Learning and Way forward

cakrishnaprasath
Nov 7 · 4 min read

As I complete my three years of my work at GoFrugal primarily focussing on investing in startups and having encountered and interacted with 300+ founders , I thought of summarizing few learning I have had and also few guidelines which I thought will be useful for aspiring entrepreneurs.

  1. Crossing the death valley — What is the most important thing in evaluating a startup ?? Founder , idea or size of the opportunity ?? One of the key learning for me from my boss was to understand the product market fit as a first filter. “When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” https://a16z.com/2017/02/18/12-things-about-product-market-fit/. Founders who put their skin in the game by sticking along for 3 plus years in their idea, investing their own time and money and have seen product adoption gradually over the period of time are the ideal set of founders who are likely to make a meaningful progress in their business.
  2. Cost of hope — Whatever be the business type of size whether it is B2B or B2C , there is a clear hype around over engineering the metrics of churn and LTV. Typically when business lose money to acquire customer and he not choosing to come back is like putting your money on the drain which I always believe is a cost of hope. Smart entrepreneurs who invest their own money or looking to build a profitable long term sustaining business will never chose to invest in anything where they will lose money on a per transaction basis as at no scale whether it is $10 million or $10 billion the company will ever make money to cover the fixed costs. Businesses investing in R&D and product innovations should always have healthy gross margins to reinvest and innovate. https://medium.com/craft-ventures/the-gross-margin-problem-lessons-for-tech-enabled-startups-e2aefab8a0d4. It is also prudent to assume that startups with high gross margins and a perfect product market fit with early adopters ( usually price insensitive) will have to shed a portion of their margins on growth , as any business with high margins will attract competition. As I repeatedly hear from my boss on every pitch” how long will that competitive advantage last 12 months ,24th months ??” , it is very important to factor in this in building financial models as cost structures will be built in for high gross margins and a drop can potentially kill the business.
  3. One step at a time — -There are numerous stories I read about how well funded companies bundle too soon . As money hits the bank, there is a rush to hire , pivot into multiple verticals, grow at any cost and prepare for next round of funding. The prudence and focus shown earlier on conserving cash diminishes and in the mad rush to grow the business is lost. I have seen founders who are conservative in spending money ( they spend a rupee when they have visibility to earn one more ) have always been at peace to execute. Businesses should give sufficient time gap between two fund raises and such fund raises also should always be for growth rather than for sustaining the business. One key parameter is to divide every incremental overhead cost by gross margins you earn per unit and see if it really makes sense to spend this money (it can be an air ticket, a conference sponsorship or an expensive sales or tech resource hire).
  4. Cash flow management — — Some founders I meet and interact get annoyed and feel I belong to old school when I ask about cash flow management . Accordingly to me , a revenue booked is meaningless unless the customer pays you for it. As a startup , it will always be a problem to collect money from your customers as they see you as a small vendor . My thesis on this is simple . “ If customer is unwilling to pay you on time , they dont respect your idea or your product or service “ and the business should not be hesitant to plug their services off if customer is doing the same.
  5. Play safe — — I know at least two founders who always are prudent in their projections in terms of growth and spends. It will help the founders and team to have realistic goals and persuade them with focus rather than chasing unrealistic metrics which will demotivate the team to the core.
  6. Culture wins — Building the right culture within the team is a critical and most important aspect which will help any startup stabilize and grow. Building teams in the right way with right expectations is one of the most important tasks on hand for any founder looking to scale. While there is no one straight success formula , I would say that being transparent , encouraging failures and learning to improve ,ensuring that all people understand the purpose and common goal are some of the things which are essential ingredients of building right culture. The true reflection of culture has always been displayed in tough times when cross functional teams work together to come out of it.In my interactions with founders and learning from their style of managing the organisation , founders who are transparent , communicative and team players have always been able to build teams which are result oriented and also sticking to the organisation vision for a long time.

These are few learning I have had in this 3 year journey and looking forward to interact with 1000’s of entrepreneurs in the years to come. I believe that our efforts to invest and support will be of use to ambitious and frugal founders in growing and building meaningful businesses which will become institutions in the long run.

Frugally yours,

Krishna Prasath

https://www.linkedin.com/in/krishnaprasath/

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