October 2, 2021

Where Founders Flounder?!

With ‘Startup’ becoming a fad term, it is better to get your feet wet, before swimming

Founders are individuals who start new organizations to pursue opportunities without regard to the resources they currently control. They make the early decisions that shape the startup and its growth, an influence that begins even before the founding itself and that can extend through all stages of the startup’s development – Howard Stevenson: Sarofim-Rock Baker Foundation Professor Emeritus at Harvard University.

When I look back over the past two and a half decades or so, I am surprised how the startup ecosystem in India has changed so dramatically. At that time, when we were about to set up India’s first private sector incubator inside of a university nobody was gung-ho about entrepreneurship (it was to compete with the best campus placement offers that students would get) and the closest that most people had heard about an’ incubator’ was the one used in hospitals for new born babies! That was around early 2000.

When we launched our first batch of ‘grooming’ at iCreate in 2013, the landscape had changed substantially. Several top IITs and IIMs as well a number of Tech and Management institutions in the private and government sector too had embarked into encouraging entrepreneurship. With both; the Central Government and several state governments dolling out schemes to encourage entrepreneurship through various arms/departments, there is a rush for institutions to apply for such schemes, and in turn, try and nudge their students to pursue the path of entrepreneurship.

Nothing wrong with that….it is a great sign of progress and aspiration to be an ‘employer’ rather than an ‘employee’. However, few within and outside the ‘system’ realize how hard the entrepreneurial journey is. Statistics are heavily stacked against the success ratio – 90% to 95% of Indian startups fail within the first five years!

The intention here is not to discourage both young and mature aspirants to pursue the entrepreneurial journey of their choice. However, I felt that as somebody who has watched the ecosystem evolve over the years and mentored several founders very intimately, it is obligatory on my part to share some ‘bear’ truths. There is no harm in life to take well informed decisions rather than impulsive ones!

I have attempted to put together some key aspects that Founders need to be careful about both; before and after setting up their entrepreneurial venture. The list is not necessarily in order of hierarchy- although I have tried to follow some logic. Also, obviously, it is not exhaustive and even the ones that I have listed here may deserve an independent article to make that topic more profound!

Choosing to be any entrepreneur because you want to be your own ‘boss’ and do not wish to report into anybody else!

This is the worst of the reasons for becoming an entrepreneur and an extremely dangerous myth! When you are an employee, you have a 9 to 5 job (may be extended by a few hours once in a while) and you report into 1,2 or at most 3 bosses. As an entrepreneur, you have a 24×7 job and everybody is your boss – your customers, employees, suppliers, financers, bankers, government….and when you return home after an exhausting day, your spouse!

Not being real about your life and personal current and possible future circumstances

At the outset, one must plunge into entrepreneurship only if you have the following:

Favorable personal circumstances: entrepreneurial motivation and passion, family support, financial support – if you have a student loan to pay back or/and the family is dependent on your predictable income then it is advisable not to venture now, not close to marriage – unless you have taken into confidence the potential spouse and her/his family, you have positive role models to emulate, and reasonable cash cushion for say surviving 3 to 5 years of ambiguity and uncertainty.

Favorable career circumstances: you have some relevant experience and/or a mindset to grasp what is required at quick speed, low opportunity cost in trying out, the golden handcuff (high salary that only a large corporate can pay) has not caught you! and it fits into your future scheme of things as a career direction.

Favorable market circumstances: you have a big opportunity to solve a profound problem, there is favorable context, customers are having the ability AND willingness to pay and there is time enough to develop a solution and go-to-market with enough slice of the pie available for you.

In short, you need human capital, social capital, and financial capital – at all stages of an enterprise.

Starting with an idea instead of addressing a profound ‘pain-point’

This is very, very vital – especially if you are starting young with virtually no or very little work experience. Don’t latch on to an idea because you get a technical ‘kick’ out of it – it may have been ok for your final year project or a Ph.D. thesis but may not necessarily have enough market demand or/and may not be able to build at commercial scale. Ability to ‘sniff’ an appropriate pain-point is one that deserves most of the time before you embark into anything worthwhile. Surveys show that about 40 to 45 % startups fail because of no market need!

Copy – Paste

This is an unsustainable approach most of the times. Just as you may visit a trade fare in China or Taiwan, so will your compatriots….implying, if you can copy, they too can…may be cheaper and faster… and very soon you may disappear! If you try and imitate a product from the Western world then its adaptation for Indian context may be tough – of course in some cases, competitive cost of doing business may help, but the market has to be big enough and the competition fairly limited for you to succeed in the long run.

Latching on to the flavor of the season – opportunistic money making versus building a sustainable business model

This a dangerous mindset – a lot of this was visible during the Covid-19 times. Everybody trying to grab whatever opportunity that was available. However, once peak demand for various items tapered off, they were stacked with unsold stock and money pending to be collected from the market. If you want to be a serious entrepreneur, then please get yourself organized – invest enough time in planning and creating a robust business model. Else all your dreams will come crashing!

Planning for a quick exit and move on to the next versus having a ‘Built-to-Last’ mindset

The Western world particularly in the US, and that too in the Silicon Valley, the mindset of becoming a serial entrepreneur came into vogue. Some of this is visible in Israel tech startups too. They plan the venture to get a handsome exit for themselves and their investors. However, one must note that it not as easy as it may sound – a lot if it depends on Intellectual Property (IP) created and/or market penetration/customer acquisitions made or in some rare cases a fascinating team. As opposed to this, Indian entrepreneurs may be better-off having a built-to-last mindset. Of course, I am not suggesting that it need to be a generational thing but possibly 15 – 20 odd years may be a good bench mark to take a call. Not all Founding Teams today would think like an Infosys when it was conceived as a first generation tech startup!

Quick and big money being the sole motive

Again, terrible for starters! Money has to be a consequence of having done many things right and at the right time….first and foremost, solving a profound pain-point with a solution that is relevant, affordable and trustworthy in being able to deliver what it promises to.

The myth of ‘First mover’ advantage

This is one of those romanticized thoughts. First mover is a double-edged sword! It may or may not work in your specific case. Usually, it needs deep pockets and considerable effort to get early adopters and subsequent traction of enough customers who are consistently able and willing to pay. In fact, more often than not, it is the second mover who reaps all the benefits of the hard work and learnings of the first mover!

Confusing ‘Products’ with ‘Services’

Most aspiring entrepreneurs may draw inspiration from the successes of the software industry and think that the same can be emulated in hardware too. In doing so, they grossly undermine the time, effort, money and go-to-market challenges among other things. Even among software, there are SAS based solutions which have challenges similar to that of product companies. Complexities deepen depending on who the last mile consumer is – are you doing a B2B, B2C, B2B2C, or a B2E2C sale. Warranties, customer support and annual maintenance are other nuances that need to be built into the product costs. Products have an edge in terms of potential IP that could be capitalized – but it has to be very, very compelling and strongly ring-fenced for the entrepreneur to leverage and reap the benefits.

Lack of balance between functionality and aesthetics

This is an aspect very crucial for hardware products. Tech founders can often can get very biased to lean more in favor of the functionality and feature aspects. However, one needs to get into the last mile consumers’ shoes and understand why aesthetics is a vital aspect from their perspective. This implies that the venture factors in time, effort and budget for this. It also involves having the right set of people for this in the team or finding a good outsourced resource. Post design, there is cost of making dies and approaching the right manufacturing facility for producing enclosures for example. Choice of the right material that don’t negatively conflict with functionality is important and therefore this needs balanced thought at PoC or soon after PoC stage itself. It is heartbreaking to discover bad news at the fag end and going back to the drawing-board all over again!

Not taking the right judgments on Intellectual Property (IP)

While IP is a very powerful tool to leverage for tech ventures, one has to do it carefully and with the right timing in mind. Unless it is a very distinct and powerful opportunity one should weigh in the pros and cons between spending time and money for IP protection versus hitting the ground and going to market as quickly as possible. This needs a very careful and well informed judgment call and it is better to seek proper advice from relevant subject matter experts as well as IP experts before plunging one way or the other.

Making the wrong choices of DIY versus Outsource

In today’s world for almost all products and services it is imperative that they hit the market as soon as possible. If it has to fail, it better fail fast! One common dilemma in young startups when moving from idea stage to PoC with a small team and dependency on part time piece –meal work associates and/or interns is, what are the things they should be doing on their own versus what can get outsourced? There is really no rule of thumb for this. However, DIY if the core tech strengths lie within the team and in aspects where potential IP resides. If you choose to outsource, then make sure of what you want – get the specs crystal clear and keep a tab on the progress constantly. This is to avoid a situation where you have spent time and money and still not got what you wanted resulting into unnecessary heartburn among all stakeholders! This is not uncommon and I have witnessed this over and over again. It is therefore imperative that the team invests enough time in the ‘planning’ phase rather than rushing to execute.

Also, the technology animal is ever changing and difficult to get it right everywhere and every time. It is helpful for tech entrepreneurs to remember that “perfect is the enemy of good”. In the obsession of being a perfectionist, don’t miss the go-to-market window. It is quite possible that customers are happy with the ‘good’ version – which fully solves their problem at a price point acceptable to them. Perfection is what the entrepreneur and the development team may be aiming at from a technology perceptive. By saying so, I am in no way suggesting that at any point in time the team must take a short-cut and compromise on quality.

Lack of courage to quit and move on or pivot and take a new path

The dictum of the passion that one desires of an entrepreneur also ironically comes in the way when some hard decisions have to be made. Once an idea moves to a ‘Proof of Concept’ (PoC) stage, the challenges start emerging and often it could be from unimagined corners like a regulatory bottle neck (say in case of Medtech startups) or a new competitor from a completely unknown territory. Attachment or obsession to one’s original idea can often blind the entrepreneur from the worldly realities. It is good at such times to fall back on Sahir Ludhiyanvi’s famous lines: “Chalo ek baar fhir se ajnabi ban jayen hum dono”Ability to ‘let go’ is an important attribute that entrepreneurs must possess.

Dilemma of Solo versus team and……founding the team with wrong members on board

While it may be ok at very early stages when you are looking at worthy of solving pain-points and exploring ways of solving them all on your own, the solo route is not the one that is encouraged beyond that. It is very crucial that you have the right founding team and they are all in it for the right reasons – each one complementing or supplementing each other’s skill sets. It is OK if the team has been formed because you studied or worked together – but there has to be clarity on what value each member brings and there needs to be shared passion, vision, purpose, and mission. It is helpful to undertake a brainstorming exercise among the potential founding team members on “What is in it for me?” and ‘What is in it for us?” If the answers are vastly contrasting, then that is red flag. Also, it is very important to recognize the fact that in any team there will be a ‘first among equals’ and that must be respected by all co-founders. Again, surveys show that 23 to 25% startups have failed for want of a good founding team.

Confusing Family AND Business as Family Business!

This has particular implications in the Indian context (although it is true even in the West and the East). There is as such no harm of involving family members actively in the startup so long as they pass the test and undertake the exercise that I have suggested in the earlier point. There is a catch here though – that all the stakeholders must have enough maturity to recognize that family and business are distinct relationships. You cannot bring business disputes to the family dining table and you must not carry over family differences of opinion to the workplace. In the end, you would land up destroying both – thereby making a Hindi serial producer or an OTT platform to get a good storyline and make money at your cost!

Not investing enough on talent

Startups must set up right in the beginning a culture of delivering the best product or service. That implies that the talent pool that the venture has, needs to be the best (but not necessarily THE best and THE brightest). One has to look for the ‘Best Fit’ talent – one that suits the culture, shares the vision, mission and passion of the Founding Team – especially the early core team that joins the venture. In almost all cases at early stages, the venture cannot compensate the staff at par with the industry standards (especially for those with work experience) and often times they would be willing to join at equal to or lesser salaries that they would most likely get in other companies. It is important therefore for the entrepreneur to remember the early sacrifices that such individuals have made. Failure to recognize key and/or early team members as important stakeholders, is not a good sign of a fair enterprise.

Not having put a cash pipeline in place

This is the bitter truth – that no venture is possible without capital at almost every stage. Initially, one could dip into personal savings, borrowing from family and friends, government grants, if you have an impressive PoC you may win some prize money, incubators may help you with funding of various types (project costs, sustenance, go-to-market funds by way of grants/loans/equity/convertibles). But all this may dry up at some point in time unless the venture does not start making its own money to sustain. It is imperative that at all points in time the enterprise has a healthy cash flow – this is something I have always encouraged entrepreneurs to be watchful about. No matter what funding you have, how much has business earned for itself to keep the wheels going, and for how long? Almost 30% of startups fail due to want of a steady cash pipeline.

Not understanding competition enough

Undermining competition is death knell for an enterprise. Even if you got the early breaks and managed to capture a substantial portion of the market, you cannot afford to take things for granted. In today’s world, monopolies hardly exist. There will be some competition always round the corner and you have to be very watchful. They are bound to nimble, energetic and stronger in terms of new resources and coupled with their hunger for success, their animal instincts is ready for the kill. Close to 20% of startups shut down for want of shrewd understanding of competition. There are of course a number of case studies and stories of all those upstarts that brought down well established giants.

Gross under-estimation of cost of doing business

If there is one worrying thing that I have noticed in several ventures at least in their initial pitches is their inability to grasp the need for estimating a reasonably realistic cost of doing business. Typically, they know the bill of materials at PoC stage and at best, will argue that the costs will only come down when “we procure inputs in bulk”….which is true. However, what they tend to ignore or lack experience in estimating, is all other associated costs. They also ignore covering for the Founding team’s opportunity cost or their replacement cost for part of the functions that they are handling currently. In ventures where marketing efforts need deep pockets, lack of judgment can be suicidal! How will you peg a price to customer if you don’t have a handle of cost of doing business?!

Not having a sound pricing model

Almost 18 to 20% ventures face failure on this count. Some of the cause is related to the earlier point, Add to that, lack of clarity on a sound and consistent pricing model, which is crucial. As an example, in the excitement of trying to offer too many features vis-a-vis competition (features which may be useful for less than 2% of customers) one might actually be under- pricing it! Possibly, one should have considered a model that builds up price to customer based on the features desired, including premium pricing for ‘customized features’. Again, one should be careful getting into the lure of customization if it involves considerable effort and that too at the expense of your running standard version.

Undermining marketing efforts

Even the best of content in any field today needs marketing. Unless you are in a very niche product/services segment where the value is high and typically it is a B2B business which you have cultivated with high quality delivery and timely customer care, the journey is tough. Marketing is necessary for most products and services today because customers are increasingly more aware, have a wide range of choices to make, and virtually no field is competition free. Even if there is none now, there will soon be one round the corner! There is a need to make one’s offerings visibly through various mediums and also establish a ‘brand recall’. Again, this is not a one off effort and needs to be ongoing and therefore needs consciously effort and budget.

Not listening to the voice of the customer

It is very imperative that all entrepreneurs no matter what stage and what pinnacle of success they may have achieved, must constantly listen to the voice of the customer. They are the ones who will constantly give honest feedback and help your offerings improve. I have already written an article on this topic earlier.

Looking for money rather than ‘smart money’

Right from the time you take the right slice of money in whatever form – grant through incubators, angels, early stage VCs – it is wise that you don’t get lured only by the quantum of money available on the table. Money along with some other attributes would be of much greater value e.g. if it comes with help in technical refinement, market connect, supply chain, team building, help in next round of fund raising , help in legal and statutory matters (particularly in very early stages). This is where at very initial stages and up to being fully geared to go full-hog into the market place, incubators may be a good option to consider. Among them, some will be specialized in certain focus areas and will offer particular strengths in holding your hand along the way – so make informed choices that are relevant and suitable to you.

Not enough attention to documentation, policies, and statutory matters

This is a common hurdle most tech founders face. More often than not, it is not deliberate but plain ignorance and lack of time for getting this on their priority list. While there are tall claims of ‘ease of doing business’, doing any business in India is not that easy! For one, it is may be easy to start a new venture, but a night mare to shut it down!! It is important that aspiring entrepreneurs seek right advice at the right time for legal and statutory matters impacting their area of business. It is not expected of the Founding team to be an expert on everything in this arena but plain ignorance is unpardonable! Also on the operational front, it is better to put in practice of documentation and some basic processes in place like HR policies to begin with. The more one defers these practices and operates in the environment of informality, the more difficult it will become to introduce them and make it acceptable – especially for the team that has been since the beginning – as they say, “Old habits die hard”.

Disharmony among founding team members

This is the most slippery one to handle and often times hard to resolve among the parties involved. It may need a mentor or any other person commonly acceptable to help resolve the issues. First and foremost, if there are difference they better surface loud and clear and quickly. Don’t brush it under the carpet and defer taking hard decisions. Delay in resolution will only make things difficult and de-motivate all other team members. It needs to be handled maturely and irrespective of the issues involved, one must part with grace. One of the most common troubles faced is equity distribution. Therefore, clarifying this right in the beginning quantum and method of equity distribution and also agreeing on how to part when a disagreement situation crops up, is sign of a mature founding team.

Souring relationship with investors

One must remember the Golden rule: ‘One who has the Gold, makes the rules!’ While money is important at all stages of the entrepreneurial journey – more so in the early stages, entrepreneurs must realize that irrespective of in what form it comes (grants/prize/equity/loan/convertibles) at the end of the day, it is somebody’s hard earned/tax payer’s money that is at risk and they are willing to let you take chances. If you hit a jackpot there are many gainers, but if the venture goes bust, there are few losers, mainly the funding agency (in hard cash) and the Founding team in terms of opportunity cost (but hopefully they would have learned some valuable lessons). Therefore, it is advisable that as far as possible don’t sour your relationships with your investors. Whatever negotiations you want to do, do it before signing the dotted line – and fully understand what you are undertaking. Ambiguity and unwritten trust actually lead to relationships going sour. Almost all investors recognize the fundamental truth: that only if you succeed, they succeed. So they will work in your best interest. There may be differing views – but there are amicable ways to sort them out. Their network and introductions are very valuable and you must be able to capitalize on it smartly.

Not having a competent and caring Advisory Board

When ventures go past the initial phase of proving their value position and beginning to ‘settle’ down it is good for them to gradually start putting in place a competent and caring Advisory Board. I use the word ‘caring’ deliberately – not to suggest pampering, but like good parents, pull up the Founders when they flounder and appreciate them when they deserve….and both; at the right time and place! To begin with, this may not be a jumbo Board – get experts as the need demands. At initial stages the venture may need people with sound relevant tech background, market connects and networks and later, one may need those who help build and manage talent pool, help in approaching VCs, international markets, help in deliberating about growth strategies and so on. Importantly, they are expected to be people with their ‘heart in the right place’ and do it for the joy they get rather than any materialistic returns.

Inability to create a leadership pipeline and a succession plan

If there is one thing that founders must accept as reality is that they are not going to be around forever and that there will always be a need for better people than themselves to run the show. Also, if they keep doing what they were doing in the initial years (read ‘micromanaging’), then neither they, nor the venture will ever grow. Firstly, they need to bring in professional people and build cohesive teams. Subsequently, identifying next line of leadership and grooming them is a key task of the Founding team. Also, succession plans should be transparently discussed firstly among the Founders and then with the next layer of management and made known to the organization at an appropriately time and manner. If a Founder or/.and the Founding Team hangs around for too long, then there is the danger of what the famous historian John Dalberg Acton said once in another context “Power tends to corrupt and absolute power corrupts absolutely”.

Not having a mentor or a life coach in the entire journey

Entrepreneurs young or old, are at some point in time likely to feel ‘lonely at the top’. It is always helpful to have somebody or more than one mentor to help you navigate the pitfalls. While most mentors would be able to guide in addressing several business challenges, few of them would have the competence and knack of being a very valuable ‘Life Coach’. That relationship is normally lasting for life and goes beyond the area of business – more counselling in nature – which is very essential given the stresses and strains of entrepreneurship. It is good to spot a life coach early in one’s entrepreneurial journey. Almost all of them would be willing to give time for free – because they do it for the joy of giving back to the next generation. To those who do it on professional terms, even they recognize your entrepreneurial / financial compulsions and would be willing to get engaged on a “payable when able” basis (a term that I borrow from a very close book vendor of mine- he would allow me to purchase books in this manner when I could not afford them!).

Hope this article is somewhat useful for beginners as well as the veterans. Intention was to point out some of the most common pitfalls that tech entrepreneurs face, and some clues on how to navigate through them. Wish you a journey that is enriching for I am sure that irrespective of the eventual outcome, there will be some valuable learning. As they often say “the journey is more important than the destination”.

DisclaimerThe views of the author are personal and does not reflect those of the institutions or organizations and their affiliates he is associated with.

K Thyagrajan

Founding Team Member and Mentopreneur & Visiting Faculty, iCreate

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