In Startup50 2016: Through a series of thought-provoking ‘how-to and how-not tos’, Ashok Soota, the Chairman of Happiest Minds Technologies, explains how startups can arrive at best strategies to succeed in different stages of their journey such as early stage, scaling up, pivoting, tackling competition and minimising risk
With the launch of Ashok Soota’s first book, ‘Entrepreneurship Simplified; From Idea to IPO’, on the anvil, his presentation at The Smart CEO Startup50 this year couldn’t have been timed better. Addressing a mixture of over 200 early stage and mid-stage entrepreneurs, he delivered a lucid talk on his approach to strategising and decision-making at the idea stage, startup stage, scale-up stage, pivoting and risk minimisation.
Of course, the 30-minute session by Soota was founded on a key premise that, as an entrepreneur, you can never be done with your strategy approach. It almost always is a continuum of strategies across the different phases of your entrepreneurial journey.
Bound with ample examples from his past experience at Wipro, Mindtree, Happiest Minds Technologies, and his close observation of the startup ecosystem in India, Soota slotted his presentation in four components; why, why not and how, how not.
(As narrated in first person)
The Startup Strategy
On the premise that most entrepreneurs (at the conference) have graduated from the idea stage, as you enter the startup phase, the first thing you need to do is validate all assumptions you made when adopting your business idea; be it the business plan, the future projections, financial returns or more. You need to ask yourself, what is the market size for my business, and what is the addressable market size?
Why is this crucial? Because the assumptions you made at the idea stage need not pan out as expected. Let’s take an example. When Portea Medical was founded, its vision was to deliver quality medical services at a customer’s doorstep. Now, an outsider could look at the market and say, it could be targeted at a customer who wants to save on time and avail this service. But, look closer and you’ll notice that the people more likely to use it are those with foot related problems, which may be impacting his/her mobility. On the other hand, someone with a shoulder ailment might choose to walk into a physiotherapy centre than avail a home service.
Lesson: Be very clear when you are segmenting a market and determining an addressable market. You can classify your market according to income groups, ease of use, nature of ailment or other criteria.
The second question you need to ask yourself is, what is the ease of adopting my service? When you start a business, you will either have existing competitors, or they will soon come in. In the former case, what will be their response to your strategy? In the latter scenario, ask yourself, does my customer need a behavioural change to adapt to that service?
A good example for this is ecommerce. When companies made an entry into this space, they had to get people who were used to buying in physical stories to buy online. In other words, changing their behaviour.
Lesson: Whether there are existing competitors or potential competition in future, for your business, identify the ease of adoption for your customer, and anticipate a response to your strategy from both customers and competitors.
Thirdly, identify if you are too early or too late into the market. Here again, ecommerce is a good example. Today, because it’s such a success, everybody thinks they can create an ecommerce portal too. What they don’t see is, if you’re too early, you’ll need to burn cash to develop a market. Instead, if you’re late, you can look at what existing players are offering, adapt their service and offer something better.
Lesson: If you’re too early into the market, don’t knock out but conserve your cash to be ready for the battle as the market builds up. If you’re late, adapt an existing service and offer something better.
Fourthly, all of us like to introduce ourselves as a disruptive company. But before you do that, ask yourself, is my disruption a fact, or a figment of my imagination? What type of new genre or product am I offering? Am I disrupting the distribution structure and knocking out intermediaries? Am I helping customers gain a disruptive advantage? At Happiest Minds, we don’t say we’re a company in the disruptive space but we work with disruptive technologies which enable our customers to create disruptive differentials.
In addition to this, as your company grows, remember that all differentiators, other than culture, have a shelf life. You need to keep developing new strategies and differentiators and visualise a pipeline of differentiators to be introduced into your business.
Lesson: Are you really disrupting? If so, how? Analyse this. Secondly, visualise a pipeline of differentiators to be introduced to your business.
Fifth, many of you, as you enter the market, might think you have to offer a lower price. In my opinion, price is not a strategy; it’s just throwing away your margin. Lower price is justified only when your costs are lower. You might see the impact of this when the large gorillas (large firms) come into the picture. You may not have a healthy balance sheet and you’ll find lower valuations in subsequent rounds.
That being said, there can be exceptions to this strategy. For example, the blade and razor model. If you’re selling a razor with a view to selling a lifetime of (customers) buying blades, it makes sense to price the razor low. It’s a leading edge product hooking on your customer and also making them buy follow on services.
Lesson: When entering a market, lower price is not a recommended strategy because when big firms enter the space, your balance sheets may not be healthy and valuations may drop down.
The Scale-Up Strategy
As you enter the scaling phase, identify how you can increase your addressable market. You have two options; you either go up or down the value chain, or cater to adjacent markets. There’s no one size fits all. Another approach you can look at is, growing with just one or two segments where you’ve got leadership, and you can be more profitable. Albeit, the danger in this approach is if the market dries up or if a new competitor comes in and has a winning formula that can displace you from your leading position, you’re under threat.
Lesson: There are three approaches to scaling; going up or down a value chain, catering to adjacent markets or growing in just one or two segments where you hold a leadership position.
Secondly, as a startup, you would’ve built partnerships. These partnerships become very important as you begin to scale up and odds are your partnership will be asymmetric; meaning, as a young, growing company, chances are, you’ll be looking for sell side or buy side partnerships with giant players much larger than yourself, and there will be an asymmetry in the way you negotiate your deal. In such a case, it’s important to determine what your parameters are and what the areas on which you will not concede are. For example, you can either give someone exclusivity with the guarantee that they will fulfil your revenue objectives or you could have an IP that you want to make available to larger players, and thus, tell your client that you will offer it to them on a white label basis.
Lesson: Since, as a startup, your partnerships will be asymmetric, determine what your buy/sell parameters are, and areas you will not concede in.
Thirdly, platformise everything you possibly can. This will help you grow much faster in a larger market. One of the best examples for this is Aadhar; it could’ve easily been one of the world’s largest repositories of information. Yet Nandan Nilenkani and his team created it as a platform and you can see how it is beginning to find application in industry after industry, application after application.
Lesson: Platformise everything you possibly can to enable faster growth in a larger market.
Fourthly, your growth must be manageable. You may come up with a wonderful product and suddenly find yourself witnessing break neck growth. But, there’s also chaos. If you think, let’s first capture the market and bring the chaos under control later, you’re mistaken. A good example for this is Deccan Aviation. They came in with low cost airlines and created a market. Yet, everybody who has taken the flight says they never know when the flight will take off or land or whether your baggage will reach with you. Even investors couldn’t get financial statements out from them on time. But, the greatest thing that happened to them and you can’t counter that is, they got bought over by Kingfisher and they went laughing to the bank and you know what happened to Kingfisher.
Lesson: When you’re growing, keep an eye not just on revenue but also on profitability. This is a stage where you must start moving into profits because revenue is for ego and profit is for creating a sound organisation.
You’ve got to scale up your systems, create organisational capability, and most importantly, be clear about how, when and where you will raise future funding from. You should visualise a long-term cycle and determine how much money you will need, split that across different rounds, and then design an approach to how much dilution you want to do at each stage, keeping in mind a goal of how much percentage of ownership you want at the time you’re ready for exiting your business, or getting acquired.
Lesson: Visualise a long-term cycle for your organisation and determine how, when and where you will raise funds from, with a firm footing on how much you want to dilute in each round.
Competing with Gorillas
There are three ways to approach this; Judo Strategy, Taichi Thinking and Guerrilla Warfare.
In the first approach, there’s a book called Judo Strategy by David B Yoffie, with its origins really from CK Prahalad & Garry Hamel’s path-breaking article in the Harvard Business Review. One extract from the article talks about how to upset your rivals using their size against themselves. In other words, how do you change the rules of the game so that you make the slower, larger giant Gorilla suddenly not look so formidable but vulnerable? Let me tell you this; every large player has their own weaknesses. And, whenever we’ve competed in a large deal, invariably we’ve won in the phase of a very large competition.
Lesson: Change the rules of the game so that you make the slower, larger giant Gorilla suddenly not look so formidable but vulnerable
I thought of the second approach when we recently took up Taichi in company and I, personally. Once, to demonstrate their capabilities, they called upon a lady, not very tall or built, to stand and invited one of our well-built employees to push her. At the end of several attempts, he was embarrassed because he couldn’t make her budge. When she in turn was asked to do the same, lo and behold, he staggered a few steps back. So, what can you learn from this? You need to have flexibility, you move with the wind and you derive your strength from the root.
Let me explain this with an example. We were once bidding for a project with a large retail chain in the US; they wanted to develop an app in a short period of time, to be displayed at an Apple exhibition. While they already had five large companies bidding for the project, they chose us because large companies take weeks to even create teams. For our part, we said, we’ll give a delivery commitment and honour it. If we don’t, you can levy a penalty on us. In turn, we were rigid on price. The result? The application won an award at the Apple exhibition and a few years later, this company became our largest customer.
Lesson: When dealing with competition, you need to have flexibility, you move with the wind and you derive your strength from the root.
The third approach to tackling competition is guerrilla warfare. You should use tactics the larger player may not be familiar with. For example, sometimes we offer to do a proof of concept for a client, which larger players may not opt for because they have the pressure of creating a new mid-sized company every year. But, when we develop a POC, it amplifies the customer’s confidence in us.
Lesson: Use tactics the larger player may not be familiar with.
The Pivoting Strategy
Typically, pivoting is, when you start your business, you intend to create something. But in the end, for varied reasons, the end product might be different from what you started off with. It could also be that the market segment you chose suddenly dried up and disappeared. In such a case, a pivot is necessary. For example, in 1999-2000, when there was a dotcom boom, like a dozen other companies, Mindtree started as an Internet systems integrator and 50 per cent of our business came from dotcom companies within eight months of founding. But, overnight that market dried up. We had to clearly change our strategy to overcome this. We began offering a different set of services while many other companies folded and collapsed.
While suggesting a pivot is easy, it does come with a fair share of challenges. Foremost is, it’s a tough decision to abandon your business and start afresh. You will have issues all the time about how long you’re going to persevere rather than pivot. In such a scenario, you must look out for early warning signs, because a pivot itself is going to need a fresh amount of money. It’s like going back to an investor to sell an entirely new idea. Hence, don’t wait till you run out of cash and instead, have the money to move forward.
The Risk Minimisation Strategy
Every business involves risk but, the job of entrepreneur is to minimise risk; against competition, market dynamics, market segments and more.
Typically, startups can face two kinds of risks; errors of omission and errors of commission. The former is more risky because you don’t know what opportunity you have missed out on by not doing something. Therefore, you should have a method of scanning environment at all times, and come up with strategies which will help you to see that you’re not missing out on a very fundamental, important change that you should have done. Otherwise you could end up in a place where you set out to disrupt a business and you instead get disrupted.
Lastly, every strategy is only as good as its execution. As you scale your company, remember this principle; your decision making by evaluating the time to your next round of funding. Let me explain this. Most people examine decisions on the basis of profit; either being profitable in the short run or in the long run. For example, let’s say profitability for the short run means you have to go to market a year too earlier and in the process you get a US $10 million market value. On the other hand, in the long run you get to defer your next round by two years and at that time get valuation of up to US $20 million. Which would you go for? Naturally the latter, given the gain you’ll make by diluting your company.
Hence, this principle, the time to next round, is something every young entrepreneur should consider because the most important thing as you scale up, is to conserve your cash. It is your fuel for growth and will help you succeed as you build your business.