The Enemies of "Customer Need"

Despite learning it during my MBA, I have sometimes forgotten or not focussed on the "Customer Need" in the excitement of starting and running a business. If your business is not growing, if your profitability is low, if running your business seems like an uphill task all the time then you may want to introspect on what Customer Need you are satisfying. The usual suspects who obstruct a clear view of Customer Need are Passion and Armchair Expertise.

Passion: Startups run on passion. And this passion extends to "loving the solution and forgetting the customer need". It happens to all of us - we device a way to solve a customer need and are so passionate about the solution that we are unwilling to ask ourselves whether the need itself really exists. So balance your passion with a hard cold look at customer need. Talk to several prospects, customers, acquaintances and see what their need is. If the need exists and if the need is large, devise a solution for the need. Again run the solution past prospects/customers and debate it before it becomes "the solution". Example: I met a guy a few days ago who was excited about a technology solution he has built for small retailers. When I asked if he had ever met small retailers, spoke to them, discussed their problems, observed them at work before he created the solution he says "no, but the solution is so cool they will buy it". Well, good luck with that.

Armchair Expertise: Beware the armchair expert! This is the worst guy to have on the team - the guy who never does research, who never meets people, relies on pure logic and is full of hubris. Almost nothing in the world works the way you expect it to. In the real world, there is government regulation, local realities, cultural context, customer expectations and a million other variables that logical deduction will never show up. There are so many failed products, failed strategies traceable to armchair expertise. Did you hear about the 400 million Indian middle class that were all going to wear Nike shoes, eat Kellogs, drink Coke and drive GM cars?  

The better your understanding of Customer Need the faster is your business success.

Hold on To Cash OR What Is Your Burn?

You have taken the plunge, setup shop and got your first customer. You realize that it has been a while since you looked at your finances. So you call in your accountant, have a chai and both of you do a bit of excel sheeting and you realize you are running out of cash. Well ... don't panic. I still have to hear of a startup that has not faced cash challenges in its intial days. Bill Gates in one of his books says he decided that Microsoft, while being super-aggressive in the market, had to be ultra-conservative with finance when he realized in their second year of operation that they were running out of cash. Even the emperors of the universe face cash problems ... Lehman Brothers for instance.

To ensure you do not run out of cash you need to do two things

-- Bring in orders - as fast as you can

-- Manage your burn

While "Bring In Orders" is obvious and everybody inuitively understands it, managing burn is a challenge. Most times because startups don't know what their burn is. So a few words of wisdom on burn ...

To run a company you have to spend money. The typical startup spends on salaries, rent, electricity/water, phone, internet, travel etc. These are recurring monthly bills , and you pay up, whether you bring in revenues or not. This is your "burn" - the money you spend no matter what. When you calculate "burn" you should exclude costs you will incur only against revenue. For instance, if you make shoes, you will buy shoe uppers only if you have an order for shoes. So the cost of shoe uppers should NOT be included in the burn. But the salary/rent/utilities of the shoe factory should be included.

As a thumb rule, you should have enough cash in the bank to sustain your burn for 6 - 12 months. See the formula below

Minimum Cash In Bank > = 6 x (Monthly Burn)

OR better still

Minimum Cash In Bank > = 12 x (Monthly Burn)

If you do not have enough cash in the bank, cut your burn immediately. Usual tricks - salary cuts, turn off the lights/monitors/servers at night etc. Then one of you go out and raise money while everyone else goes out and brings in the orders.

Remember: 1) A company cannot run without cash 2) Even to negotiate with a potential investor you need some money in the bank to last you through the negotiation.

For a more detailed case study on managing cash in startups follow the link below (16 pages). You can start from Page 9 if you do not have the time to read all 16 pages.

http://www.merittrac.com/webpages/Downloads/PDF/MeritTrac%20Story.pdf

Should I Take The Plunge? And Other Startup questions

One of the challenging questions for someone who is about to start a business is "should I take the plunge?". The deeper concerns underlying the question are "what if it fails? will I get another job? how will I support my family during the initial years? I am in a comfortable job with a clear future ... why risk it all? ".

This post is my opinion on the matter based on the experience of having started and succeeded.

What if it fails is a question you HAVE to ask yourself. Having a Plan B is critical. At the same time, the imagined risks are almost always higher than the real risks. Even if you fail you are not unemployable. You have a good education, good work experience and you have the experience of having tried to pursue a dream. The Plan B could just be "I will go back to where I was working earlier". Almost every boss in the world, if you leave on a good note, says "would be glad to have you back" and actually means it. So that is backup plan 1. So keep in touch with your boss after you have left so that backup plan 1 is active. Backup plan 2 is to have some money in the bank to tide over the time spent looking for a job. Even bad economic recessions do not last for ever.

Moreover, everyone dreads leaving a job and starting off on their own. It is "sweat your palms, watery belly" kind of dread. The last day of my job at the software company I was working at was frightening for me. I left just after 9/11 happened and most people thought I was being foolish. In fact when I called my father and told him that I had resigned my job he said "You are stupid. If there is a chance, take back your resignation". December 2001 was the beginning of a tough slowdown so everyone I knew, including me, was wondering if it was a smart decision. So if you dread leaving your job, you are not alone. Some of that dread is certainly unreasonable but then when is fear linked to reason.

How do I support my family is too personal a question to lend advice on. But in general I would say "either start off before you get married or marry a person who works or marry a person of steel". 

I am in a nice cushy job is the hard one and difficult to answer. If you are a well-educated professional working in a good company, the dilemma you face is real. For instance, you are a Senior Manager at a large consulting company and throwing it all away to start something may not be worth it. The financial rewards may not make sense. Maybe you can become a Partner in the consulting company which better fulfills your goals. In some ways the educated professional has a tough choice to make because he/she has to choose between a well-paying job and an uncertain pay-off. The answer to this question is something deeper. 

The core issue that you have to deal with if you are wondering whether to start off is 'know yourself'. This is the most difficult part. Have you sat for an hour just with yourself ... no TV, no drink, no book, no facebook, no spouse, no children and wondered what makes you happy, what you really want to do in life. Personally, I always imagined that starting up something meant you imagined a blockbuster product or service, you made an excel sheet with business plans on it, you reviewed everyone on progress and you watched the company grow. I imagined a world where I was translating an idea to reality. There was also a deep urge to create something that did not exist. The sheer thrill of taking an idea to a 100 crore business that people talk about/are willing to work with you for /that people recognize/are willing to pay large sums of money to buy was my kick.

You should find what your kick is before you start. 

Does Work Experience Count?

While I was at proto.in - 2009 in Bangalore - a startup event, one of the people handling a session on starting a business asked me (I was in the audience) what I thought work experience meant. The question was unexpected; I answered impromptu. I said people with work experience usually tend to be more people oriented and more sensitive to other people's needs. The context of the question was the larger debate which was : does work experience count while starting a business and at work in general.

On mulling over it for some time, I would say work experience counts for a lot. I would argue that people who have more work experience tend to demonstrate more empathy which in turn makes them more people-oriented. This is probably because the experience of working with different types of people over extended periods make one more empathetic (is there a word like that?). This is discernible in the way they interact with employees, supervisors, customers and society at large. Another noticeable difference in people with work experience is a high attention to detail. Work experience probably sensitises one to the pitfalls of glossing over details.

While there is a corny line that goes "do you have 14 years of experience or 1 year of experience 14 times over" to denigrate work experience, this is rarely the case. Work experience matters in what are termed as critical incidents. For instance, if you observe a Project Manager at work everyday one would summarize his or her role as sending emails and tracking progress on projects. Most programmers believe they could easily do their Project Managers job. But in a crisis - a release that is not working correctly, the customer is yelling on the phone and the programmers are at their wits end on what do - a Project Manager would bring all his experience to bear in thinking through and implementing a solution. Most times the Project Manager would have thought of a solution that would have missed the programmers. This is usually the reason companies pay a premium for work experience.

If you are interested in exploring this line of thought two interesting resources ...

1) Malcolm Gladwell's book called "Outliers" where he specifically talks about the 10,000 hours rule - it takes 10,000 hours of practice to become world-class at anything

2) A post by me about the difference between Experts and Beginners available at

http://tractalent.blogspot.com/2008/09/iaea-2008-learning-2-creating.html

Can You Build My Business Model For Me Please?

Was at proto.in - 2009 in Bangalore - a startup event. Inevitably at an event like this, there were questions on funding and the challenge of raising funds during a downturn.

Based on interactions with VCs and angels, I would argue that it is possible to raise money during this downturn. An investor's view at a time like this would be 1) Only really passionate individuals start a company in a downturn 2) Valuations are realistic or very attractive 3) Will invest in interesting business models.

Raising money is possible, even in difficult times provided there is a compelling business plan/business model. This is an area where some startups require assistance. For instance, the winners of the "shotgun startup" competition at proto.in (make your product prototype in 48 hours) were two guys who designed a lego-style lamp. While there were other competitors who had written software through the night for their software products, what was appealing about the lego-style lamp was that it addressed some universal problems we face with using fixed lamps in rooms. By extension, the business model is interesting because of the product's universal appeal. (lamp here refers to the kind that emits light, not LAMP as in the software industry).

While passion drives entepreuners to create products, cold reason helps in creating a workable business model. For instance, creating Google search was all about passion but adding the Ads to Google search was cold reason. Interestingly, there are companies now that assist startups with precisely this aspect of business. These companies, by virtue of being "external" to a startup are able to dispassionately evaluate a product and help in building a business plan around it. There are several investment banks that offer venture consulting services but do not work with small startups. Some companies who work with small startups in building a business model and raising funds are Verdure Consulting (http://www.verdure.in/ disclosure: my wife runs Verdure) and VentureBean (http://www.venturebean.com/).

So if you are working on building a business model for your product, you may want to speak to them.