the truth about startups
TRANSCRIPT
THE TRUTH ABOUT STARTUPS
SESSION AT IIM TRICHY, SEPTEMBER 2015
Jithamithra Thathachari
jitha.me
WHY WE ARE HERE
Separate the reality of startups from the hype, and understand what goes (and what doesn’t go) into building a business
Understand how to build a venture from scratch
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QUICK INTRODUCTION
Co-founder of Rouse Digital – building Smart Saver, a platform
where consumers can get rewards on their daily purchases
Writer on startups, business and strategy at jitha.me
– Featured in YourStory, Rediff, and other publications
– Curate two widely subscribed newsletters – The Startup Weekly
(primarily startup-related articles) and So it Goes
(entrepreneurship, business and strategy)
Ex-Project Manager at Monitor Group (now Monitor Deloitte), a
strategy consulting firm started by Michael Porter
MBA, IIM Ahmedabad; B. E. Computer Science, Mumbai University
SO, WHAT DO YOU NEED TO START A COMPANY?
jitha.me
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Business Model
Tons of MoneyRisk Appetite
No Competition
jitha.me
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Business Model
Tons of MoneyRisk Appetite
No Competition
None of these are needed to start a company!
jitha.me
Business Model
No Competition
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Tons of MoneyRisk Appetite
jitha.me
WHAT IS PASSION?
passion (noun) a state or outburst of strong emotion
More mildly speaking:
an intense enthusiasm for something
Typical usage:
You need to be passionate about your idea, for any chance of success.
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SO WHAT WERE THESE GUYS PASSIONATE ABOUT, EXACTLY?
Helping everyone express themselves in 140 characters?
Helping people store their information online?
Helping everyone…err…schedule their tweets?
Helping people send vanishing messages?
OK, there may be some “passion” involved here
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SO WHAT WERE THESE GUYS PASSIONATE ABOUT, EXACTLY?
Helping everyone express themselves in 140 characters?
Helping people store their information online?
Helping everyone…err…schedule their tweets?
Helping people send vanishing messages?
OK, there may be some “passion” involved here
All these founders saw an interesting market to serve, and built a product for it
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PASSION COMES MUCH LATER
The Startup Curve (7-10 years)(Source: Paul Graham)
Initial success creates passion
Need passion (and dedication) to pull through
Initial success creates passion…Not the other way round
Source: Business InsiderFurther Reading: Passion is Overrated and Goals are for Losers, Scott Adams, Ben Horowitz’s Best Startup Advice
“Don’t follow your passion… Follow your contribution instead.” – Ben Horowitz
jitha.me
Business Model
No Competition
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Tons of MoneyRisk Appetite
jitha.me
STARTUPS DON’T GROW IN A STRAIGHT LINE
The main factor in startups is uncertainty – “things change”. You start with a hypothesis about the market, and then prove it. Or disprove it and pivot.
Odeo created a podcasting
platform, but didn’t find
much traction. An employee
created a side project.
– You may have heard of it
How important is vision or passion to starting, if startups pivot from their first vision anyway?
“They drove a clown car and fell into a gold mine.” – Mark Zuckerberg
Have you heard of
YouTube, the video
dating website?
The founders created
Hotmail to talk about
their previous startup
idea
Source: The Real History of Twitter, Zuckerberg on Twitter, Mashable, Further Reading: “Don’t Take Advice” and More Startup Advice
jitha.me
STARTUPS PIVOT AT ALL STAGES OF THEIR LIFE
Pivots don’t happen only at the start, when founders are ‘figuring things out’. Even companies with strong investor traction, and in some cases public companies, frequently change direction
The Flickr founder was trying to start a gaming company, and pivoted to a photo-sharing community
As a wise and successful entrepreneur, he tried to start a gaming company again, and even raised $12M. But he had to pivot again, and created Slack – the fastest growing startup ever
Oracle started in 1977 as a databases company. Ten years in, it started focusing on applications. In 2010, it bought Sun Microsystems to become a hardware company
Android was already creating an OS when it was acquired by Google. But for cameras.
Building a successful company is not about ‘vision’ as we define it. It’s more about executing well and constantly learning from your mistakes
Source: MashableFurther Reading: The Arc of Company Life and How to Prolong it
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SURE, COMPANIES WITH VISION / PASSION SUCCEED…
…but most of them fail. And you only hear of the ones that succeeded – no one writes about those passionate visionaries who held steadfast on their path to failure
According to one study, 92% of startups fail. And 74% fail due to premature scaling – investing strongly behind a vision that may
not be completely right
Source: Startup Genome Report; “What percentage of startups fail”, Quora AnswerFurther Reading: Survivorship Bias, Wikipedia
jitha.me
Business Model
No Competition
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Tons of MoneyRisk Appetite
jitha.me
WHAT YOU WORK ON MATTERS FAR MORE THAN HOW HARD YOU WORK
Startups follow a power law – what you do matters far, far more than how well you do it. Too much persistence in the wrong direction, and you’ll systematically “achieve failure”
Unlike normal distributions, in a power law distribution a small proportion of the sample accounts for most of the value; the majority of sample points create very little value
The more dedicated, persevering and passionate you are towards your initial idea, the less likely you are to be listening to the market’s lack of interest
Willingness to learn and pivot are far more important in a startup’s early days
Source: The Power Law, or why working hard is not enoughFurther Reading: Zero to One, Peter Thiel, Winners don’t do things differently. They do different things.
jitha.me
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Business Model
Tons of MoneyRisk Appetite
No Competition
WHY DO YOU NEED A BRILLIANT IDEA?
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YOU DON’T NEED A BRILLIANT IDEA?
Just like the company vision, most ideas change as soon as you hit the market
Therefore, the shelf life of your initial idea is very short; the ability to experiment with
it and make it better are far more important
So, you don’t need a brilliant idea – a decent one will do
– It’s far easier to come up with ten USD 100K ideas than one USD 1M one
“The best laid plans seldom survive first contact.”
– Helmuth von Moltke, military strategist
“Everyone has a plan, till they get punched in the mouth.”
– Mike Tyson, renowned philosopher
“Startup ideas are worthless.” – Paul Graham, Y Combinator
Further Reading: Ideas for Startups, Paui Graham
BUT WHAT ABOUT COMPETITION?
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IS LACK OF COMPETITION IMPORTANT?
You don’t need a market with no competition
– Greater probability of success lies in taking big markets, where there are already
players that have demonstrated that users want the product
– A crowded market is actually a good sign, because it means both that there's
demand and that none of the existing solutions are good enough.
It’s hard to find and target an incredibly large market that no one else sees
– Much easier to target a slightly smaller market with obvious need
– Differentiate from competitors by focusing on specific market niches
1
2
A market with competition is often BETTER than one without
Competition is a factor, but not in the way you’d think
Source: The Only Competitor that Matters, How to Get Startup IdeasFurther Reading: In Technology, Small Fish (Almost Always) Eat Big Fish, Why it’s nice to compete against a large, profitable company
jitha.me
BUT HOW DO DIFFERENTIATE? WON’T COMPETITORS COPY YOU?
You can build a sustainable competitive advantage even in crowded markets, by focusing on under-served market niches and tailoring all aspects of your business model to them
Key Partnerships
Key Activities ValuePropositions
CustomerRelationships
CustomerSegments
Key Resources Channels
Cost structure Revenue Streams
1
2
3
4
59
6
8
7
The Business Model Canvas
Source: Business Model Canvas
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FOCUS AS A COMPETITIVE ADVANTAGE
Several companies have used this concept of focus as a competitive advantage, to build lasting differentiation in crowded markets
Source: Sometimes, good old focus can be a competitive advantageFurther Reading: Good Strategy / Bad Strategy: The difference and why it matters, Richard Rumelt
Apple targets premium customers through its choices across the value chain –closed product system, app ecosystem, branded stores, tailored marketing, etc.
Ikea focuses on DIY furniture buyers, across its furniture assortment (ready to assemble), inventory management, branded stores, selling strategy, etc.
Has a pre-eminent position in “fast fashion” with its quick production runs, limited stocks, design focus
Offers health-oriented users the freshest smoothies, with its fresh fruit sourcing, production for short shelf life, faster cold chain logistics, etc.
Peers can’t copy just one aspect to compete; need to coordinate actions across their entire business model to offer any competition – which is very difficult to do
jitha.me
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Business Model
Tons of MoneyRisk Appetite
No Competition
jitha.me
NO, YOU DON’T NEED A BUSINESS MODEL
A business model or monetization plan is not the main bottleneck to success; it’s whether you can get millions of users or not
Build a product that enough users want, and you can use any “off-the-shelf” business model to make money
Advertising On-Demand
Subscription Freemium
Value-Added Services
Source: No, you don’t need a business model.Further Reading: Stop asking “But how will they make money?”
jitha.me
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Business Model
Tons of MoneyRisk Appetite
No Competition
jitha.me
MOST STARTUPS TODAY DON’T NEED HUGE INITIAL INVESTMENT
It’s relatively inexpensive to start most technology companies today; once you see consumer traction for your first product, you can begin investing more (or raise funding)
1 Server
Outsourced coder (1 month)1Facebook Ad Campaign1
1 Website
= INR 5,000
= INR 2,000
= INR 50,000
= INR 10,000
Therefore, you can keep running inexpensive experiments with different product ideas till you find traction with one, and then try and raise funding
Note: 1 USD = 66 INR as on Sept 15, 2015Source: Your Minimum Viable Product can be more ‘minimum’ than you thinkFurther Reading: Will it sell? Ask Twitter
jitha.me
SO, THERE’S VERY LITTLE RISK TO STARTING UP
Given the low initial capital investment needed, you’re not risking much on starting a business
The only risk is not getting a job if your startup fails
– Most of us will be able to go back to a corporate job if our startups fail
– Entrepreneurship often gives you unique skills and experiences, which make you
more, not less, employable
You’ll miss 1-2 years of corporate salary, which you can make up easily over a 30+ year
career, especially by leveraging valuable experience from trying to build a company
If you do it right, you don’t even need to quit your job / academics till you see real and
strong traction
There’s no risk to starting up. Only opportunity cost – which you can mitigate.
Source: Have a great business idea? Don’t quit your job yet.Further Reading: The Craigslist Method, When should I leave my job to start a company?
jitha.me
WHAT DO YOU NEED TO START A COMPANY?
Passion
Vision
Dedication
Brilliant Idea
Business Model
Tons of MoneyRisk Appetite
No Competition
jitha.me
SO, WHAT DO YOU REALLY NEED TO START A COMPANY?
A Decent Idea
Willingness to Experiment
Everything else is meaningless – your only objective is to identify a product that people want, and learn how to sell it to them
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STEP 1: A DECENT IDEA
A Decent Idea
Willingness to Experiment
Further Reading: How to create a million dollar business this weekend
DO YOU HAVE ANY BUSINESS IDEAS?
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HOW TO COME UP WITH BUSINESS IDEAS
You can brainstorm for business ideas in a few different ways
Look for problems that you have yourself – your personal “Bug List”
Solve a problem for someone you know; not just a problem you think people have
If you’ve worked before – think of problems that your customers / colleagues face
See something around you that’s “too complicated”; simplify it
Use idea templates – “remove the middleman”, services for high-growth platforms, piggyback on popular products, etc.
“The way to get startup ideas is not to try to think of startup ideas. It's to look for problems, preferably problems you have yourself.” – Paul Graham
Source: How to get startup ideasFurther Reading: How to get Good Business Ideas — The Mental Alchemy of Ideation
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THE STARTUP TIMELINE & THE LEAN STARTUP CYCLE
A startup grows into a business in three steps; in the first step, Search, you learn and iterate your way to “product-market fit”
Search Build Grow
Build
Measure
Learn
The first iteration through this loop is to validate the market by fleshing out your product concept and testing it with your target audience
Source: The Startup Lifecycle, Your Minimum Viable Product can be more ‘minimum’ than you thinkFurther Reading: The Lean Startup, Eric Ries,
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BUILD: FLESH OUT YOUR IDEA
Who is the customer?
What is the value proposition? How are you helping him / her?
How do they buy / use your product?
In the first iteration through the Build-Measure-Learn loop, just flesh out your product concept –who are you selling to, and what are you selling?
Build
Measure
Learn
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MEASURE: TEST YOUR BUSINESS IDEA
Speak with potential customers to understand the urgency and importance of their need – just “Yes, I might like using this.” is not enough
Use Google Insights / Google Trends / Keyword tool to understand whether the demand is widespread
Run a small ad campaign online to see how many users express interest – create a simple landing page and run a INR 5000 FB campaign to drive traffic
Validate that your product serves an immediate and urgent need for your target customers, by asking them
Build
Measure
Learn
Further Reading: Idea to Paying Customers in 7 Weeks: How We Did It, Will it sell? Ask Twitter
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LEARN: MODIFY YOUR PRODUCT BASED ON FEEDBACK
Based on users reactions, modify the product or pivot to fulfil more urgent and important needs for the consumer
Build
Measure
Learn
Interpret user feedback (don’t take it at face value)
If users don’t demonstrate strong need, understand other related but critical pain points faced by users
Identify changes to the product concept to make it more useful
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REPEAT: ITERATE TO PRODUCT-MARKET FIT
Iterate through the loop multiple times, fleshing out your concept, then a prototype, and finally your product itself, till you reach product-market fit
Build
Measure
Learn
Lean Startup Cycle
Iterate till you reach product-market fit – “being in a good market with a product that can satisfy that market”
Further Reading: The only thing that matters
ANY QUESTIONS?
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BOOKS / ARTICLES TO READ
Books
How to fail at almost everything and still win big, by Scott Adams
Zero to One, by Peter Thiel
Antifragile, by Nassim Nicholas Taleb
The Lean Startup, by Eric Ries
See the reading list that transformed my professional life
Articles
Before the Startup, by Paul Graham
The most important piece of advice for people starting their careers, by Jason Calacanis
The Ultimate Guide for Becoming an Idea Machine, by James Altucher
Subscribe to my newsletters, So it Goes (entrepreneurship, business and strategy) and The Startup Weekly for more recommendations
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CONTACT DETAILS
Email: [email protected]
Twitter: @jithamithra
Website: jitha.me (Subscribe here)
Weekly Newsletters
– So it Goes, curating articles and books on entrepreneurship, business and strategy
– The Startup Weekly, curating startup-related articles