Startup Ecosystem: What it is today and future prospects
Greetings folks! Have you ever thought about starting your own business and wanted some guidance on the issue? If you have, then this article will definitely help you! In this article, we are going to discuss: what is a startup and an entrepreneur, the various stages of development of a startup company, the factors that determine the success and failure of a startup company, what is a startup ecosystem, how it minimizes the risk of failure for a startup company, how the government of India has helped so far regarding this issue and last but not the least, future prospects of startup ecosystem in India.
Who is an entrepreneur? An entrepreneur is a person who has successfully started his or her own business and is legally running it successfully.
What is a startup? A startup or a startup company is a company that has just been founded by an entrepreneur. It is a legally approved company and may have its own trademark, copyright and intellectual property.
Stages of development of a startup:
- Ideating: The entrepreneur comes up with an idea for creating a potentially scalable product or service for a big enough target market. He has an initial idea on how it would be a valuable product or service. He can start it as a single person or can co-find it with another person or a group.
- Concepting: He sets the mission and vision of the company and develops an initial strategy to achieve key milestones over the next few years. If he chooses to co-find the company, then usually, the co – founders are highly skilled in specific domains that are required for the company.
- Committing: An initial product or a service version is developed by the co-founders with committed resources, who share a common vision and mission for the company. The Share Holder Agreement (SHA) is signed among the shareholders of the company where each shareholder has agreed to invest some amount of time and money in with the company and there is a consensus on how to share the profit, which is calculated using a specific formula.
- Validating: The initial strategy developed at the ‘concepting’ stage is repeatedly put to the test and modified, if necessary, to ensure that the key milestones are achieved and profit is made. Key Performance Indicators (KPI) are identified and religiously kept track of. If successful, the company can start to attract additional resources (money or work equity) in the form of investments or loans for equity or interest or revenue share from future revenues.
- Scaling: The Key Performance Indicators (KPI) are focused upon based on measurable growth in number of customers or users, revenue and market share. The company has already attracted or has the capacity to attract high amount of investments if desired at this stage. Carefully thought out plans are implemented to achieve a steady growth (not too fast and not too slow). New methods are implemented (if necessary) to improve the quality of the people hired, the processes used within the business and the strategies used to achieve growth. Growth and expansion are the main focus of the company at this stage.
- Establishing: At this stage, the company has already achieved a high growth and the main focus is to consolidate on the gains. The vision, mission and strategies of the company may be modified if necessary. The co-founders of the company may either choose to stay with or leave the company. The company may or may not experience further growth at this stage.
Main reasons for success of startups:
- The idea: The strength of the founder’s idea might seem to be the biggest factor responsible for a business’s success, but in reality, it’s only a small factor of how things might turn out. Consider Google, whose core idea of an interactive web search was, at its start, already being implemented by dozens of competitors. But because Google’s founders’ plan, execution and timing were superior, their lack of originality didn’t cripple their chances of success.
- The leader(s): Leadership is of paramount importance in startups. Leaders make the decisions, set the mission and vision of the company and inspire employees to work harder for the company’s goals. If we put an incompetent leader in place, not only will high-level decisions be made less effectively, but the morale of the team could be put in jeopardy. On the other hand, a skilled and experienced leader can turn even a weak idea or team into a successful one.
- The team: Entrepreneurs are important, but they rarely accomplish great things alone. Having a united, cohesive, efficient and motivated team is very important to achieve the organization’s goals.
- The capital: Having sufficient, initial working capital is important. Sources of the capital can be: bank loans (MSME loans), family or friends. If a bank loan is taken, it is advisable to keep an eye on the cash flow. One wrong move here can put your cash in the negative territory (loss).
- The initial plan: The initial plan to achieve key milestones for the organization has to include more than just the plan. It has to include the targets, strategies to achieve them, processes to implement the strategies and more. The degree to which the plan is researched and fine-tuned will greatly affect the chances of success.
- The execution: A plan is only as valuable as its ability to be executed. If you have a great plan, but mess up its execution, your entire enterprise could be compromised. On the other hand, if you have an adequate plan and execute it perfectly, success will definitely follow and you will a key understanding of what did and did not work from your original concept (if something went wrong).
- The timing: Timing is important, from a competitive perspective, and it has led many businesses to prominence despite a chaotic and busy market at their time of entry. For example: when YouTube was founded, there were already dozens of video-streaming platforms. But because YouTube was launched at a critical moment i.e., after high-speed Internet became the norm, but before any other streaming service had risen to prominence, it enjoyed a radical and early success.
- The crisis response: No matter how good the idea and the initial plan were and no matter how good the execution was. Something may go wrong at some point of time. How well the crisis is managed is far more important than what steps are taken to avoid it. One poorly treated crisis is all it takes to bring down a company, so careful but swift response is needed.
- The marketing: How well the business is marketed matters a lot. An inferior product that is marketed in a more appealing, exciting, and unique way will always outsells its superior product that has been marketed poorly. Example: Internet Explorer and Mozilla Firefox. Though Mozilla Firefox had superior firewall compared to the Internet Explorer, it did not sell half as much as Internet Explorer did due to poor marketing!
- The growth: Finally, the path you choose toward growth plays a significant role in the fate of your company. Grow too fast and you may end up having a financial crisis. Grow too slowly and you’ll never get anywhere. So, find a balance, and plan your growth carefully.
Main reasons for the failures of startups:
- Not seeking professional advice: No matter how informed you feel you are, once you want to startup a new line of business, it is imperative that you seek professional advice. This will help you ascertain whether or not the business is as profitable as you thought. Most times, entrepreneurs start up a business because they find others doing the business and profiting. Yes, they might be profiting from the same business, but there might be a secret behind their success. It might be the location, good customer service, knowing the right source to get the raw materials from etc. It is good if you have a mentor who will always see you through and avoid silly mistakes. Another advantage of seeking professional advice is that, you will meet people who have already done the business and who have made the mistakes and know the best way of doing it.
- Lack of good customer care: It is very important that you make your customer care a priority. A business with good customer care grows. Good customer care brings return customers and return customers bring referral customers. If you do not treat your customers well, they will go to your competitors. Show your customers that you appreciate them. Always ask them questions about the product and offer them a product or service review (either positive or negative review). If you are not close to your customers, if you treat them like an ordinary person, they will only come to you when there is no other option. Bad customer care has killed a lot of businesses!
- Copying others: What works for person X need not work for person Y. Many people had begun a business or made a business choice because they saw others doing it and thought they could be successful in it if they tried. This does not always work! Every business requires a particular mental makeup, knowledge set and skill set that every entrepreneur should possess if he or she wishes to succeed in that business. Simply starting a business because others have done it will only lead to failure of the business. It is good you add your own idea after proper consultation, that will distinct you from others.
- Lack of experience: Lack of experience is one of the main causes of business failures. If your management is completely made up of novices, then your business is as good as dead. When starting a new business, it is advisable to get the services and advice of people experienced in that field. They can be your partners or your employees.
- Unaccountability: You must be accountable for every penny your business makes. Most times, many entrepreneurs do not account for their daily sales. Once there is a sale, they spend most of the money on personal needs, believing that they will make another sale. If you must succeed in business, you must be accountable for every penny that you make. Make sure you plan out your spending. For a business you plan to grow, 60% of your profit must go back into the business for investments.
- Lack of personal development: Many entrepreneurs do not invest on themselves. They want to be great but they do not read or research, neither do they attend seminars or workshops that can increase their knowledge base. Personal development of one’s knowledge and communication skills is a must to succeed. It is hard work and it takes discipline. One will have a hard time succeeding without developing and working on one’s attitude and abilities. No one gets ahead in life without building themselves with new knowledge.
- Poor location: Every entrepreneur should place his business in a location where there is a demand for his or services. A business located in a place where there is no demand for the services, no matter how posh the locality or the building is, will definitely fail. On the other hand, a business located in a place, where there is a reasonable to high demand for the services or product will succeed provided the product or service is good, no matter how humble the beginning may be. For Example: In my own area (GM Palya, Bangalore), I know two entrepreneurs who started two radically different businesses, one a coffee shop located near a vegetable market and another who wanted to sell gym and exercise equipment located near to the coffee shop. The entrepreneur who started the coffee shop saw a radical improvement in sales and became successful quickly. He even had the money to rebuild his shop to look more modern! On the other hand, the entrepreneur who started the gym and exercise equipment shop hardly had any customers and had to shut down his business and leave in just a few months’ time. Reason? Location! The coffee shop entrepreneur had located his shop just right. People, mostly Brahmins, who are crazy about coffee, stopped by his shop to buy some coffee, which is still good, whenever they went to buy vegetables in the market or even otherwise. There is a demand for his product, the location is convenient, the prices are just, the coffee is good and above all he treated his customers very well and maintained a good rapport with them. The other entrepreneur wanted to sell equipments which were costly, which people in my area could hardly afford and for which there was little demand. Hence, he failed and had to shut down in a short while. Moral of the story: Location is of paramount importance for a business to succeed.
- Lack of focus: Entrepreneurs can easily be distracted with too many minor risks. Every day, their focus tends to shift, their thinking shrinks. A good entrepreneur or business person will never lose focus on what’s important and where their priorities are.
- Wrong Expectations: Some startups were being sold the idea that all they need to do is get into business and the money starts rolling in without doing anything. Sometimes it is the person’s fault because they only hear what they want to hear or they think they know better. Bottom line is: building a successful business is not a 60-yard dash but a marathon. If you don’t want to die in poverty or see your business collapse, then you must be diligent.
- No intellectual property: If you expect to attract investors, or you expect to have a sustainable competitive advantage against giants in your industry, you need to register for patents, trademarks and copyrights, as well as enlist non-compete and non-disclosure agreements to protect trade secrets. Intellectual property is also often the largest element of early-stage company valuations for professional investors.
- No Website: Simply put, if you have a business today, you need a website. At the very least, every business should have a professional looking and well-designed website that enables users to easily find out about their business and how to avail their products and services. Remember, if you don’t have a website, you’ll most likely be losing business to those that do.
- Giving up too early: One of the most common causes of startup failure is that, the entrepreneur just gets tired, gives up and shuts down the company. Despite setbacks, many successful entrepreneurs like Steve Jobs and Thomas Edison kept slugging away on their vision until they found success.
Now that we have seen the causes for failures of startups, let us have a look at the startup ecosystem and how it helps to minimize the risk of failure for a startup.
What is a startup ecosystem?
A startup ecosystem is like an interdependent social network of startup companies, each belonging to a unique sector of service like universities, funding organizations, support organizations, research organizations, service provider organizations, etcetera. Investors from these roles are linked together through shared events, activities, locations and interactions in which information and knowledge are shared. In addition, resources like skills, time and money are also essential components of a start-up ecosystem. The resources that flow through ecosystems are obtained primarily from the meetings between people and organizations that are an active part of those start-up ecosystems. These interactions help to create new potential startups and/or to strengthen the already existing ones.
Factors affecting startup ecosystems: Start-up ecosystems are controlled by both external and internal factors. External factors, such as financial climate, big market disruptions and significant transitions, control the overall structure of an ecosystem and the way things work within it. Start-up ecosystems are dynamic entities which progress from formation stages to periodic disturbances (like the financial bubbles) and then to recovering processes. Start-up ecosystems in similar environments but located in different parts of the world can end up doing things differently simply because they have a different entrepreneurial culture and resource pool. The introduction of non-native peoples’ knowledge and skills can also cause substantial shifts in the ecosystem’s functions.
Employee diversity also affects startup ecosystem functions. Startup Ecosystems provide a variety of goods and services upon which other people and companies depend on. Thus, the principles of start-up ecosystem management suggest that rather than managing individual people or organizations, resources should be managed at the level of the startup ecosystem itself. Classifying start-up ecosystems into structurally similar units is an important step towards effective ecosystem managing. All ecosystems, whether small, medium or large, share the common goal to accelerate their growth. Learning from the evolution of other ecosystems to understand what triggers such acceleration to inorganic growth rates can greatly inform their strategy.
Present day climate for startups in India
PM Narendra Modi’s Stand Up India Startup India initiative includes a $1.5 billion fund and 3 years of exemptions from income tax, labor inspections and capital gains for startups. The proposal also includes free legal support, faster and 80% cheaper patent applications, and an app that enables same-day business setup.
Startup India includes funding for a nationwide network of incubators, research parks, and university research centers, even 3D printers for engineering labs. To foster a startup mindset and build social ties between IT students, more than 500,000 schools will offer innovation education programs that integrate with ongoing startup fests and pre-incubation training.
Whether or not the new economic, educational and regulatory moves proposed in Startup India comes to fruition, bankers and investors (domestic and international) are stepping in where angels once literally feared to tread. According to VCCEdge, Indian private equity investments exceeded $21 billion last year, a 67% increase over 2014.
Since PM Modi’s proposals were unveiled, private lenders have made moves to support the startup community. RBI Bank’s India Startup Club offers founders end-to-end banking services, as well as administrative services like HR, Office space and CRM. The State Bank of India opened ‘InCube’, a Bangalore branch which will also assist with financial services and mentorship.
Climate for startups elsewhere
On Friday, the 29th of January 2015, the follow-up of the ‘How To Get There’ summit took place at Brightlands, Chemelot Campus in Geleen. Purpose of this meet-up was to further delve into the subject: corporates and startups; in what ways is the cooperation between the two depending on local and regional hubs? What role is reserved for the ecosystem? Moreover, Director of Startup Delta Sigrid Johannes pointed out that regional hubs are crucial in this process since they may have an important filter function to organize contact between corporates and startups at just the right time.
During the Brightlands session, however, the central theme was what role should the hubs in the ecosystem have? Hubs can link various networks and knowledge within the ecosystem. They are the ones who can map which startups are where. Prof. Jansen concluded that a specialization of hubs offers acceleration and effectiveness in the startup ecosystem. “Further professionalization and specialization among hubs could bring startups and corporates closer together,” said Prof. Jansen.
A network with all the stakeholders must be set up including a sector-specific approach which offers instruments for startups of all ages (from startup to scale up). Dr. Kuiper states that where we first only talked about corporate venturing, we are now talking about co-creating an ecosystem. “The startup does not exist and the corporate does not exist, they all work together in an ecosystem.”
After these three speakers the break-out session with the various hubs began. The topic of specialization appeared to be a recurring one. The vision of one single hub with regional hubs specialized in specific domains would be the ideal situation for attracting startups and corporates from the all over the world. Foreign startups with a specific specialization could then be assigned to the most fitting hub. The argument of sharing knowledge was also wholeheartedly agreed upon by the hubs. This is culturally something we need to learn, allow each other to learn and grow from shared knowledge and cooperation.
Benefits of having a startup ecosystem
Cooperation between startups and corporates is important because the two reinforce each other’s strengths and potential. Corporates have access to an international network, from which a startup could benefit, to speed up their process of growth and innovation. Collaborating with an innovative startup on the brink of regeneration will make corporates more innovative and competitive in a market that is evolving at a fast rate. Everyone wants to work with startups and accelerate innovative ideas nowadays. Corporates have also realized that they are not fast enough to develop new models and react to external changes with their old operating models. That’s why they want to cooperate with startups, accelerate internal and external new projects, and also invest in new companies and businesses.
Future prospects for startups in India and abroad
In the coming months, one barometer of success for India’s startup ecosystem will be the number of new companies that are based inside the country. I firmly believe that due to the revolutionary changes brought about by the Indian PM, Narendra Modi’s ‘Stand Up India Startup India’ scheme, many new companies will be based in India and the Indian economy will not completely rely on FDIs. Startups in India will have sufficient capital to begin with; exemption form burdening taxes for three years, sound advice from the startup ecosystem through specialized knowledge hubs in the ecosystem’s network which will minimize the risk of failure, a much wider opportunity to connect to corporates, mentors and experienced people in the sector through which knowledge, ideas and experience can be shared and mutual learning can be had, which will further reduce the risk of failure for startups and last but not the least, an opportunity to learn, innovate and continuously re-invent oneself by attending seminars and workshops in incubators, research parks, and university research centers setup by the BJP government. The future looks promising for Indian as well as startups based abroad thanks to the establishment of a startup ecosystem and the innumerable benefits it offers.