Creating Financially Viable Startups – Which Problem Should A Startup Tackle?

A startup founder starts with a clean slate, which means he can tackle any problem he selects. Often this is a problem he is very passionate about solving – but he hasn’t bothered to find out if anyone will pay for the solution. This is a big issue with techie founders who create a clever product because they’re in love with their technology and then look for someone whose pain point it can solve. However, finding product-market fit can be extremely difficult when you put the product first.

It makes more sense to reverse this if you want to be a successful entrepreneur. You need to look for the market’s pain points and identify which problems customers will be happy to pay you for solving for them.

BFSI: Case Study

Let’s look at the banking and financial services industry for example. It’s broken in lots of places which means there are lots of gaps which could be addressed efficiently by a fintech startup. This is why so many founders are getting into microfinancing, for example. This is an area which traditional banks have ignored, and they see this as being virgin territory, which offers them an attractive opportunity.

I think this is short-sighted, because you’re competing with banks on their own turf – after all, their core competence is lending money! While it’s true that microfinance is of minimal interest to banks today, as the segment grows and starts becoming profitable (thanks to the startups which invest in growing this market) they will start competing for their customers in this space.

Because the bank’s cost of raising funds is much less than that of startups, the entrepreneurs will find themselves at a disadvantage, which means their terminal value after 10 years is likely to be poor.

Others take pride that they can use technology to disburse loans in a few minutes. I think this is a great marketing gimmick, but am not sure what difference this makes in real life. Instant gratification is hardly a desirable goal in financial affairs, and can lead to consumers taking loans to indugle in impulsive spending, which they then find hard to repay.

Also, technology is becoming a commodity, and while a startup can implement much faster than an established player, it won’t take much time for the banks to catch up, which means this is not really a defensible competitive moat.

This is why it’s far better to find a problem for which banks will be willing to pay – something which causes pain to their customers, but is not part of their core competence. A good example of a bank’s customer’s pain points would their customer onboarding process – for example when someone applies for a loan. Banks need to get them to fill in a KYC because this is a regulatory requirement, but this can be quite a time-consuming painful exercise which no one likes doing. It’s a cost for the bank, which they are forced to bear.

Since the KYC is never going to be part of a bank’s core competence, they have to outsource it so someone. If a clever startup finds a technology-based solution which allows them to do the KYC more efficiently, quickly and less expensively as compared to the traditional process, lots of banks who will be happy to pay them for their solution.

In Conclusion

So does this mean you shouldn’t dream big? No – it just means that you need to be a realist, and understand that you do need to generate revenue to make your dreams come true!

If your solution is one which no one is willing to pay for, then you need to ask yourself – Are you addressing a problem which needs a solution in the first place? Or is it just a pet hobby horse you are riding?

Once you have enough money in the bank, you then have the luxury to be able to follow your heart’s desires, but till then you need to obey the market’s dictates!

[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

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