Archive for the ‘startups’ tag
That ideas are worth nothing without good execution is well demonstrated from this true story from way back in 2005. In a span of a few months, I independently came across the same compelling idea thrice.
The first time was while visiting the Bay Area, when I met my friend Sorav (now professor of computer science at IIT Delhi) at Stanford. Sorav and his buddies at Stanford had a kind of a startup club which met weekly to discuss new prospective business ideas. The week I was there, I got invited to that meeting. The idea that got discussed was of to develop a group messaging sms service. It was supposed to be like the yahoo groups of mobile phones so you could send out an sms and it would reach all your friends who could continue a group conversation using SMS. The idea excited everybody and I think we even continued to discuss it when I got back to India. But that was the end of it.
I heard something similar a second time when I met Saad around mid-2005. Saad and I had connected with each other via our blogs and decided to catch up and brainstorm ideas (in those days, Saad actually used to carry around a brainstorming kit, don’t know if he still has it!). Anyway, the idea was to see what we could do together. Saad mentioned that it would be cool if there was a way to share stuff in real time with rest of the world using the mobile phone. The specific example that Saad gave was, to quote him loosely, “Imagine if I could take a photograph of this room with my phone, and send out a message saying where I was, with whom and what we were doing”. It was supposed to be like a real time blog. The scenarios we discussed were sporting events or other situations where it would be cool or useful to be able to let the world know where we were and what we were doing. Both of us thought it was a really neat idea but nothing came out of it.
The third time I heard something similar was from Alok. We were discussing social networks and Alok mentioned that he felt that a mobile based social network would have lot of potential. After all, everybody’s social graph already exists in their phone book and leveraging that an interesting social networking concept could be developed. Once more, the idea sounded appealing but nothing came out of it.
Note that none of the three situations above were just drawing room conversations. I was in the business of building web based software and actively scouting for ideas. Technically, we could have actually accomplished what we had discussed and in fact a team already existed that could have executed any of these ideas. And of course, this was much before twitter came in to existence or became popular. All the three ideas above were similar to what twitter enabled eventually. The fact that I alone came across this idea thrice in that short span of time just shows that hundreds of people must have gone through a similar thought process at that time. It was obvious that mobile based social interactions were the next big thing. And yet, only one twitter emerged out of it.
So, the moral of the story is that if we could get a penny for our ideas, we would all be millionaires! We often give too much importance or credit for a good idea. But the real test lies in executing an idea, taking it to the market, refining it and building it into a success.
Oh, by the way, did I tell you that youtube was also my idea?
Let me explain the worst kind of business you can get in to. I have been through some not-so-perfect business models myself so I can say I have some insight in to this topic. There are three factors that typically describe a business:
1. How much does it cost for me to sign up a customer (cost of customer acquisition)?
2. How much does this customer pay for my products/services (pricing)?
3. How much will it cost to service this customer ?
Looking at the three factors above, its easy to figure out what would be the worst type of business model. It would be a business where signing up a new customer takes lot of time and money, the customer pays little for the services offered and finally it takes a really long time (and money) to actually service the customer.
Now this might look obvious, but it is worth mentioning because most companies actually fall in to this model doing business. This happens as we often look at the above three factors in isolation. The mindset in a startup is that “we need customers at any cost and we got to keep them happy because then they will give repeat business and also refer us to other prospects eventually leading to profitability and success”. In theory, it is practical. In practice, it is often not so simple!
Most companies start out by offering competitive pricing on their products. This is the easiest way to sell because pricing is a quantitative measure and all other things being equal (or too difficult to judge on), customers will choose the cheapest. At this point, two things can happen – your product has no takers even at a lower price point which is the end of story right there, or you end up signing customers and actually generate revenue. If the latter happens, then you have at your hands the task of servicing these customers but within limited resources since you are selling cheap. Now, again two things can happen – either you screw up on delivering to these customers which is the end of story right there, or you do manage to service them albeit with a lower margin. The side effect of having started selling at a lower price point is that you can never increase your pricing (worst, you even got your competitors to bring their pricing down!). So now you have a real business which has products, customers, revenues and possibly even profits. The profits are likely small in quantum because the margin per customer is low. So to become a big business, you need lots of customers, or in other words, you need to scale up. Now once more, two things can happen – either you will not manage to sign up large number of customers because your pricing was so low that it left no room for investing in to growth, in which case congratulations, you just ended up with the worst type of business model OR you might actually manage to sign up a huge number of customers. If the latter happens, you would be facing the final test – does your product or service scale up along with the growing customer base? Now, for the last time, two things can happen – your product doesn’t scale up and you end up with unhappy customers forcing you to further lower your pricing leading to ending up with the worst type of business model OR your product does indeed scale up and you end up with lots and lots of happy customers and the best type of business model!
The moral of the story is that it takes only one step in the wrong direction to start with an excellent business plan and end up with the worst kind of business model. From my own lessons, I think we must answer these three fundamental questions before venturing in to any new business:
1. Will the cost of acquiring a new customer increase, decrease or stay the same as our customer base grows?
2. Will the cost of servicing a customer decrease as the number of customers increase?
3. Will there be enough number of potential customers out there to enable us to achieve scale (should the above two questions have favorable answers)?