What Does It Take To Build A Great Startup?

It is a great time to be a technology entrepreneur. The stars are all aligned – vibrant ecosystem, access to capita; increased social acceptance, growth and exit opportunities are catalyzing entrepreneurship. Although there has been some tepidness in funding of late the long term secular story is robust. However, behind the poster boys of startups, there are hundreds who fall by the wayside. This does not mean that they become defunct but they meander and lose steam before the inevitable.

Based on my own experiences dealing with startups and reflecting on the reasons for their success, I find that there are a few characteristics that are similar. I am not going into factors that are beyond your control like serendipity or luck, but really getting into the key ingredients needed to make a venture work. There is clearly no silver bullet or a magic potion but a combination of factors that characterize successful startups.

Attractiveness of the market in terms of breadth and its depth is the foremost factor for any venture to succeed. Caliber or Credentials of the team has no significance if the potential market is incapable of pulling customers. A mediocre team in a rapidly expanding market will see more success than a team of rock stars in a saturated market. Once the “product market fit” is achieved, it is possible to kick into the growth mode. Entrepreneurs must focus on building solutions for markets that have minimal government interference, high propensity to pay, low customer acquisition costs, high repeat rates and high entry barriers. Typically, such markets are extremely competitive and hence companies need to get their value proposition right & clearly differentiated and execute clinically as markets can be unforgiving. Most successful ideas today like e-commerce were tried during the dot com boom days and failed. They failed because the market was not ready – there were not enough users of the internet, mobile was still used only for phone calls and backend infrastructure was inadequate.

Another trait of a good founder is a strong nose to sense an opportunity and ability to move swiftly like a Cheetah to seize it. Let us take the classic example of Uber, for instance. Today, we as venture capitalists see a plethora of ‘Me too’ business models which are usually a blind copy- paste from US models peddled by entrepreneurs. I am not suggesting that a “Me Too’ business model will necessarily fail but these need to be contextualized for the Indian market to succeed. For example, hyper-local delivery using kirana stores for instance is effective in India, given the structure of the industry here.

Since there is too much capital chasing deals (it is estimated that there is more than 2 BUSD of dry powder with India focused funds), everybody wants to jump on the ride. As a consequence, we come across a significant number of entrepreneurs who have started ventures to sell, make money and be on the cover of Fortune magazine. It is not difficult for a discerning VC to spot such traits and pass these opportunities. For example, if the pitch deck gives disproportionate space to competitive funding, exit valuation, absence of a long term vision or plan, the game plan is obvious. Entrepreneurs need to realize that if they build robust businesses, exits will happen. There will always be buyers for good businesses, no matter what state the market is in.

Ability to be nimble and flexibility to change course without being dogmatic is another trait we have seen in successful startups. Startups normally begin with a certain hypothesis and start building a MVP. However, it is not always that you get it right because it may well nigh happen that the market requirements are different. It is normal to accept this and pivot the business rather than getting stuck. Successful entrepreneurs are those who can sense this and Act and more forward with conviction while backing their instincts.

Ability to build a team of people that not only complement each other but are passionate and fired by the idea is an imperative. We have seen startups and passed an idea because the entrepreneur did not give enough thought to this aspect. This could happen if the founder is a prima donna and wants to be the fulcrum or he has not given thought to it. While cash burn is an issue that inhibits startups, there should be a clear thought on the organization design that will execute the idea. In my view having a third class strategy with a first class execution is much better than having a first class idea with a third class execution. One of the things peculiar to India is that the main Founder who owns the idea or who puts in the initial capital, is the de facto CEO of the company. In few cases it does work well but a truly mature founder realizes whether he / she is better off getting a CEO for growth because the skills needed to incubate an idea and to grow a business are entirely different. We have passed opportunities because the Founder was fixated in being the CEO.

As an entrepreneur, you will be negotiating all the time – with customers, investors, vendors, employees, board etc. Successful entrepreneurs are good negotiators without being unfair. They unabashedly promote themselves with passion without being delusional. Although there is a thin line between confidence and hubris, successful entrepreneurs understand this difference.

One of the key aspects I want to emphasize is to have a clear focus. It is quite natural for a startup to show a propensity to hedge bets by being opportunistic and do too many things to too many clients or come up with ad-hoc solutions rather than perfecting the value proposition. Startups have limited resources and thus should focus on one product at a time to solve a single pain point faced by a large number of customers and create a wow factor. If a startup is unable to create ambassadors of its first few customers, it will have trouble scaling up. The issue also crops up because most startups fail to identify the low hanging fruits for their products. For example, Facebook’s initial users were elite university students, Apple’s initial target were hobbyists. These kinds of beta users of a product are more forgiving and willing to pay for the next cool product idea. In the absence of a target group, a startup takes longer to develop its products and is unable to create virality for its products.

One of the biggest mistakes startup make is getting fixated with valuation and raising either too little capital or too much. The key is to strike the right balance and get so much capital so as to reach the most appropriate milestones for the next round of funding while factoring appropriate contingencies. In a world where business models are easily replicated, raising too little capital would actually hamper your pace of growth allowing others to catch up. It is absolutely imperative to ramp up fast, build defensibility and get a head start.

In sum, true entrepreneurs are forever hungry for new business and growth. They fundamentally need to be risk takers and make bold bets and challenge the status quo. Conserving cash does not help but there has to be a healthy respect for capital so a right balance is needed.

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Startups that are adding customers furiously will attract funding even in the worst of times. Startups follow a binary outcome : “Go big or go home” – the success of a startup has to be large for all stakeholders to make profit. To create a product for which a customer would pay, is never easy and needs few iterations before hitting the mark. Startups must reach MVP stage as quickly as they can and launch the product to its initial beta users. A good marketable product will need much iteration and in some cases pivots. Startups which do not iterate quickly, fail quickly.

Effective entrepreneurship is often underpinned by the above mentioned qualities. A realistic assessment against the aforesaid qualities would help entrepreneurs take the right steps in the right direction to succeed.

[Shailesh is Managing Partner and CIO of Exfinity Venture Partners LLP, a fund focused on funding early stage Disruptive Technology Startups.]