Start-Ups – Dos & Don’ts by Yashodhan Khare

Yashodhan Khare – Blogger, Sentiments & Bubbles Blog (Stock Broking)

According to Merriam-Webster, start-up means “the act or an instance of setting in operation or motion” or “a fledgling business enterprise.” However, the word startup is now bandied about to describe a new venture of any kind. In the ‘good old days’, there were start-ups as well, just that the connotation was different. In my opinion, there are two important connotations of the word start-up which are a bit misplaced. I prefer to call them myths. These are:

  • The fact that start-ups refer to businesses that are internet enabled (online) or have nothing to do with traditional business models (offline) and
  • The fact that all start-ups lose money and are inherently unprofitable at inception and for many years after that

Why do I call them myths? I will highlight two businesses; hair cutting saloons, and stitching clothes. Both of these are primarily offline activities and cannot run online; that is clear. If a hair cutting salon in your city were to try and expand nationwide and create a brand image, would that not be a start-up venture? In my opinion, yes. The ‘act or instance of setting in operation or motion’ is present, the outcome is unknown, it requires an enormous infusion of funds and is not possible without internet connectivity. At the same time, these are profit making businesses from day one and do not necessarily bleed cash.

Does such enterprise exist? The short answer is yes, they do. State Street Barbers is a chain of barbershops, something that can’t be done online! Just click on the link and see how they have used the internet to monetise their services and increase their reach. Another example of a similar venture in a primarily offline business is Crackerjack Shack.

Both of the companies highlighted above have raised money from friends and relatives, put it to profitable use and prospered. They are examples of traditional businesses (non-technology) that have used the internet for increasing the personal touch and for building business relationships and a brand name. Since Internet made distribution free, they found it easy to convert visibility into viability. I am sure there are many such ventures in India as well, just that they are not that well known.

Today the words start-up is a fashionable way to describe any new business venture. Come to think of it, any company that was started by anyone in the past was a start-up at some point in time. Why the fashionable connotation? I believe that it is something that we have imported from the developed world. The enormous success of start-up ventures in the United States seems to be acting as a catalyst. After all, Mark Zuckerberg reportedly started Facebook from his dormitory and proceeded to drop out. The subsequent listing of Facebook on American bourses and the fact that Mark Zuckerberg was a millionaire many times over even before he turned thirty seems to have set in motion the wheels of the start-up movement all over the world.

With the advent and proliferation of the internet, we in India are seldom immune to what is happening in other parts of the world. Needless to say, Indian entrepreneurs have now raised a considerable amount of money via the start-up route. We are well and truly bitten by the start-up bug. Given the demographics, India it seems is a dream come true for venture capitalists specifically with anything to do with e-commerce. The global venture capital industry was sold on the opportunity of such a vast and hitherto untapped market. Of late, the enthusiasm is on the wane. The reasons are not hard to find. The main ones are (a) India’s low GDP, (b) bureaucracy and red tape, and (c) no easy exit policy.

A lot of start-ups confuse the words destructive and disruptive. Disruptive doesn’t always have to be destructive, not necessarily so. Often it so happens that those destructive models end up self-destructing, and investors in such ventures lose a lot of money. That is one of the main reasons why start-up funding has dried up of late. In the ultimate analysis, quality matters. In myopinion, any start-up must have the following:

  • The promoters must have a reasonable capital commitment to start with and the ability to increase the same if required. They must manage the business like they would manage it if they owned 100 percent.
  • Having a vision of how to improve the viability of the businesses and ability to communicate the same. At all times, visibility has to be long-term only, and one has to think regarding how the end user can benefit.
  • The idea is to focus on one change at a time, not a whole lot of them at one go. Focusing on one change at a time enables start-ups to get a feel of what is working and what isn’t.

An innovative idea must back start-ups. In the case of start-ups in the services sector, the idea must be to provide a value-add to the ultimate user. The question is: Is there real innovation or are there real profits? In my opinion, any venture or start-up that a budding entrepreneur may want to start must avoid the following pitfalls:

  • Having lots and lots of users, but no idea of how to monetise them.
  • Change the business models according to the evolution in trends.
  • Give an impression that the whole idea is to build something that can be sold.
  • Using Excel spreadsheets and extrapolations of projected profitability that are inherently flawed or based on unrealistic assumptions.
  • Remember that the Internet is a productivity tool and not an end in itself. Most start-ups don’t seem to know the difference. The internet enables an entrepreneur to increase the reach of his product or service. A bad product or idea cannot be sold just because of internet connectivity. The concept of value add is critical. The user must benefit in a meaningful way because of ideas or services that the start-up envisages.
  • Since most start-ups are online, entrepreneurs must also explore offline options to supplement their business models. At the same time, many services are Start-Ups not or cannot be made available via the internet. In such cases, the use of the web ought to be restricted to marketing opportunities.

To conclude, the Indian economy is expected to grow at an expected rate of seven percent per annum over the next couple of years. The ‘Make in India’ initiative and changes announced in the Union Budget (presented in February 2016) has given further impetus to ‘start-up movement’ in India. A shake-out is underway currently and will result in separating the wheat from the chaff.

Author of this article is Yashdhan Khare

Yashodhan Khare

Yashodhan Khare, an expert in the business of stock broking with an experience of 20 years. He is a partner with Pune based retail stock broking firm Vimal & Sons, which is a member of the National Stock Exchange of India. A Chartered Accountant by qualification, Yahsodhan’s prowess in understanding the Indian Share Markets has enabled him to guide & mentor people looking for an expert’s opinion while investing in Indian market.

His blog Sentiments & Bubbles gives a thorough insight about the stock market and attempts at making markets less overwhelming for investors.

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