Some do, some don't

Why start-ups bloom or they don’t

Roopen Roy

(The author is the Founder and CEO of Sumantrana a strategic advisory firm)

In his book “Letters from Russia”, Rabindranath Tagore had famously said, that those who say I will write an epic if I receive a pen of gold are focused on acquiring the gold pen, not on writing a great piece of literature. The start-ups that begin their businesses looking for funding and focusing only on valuations are the ones that have a high probability of failure.

Which are the start-ups that are likely to succeed? What is it that a fledgling start-ups need? More than money, they require insights on the market space, competition, sustainability of the revenue model and networks with potential anchor customers or alliance partners.

Let us look at a model that has worked in the US. One of the successful incubators is called the Y-Combinator fondly called “YC” in the Silicon Valley. In the past few years, it has incubated start-ups that have brainstormed, networked and honed business models within its walls, including Dropbox, Reddit and Airbnb.

How does YC work? Twice a year, YC invests small amounts of seed capital (about $120,000) in a large number of start-ups (this year so far they have funded 85). The chosen and funded companies then move to Silicon Valley for 3 months. YC engages and works with them to get them into the best possible shape and refine their pitch to investors. The Big Day is the Demo Day when the start-ups present the companies to a carefully selected, invitation-only audience.

Apart from preparing start-ups for the pitch, the YC mentors provide advice that is impactful and which makes a difference between success and failure. YC and other incubators have identified some common mistakes that damage start-ups. Let us understand some of them.

The first learning: start-ups should be a team effort. Very few companies with a single founder survive. “When you have multiple founders, esprit de corps binds them together. Each thinks "I can't let my friends down." This is one of the most powerful forces in human nature, and it's missing when there's just one founder.”

Many believe that location can play a critical role. It is well-known that players in any industry tend to cluster. For instance, the automobile industry is today clustered in just four states: Maharashtra, Haryana, Tamil Nadu and Gujarat. Start-ups and innovations tend to work in some locations and fail in others. Here is a nugget of YC wisdom, “Who knows exactly how these factors combine to boost start-ups in Silicon Valley and squish them in Detroit, but it's clear they do from the number of start-ups per capita in each.”

However, clustering itself is not a recipe for success. In fact herd mentality without a real pull can be a cause of failure. If you are building a truly unique product that is based on intellectual property (IP), you may actually base it close to the IP source regardless of the existence of other industry players. Bose Corporation, a world leader in audio systems and speakers, is located in Framingham, Massachusetts because of its symbiotic relationship with MIT.

Start-ups must be agile and quick to market. Even bright ideas have shelf-lives and changes in technology happen in the twinkle of an eye. Therefore, obsession with perfection is not a great quality for start-ups. Even an 85% perfect solution now is better than one which is 99% perfect but one year late. Customers understand that a disruptive innovation will never come first time in a 100% perfect state. Look at digital photography. The initial cameras were clunky, the images were grainy and the storage devices were primitive. Once the market accepts, it is much easier to bring in improvement in rapid cycles from revenue streams that roll in.

Innovations often come through change of format and the revenue model. Cricket aficionados were initially very critical of the 20-twenty world cup format. But the innovation was designed to meet the requirements of the time-poor cricket lovers and tap sponsorship and TV rights. It has been a great success.

Let us take one example from the vernacular film industry. Bangladesh has about 149 million people who speak Bangla and there are about 83 million people in India who speak the language. If you include the diaspora, the total number of people who speak Bangla (or one of its dialects) is estimated at 300 million. Yet the film industry is unable to access a unified market because of political, trade and legal barriers.

Start-ups are now experimenting with innovative IPL-like models. Short films on YouTube or Vimeo are being created entirely funded by sponsors out of their advertisement budgets. A number of short films, typically 12 minutes to 18 minutes of run time, created by well-known film directors have become a run-away success.

In the US, because of greater penetration and speed of internet, the innovation has taken the form of webisodes. A single webisode is 5 to 15 minutes in length but is usually part of a dramatic serial storyline and is typically streamed online over the internet. Webisodes are part of branded, digital and sponsored entertainment. As the internet infrastructure in India improves, we will almost surely see the webisode format taking off in the vernacular space.

Technology can unify an otherwise fragmented market. When customers are cash-rich but time-poor, new channels and formats enable content to be delivered at any time on any device with a shorter run-time. It then unleashes the power of the “virtually” unified market and the revenue model becomes compelling. As always, finding new answers to old questions is at the heart of innovation and the key to success of new ventures and start-ups.