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What leads to the success or failure of a start-up?

The pool of money is growing. And therefore a start-up is almost the first career choice.

Published: 24th July 2020 06:49 AM  |   Last Updated: 24th July 2020 06:49 AM   |  A+A-

Startups

For representational purpose.

Till about a decade ago, a fresh graduate starting a company was unheard of. It implied that he/she was unable to get a decent (or maybe even not so decent) job, did not have the credentials to become a professional and did not have a family business to join. This has changed and how: The country has seen the growth of angel investors, VC Funds abound and are growing year on year, and now corporates are also taking start-up bets. The pool of money is growing. And therefore a start-up is almost the first career choice.

A few success stories were all it needed, companies like Infosys, Naukri, Oyo, Flipkart, Big Basket or Zomato. Domestic and global investors are finding this to be an attractive asset class and investing in innovative ventures across sectors. This has made India the fastest growing start-up ecosystem. So what leads to the success or failure of a start-up? While there is no sure-shot recipe for success, a few fundamentals have not changed even in the new normal: Team: This is the most critical bet in a start-up—by definition, there is nothing else in a start-up but the team with its competency, ability and potential to lead. Passion, perseverance and patience are necessary reasons for a start-up to even have the potential to succeed.

These are teams that will be “chased” by investors—rather than the other way round. Apart from a deep understanding of their space and their customer, this team must have a clear vision of what it wants to achieve, a passion for what it is doing, an understanding of each others’ competencies and most importantly, implicit trust in each other. Product/Services: Clarity on why the product is required and how it works is the reason for existence. “Best of next” is at the heart of innovation, ensuring functionality, quality and price competitiveness. And to stay ahead of the competition, it needs to keep innovating and upgrading. 

Customer and Market Focus: Understanding the customer’s need is key. Whether the product is allowing the customer to do his business “differently” or brings a “different” value, brings ease of use, easy access and affordability is critical for the product to be bought. This is even more critical in Covid times as markets have not vanished but consumer behaviours have changed. Understanding this shift is important as factors like social distancing, digitisation, online commerce, etc., are new paradigms to incorporate. Deep understanding of the market size, behaviour and trends are the key. They define the business model of the company.

A “need-to-have” product will invariably have large and growing markets, and will require standardisation and scale, while “nice-to have” products will have niche and boutique businesses. This is what will drive the sales strategy for customer acquisition, distribution strategy, dealer networks, online sales, etc., whether it is ‘one-time-use products, service-backed products or even customised products.  Delivery: A good product, a growing market and a potential customer are necessary but not sufficient factors for a profitable and valuable business. It is the delivery of the product to the customer and the customer deriving value from it, which brings in the revenues.

An undamaged, perfectly functional product is what a customer wants served and that too with ... a smile. This is the most critical part of any business; it rests on the team’s ability to execute perfectly and in unison. It is a well-delivered product/service that then goes to build brands, reputation and customer loyalty, which fuels growth and brings in a sense of achievement that ensures a high-quality team is charged up to “do more”. Finances and Funding: Representation of financials and projections is a mirror of the founders’ thinking. In the early start-up stage, the projections are largely based on assumptions; so why are they important? It is as it provides a view into the founders’ mind: How well is the business planned, have all the lines or revenue and expenses been recognised, etc.? And even more important: Is there a focus on cash flow.

How efficiently is the company likely to be run? I often say that the left column of the Excel sheet is far more important than any other column: It’s the quickest way to assess a business. Of course, funding is critical. It is the fuel to get the business off the ground. There are several ways of funding a business.

1) Revenues: ideal as it delays any external obligations;
2) Grants: good for funding early years but in India, this is long and arduous and could come with some non-financial obligations;
3) Debt or loan: banks need to assess the history of the company, which is impossible for start-ups to provide and cannot provide the requisite collaterals;
4) Equity: through sale of the company’s shares to investors who are now taking the same risk in the business as the entrepreneur and do become co-owners of your company.

Equity is in effect the most expensive way of raising funds, but in many cases the only way. Hence, raising money from quality equity investors is critical: those who invest beyond funds, by adding value to help the company grow, provide operational guidance, leverage their networks for customers, talent, etc. makes it additive. Choosing the right investor is almost a make-or-break decision for the future of the company.  It is often said that “when the going tough, the tough get going”.  I would add that today, than ever before, the tough need to have a toughened partner to handhold them!

Padmaja Ruparel
Co-founder, Indian Angel Network, and Founding Partner, IAN Fund
(padmaja@indianangelnetwork.com)

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  • Anant

    Great Article Padmaja
    1 month ago reply
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