Chakra | October 15, 2015

Two steps to a better startup journey

Where to start?
What is the starting point to build a scalable business?
How to attract money into the business?

These are the questions many aspiring entrepreneurs ask before they get started. What I’ve suggested here is not a sure-shot solution to become an entrepreneur and build a business, but methods that I’ve seen many entrepreneurs use to start and scale their ventures.

Most aspiring entrepreneurs in India already have a job. They look for opportunities to start up while they are in the job and make a smooth transition when they take up entrepreneurship. As soon as they find an opportunity and a solution, the next step is raising financial resources for it. They start approaching investors at this point, which is when a lot of them are turned away. The reasons investors give are aplenty – ranging from operations on the ground not being significant enough, limited customer understanding, no domain experience etc. On the other hand, entrepreneurs also struggle to build the product, show traction on the ground owing to lack of financial resources.

Here is a path that could help overcome these challenges and help raise capital over time while still building the business with limited financial resources:

1) Gain customer understanding through service/ trading business.
This is the fulcrum of any business.  Let’s say the aspiration is to build an energy product in solar (say, a solar dryer) for farmers. As a first step, one could start with a service based in solar for farmers, such as a service for solar lighting products or act as vendor in these verticals for big companies. This would give you a firsthand understanding of what your customers want (their demography, needs/ problems). This will also help in understand some of the challenges associated with various aspects of the business model, ranging from the customer’s price sensitivity and disposable income, distribution channels (to reach the customer), customer relationship, financing the product and competition.

If the idea is to start a supply chain business in fruits and vegetables to benefit farmers, a good starting point would be to trade fruit and vegetables by procuring them in small quantities from farmers and selling to the customers. This would expose potential supply chain issues that may come up and validate the solution first hand. The scale could be as small as Rs 1,000 procurement per day. Loss in this scale would help the entrepreneur to rethink the business/ solution proposed and many more iterations could be carried out instead of investing huge sums of money and reeling under a big loss.

2) Downsize the business to the lowest unit and validate it
Any kind of business could be downsized and replicated to understand the profitability before investing big. If you want to start a dairy farm of 100 cattle, start with one cattle. If the idea is to start a masala powder processing unit, rent out one processing unit and make masala powder (your unique formula) instead of investing in capital intensive machineries initially. This reduces the risk significantly for an entrepreneur and reduces the burden on the finance required.

In some cases, it has even helped to validate the interest on doing such a business for an entrepreneur as some of them eventually found that it is not their cup of tea.

By starting a business this way and adopting these two critical steps, an entrepreneur could start with the money that they have in hand (no external funding required) and get started quickly (without waiting for money to come in). The other advantages are the entrepreneur’s journey would have had already started, there would be more leverage in valuation at later stage (when raising money from investors) as the business has proof points and history, and there would be cash flow on a day-to-day basis (through service business) while you may choose to infuse some for product building.

Proven examples in this case are the Hatsun group (the brand behind iBaco ice cream, Arun, Arokgya milk), which started as a small-scale ice cream seller before starting the milk chain. Similarly, the Lion dates entrepreneur too started out as a person who sold dates door-to-door to small retailers. Cavinkare has similar background too.

By doing this, an investor gains confidence in the:
a) Entrepreneur’s commitment to the business and perseverance
b) Traction in the market (service business) through positive cash flow, customers and the team (with domain experience) that is being built around it.