The fall of product-centric startups
I have been associated with the startups for a little over the past 5 years. In this time, I have witnessed a lot of improvement in the startup ecosystem in India. Everything from raising capital, getting experienced advisors, to recruiting a talented team has become significantly easy. We have also had some much needed success stories either in terms of exists, buyouts, or pure growth.
However, the mortality rates for startups are still very high. I have always been curious about reasons for startup failures and possible mitigation strategies. The reason for failure certainly does not seem to be technology challenges. The majority of startups in India are not really technology breakthroughs (nothing wrong in that at all). Majority of them are either trying to solve an unaddressed problem or improve an existing solution.
Most startups just seem to fail because of lack of market adoption. So it seems to a case of either incorrect understanding of the customer needs or not creating the right kind of mouse trap. It is interesting that both of these are classic problems associated with using a product development model to take a new product/ offering to the market.
The product-centric model is a process that evolved in manufacturing industries and since was adopted by the consumer packaged goods industry in the 1950s and finally became the de facto standard and an integral part of the tech startup culture till recently.
Startups following this model start with defining a concept and associated business plan, then get into product development, followed by alpha-beta test, and finally product launch. The model is not really bad, in fact it is a great approach if you are building an offering where the customer’s problem and the solution are well known (e.g extending an existing and successful offering). However, we all know that the majority of startups are dealing with ambiguity not only in one but both of these areas (i.e. both the customer’s problem and possible solutions are not completely clear at the start).
In such situations, this model is sure to lead to disaster because of its inherent disadvantages. The issue with this model is that it is purely focused towards product development. All the goals and milestones are associated with defining the scope of the product, achieving development milestones, and then shipping it out the first set of customers. There are no real milestones associated with marketing or sales other than creating collaterals, developing partnerships, and creating a sales force. I like to term this problem as the cocoon effect. The cocoon effect is when a startup functions in a closed environment and just keeps working on developing the product in isolation. This results in feature bloat (i.e. over engineering) and in most cases the market / customer completely rejecting the product.
Customer development and the lean startup
Steve blank a serial entrepreneur from the valley articulates this problem in his book the four steps to the epiphany (if you are a founder and have not read this book, I would urge you to pick it up ASAP). He defined a better alternative to the product centric development model. He proposed the use of a “customer development model“, where the customer and his needs were at the heart of the startup’s approach and not the product.
This model focuses on understanding the customer and constantly validating your solution with them till you get it right and then starting with outreach programs and company building initiatives. This model works really well when the problem that is being solved is not completely understood.
Eric Ries another serial entrepreneur from the valley used this model and further extended it for software tech startups to even account for ambiguity about the solution to the problem. He proposed that startups should use extreme programming methods to come up with quick release cycles. This prototyping based approach can help startups to arrive to the optimal solution without losing too much time or resources. Such agile startups would in turn be able to increase their chances of success.
Even though the lean approach is a great way to run your startup, you may still have to deal with the issue of funding while in the prototyping stage. Even if available, it may not be smart idea to raise serious capital as you are still not at a stage where you fully understand your customers, the problem or know the right solution. You could raise funding from angels but finding the right kind of person is always very hard. I think there is better way to solve this funding problem using the social web.
Kick-starting your passion
Recently, I read about how some startups used crowd sourcing based approach to raise funds to kick-start their business. Kickstarter is the largest online crowd funding platform for creative projects in the fields of Art, Dance, Film, Music, Photography, Publishing, Theater, Food, Design, Fashion, Technology, Games, Comics and Journalism. It can help startups raise capital directly from their potential customers (i.e. people who share a common passion with the founders for a problem).
Some of the key guidelines for using this community to raise funds are:
- Members are only allowed to raise funding for projects. A project in this case is something with a very clear beginning and end. This makes it easy for the community to decide whether a project is completed as per expectations ( it is actually good for the entrepreneur because there will be no ambiguity about your progress )
- The projects cannot be related to charity, causes, self-help, or As-Seen-on-TV products
- The funding cannot be used to hire programmers/developers to build your website/app
C-loop is a great example of a startup which leveraged the kickstarter platform to raise capital and build their business. Ivan Wong, a professional sports photographer struggled with his camera strap while taking snaps. He checked with his brother, Ben, and friend Anne Bui (a programmer) and all of them seem to have the same problem. So they went ahead and designed their own solution. The idea was to connect the strap to one point on the bottom of the camera—the threaded tripod mount—instead of two points on the top.
They quickly built a prototype that wasn’t pretty, but it worked and called it the C-Loop.
The team needed $15,000 to produce the initial lot of C-Loops, which they could take to the market. Through kickstarter they were able to raise $63,163 in their funding period which was used to develop 1,800 c-loops. The engagement on kickstarter also helped them to book their initial pre-sales with the very same people who funded the project. They now have distributors across the world and have also launched other successful products like the Spilt Strap (an ergonomic accessory for camera, laptop bag, duffel, or guitar).
Social crowd-funding platforms like kickstarter can help founders adopt a new and low risk model for building their business. Some of the salient features of the model would be:
- Discover a problem and validate if others seem to have the same problem ( understand your customer really well )
- Create a quick prototype solution. It does not have to be pretty, it just needs to work and solve the problem ( kind of like a jugaad)
- Use social platforms like kickstarter to discover others who suffer from the problem enough to be willing to fund the solution.
- Use the funding to build the first version and ship it out to initial customers who have funded the project.
- Collaborate with these initial customers to improve offering and get great stories of how they were able to improve themselves by solving the problem using your product / service
- Use these studies and learning then to scale your outreach efforts and leverage the initial set of people as your product evangelists. This is the perfect time to also look out for venture capital if you want scale quickly or just focus on growth through smart viral with your initial passionate customers as the base group.
This model ensures you build something that you and your initial customers are truly passionate about, there is a clear purpose to your venture which is validated by the funding from potential customers and the best part, there is clear profits (however small you remain as a company).
I truly hope we see more Indian startups following this model and create startups which collaborate with their customers using social platforms and create more long lasting businesses. What’s your take?