Customer funded startup are you scaling rightly

Customer funded startup: are you scaling rightly?????

India is the third largest startup country with 3,100 startups after the US which has 4,500 and the UK with 4,000 startups. While no statistical data exists, anecdotal data indicates 1 in 4 wrap up in the first year itself, 36%fail in the second year and 44% fail in the third year. Probability of failure increases if the product/service is a break through, has no external capital to support the growth or entry barriers are high.  In recent years, venture capitalists, angels and incubators have supplanted the startups with much needed capital. In the midst of chaos, there are startups that for various reasons want to grow with self-generated funds. They prefer to grow organically, gain from each customer win and experience and sustain the firm. Customer funded startups tend to preserve cash from each customer win, focus on optimization of resources and multi-skilling, and drive the growth incrementally.  Unlike their richer VC funded cousins, customer funded companies usually have their offices in backyards, hire people for their attitude, often hire from smaller schools, extensively rely on positive words of mouth to access newer customer. Customer funded startup founders major focus is on enabling great customer experiences at affordable costs.

From our analysis of customer funded startups, there are three broad stages of scaling up. First stage, is when the “relevance” needs to be established. In the initial stages, startup must play hard to prove why it can deliver better value and experience compared to an incumbent. The focus in this stage is all about smartly packaging winnable features compared to incumbent. Most customer funded startup find this stage is challenging, but albeit surmountable.

The next scale up stage happens around 6–14 months. Armed with their first customer experience, they need to assimilate, and standardize the offering so that it can work in various other settings than the initial customer environment. Customer funded startups go through this stage in an iterative “learning by doing” approach, eliminating some that did not work, ironing out the sticky corners and shaping the edges better so that the product/offering meets broad acceptance. In this stage, most customer funded startups, to gain broader experience pick orders that may not be right ones for them. Startups suffer when the engagement cost enlarge because of too much customization for the new client or they have chosen to work with a client with high transaction cost (both bonding, and monitoring costs). Many startups suffer are yet to figure out what resource to be assigned for which projects.  It is not uncommon to find their A resources working on projects of low margins!. Most of them suffer from utilization mentality rather than effectiveness. Another challenge customer funded projects find at this stage is picking up orders without a good analysis of costs and margins involved. Some do not even do a back of the envelope calculations and rely on their gut feels. Priority list of customers are not explored, no focused account mining is adopted and sales is at best reactive.  Key to scaling up in this stage is to know what customers to be dropped, what resources to be allocated when, automation efforts and reduction of overheads, and right costing. Startups have to adopt rigorous accounting principles, sales plans and reporting structure. Decisions related to industry specific versus industry agnostic or how to prioritize key customers and how to align functional process so as to enable the company to work seamlessly at higher scale need to be considered.

The next stage of scaling, emerges around 34-46 months. This is the most difficult one. At this stage, startup’s focus is more on “institutionalization”. How to ensure the culture that sustained them till this stage is preserved and extended, how to identify and encourage next level of leaders to emerge, how to formalize unique organizational practices, how to identify “intrapreneurs” who would own and drive the innovation and change, where to formalize the process and so on. And if it does have a lot on its plate already, how is execution of work going to happen?  Do they have a dedicated set of people who believe in the company’s culture, execute and deliver? Companies have to adopt some standardization and routines, bring in some formalization, even some positive bureaucracy. These are required to bring in both allocative and technical efficiency of operations.  To succeed in this stage, customer funded startups now must learn to wear the mask of the very “incumbents” they were attacking.  Evaluate the efficiencies of process and the scale at which they work, move away from optimization but focus on efficiency,  formal reporting and review to encourage decision making and ownership. While learning and aping from the “large incumbent”, the key is to understand what to assimilate, what to preserve and what to shed quickly.

Sindhu Raviraj

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