Start-up’s journey to capital, part 2

By Professor Arun Sangwan, Alliance University School of Business

VENTURES AFRICA — One of the key takeaways from Part I of this article is that the Sauvé investors seek (a) evidence that your idea will work and (b) evidence that you are capable of making it work. Also, that between the two, the latter eclipses the first. And that is because it is your entrepreneurial competencies like ingenuity, leadership, problem solving skills, perseverance, commitment to work and quality etc. which make the idea work in the first place.

However, budding entrepreneurs often believe that success is all about the ‘best’ cookies, apparel or carwash. Such myths can wreck your startup at the ideating stage itself. Building a successful business is like solving a Rubik Cube.

A case for budding entrepreneurs

Let me tender an example that most of us can relate to. It is common knowledge that the tutorial services, after school care and fitness for children are rapidly growing industries. While largely unorganized, the competition is fierce.

You see an opportunity herein. Your plan is to create a formidable brand and take a franchise route to establish a nationwide network of say, tutorial centres to start with. And at a later stage you plan to introduce the after school care and fitness services for children. Say, what attracted you to tutorial services in the first place, is your expertise in one or more subjects. You take heart in the fact that most of the large chain stores started as a single outlet. Answer the following questions –

  • How would you effectively compete in this market?

Do you believe that a stupendous success in this market is all about delivering the best (academic) results? Do you believe that it is all about attaining the best teacher tag in town? Well, most respondents do so. Further, the respondents seem to confuse this tag with being an Einstein. Let us discover if it is correct.

A startup is no child’s play

So you start a tutorial centre and the first enrollments happen. You expect the trickle to turn into a deluge with time. However, it does not. You experience churn with as many students deserting as those joining you. You eventually discover that the ‘focused on results’ approach and or the Einstein tag is not the key.

It is evident that the customer enthusiasm about your offering is lackadaisical. And if so, you are destined to be a small business. It is time to answer the following questions –

  • Who your audience is?
  • What does your audience truly value?
  • How would you serve them better than others?
  • Accordingly, what products or services should you configure and deliver?
  • And hence, what competencies and resources should you develop or acquire?

*I suggest you write down the answers before reading any further.

Slice the market

  • Did you assume that the entire student population is one large homogenous community?

If yes, this assumption is fatal for any startup. I suggest you slice the population into meaningful segments based on similar characteristics. You may see many similarities but it should be the definitive characteristic. If so, you are closer to answers to all the questions asked above. For tutorial services, it is prudent to slice it as say, the students in top-20 percentile, the students in bottom-20 percentile and the ‘inbetweeners’.

  • These are 3 vastly distinct audiences, with distinct goals.
  • And so what each truly values is vastly distinct from the other.

Say, you decide to serve the largest slice, the inbetweeners. However, I must alert you that you are not done yet.

  • Further, in all markets there are patrons of luxury, premium, medium, budget and lowest priced offerings.
  • The utility or value perceived and sought by patrons of each is as distinct from each other as chalk and cheese.

For instance, the utility (or value) for the patrons of luxury offerings is directly proportional to the scale of exclusivity or rarity. Price is absolutely nowhere in the picture here. On the other end of the spectrum, the utility for the patrons of lowest priced offerings is inversely proportional to prices. The lower the price, the higher is the utility perceived by them. So, who is your audience for tutorial services?

  • Say, you decide to offer premium services for the inbetweeners.

Now that you have a better understanding of your audience, it is time to configure an offering that represents maximum utility for this audience.

Inspiration from Friends, Seinfeld and The Simpsons

Can you ever imagine what thrills the geeky Sheldon Cooper, Leonard Hofstadter, Howard Wolowitz and Raj Koothrappali, of the sitcom ‘The Big Bang Theory’ will even remotely thrill the inbetweeners? So the questions at this stage are –

  • How do I configure a premium offering for the inbetweeners, which generates a customer response similar to that of Friends, Seinfeld or The Simpsons audiences?
  • How do I sustain it like these sitcoms do?

I am convinced that the answers lie beyond the banality of say, Chemistry, Physics or Commerce etc. You need to concoct a magic potion by perfecting the following –

Product attributes – leverage creativity for introducing elements that can generate a stupendous response. The answers will lie beyond the boundaries of the class as well as books. Remember, it is not price, in other words affordability that restricts such business (with a premium offering) but the lack of creativity and resultant innovation on part of the provider that restricts it. Your product features should include –

  1. visits to observatories, museums, libraries, parks, planetariums, universities, sport academies, nature trails etc. whatever can be leveraged for learning,
  2. also use storytelling, drama’s, sports, adventure sports as pedagogy,
  3. invite experts, sports coaches etc.,
  4. encourage development of skills which is learning by doing as in experiments,
  5. help them consolidate learning and sharing the same through making short films, posting videos etc.

Service attributes – the aspects of the delivery process have to be as innovative.

Associated personal attributes – this is about the staff members that interact with your audience. Does your staff exhibit empathy, enthusiasm, eagerness to solve problems that may arise, commitment, drive and energy, patience, bonding etc.? It assumes critical significance especially in the service industry.

Do you think this will generate huge enthusiasm? I feel it can trigger powerful word of mouth marketing. This could be the tipping point.

Beyond the tipping point

Now, predictably the demand soars. The challenges are –

  • With rapid growth how do you retain the level of customer excitement or enthusiasm around your offering?

The product and service attributes are a lot easier to administer once you have appropriately configured it. The challenging part is the associated personal attributes. How do you effectively administer whether your staff is as empathetic and as inspirational?

  • Now the question is how do you ascertain and ensure compliance?

As a leader you should focus on evolving effective, predictable and resilient systems. You need todesign an organization that deliversOne, you need to articulate your vision, mission (reason for your existence) and objectives precisely. Two, you need to make it an integral part of your startups culture. Three, you need to design an organization structure that plays a supportive role. Else, you shall remain a small business.

Ruling out role of providence

Your success may largely be because of providence like favorable demographical factors in your first location. However providence is not likely to come to your rescue when you chose to operate in say, other locations in the city or different cities. Again a majority of startups fail at this stage. A handful that succeed make it to the next stage.

  • Can you replicate your success say, across locations or cities?
  • Does your system still ensure compliance to your core values?

You figured it all

Let us say, at this stage you have multiple centres successfully running across cities. Now there are no more nasty surprises in store, and even if there are your system is predictable and resilient enough to solve it. Further, replicating it is purely a matter of capital. This is where the vultures – the venture capitalists come in. Just as the vultures patiently wait for the feast to begin, VCs wait for startups to turn risk free before making investments. Be clear they do not wish to be solving your business challenges. Their model is simple. Put in say, R5 million at this stage and as the business explodes, exit with say R20 million or more, in 3-5 years. They are ardent believers of theory of natural selection and evolution (Charles Darwin), and theory of survival of the fittest (Spencer).

Final words

The moral of the story is that the narrative of nurturing a successful startup is similar.

To concoct a magical offering for a stupendous and sustained customer response, you need to understand that the utility or value perceived and sought by each segment in a market is as distinct from each other as chalk and cheese. Once you identify the utility, you need to perfect the product, service and personal attributes. Thereafter, focus on evolving effective, predictable and resilient systems. Once done, there are no more nasty surprises in store for you and even if there are your system is predictable and resilient enough to solve it. Further, replicating it is purely a matter of capital. This is where the VCs come into picture.

Editor’s Note:  This article was first published on Ventures Africa in April 2014 with the title “A Start-Up’s Journey to VC Street – Part 2.”  Part 1 was published on MoneySpentWell on June 27, 2014.

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