In the world of business, several entrepreneurs start off with a business plan (say, Plan A) that they think can solve a big problem and delight customers. They assemble a team, raise finance and strive hard with tenacity and perseverance to make the venture successful. But what happens if Plan A doesn’t work? How does an entrepreneur deal with his various options and move on to a Plan B that may or may not work? Should he modify the fundamentals of his business model?
John Mullins, professor of management practice at London Business School and an expert on entrepreneurship, doesn’t have direct answers to these questions, but suggests a ‘process-oriented’ approach to make the transition from Plan A to Plan B and go further. His book, ‘Getting to Plan B: Breaking Through to a Better Business Model’, which he co-authored with venture capitalist Randy Komisar, explains this process to entrepreneurs.
The book is based on field studies of more than 20 ventures, most of which made drastic changes to their initial business models, used data to evaluate their business decisions and continuously made corrections to make a venture work in their (and their investors) favour. The book goes on to talk about five key elements of a business model that are critical to any business. These include your revenue model, gross margin model, operating model, working capital model and investment model. These different elements become crucial at different points in time, depending on your business.
For Google and Facebook, the revenue model kicked in much later and the investment model was critical in the early stages. For Starbucks, its pricing strategy (charging customers higher prices for the Starbucks experience), which made its gross margin model work, was crucial. But, at a broad level, for long-term success, Mullins and Komisar believe all these five models must work in tandem.
Our cover story this edition is inspired by Mullins’ and Komisar’s book. We uncover seven venture capital-funded Indian growth companies that made the transition from Plan A to Plan B (or Plan C or Plan D…) based on hard data and evidence gathered from the market. It proves that in an entrepreneur’s journey, continuously measuring the key metrics of your business and fine-tuning your model based on this data is crucial for success.
The Smart CEO caught up with Mullins to talk about an entrepreneur’s journey from Plan A to Plan B and beyond.
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Why do you want to bring in ‘process’ into an entrepreneur’s journey?
Like anything else in life, if you do something with discipline and systematic intent, you will probably do it better. Empirically, we have found that Plan A (for a business venture) doesn’t work most of the time. Therefore, entrepreneurs have to get to some other plan.
There is widespread belief among entrepreneurs and investors that entrepreneurship is about tenacity and perseverance. They think if you only keep trying hard enough to make Plan A work, it will eventually work. We think that is wrong.
Additionally, if you carefully measure the results from Plan A, data can show, unambiguously, that some of your assumptions were wrong. Based on this data, you can identify additional leaps of faith (new assumptions for which you don’t have evidence) and metrics you need to measure while implementing your Plan B.
The book suggests that entrepreneurs should carefully gather data from analogs (data from other businesses you’ll copy in some way that provide a foundation for your assumptions) and antilogs (data from other businesses that you’ll explicitly NOT copy), which will help them in formulating their business model. Please explain this.
There are two ways you can formulate your business model. You can pull numbers out of thin air and hope, or, you can base your assumptions on some kind of evidence. Our advice to entrepreneurs is that most ideas are not completely unique. When Steve Jobs invented the iPod, he had data from Sony’s Walkman, which had sold more than 300,000 units. You gather that data and it will give you some insights.
Let us take the story of Jeff Bezos of Amazon. Bezos raised money really early with the assumption that he could sell books online. It hadn’t been done before, so he didn’t know for sure if it would work, but as soon as he launched Amazon, he started measuring. Are people willing to pay for shipping? What kind of discounts do they expect online? There were a whole bunch of metrics he vigorously tracked and this was crucial for him.
I want to discuss a little bit about two very different potential businesses in India: one entrepreneur wants to build a quick service restaurant (QSR) chain in India (say, a Subway clone in India) and another wants to build a local-language voice-input search engine for rural India (say, a voice-Google for rural India). How does he go about gathering evidence?
The ‘process-driven’ approach really helps in both cases. If you are trying to start a QSR in India, there is data out there from McDonald’s India, Subway India and several others. One can probably make assumptions on some aspects; say labour costs and gross margins, from another QSR player. But the entrepreneur still needs to measure some other aspects. Say, he wants to sell French quiche; he needs to measure if Indians will buy quiche in a QSR format in the first place. He could start a store or he could experiment by setting up a one-time stall in an exhibition. The data from this experiment will give him some insights.
In case of the technology entrepreneur who wants to build a voice-search engine, it is an innovative idea, but there are some aspects that have been done before. Data on how many man-hours it will take to develop the product can be gathered. Observing initiatives like ITC’s e-Choupal might give some insights on how many customers will be attracted to a service like this.
Overall, some assumptions are made based on data available. Some leaps of faith have to be tested by evidence gathered from experiments. A process-driven approach works in both cases.
Finally, should entrepreneurs be worried that the startup they are working on might be in an industry that is going through a bubble?
The answer is yes. However, it depends on what you are looking to build as an entrepreneur. If you are looking to run a long-term, sustainable business, raising several rounds of financing, eventually the bubble is going to pop and that will be bad. However, if you exit the business before the bubble bursts, you as an entrepreneur would have still made money. But what if the bubble pops a few days after you raise money? That is the risk associated with running a business in a segment that might be in a bubble.
The journey of 7 Startups
Based on the book, we at The Smart CEO identified seven Indian startups that made the transition from Plan A to Plan B, and beyond. Here’s a quick peek into their exciting world.