Wednesday, May 11, 2016

A Theory of Successful Startups: Ten Principles of Sustainable Success

The flavour of the past few decades has been entrepreneurial ventures as the core of new business generation, and the most visible form of not only self-employment but also generating employment for scores of people. However, over the last few years, the word startup has been in increasing circulation in business and social media. The last decade and this decade clearly belong to startup as the more profound form of entrepreneurship. Strictly from a dictionary point of view, a startup company or a startup is an entrepreneurial venture or a new business in the form of a company, partnership or temporary organization designed to search for a scalable and repeatable business model. This definition hardly provides a distinctive or differentiating colour to startups. A more practical and true-to-the-ground definition of startup provides a different and relevant perspective.

From a real life point of view, a startup is a company working to solve a problem where the solution is not obvious and success is not guaranteed. This is the fundamental characteristic of a startup, as differentiated from any other venture that may be established by normal entrepreneurs or existing companies. An example or two would make the concept clear. The concept of exclusive retirement homes for senior citizens, usually located in outer suburbs as gated communities, is gaining ground. An entrepreneur may set up such a project in a new city or in the same city in a different format. A startup, however, would try to find a way in which such senior citizen services could be offered in the current mixed neighbourhoods, without moving senior citizens out of their current homes. The former, while it has its entrepreneurial risk, largely works on a proven business model. The latter, a true startup, seeks to create a new business model out of the idea of serving senior citizens creatively.

More fuzzy, more valued

Startups usually have a fuzzy or unclear texture. One can certainly make out the shape of a fuzzy object but would find the edges hard to describe. A startup is also like that; it is indeed easy to synchronize with the startup idea but difficult to understand the details. It is this fuzziness that makes startups attractive for investors looking for the next breakthrough business opportunity to cash in on. In fact, the more fuzzy a start-up is the more attractive the valuation could be, provided that the fundamental basis of the idea has been validated in a pilot. Another example could make things clearer. Providing microfinance to the underprivileged is by now a proven concept. However, providing microfinance exclusively for drinking water and sanitation purposes could be an idea that connects current governmental missions with focussed needs of rural population. The concept could be understandable but the business model by which the concept could be workable and viable is fuzzy.  

The skill and passion as well as the diligence and determination of a startup founder make such fuzzy ideas work. To be realistic, while they may work in most cases, they could also fail in certain cases. Once the fuzzy idea is workable the market opportunity could be enormous. Unlike an entrepreneurial venture which relies on a superior competitive strategy or execution, the startup, once successful as an idea writes its own rules and develops its own industry structure. The incentives to investors and employees, in a successful start-up, are therefore more exciting compared to a normal entrepreneurial venture. The incentives are compounded because a start-up tends to pass on its ownership from time to time based on scale up investment requirements and investor appetite opening up opportunities for founders and employees (who have been issued stock options) to cash out periodically.

Ten Sustainable Principles

While the theory of start-ups is, no doubt, exciting there tends to be many a slip between the cup and the lip. The margin for error in a startup is low while the temptation to err is high. This blog post summarizes ten principles which could help start-ups be successful, and in a sustainable manner.

Ideas from environment

Startups do not necessarily require product discoveries or process innovations.  Startups, however, surely require an inventive mind to understand the latent needs of socio-economic environment and provide creative products and services. This has been accomplished through either digital aggregation or disintermediation until recently but could entail artificial intelligence and internet of things in future. Startups succeed when they understand creative use of new technologies.

Strength through partnership

Startups are usually based on certain singular ideas and unique core competencies of founders; competencies are, no doubt, critical in converting ideas into reality. However, converting an inventive idea into a successful business requires more than technical competence, organization building or external interface, for example. Co-founders who work together, share and synergize responsibilities have tasted higher levels of success.

Differentiated employees

Just as founders of startups are different, employees of startups are also different. They are not solely motivated by monthly salaries or career progressions as understood in large organizations. They are also willing to commit their efforts and time in advance to see the success of the startup ideas. Heart of heart, some of them could be nurturing the idea of becoming founders of future startups too. Selection of the first employees for a startup with this zeal rather than with the comfort of prior association is important to create the right startup culture in the organization.

Funding needs to be humbling

The high point of startup ecosystem is the excitement of exponentially escalating serial funding. Responsible startups view such funding as a humbling reminder and positive reinforcement of their commitment to the ideas, investors and consumers. There are, however, some not so responsible startups which, carried away by such funding, expand operations adventurously; some even splurge irresponsibly. Such startups fold up sooner than later. Recent experience suggests that ‘down-rounds’ (current valuations being lower than earlier valuations) would increase if spending out of funding is not prudent.

Capitalism through socialism

Startup is, in essence, capitalism in intellectual form. The objective of making money is certainly a visible trigger for all startups. However, they also need to have a socialistic fabric in that founders and employees should be willing to put their ideas, efforts and time in advance with low remuneration and are willing to wait for future wealth. The system encourages sharing of wealth (or, the pain of lack of it) until at least a particular stage is reached. Some startup founders also live a relatively spartan life as their co-founders or their employees lead. Although the startup system is capitalistic, the pathway is a trifle socialistic; to that extent it is appropriate for emerging economies such as India.

More sunrises than sunsets
Startup ecosystem is inherently optimistic. It tends to take failures in its stride and move on. Established businesses are influenced by analytical data of successes and failures while startups believe in the success potential of their ideas rather than the failures encountered by their peers. What is unique is that entry into the startup ecosystem is not governed by conventional strategic analysis of entry and exit barriers. It would, therefore, be somewhat antithetical for a startup to work on a business plan of classical mode; rather it needs a business plan that is idea-execution centric, with no frills.

Sustainability, rather than shareholding

Startups founder mindsets tend to be somewhat paradoxical; they are at one level extremely passionate about their creative ideas but at the same time they are willing to let go of their firms if sustainability is better assured in new better endowed and more powerful hands. While cashing out is, no doubt, a driver, startups have a more practical, and if one may say so wiser, approach to sustainability than typical large scale entrepreneurs. The ability of a startup founder to manage the paradox is a vital ingredient.

Self-promotion is vital   

Self-promotion is seen often as a narcissistic trend in structured organizations, and even in broader social interface. For a start-up, however, self-promotion is critical as usually there is none other than the startup who believes in the story of the startup. An ability to conceptualize and articulate the startup value proposition and the competencies of the founders is an essential requirement for startup success. If a startup founder is introvert and unlikely to enjoy such self- promotion, partnership with a co-founder who is an extrovert and a persuasive communicator could be a way of overcoming the limitation.

A sense of urgency

Startups, unlike more structured entrepreneurial ventures, do not have all the time in the world to bring their ideas to fruition. Cash burnout is one issue in the initial stages; and even after the first success the need to generate surplus cash is another. In a market waiting for ideas, if an idea takes time to become feasible and commercial, there could be superior ideas floating in with superior execution. A sense of urgency is vital; however, it is not to be confused with a sense of recklessness or doing things without thinking through.


A startup is never a startup for ever; it fades or blooms. Successful startups who stay on have a responsibility to steer themselves seamlessly into a structured corporation. Those who cash out have an even more primal responsibility to keep utilizing their core competences to establish new startups serially. In both the cases, managements have a responsibility to encourage startups in domains or activities that can be outsourced.

Disruption but not self-disruption

One of the important factors for start-up success is their ability to disrupt existing products and services as well as industry structures. In this quest, start-ups also go in for maverick leaders and leadership styles. The urge to be different and disruptive should not be allowed to result in self-disruption. There are unfortunately many examples of brilliant ideas and emerging models getting derailed by disruption. A positive mix of the above ten principles could be a robust insurance against such trends.

Startups also must be cognizant of the fact that disruption could be a competitive tool in the hands of other competitors, startup or established. Although not comparable, the manner in which tablets have disrupted the laptop market but are now finding potential disruption from convertibles illustrates that disruption is a good entry strategy for a start-up but it also needs to guard against complacency, an in fact develop competitive shields to protect itself through the proof-of-concept and growth phases.

Posted by Dr CB Rao on May 11, 2016

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