Small businesses are the backbone of our economy, creating employment, experimenting with new and innovative business models. The same is also true about all startups – they have been instrumental in creating exciting and groundbreaking innovations in almost all verticals like technology, food and catering, ecommerce, consulting, health and wellness, etc. To give an example, most of the apps being used seem to have started out as a basic idea put into motion by eager entrepreneurs.
This phenomenon certainly goes to prove that there is no dearth of brilliant ideas and opportunity in our country. Perhaps this is what led the new government to set out an agenda for the creation of a dynamic startup ecosystem that will transform the lives of India's youth. Last year, we have seen several 'big announcements' on Start-Up India and a plethora of related schemes, concessions and benefits. There has also been a lot of talk about startup funding. The schemes have been announced and definitely exist on paper. However, the new breed of entrepreneurs and CEOs opine that there is a lot to be done in the area of permissions and compliances. The compliances related to the ‘ease of setting up the businesses’ is far from being satisfactory, and this is what the government must work on to encourage the startup culture.
For the first generation young founders, running companies for the first time and scaling it, there is not enough support that comes their way. The support that a mentor can provide at this stage could be in the form of identifying some critical factors like:
- Acquiring customers
- Changes in regulation or legislation that can impact the business
- Growing too fast – more orders, demands that the business can’t meet
- Growing too slow – stagnating leading to cycle hiring or firing
- Advances in technology or processes that make businesses obsolete and stale and many more
Young and first generation entrepreneurs are so excited about their business that they presume it will be easy to acquire customers. They build an interesting product, service and an interactive and interesting website and hope that the customers will walk in. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases, the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV). In order to have a capital-efficient business, it is important to recover the CAC in less than 12 months. However, there isn’t much mentoring support for the new businesses that can act as a support system and also help the first-time entrepreneurs to identify these crucial aspects.
The other major reason for startups to fail is because they run out of cash. It is imperative to understand how much cash is required and also what will be left and whether that can carry the company to a milestone that can lead to a successful financing. One round of funding a year ago does not imply that the valuations would be up and the Series B comes in automatically. To achieve an increase in valuation, the firm must reach key milestones, as valuations don’t grow in a linear fashion. Different situations that the entrepreneur ends up with is that the firm is unable to achieve the next milestone before cash runs out or that it was able to raise cash but the valuation is significantly lower. These are the growing up pains that the company must experience. However, the financers and funds that have flooded the market are in a hurry to capture market segments and be a part of the next boom to the extent that they set big expectations of accelerated success stories of startups. In turn, the new ventures are being pushed toward short-term solutions and unreasonable scale early formats.
The entrepreneur’s tact lies in knowing how to regulate the accelerator pedal. In the early stages, while the firm is just growing, the accelerate mode needs to be set very lightly to conserve cash. A fast track growth plan does not assure success; on the contrary, it will create a ‘no cash’ situation leading to a quick exit. When it is proven that the business plan has positive outcomes indicated by upward sales and a CAC recoverable less than 12 months, the accelerator pedal can be pressed down hard, as hard as the capital resources permit. The journey can be a roller-coaster ride moving slow at times and throwing in jerks. For the first time entrepreneurs, knowing how to react when they reach this point can be tough. With the help of a good support system, the startups may be able to navigate well and start investing aggressively ahead of revenue.- Madhavi Lokhande is Senior Associate Dean - Academics, Finance and Organisation ecosystem, Prin LN Welingkar Institute of Management Development and Research (WeSchool), Bangalore. She teaches subjects in the area of Finance and Costing.
[This article has been reproduced with permission from Welingkar Institute of Management Development and Research (WeSchool)]