-Covid. However, there is no reason to be disheartened if an investor rejects you. At no point in time does getting into an incubator defines your success or failure.
Jayaraju, in response to the situation above, reassures, “I think the best thing about VCs is that the more they reject you, the more you tend to refine your proposition and make your business model even more successful. You never know if you’re gonna be successful after the first pitch or the sixtieth pitch, but by asking the right kind of questions, you can still add value. Even if they don’t fund you, most of them are open to giving you suggestions, and they are more than happy to help you connect with other people,”
In support, Ray concludes, “Sometimes a startup journey can be a very lonely one and may seem like you’re just sitting as a frog in a well. It is the incubators, accelerators, and VCs who ensure that you don’t remain in that well but also go out and see what is going on around the world, because they are meeting multiple people like you across the industry. They can give you that reality check and sometimes be the nudge that puts you on the right path.”
Apart from that, they also look into things like validation core, crowd infrastructure, as well as technology infrastructure. It’s not possible for a hardware startup to have huge infrastructure right away, which is why being part of an incubator is so valuable.
The bad and the ugly
Creating anything of your own is as exhausting as it is exhilarating. Every successful startup is the result of the sweat, blood, and tears poured into it by its founders. As inspirational as it sounds, sometimes a lack of cushioning, either financially or emotionally, can do more harm than good. This is more so in present times where startups are evolving every day and it is getting increasingly difficult to set yourself apart.
“A lot of entrepreneurs and founders are exploiting themselves. They are working without taking a break, not being paid salaries, not taking care of themselves nor the people around them. What they’re doing is they’re just killing themselves, which they shouldn’t.” notes Shastry.
Even so, Jayaraju argues that too much cushioning can also have an adverse effect such as complacency. “You do not need to be self-exploitive but at the same time, unless there are sacrifices made or there is sole devotion to a certain cause, you may not end up making great products or solutions, because you have a backup. So, the answer really lies in questioning yourself: How much risk are you willing to take?”
The formula for creating a successful startup has not changed much post-pandemic. However, the importance of building a robust product or solution as a tech startup has never been made clearer. With the future looking bright for startups, the founders need to find the middle ground between their passion, customers, and what would make money.
In conclusion, Ray states, “The startup founder is ‘a buck stops with me’ journey. You and the founding team are alone, and once you let that seep into your flesh and blood with added thick skin, you are mentally ready whatever the time may be.”
The article is based on the panel discussion ‘Idea To Startup: How To Do It?’ presented at September edition of Tech World Congress 2020. It has been prepared by Siddha Dhar, a business journalist at EFY.