Economics and Control in Startups

“I think luck falls on not just the brave but also the ones who believe they belong there.”

- Novak Djokovic

Entrepreneurship is not for the faint-hearted. Early-stage startup founders are the champions of enterprises who are willing to bring about a long-standing change in the ecosystem. India has seen a quantum change in its mindset towards self-employment and entrepreneurship in the past few years and trend of brave young people starting new businesses will continue for a long time. However, with the dearth of information or rather guidance, many founders may find it difficult to navigate the complexities of running their own business.

Though founders can’t jack out on all trades, they can surely master some. Here are two most important areas that early-stage entrepreneurs shall focus on — Economics and Control.

Economics

Price — Most people don’t understand the “value” of price. A little drop in price can increase the demand of a product. A little increase may take the startup out of business. A startup founder shall know the price you pay to start-up. The “entrepreneurial” cost or cost of entrepreneurship is low when entrepreneurs are 24 than when they are 28. Indeed, it is supercool to be your own boss; but startupreneurs shall always keep the eye on the price they pay or the monetary hit they take. If they have worked hard to bring about a differentiated product in an existing market, they should charge a premium for their product. You don’t make the competition irrelevant through aggressive discounting but generating better satisfaction for the users and delivering a good overall experience. All those “unicorns” are realizing this the hard way. Keep an eye on the price the employees are charging for their service in your firm. Make this thing as a rule of thumb — if at your existing burn rate, you know you won’t last another 6 months; either cut costs or look to raise some immediate money. If startupreneurs aren’t pushing themselves to get a higher price in the market for their product, they are doing it wrong. Shut shop and find another job. Acquire users and give them such an experience that they wouldn’t mind paying an incrementally higher amount for the product or service at the cost of their own comfort. In this digitally connected world, experience is everything. Make sure you not only pay the price to give an experience but also charge a premium for the endorphins. We all are in the feel-good economy.

Raising Capital — There’s something fundamental about running any business. It requires a capital investment to kick-start. A startup is a little bet that few risk-oriented yet risk-averse people place on solving a real or perceived pain-point of the users or audience at large with the hope of achieving a repeatable and sustainable business model. Period. Basically, startups don’t have business models but “operating spaces” in which they try to make a mark of their own. Only when startupreneurs little gig comes to the stage of ‘creating’ demand, where they achieve a fair product-market fit (usually 2–3 years from the founding date), then the company can boast of its business model. If that doesn’t happen, all startups will keeping pivoting in the hope of finding their profitable BM. When it comes to raising funds, an entrepreneur shall know the nuances of raising money from investors. In the crudest language, most investors (institutional) place a term-sheet on the table if they are interested to invest in a startup. Learn about dilution of equities, common v/s preferred stocks, participation, vesting arrangements, liquidation preferences, ESOP pool creation, valuations (pre- and post-money) and relationship management with the investors.Sometimes the term-sheet clauses will set the tone between whether you will raise another round or pack up. It’s highly important to be on your toes with these monetary concepts associated with the startup. At the end of the day, both the investor and entrepreneur are here to make money. Financial motivations of an investor must match with the entrepreneur’s intentions of raising cash for her startup. Changing the world while generating cash is cherry on top.

Control

Design — If you see the past few years, the kind of startups that went down were those who focused more on the product and less on service or design. In the future, starting probably from today, every new enterprise or an existing one, will be a design company. Well-crafted design strategy shall be leading the product vision while the product strategy supporting the business functions of sales and marketing. Design thinking is not only the next big thing in creating innovative products but also the most essential future skill of any entrepreneur. Be an artist first and then a businessman.Rapid proto-typing, wire-framing and building mockups help the founders test out their ideas before going in for the kill. Build, Test and Iterate! Your design shall also include how a user would flow through the system. According to me, user flow is the user’s entire experience from initiating the use-case, prototype, or product to closing it and returning to their normal lifestyle. Design controls the user flow, product controls the outcome. Early-stage startups need to design their products, operations, marketing and technology functions in such a way that they stand strong in the face of rapid advancement in the technological realm. Great user experience doesn’t happen by chance, it has to be etched out from the founders’ mind. Only a robust design strat along with strong understanding of user behavior can help you in the overall working of your enterprise.

As Evan Williams puts it, “User experience is everything. It always has been, but it’s undervalued and underinvested in. If you don’t know user-centered design, study it. Hire people who know it. Obsess over it. Live and breathe it. Get your whole company on board.”

It’s true.

Decision-Making and Strategy — This goes without saying that decision-making and strategy development are the top-most skills of any entrepreneur. Successful founders have a holistic decision-making ability — their ability to analyze the uncontrolled barrage of information, their slowness to reach to a conclusion yet calculative in their approach sets them apart. Rather than making decisions, founders shall make small choices. Do not juggle with all choices to come to a decision. Eliminate choices that don’t support your long-term vision. Remove the time and effort consuming alternatives. Small choices have great benefits. One of them being that it helps avoiding will-power fatigue. Choices, when automatic, become easy decisions over time. Your choice to enter a newer market or an existing market with a differentiated product will become a good decision in hindsight only if the payoff is decent. Or else it’s a bad decision. Decision-making holds emotions at its helm which makes it difficult to move on. A choice to have a product vision will help steer your startup achieve escape velocity. Your small choice of having clear and concise product principles will serve as a bedrock for your product and marketing strategy. Entrepreneur’s choice of having good advisors on her board will lend credibility to her startup. Your small choice of having a networking strategy will help you find cash. So make choices and create documented strategies.

Feel free to share your thoughts and feedback. Follow me on Twitter or drop me an invite on LinkedIn, would be great to connect. I am reading pmarca’s blog posts, and Change by Design. Next up would be Superintelligence.

Mucho gracias. :)