StartUps Rushing for Investment –Do You Really Need Funds NOW ?

Dr. Shridhar Lolla CVMark Consulting lolla@cvmark.com Early Draft , Needs Editing Mar 2011, Bangalore, INDIA
(This caselet belongs to ‘respecting the business’ series of CVMark. It is based on real life experience at several startup companies, whom we have been handholding during last decade)

Key words: Funding, Investment, Startups, Business Model, entrepreneur, entrepreneurship, value flow,
Business Model Canvas, organizational thinking, simplicity, breakthrough performance, performance Improvement, Core capabilities, Thinking Capabilities, focused execution, business rules, business fundamentals, built to last, capacity building, entrepreneurial behavior, first generation entrepreneur, value system, culture, focusing behavior

Definition: Prime Rule (n)= Non negotiable rules Prime Rule #040: For most of the StartUps, Funding is not an early leverage point. #040.1 For most of the StartUps, availability of funds not necessary improves business performance. #040.2 Scarcity of funds does not often prevent organization from achieving its objective. This is a sequel to following caselets: 0. The Saga of Startups 1. .Business Model Innovation for Startups in Software Development. 2. When sales Staff quit, Clients switch over 3. Sales is the prime responsibility of entrepreneurs 4. Not Succumbing to Pricing Pressure 5. Entrepreneur Agrees to do Sales 6. Temptation of taking large orders 7. Pitching Business Idea within 3 minutes 8. Startup Carnival 9. Taking Funds NOW or LATER 10. Not Succumbing to the temptation of every opportunity 11. When People Management is not a Prime Responsibility, Business Downfall is Inevitable
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________________________________________________________________________ The entrepreneurial ecosystem is quite abuzz with activities. When one talks about business, one talks about achieving an objective and for which, one of the necessary conditions is that the business must make money now as well as in the future. The amount of money that is available today in the system is such that for a vast majority of entrepreneurs and managers, making money means ‘making money from money’. No doubt then, the moment one conceives an idea of the business; the immediate tendency is to run up to the investors to seek funds. However, as we know, business is a system comprising of a number of building blocks and Finance is just one of these building blocks. And since all building blocks must ‘together’ work seamlessly to run the business; not in many cases, funding is necessarily the dominant requirement to create or run a business effectively. It is an important recognition that before an entrepreneur seeks funding, one must explore possibility of improving the business by leveraging activities in other building blocks of the business model. For most of the businesses, seeking funds must be preceded by exploiting other opportunities and road testing of the business model. This caselet, is a part of Respecting the Business series of CVMark. It provides an approach to identify the next step an entrepreneur needs to take to improve performance of the organization quickly and significantly, without exhausting key resources and without taking real risk. It exhorts the entrepreneurs to be well prepared before seeking funds, so that expectations are realistic for both investor and the entrepreneur.

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Introduction It is becoming increasingly clear to us, may it be businesses in the creation phase of a startup or those in the operating stage of an incumbent, that they must know with a certainty, what is their next move and which part of the organization needs attention. Lets explain this here.

Improving Flow of Value is the Prime Objective of Business A Business is a system comprising a number of building blocks, that together take it towards a common objective. And together they must ensure that the value is seamlessly created, delivered, captured and invested, NOW as well as in FUTURE. These four aspects of value must flow in a close loop as shown below, Figure 1. This is also the loop for the flow of money. It is the goal of the business to make this rotation of value (and therefore money), as fast as possible and as thick as possible. An easy way to visualize this sine quo non logic of the business is explained in our publications, which is based on Alex Osterwalder’s Business Model Canvas. Look at the Value(Money) flow, when it is superimposed onto the Business Model Canvas in Figure 2.

Figure 1 : The business model must facilitate in the seamless flow of value (and money)

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Figure 2 : All building blocks of the business model contribute to the seamless flow of value (and money)

On an ongoing basis, as this value-loop of business is operated, managers face obstacles. These obstacles throttle the flow of value and money; and therefore, the business slows down (business results show negative bias). While there are different types of disruptions to flow, small and big, critical and simple, urgent and important etc; since business is a system, there always will be one critical disruption that will have a defining impact on its growth (A la, Weakest link of a chain). The same disruption will also be the leveraging point of the organization because, unless this critical disruption is tackled the organization does not make significant improvement or growth. It therefore, behooves on the entrepreneurs and managers to identify such a key disruption (weakest link) and focus their attention on it, to improve performance of the organization, quickly and significantly.

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Every Organization has a Unique Leverage Point Now since different organizations have different business model and are at different stages of maturity, it is natural that such leverage points are different for different organizations at any given point of time. And it does not make sense to choose a leverage point based on some other organization’s experience. It is important for entrepreneurs and managers to recognize this difference, since the effective solution to improve organization performance will be dependent on this realization. Take for example, when we talked about EnggCons in our publication. Its revenue fell by almost 30% even when its lead generation increased by 100%. A systematic analysis revealed that its sales channel needed improvement. That is, for EnggCons, the leverage point (constraint ), was in the building block of the business model, which represented activities of its Sales block. The way it was handling sales process, its chances of growth was not only throttled but even went negative. As soon as it opened up the constraint in sales, and leveraged the simple solution; its revenue zoomed up within a quarter. All this without exhausting resources and without taking any real risk.

Figure 3: EnggCons had leverage point in the Sales Building Block of its business model

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Similarly, we talked about Indo-Soft in our earlier publication. For a startup company, IndoSoft understood the lopsided business model of existing software companies in India, and at a given point in time innovated its business model specifically on the market side, and chose Germany as the market; thus opening up its constraint in the market or Customer Segment.

Figure 4: InfoSolve had leverage point in the Market (Customer Segment) Block of its business model And in our publication about IndoFreshGarments, the constraint was in the supply chain. It built a System of Supply based upon Consumption to dramatically improve its results and achieve breakthrough performance.

Figure 5: IndoFreshGarments had leverage point in the Resources (SCM System) Block of its business model

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These examples tell us that while organizations are always resource constrained, whether it is a startup or an incumbent; there is always an opportunity to obtain breakthrough performance without exhausting resources and without taking real risk. And thus it is possible to make the flow of value (and money) faster and thicker. And importantly, the Business Model Canvas can help in clearly seeing the constraint within the business.

Funding is not Always the Leverage Point For startup companies this may seem counter intuitive. It is so because, the current trend in entrepreneurial environment is such that a vast majority of entrepreneurs tend to feel funds as the prime constraint for their business (otherwise, why does every startup rush to prepare a business plan for investment, even before it thinks through its business idea). However, in reality, Funding (or Financial Block of the business model) is not the real constraint or determining factor for the creation or growth of a business, most of the time. In most of the cases, either several of the organizations do not need funds or that the time is not ripe for them to seek funds. Not realizing this fact, only has bad ramification for both entrepreneurs and investor (see our publication). Which also means that there are non-financial options that must be explored and worked out before financial options are looked in to in order to improve business. Identify Your Leverage Point before you seek Funds What it means is that in most of the cases, something other than funds, prevent growth of the organization, and entrepreneur must be able to figure this out. It means that entrepreneurs should be in a position to figure out activities of which block within its business model choke its growth. And then they must have capacity of such choking block ‘opened up’. This means that they must first understand and establish high credential of value flow in their business model. Conceptually, all blocks must logically line up and work in sync seamlessly to reinforce flow of value. This could in most the cases be done through boot strapping, prototyping, proof of concepts, mock ups, customer buy ins, minimum viable products etc, which do not need significant investment. The validation of value flow or road testing the idea, guarantees that the business is now waiting ONLY for funds and rest of everything is taken care of or predictably under control. Once the business model flow is road tested, it becomes easier to assess the need of investment, which should mainly be to prime or reinforce flow of the business; and not to run the business. The indication of ‘funds’ being constraint will be reflected in the Key Cost block of the business model. It is here, that the business model requires a financial injection to activate one or more elements of some other blocks. When the constraint is so clearly identified, and when pitch is made for investment, investors too gain confidence in the business as they clearly see the investment being pumped in for very specific activities; which is to open up the weakest link in the organization. They realize that this will in turn, quickly improve its performance of the business and it is worth placing their bets.
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Figure 6: Funding requirement is reflected in the Key Cost block of the business model, only when no other block is the constraint

Have your Business Idea Road Tested before You Prepare Business Plan We have been applying this method of identifying, ‘what prevents a business to move to the next level’, now for a decade. Our results have been astoundingly clear. Increasingly, we find that first generation entrepreneurs recognize funds as not necessarily the constraint of the business (nor the leverage). During last quarters, sizeable number of entrepreneurs either refused accepting funding from investors or reduced their funding requirements dramatically, even when they worked hard to go through due diligence process of over a quarter. This is just because they realized that the key to their business creation as well execution is not funding but something else (one of the building blocks of the business model) and that they better identify and leverage that aspect of the business, first.

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Disclaimer:
CVMark Consulting is an independent business-innovation research agency based in Bangalore, INDIA. It handholds entrepreneurs and promoters in road testing their business ideas and in delivering breakthrough performance. CVMark Consulting intends to serve business community through advisory, consulting and coaching engagements. As a part of its engagements, it regularly brings out insights, perspectives, research reports, newsletters, issue-oriented reports and other products. This caselet captures description and direction of solution to generic problem faced by business owners. It is intended to share experience of CVMark with a wider business community. This document in part or full can be reproduced subject to a reference to CVMark Consulting and to this document. Factual material contained herein is obtained from sources believed to be reliable, but the publisher is not responsible for any errors or omissions contained herein. Opinions are those of CVMark and are based on research conducted for this report. CVMark holds no responsibility for decisions made on the basis of content of this report.

CVMark Consulting Bangalore, INDIA

Clet:11-25

___________________________________________________________________
What do entrepreneurs and promoters do before they write business plan? They get their business idea road tested by CVMark.
For developing, innovating and executing your business model, call Tel: +91 94480 70081 or Email details to : lolla@cvmark.com . CVMark Consulting, #2304, Nandi Park, Gottegere, Bannergatta Road, Bangalore 560083, INDIA Web: http://www.cvmark.com

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