Darwin’s Theory of start-ups

Darwin’s Theory of start-ups is not an original theory, I first learned about this theory at a talk by Sam Ramji in a conference a few months a go.

In his presentation Sam delved in to the theory of Darwin’s finches. Darwin’s finches are a set of different bird species, approximately 15 different groups of birds. All of these birds were found and studied by Charles Darwin on the Galapagos Island.

To briefly summarise the theory of Darwin’s finches; Darwin hypothesised evolution, that the different species of Galapagos finches descended from mainland finches that had reached the islands sometime in the past. Over time they evolved and gradual changes occurred to the island finches. Eventually they were different enough from the mainland finches to be considered a new species. Darwin proposed the island had become inhabited by many different but related species of finches. The following image was taken from Sam Ramji’s presentation, and graphically describes the evolution animal.

How does all of this biological science relate a startup company?

Start up companies, especially technology start ups, share similar patterns to those proposed in Darwin’s evolution theory. Businesses can be grouped in to sets (species), revolving around solving one problem. For example businesses that evolve around email may have one set of businesses who are the email inbox providers such as G-Mail, or Hotmail, Yahoo Mail etc. The second set of businesses could be email clients, that includes Sparrow, Thunderbird and Outlook, the list can go on.

Ramji uses Twitter, and it’s API as an example of comparing Darwin’s finches and modern businesses and startup companies (see slide 86 on the Slide share below). Using this example, there are many different types of  startups that have evolved from Twitter’s API.

Startup companies like Hoot suite and Tweet deck for scheduling tweets, and Bit.ly for shortening urls so they can fit in a tweet. All of theses startups have different interfaces, functionalities and use-cases, however they all originate from Twitter, and function around Twitter, through harnessing Twitter’s API.

What can a startup company take from this?

1) If you are building a business that has evolved from a similar product or service, you need to define what value you bring when using your product or service. Using Ramji’s example, with Tweetdeck one can schedule their tweets, and there isn’t the necessity to be logged in to twitter when the tweet is published.

2) When starting a business, or running a start up, you need to be aware of your market, and understand that there are other companies similar to yours. What you should do is study your competitors and find what defines you as the successful business in your market.

Finally Ramji has demonstrated that there are some similarities between Darwin’s evolution theory and 21st century startup companies. It is now for you to distinguish your company in your market, and succeed.

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From - Startup Guru

Vipin Sharma

MBA- Financial Services Management

Udaipur

Lean Startup method

“Startup success can be engineered by following the process, which means it can be learned, which means it can be taught.”- Eric Ries

The Lean Startup provides a scientific approach to creating and managing startups and get a desired product to customers' hands faster. The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere-and grow a business with maximum acceleration. It is a principled approach to new product development.

Too many startups begin with an idea for a product that they think people want. They then spend months, sometimes years, perfecting that product without ever showing the product, even in a very rudimentary form, to the prospective customer. When they fail to reach broad uptake from customers, it is often because they never spoke to prospective customers and determined whether or not the product was interesting. When customers ultimately communicate, through their indifference, that they don't care about the idea, the startup fails.

“The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere-and grow a business with maximum acceleration.”

The Lean Startup Process- Diagram

ELIMINATE UNCERTAINTY

The lack of a tailored management process has led many a start-up or, as Ries terms them, "a human institution designed to create a new product or service under conditions of extreme uncertainty", to abandon all process. They take a "just do it" approach that avoids all forms of management. But this is not the only option. Using the Lean Startup approach, companies can create order not chaos by providing tools to test a vision continuously. Lean isn't simply about spending less money. Lean isn't just about failing fast, failing cheap. It is about putting a process, a methodology around the development of a product.

WORK SMARTER NOT HARDER

The Lean Startup methodology has as a premise that every startup is a grand experiment that attempts to answer a question. The question is not "Can this product be built?" Instead, the questions are "Should this product be built?" and "Can we build a sustainable business around this set of products and services?" This experiment is more than just theoretical inquiry; it is a first product. If it is successful, it allows a manager to get started with his or her campaign: enlisting early adopters, adding employees to each further experiment or iteration, and eventually starting to build a product. By the time that product is ready to be distributed widely, it will already have established customers. It will have solved real problems and offer detailed specifications for what needs to be built.

“Using the Lean Startup approach, companies can create order not chaos by providing tools to test a vision continuously.”

CONTINUOUS INNOVATION

DEVELOP AN MVP

+LEARN WHEN IT IS TIME TO PIVOT

A core component of Lean Startup methodology is the build-measure-learn feedback loop. The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect question.

The startup will also utilize an investigative development method called the "Five Whys"-asking simple questions to study and solve problems along the way. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.

VALIDATED LEARNING

Progress in manufacturing is measured by the production of high quality goods. The unit of progress for Lean Startups is validated learning-a rigorous method for demonstrating progress when one is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build-the thing customers want and will pay for-you need not spend months waiting for a product beta launch to change the company's direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.

“Progress in manufacturing is measured by the production of high quality goods. The unit of progress for Lean Startups is validated learning-a rigorous method for demonstrating progress when one is embedded in the soil of extreme uncertainty.”

From- Vipin Sharma

Udaipur (Rajasthan)

Top 8 Food Startups of the year 2015

Food Startup is a hot talking point nowadays. We have seen good advancements in     e-commerce, real estate and taxi services and current focus is towards the world of food. In Bangalore, Delhi and Mumbai, there was a new startup which was delivering at the doorstep.

Simple Categories of the Food Tech (Customers Viewpoint)

Delivery –

• Grocery to Home – (Ex – BigBasket)
• Recipe Box to Home – (Ex – HalfTeaSpoon)
• Internet Only Service

Discovery – 

• Restaurant to Visit – (Ex- Zomato)
• Coupons and Deals – (Ex-  MeDine)
• Dish Selection – (Ex- Quinto)
• Chef to Come and cook at home – (Ex- ChefHost)

Convenience- 

• In Restaurant Payment Service – (Ex- Momoe)
• Table reservation Service – (Ex- DineOut)

1. Zomato

Founder – Deepinder Goyal and Pankaj Chaddah

Founded – 2008

Business – online and mobile restaurant search and discovery service

Valuation – USD 660 million

Investors – Sequoia, Info Edge and VY Capital

Website – zomato.com

2. Dineout

Founder – Ankit Mehrotra, Sahil Jain, Nikhil Bakshi and Vivek Kapoor

Business – Table reservation Service

Valuation – USD 10 million (Acquired by TimesCity)

Website – dineout.com

3. Foodpanda

Founder – Amit Kohli and Rohit Chadda

Founded – 2012

Business – online and mobile restaurant delivery service

Valuation – USD 20 million

Investors – Phenomen Ventures and AB Kinnevik

Website – foodpanda.in

4. Swiggy

Founder – Sriharsha Majety

Founded – 2014

Business – Food deliveries

Valuation – USD 2 million

Investors – SAIF Partners and Accel Partners

Website – swiggy.com

5. JustEat

Founder – Ritesh Dwivedy

Founded – 2006

Business – Food-ordering provider

Investors – Food Panda acquired

Website – justeat.in

6. TinyOwl

Founder – Harshvardhan Mandad

Business – FoodInvestors –  Sequoia and Nexus

Valuation – USD 3 million

Website – tinyowl.com

7. Spoonjoy

Founder – Manish Jethani

Founded – 2014

Business – Healthy Food affordable & accessible to everyone

Valuation – USD 1 million

Website – spoonjoy.com

8. Zootout

Founder – Subrat Kar

Founded – 2012

Business – Hyper local recommendation search engine on food & lifestyle

Website – zootout.com

Story of Rahul Yadav- Housing.com

There are CEO’s who had anxious relationships with their board and then there is Housing.com’s Ex-Boss Rahul Yadav. Here is the story.

His Behaviour

• Yadav secured more than $125 million in venture capital and made his Mumbai-based company one of India’s leading online hubs for real estate rentals and sales.
• He accused the investors of vague misdeeds, publicly criticised his directors, made comments on other entrepreneurs, and then resigned and un-resigned.

Board Decision Making Time

• July 1 – Board announced it had removed Yadav and installed Chief Operating Officer Rishabh Gupta as interim CEO.
• Housing Spokeswoman Zeenat Khan’s Statement – “The board believed that his behavior is not befitting of a CEO and is detrimental to the company”

Story of Housing.com

• Founded in year 2012
• Housing.com has stood out from rival services by policing fake and repetitive listings.
• There were times where their photographers themselves visited the places for the listing verification.
• The filters of the home-seekers were based not he amenities (Furnished, AC)
• Yadav was among the 12 co-founders, who were all classmates of Mumbai’s IIT.
• Yadav was good at raising funds and most notably Japanese company SoftBank with $90 million investment.
• In March, Yadav sent a Sequoia MD an e-mail and later accused him on Quora (Q&A Site) for “brainwashing” Housing.com employees.
• “If you don’t stop messing around with me, directly or even indirectly, I will vacate the best of your firm,” Yadav wrote. MD from Sequoia called for collaboration rather than “being vindictive and petty.”

Rahul’s Resignation

• Yadav clashed with investors over personnel appointments and the speed of his expansion, says the person familiar with the matter.
• By the end of April, the CEO openly derided his board, which was made up of representatives from SoftBank, Indian fund Nexus Venture Partners, and Mauritius-based Helion Ventures.
• April 30 – Yadav wrote that he didn’t consider his directors “intellectually capable enough to have any sensible discussion.” also announcing his resignation.

Cockroach Theory for markets, investing and life.

Cockroach theory – are you kidding me?

What comes to your mind when I say ‘Cockroach’? A slimy, dirty, ugly creature that you want to stay as far as possible from. And yet, much to our irritation, it appears just about everywhere.

Do you know that a cockroach can survive a nuclear attack? Yes, a nuclear attack!

The ‘keeda‘ or cockroach has amazing resilience. It can go without air for close to an hour, withstand freezing temperatures and survive underwater for half an hour.

No wonder, these special features have given rise to a cockroach theory and become an inspiration for a cockroach portfolio.

Let’s see how the cockroach theory gets applied to markets, investing and life.

Cockroach theory applied to markets

In the markets, the cockroach theory suggests that if there is a bad news emerging from a company or market or government, expect more to come. What’s cockroach got to do with it? Well, you know, will never see a cockroach alone. If you see one, there will be others around too.

Remember the Satyam episode of mega corporate fraud. When it happened, there was a series of unwelcome news that came out one after one. There have been several other such episodes, not to mention, those of high level corruption cases.

Cockroach theory applied to investing

Dylan Grice, an investment strategist and financial commentator, applied the theory to investing. How?

Now you see, you don’t expect a cockroach to understand stock markets, interest rates, economic conditions, foreign exchange reserves, the government’s socialist or capitalist leanings or asset allocation and pricing for that matter.

Without all this burden, how would a cockroach build its portfolio? Simple, it would divide the portfolio into 4 equal parts: Equity, Bonds, Gold and Cash – 25% in each.

Let the apocalypse come or let global warming sink the world – the cockroach portfolio would come out unscathed – just like the cockroach.

And the best part – this portfolio involves absolutely no emotion, no views on the market, no guessing the interest rates; just a stable proportion between the four asset classes.

Looks like an absolute winning strategy!

Cockroach theory applied to life

Here’s a story. Once in a restaurant, suddenly from no where, a cockroach jumped on to a lady, who was dining there. The lady, as soon as she realised that she has been pounced upon upon by a slimy creature, panicked. She aimlessly used her two hands to get it off her. But the cockroach just kept moving on her saree.

The other guests there turned around and looked at the lady, not understanding, what was going on. In no time, the cockroach flew and found itself, this time, on a lady at the next table. The drama ensued further. All hell broke loose!

The waiter, who by now got some sense of the situation, jumped forward to help. The cockroach seemed to be in a different mood. It took no time to fly and land straight onto the shiny white shirt of the waiter.

The waiter stopped in his tracks, standstill and held his breath. He did not let out a single voice nor moved a single limb. For the next 2 seconds, his eyes were sharply focused on the cockroach. With absolutely no warning, he grabbed the cockroach in his palm and threw it into the dustbin.

Finally, the chaos was over.

Who do you think was responsible for the chaos? The cockroach? The ladies? The waiter?

If it was the cockroach, then why did the waiter not react the way the two ladies did? In fact, it was the waiter who understood the situation first and then resolved it. In other words, he didn’t react. He responded.

Most of our problems resemble this ‘cockroach in a restaurant‘ situation. In our everyday lives, we tend to ‘react’ – to the boss, to the traffic, to honking, to markets falling, to a sudden emergency.

What we need is to give time to the issue at hand, understand it and then respond to it appropriately. There is no problem that cannot be solved.

An important life lesson indeed.

I am wondering if you really want to use that ‘HIT’ to clean out the cockroaches in your house. 

Is a startup on your mind?

After working for this large company for some years now, you are now feeling bored. It is not as exciting as it used to be, and you just hate the hierarchy.

Now, you want to startup on your own. You have thought of this great idea, which has been on your mind for some time. You can see the huge unmet demand in the market. The solution that you propose is going to be lapped up before it even hits the market. It’s the next multi-million dollar business. The press will be talking about it and your fellow peers will be going gaga (actually jealous).

I am sorry to break the bad news. That’s how the story starts in your mind. But that’s not how it moves forward.

It takes more than an idea to be an entrepreneur and to build a startup. The big question that you should be asking yourself  is “Am I financially ready to startup?”

Having done 1 startup, moving into another and lived an almost a startup like career, let me share with you my personal experience. A startup is not just all about fun. It is also a great struggle.

The idea of creating something that you believe in and taking it to the customers in the market is the fun part. However, a startup also tests you at every level – physical, mental, emotional and financial. It can be a great, perhaps the greatest struggle of your life.

I speak about this from personal experience of living an entrepreneur’s life and having gone through the grind.

The one thing that haunts you the most is money. And if you happen to be a family person – not being able to provide food on the kitchen table is the single biggest factor that can drive you to kill your startup dreams. Ask me!

Money, Money, Money

The fact is that you can handle a lot of pressures when you get your financials in place.

Hence, it is very important that before you startup, you have enough money to take care of at least the next 3 years of your personal expenses plus any expenses that you might need for your startup.

As you go through the initial and the most difficult phase of building your startup, it may involve multiple pivots to arrive at the right product-market fit. You will need enough financial backing to ride through this very demanding period.

Now, in all probability, you would say that you would get venture funding. You are right. You may.

Here’s the truth for you to consider. More than 95% of startup pitches are rejected. Mine was too!

While you hear a lot about startup funding and millions of dollars being offered even at idea stages, it does not mean that you too will find some God-sent Angels or Venture Capitalists to fund your startup dream. They may but only when they see that it makes profitable sense to do so.

The lesson is – Be prepared to do the journey yourself.

How much you may need will depend upon various factors? But I am going to make you a proposition. Here it is. You can save upto Rs. 83 lacs or over US Dollars 140,000 for your startup fund.

All this is your money. No VCs, no borrowings or no support from parents, friends, family. And here is the other better part. You can save all this money in less than 5 years.

Want to? Then, let’s go for it!

From - Vipin Sharma

www.mycleanmart.com

Udaipur, India 

Are Business Plans Still Necessary?

This is part of my ongoing series of posts and I need to file this one under both Raising Venture Capital and Startup Advice.

I remember going to an Under the Radar conference in 2006 in the heat of the Web 2.0 craze.  There were tons of young entrepreneurs showing their latest Web 2.0 wares.  Ajax was the new buzzword and many companies went overboard.  People mistook extra doses of Ajax for a successful product.

Unfortunately this was reinforced by the many conferences that rushed to espouse the benefits of Web 2.0 and the subsequent acquisition sprees of companies like Google, Yahoo!, Cisco and others went out to fill out their Web 2.0 portfolios.  Many of these businesses were what First Round Capital called FNACs (features, not companies – this acronym has always stuck with me).

The last 12 months has seen the rise of many new trends.  Facebook Apps, iPhone Apps, Social Games and now The Real-time Web (finally a new, sexier buzzword to replace Web 2.0.  RIP 2.0.  Sorry Tim O’Reilly – you’ll have to work at coining the next trend.  )

The last couple of years has also seen the huge initial success of Ycombinator, the Lean Startup and many other product driven approaches to going to market.

Broadly speaking this last trend has been healthy as it has brought an increase focus on launching products that you can test with the market and on capital efficiency.  It has also brought about my favorite new term – Ramen Profitable.  Someone remind me to do a future post on why I think the Ramen Profitable approach has actually hurt some businesses.

In all of these new product and cost-focused new trends, a big problem has emerged that all of these movements have not addressed.  In an era of “launch and learn” is there a need for a business plan?

Short answer: absofuckinglutely.  I have seen really great product people espouse the death of the business plan.  Do so at your peril.

So, definition: when I talk about a business plan I’m not talking about a 40-page Word document outlining your market approach.  That died with waterfall software development.  I’m not even talking about your 12-page Powerpoint presentation that you need to raise venture capital or to talk with potential biz dev partners.

I’m talking about your financial spreadsheet.  I will quote a prominent, well-known entrepreneur whom I like and respect and who told me when he was raising money, “I don’t know how much I’m going to charge for my product so why should I create an artificial spreadsheet?”

Here’s why.  Your financial model tells a story.  Let’s take your revenue line.  It should talk about how many customers you think you will acquire and how much you’ll charge for your product.  If you can’t estimate the former then I would suggest you haven’t done your homework before building the product.  Do you really want to spent $100k building a product to discover through Customer Development that the market is too small?

Don’t know how much you can charge for your product?  Let’s start with how much value you think you’ll create for your customer if they use your product in terms of hours saved, costs avoided, extra sales, better conversion rates or whatever.  If you have no clue then I would suggest you haven’t thought hard enough about whether there is a real problem you’re solving.  Better that you find that out before showing off your wares at the next trendy conference only to smoke your friends & families’ money.

What about your competition – how much do they charge?  If you plan to charge more than them I need to know how your product will differentiate to command a premium.  Going to charge less?  How will you go to market in a cost effective way to achieve similar margins as your competitors.

See I don’t care if your projections prove wrong over time.  I care about your assumptions going in.  I care about the thought that you’ve given to the customer problem.  I care about how much you’ve thought about market share, competitors, adoption rates, etc.

My suggestion is that you do a detailed MONTHLY plan for the first 24 months and then an annual plan for what we call the “out years,” 3,4 and 5.  Why do VC’s care about these years?  Good ones don’t care about the granular details in a startup but they do care about how big the market is, what share you’ll get and what assumptions you make about pricing over time and other market factors.  VCs care that you’ve thought about these issues.

The cost side of the equation is also important.  The COGS (costs of goods sold) tells me about how big your customer acquisition costs will be.  I should be able to test these assumptions against comparable companies.  If you’re a consumer destination the revenue and COGS lines should tell me about how big your funnel is, how you fill the top end of the pipe and what your conversion rates will be.  Ditto for enterprise software companies.

Don’t know what LTV is? It’s “lifetime value” of a customer.  If you don’t understand why this is important I encourage you to do a little Google research.  Not knowing can be the kiss of death in raising money but more frankly the kiss of death in your business.  Great product managers who are not great business people still often fail.

What assumptions do you make in the cost lines about people?  Usually in a tech / software startup 70-80% of your costs will be people.  This is where I spend most of my time.  How many people will you hire in the first 24 months and in which sequence.  How much will you pay?  Don’t know the running rate for engineers?  Fail.  This information isn’t hard to find.

How will your costs scale as your revenue scales.  We see many naive entrepreneurs who tell us, “My revenue will grow to $60 million by year 5 but my costs mostly stay flat.  I won’t need to hire many engineers or customer support staff.  This stuff is ‘zero gravity.’  Our Net Income will be $40 million.”

Really?  66% Net Operating Margins?  Show me companies doing this.  I don’t think my job is to teach you economics or financial modeling.  And frankly I’m somewhat forgiving of people who are naive about the “out years” like I outline in the last paragraph.  But many investors are not so forgiving.  Do your financial model and run it by friends or colleagues for feedback.

Finally, one last point about financial models.  They are not just for fund raising.  They are the most important document you can prepare to align your management team on where you THINK your business will go.  They are your map.  If you’re flying from SF to NY with no map I can assure you that you won’t get there.

Each quarter you should review your model.  What assumptions proved wrong in the last quarter.  How does that change your assumptions going forward?  Too aggressive about the rate of customer adoption?  Better to model that now.  You might then slow down your burn rate or raise more money.  Your funnel wasn’t wide enough?  Do you need to rethink referral deals or do you need to improve your conversation rates to hit the same revenue numbers.  Or do you need to raise prices?  Or lower revenue assumptions.

You get the point.  Financial models are the Lingua Franca of investors.  But they should also be the map and the Lingua Franca of your management discussions.

From -

Vipin Sharma

fms.vipin@gmail.com