Certainty

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In life the things that you do depend on the degree of certainty.

A few days back Salma mailed this image and asked me which company seems to have the best revenue split.

Revenue Split

The instinctive answer was to say – Microsoft. They seem to the most diversified. They are not dependent on any one stream of revenue for their survival. Facebook seems the most skewed; If anything was to disrupt advertising altogether, their business would be in turmoil.

Yesterday, I was reading Zero to One by Peter Theil and he made a very pertinent point in there. If you had the opportunity to do something that you knew would not fail, would you put all of your efforts behind it or would you diversify and pursue multiple opportunities. Most successes are a result of determined people acting with belief and putting all of their efforts behind it to make it a success.

He defined the category of people as:

  • Definitely Optimistic – Is certain of a great future and works towards it
  • Definitely Pessimistic – Is certain of failure waiting around the corner and is always bracing for it
  • Indefinitely Optimistic – Is unsure of the future but thinks it will all work out fine
  • Indefinitely Pessimistic – Is unsure of the future but thinks there is a surprise waiting around the corner

Now using this categorisation when you look at the above graphs, the one thing that becomes clear is Facebook is Definitely Optimistic – They are certain about their plans and they think they know what is about to come and are ready for it.

At the same time Microsoft is a clear example of confusion. Given that it is an American company I would say that they are Indefinitely Optimistic. The graph is a clear representation of the fact that they do not know which segment is going to be their cash cow. They are doing everything and  hoping something will go on to become big. At the same time they lack the conviction to say which one and focus more on it. If you make a graph for Microsoft of the early 2000’s, I am sure it would not resemble this. Windows and Office were the flag bearers for Microsoft and they put all of their efforts behind it.

Google and Amazon still have a high skew towards one of their revenue channels because they are Definite about it. Apple looks diversified but a large portion of their services revenue is all thanks to the iPhone that their users use every day. If you look at it from that perspective in all the three cases almost three quarters of their revenue comes from one thing that they do very well.

As a startup it is even more important not to diversify into too many revenue streams since it is very hard to be great at too many things. Be great at one thing and expand that revenue stream as rapidly as you can. You may undertake support activities but a majority of your income will come out of one or two things you do really well. This is also referred to as Pareto Principle – 80% of the effect comes from 20% of the cause. In business 80% of the income comes from 20% of the clients

Would you put all the wood behind one sharp arrow or many blunt ones?

MVP Testing

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Most entrepreneurs start with a problem statement. They wish to make money by solving the problem that people are facing. Building a product can be a long, challenging and expensive task. Nobody wants to be undertaking the effort with no certainty of whether or not the product would be accepted by the market. In order to mitigate this risk, an minimum viable product (MVP) is built to test the market and ascertain the demand for the solution.

I often find many startups go with a quick and dirty version to potential customers to find out what they think of the solution and if they would be interested in using it. Often the solution is pitched in the absence of a financial cost because it is very basic! When the real product hits the market, entrepreneurs find it hard to get customers to pay for the product. The discount spiral begins and continues down a slippery slope.

During one of the meetups that we were conducting, we were brainstorming some ideas with students at the Vellore Institute of Technology. In a room of 50 students, one of the students came up with the idea for an app, which would be able to show the mess menu. Since their hostel are 7 stories high, they find it inconvenient to come down to check the menu before every meal, in order to determine whether to eat at the mess or go out.

We asked the group of 50 students in the room, how many thought that the problem was worth solving; all of the hands went up. We then discussed what kind of app could be built and the features that would be required in the app. Everyone seemed to agree that the solution was great so I popped a question, “How many of you would pay Rs. 60 per year for the app?”; 2 hands went up!

There are inherently two types of test that the MVP should be able to succeed on.

 

Testing for behaviour

Every business is based on an insight into human behaviour. The entrepreneur exploits the behaviour to generate an income and a profit.

The first thing that the MVP is supposed to be able to do is prove that the behaviour that one is seeking to exploit does exist. If you are building an e-commerce business, the assumption is that people are ‘lazy’ enough to want to sit at home and shop for products than to visit the shop and buy the product. One of the biggest USP of e-commerce against traditional retail is ‘convenience’. The job of the MVP is to prove that people actually perceive a convenience. This is to test if the expected behaviour is shown.

Are people okay with buying goods from their computer? Are they willing to go ahead with a purchase in the absence of tactile feedback? Are they willing to pay online? Do they like the vast choice being offered?

 

Testing for value

The next step is to prove that the users see value in the convenience being provided. So is the user seeing enough value to pay money for the convenience being provided. If your solution cannot generate income, the path to sustainability is unclear.

Too often entrepreneurs miss out on testing for value, which arguably is the most important part of establishing an business. The purpose of any business is to create value for the customer and exchange that value for money. The value creation should be apparent for the customer.

Being able to test both of these aspects is critical to being right about the product that is being built. Therefore, an MVP must be a product that can be sold to the customer.  The MVP is not a model, it is a product that performs a function in a much simplified manner.

Speed, Trust and Belief

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The other day I was driving out of town. It took me about 45 minutes to do 15 Kms inside of Bangalore at 4 AM. There was no traffic on the road. Once I got out of the city though, I was able to drive a lot faster and covered the next 200 Kms in about 2 hours.

For those who are intimately aware of Bangalore, the roads in the city are not great. It is not that I could not have driven faster in the city, it is just that I did not trust the roads enough. As soon as I would speed up, a pothole or some undulation would appear forcing me to brake. More fundamentally, not knowing where these surprises were going to pop up meant I did not trust the road ahead. As a consequence of this I did not cross 60 Km/hr while driving within the city.

People do not like uncertainty.

To the contrary once I got onto the highway, I kept getting faster and faster. As I started driving on the highway, I was cautious for a period of time. As I noticed that the road was more predictable and no surprises were in the offing, I forgot the bad experiences within the city and sped up. I trusted the road that lay ahead of me; This trust in the highway allowed me to speed up and stick to it.

Your ability to go fast is directly proportional to your trust/belief in what you are doing.

When you are driving if you do not trust the next piece of road to be safe you will not be able to commit to speed; If you are running a business and you do not believe in what the company is doing, you would not be able to grow fast.

When you run a company trust manifests itself in the form of belief.

If you are put in a situation where you are left selling your product to someone who is ‘sitting on the wall’; your ability to sell will depend on how strongly you believe in your product. If you really think that this product is worth every penny and that it is going to make a positive change to the customer, you will sell it to the best of your ability. And most often your will succeed at it as well.

What did Steve Jobs bring to Apple? Not knowledge, not technology, he brought belief.

Your  ability to achieve what other call the impossible is greatly accentuated by your belief. This is the reason, in certain cultures, people walk on fire; they believe that they will not be harmed.

Starting a startup is hard. It is like walking on fire.

Do you believe the activities that you are pursuing with your startup is going to change peoples lives positively?

VR Vs AR, which way is the battle headed?

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The paradigms of computing are changing. In the past 3 decades, computers changed the way in which we have been communicating and carrying out day to day activities. Over the past 10 years, the mobile revolution swept the world and has for better or for worse changed the way which we interact with the world around us and the way in which businesses have been functioning and business models have evolved.

A business like Uber would have just not been possible in a world where the smartphone did not exist.

We have witnessed path breaking changes over the past few years which have altered our way of life quite rapidly. Therefore, its important to understand where computing paradigms are headed and how this will affect the businesses of the future.

Based on the technologies that I have seen, VR and AR seem to be the next paradigms of computing.

What is Virtual Reality?

Virtual Reality is a technology that replicates or recreates the environment around you. Virtual reality takes advantage of both the visual and the auditory senses. This creates a much more immersive experience for the user and places them in an environment that they can interact with and manipulate.

Mark Zuckerburg Samsung VR

This picture is a perfect example of how immersive the environment is.

Since the entire environment is imagined or artificial, and disconnected from the real surroundings, the degree of movement that the user can be afforded is limited. Its essential that the space in which the user is allowed to move in, has no obstacles.

This implies that the applications for VR will be ‘motion limited’. A person would almost certainly be sitting when using VR. Even if they are allowed to move, the degree of freedom is going to be fairly limited. This leads us to a specific set of applications that are possible for VR.

Games will obviously be a huge draw and therefore a huge money spinner in this segment purely due to the immersive feel of the experience. It will also be used to create incredible content experience, audio and visual. Imagine a movie where you can be part of the decisions the protagonist makes. The avenues for movie-makers to make money will expand incredibly with the mainstream adoption of VR. Group VR experiences where 4 friends live the Point of View of various characters in the movies, the possibilities seem endless.

VR will also find a whole host of applications on the enterprise side. Hospital might use it to provide better visualisation for doctors to prepare for surgeries or conduct pinhole surgeries. VR can also be used in the area of engineering design, architecture and designing in general.

While all of these possibilities seem exciting, the constraint is in terms of moving beyond a defined space. It is possible to map your entire house and render spatial awareness so you can have the headset on and move about, but it does not seem like an appealing solution, which brings us around to AR.

What is Augmented Reality?

As the name suggests, it is a technology that allows you to interact with your surrounding environment with a variety of elements added to it. There are many ways in which this can be implemented, but the essence of it is to enhance your perception of reality using a computing device. Since AR only augments and does not recreate, it provides you the environmental and spatial context around you and enables movement.

Augmented reality adds elements to the reality that surrounds you. This can be in the form of content such as video that appears in your environmental context. All kinds of digital elements can be added to your surroundings using computing devices. The two ways in which this has been implemented is, either as an application on the phone working in conjunction with the camera or as a heads up display (HUD) which is worn on the eyes.

Google Glass was an attempt to create a face mounted HUD which one would be able to wear at all times. It did not succeed because of the price and the paradigm shift that it presented. I felt that the way in which the camera on the system was being used, made the entire things seem very creepy.

AR is many folds more powerful than VR due to the spatial awareness. It introduces a whole new paradigm for advertisers. For instance, it is possible to create an app that scans any movie poster and begins to play the trailer of the movie. The same application can be built around various brand names and this leaves the door open to undertake interesting advertising campaigns. It is also possible to use it as a visualisation and sales tool; imagine being able to see what a sofa would look like in your living room before buying it.

Pokemon Go has shown that is possible to build extremely immersive gaming using AR.

The application of AR as an add-on to existing solutions like e-commerce apps is way more interesting that building an app which one wishes to hawk directly to the consumer. Why would you download an app whose only purpose is to scan movie posters and play trailers? But if Bookmyshow was to integrate it into their app, it makes for an additional way to engage with the application.

Off the startups that I have seen, too many of them are building solutions that they wish to sell directly to consumer. It is going to be incredibly difficult to acquire customers. I am yet to come across any startup going with an HUD approach.

Computing paradigms

10 years ago, the computing paradigm moved from the laptop towards the smartphone. It changed, the way business was done and the kind of business models that were possible. More importantly it moved software consumption from being a B2B heavy business to one that is more skewed towards B2C.

VR and AR will move the computing paradigms again. The hardware side of the solution is undergoing the process of definition. While the VR form factor seems like a head mounted display; nobody is quite sure how the final form factor would look life for AR. Nevertheless, there are several examples including Google Glass, that we can draw inspiration from.

In 2008, if you were developing smartphone apps, you were on the verge of discovering el-dorado. I believe the same is true today of VR and AR.

Having said that, it is important to understand the breadth of the market and opportunity in each of the case. Considering the nature of VR, I feel the market size for VR would be comparable to that of desktop computers. They may sell in the hundreds of Millions but the volumes may not be in the Billions. In other words, I see the possibility that every household and several businesses might buy it. It does not seem like a solution that would be bought by every single individual.

I still do not know what paradigm or form factor might perfectly suite AR. It can be implemented using phones but I suppose a dedicated HUD device will find a way. The application and utilisation of AR would be similar to the mobile phone. I believe that it would find its way into the hands of every individual, it would certainly sell in volumes that are similar to the smartphone.

If Pokemon Go is an example of the things to come, there is going to be much excitement in the future.

Drawing the battle lines

These technologies are not new; they have been around for decades. There has been much work and research that has gone into bringing it to the state of maturity today. More importantly, computing speeds were not high enough a couple of decades ago. This has fundamentally changed allowing AR and VR to blossom. Even with the increased computing speeds today, Oculus Rift has said that it will be a couple of years before they would be able to deliver the quality that they would consider the gold standard as far as VR is concerned. Its like running two monitors simultaneously and rendering graphics simultaneously and in concert. Not only does it take a great deal of computing, by extension it chews through a lot of battery.

As far as the big boys are concerned, they seem to be throwing their hats into the ring, making their bets.

Apple CEO Tim Cook mentioned on the call with analysts during the Q3’16 earnings call that Apple was indeed working on AR. Apple is making a strategic decision that AR is going to be an interesting space in the future. As with most things Apple, we may not know much about what is happening till time comes to launch the product. Also, Apple tends to wait till some of the others have launched their offerings and tested the market.

Microsoft Hololens AR

Microsoft has gone the AR route and put its weight behind the Microsoft Hololens. It remains to be seen when and at what price this product is brought into the market. The company has been able to already provide some impressive demonstrations of the product and shows several potential applications. Minecraft is going to be unbelievably great on AR and so will many games that adopt the platform.

Oculus Rift Facebook VR

Facebook had made a Billion-dollar acquisition of Oculus Rift. VR possibly suites Facebook better since they are in the business of content distribution. Apart from connecting individuals, a great deal of content is consumed through Facebook including a lot of videos. This may have been the factor that influenced the strategic choice that Facebook has made.

Google VR

After the debacle of Google Glass, Google seems to have shut down the project and decided to go the VR way with Google VR. From a Youtube perspective, this makes a great deal of sense but not from a search perspective.

Companies such as Samsung and HTC have also been doing their own versions of VR. There is certainly a dearth of AR hardware play. For AR to be successfully deployed, an HUD is an important component to make the technology disappear. Having said that, Google Glass has shown that society might not be ready for this yet.

What form factor AR will take, is a question that still needs to be answered?

Are any of the startups up for the challenge?

Turning a Startup into an Organisation

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I have been working with startups for a fairly long time now. The fun part of working with startups is that there is absolutely no way to anticipate what would come next. You have to be fast and nimble, constantly adjusting to the changes that are happening around you.

This is precisely what makes building a startup really challenging as well. There are those who thrive under these circumstances and then, there are those who don’t. The trouble is that as one proceeds through the life cycle of a startup, the things that are an asset at the beginning turn out to be a liability later on. Founders need to constantly adapt and change to the changing realities of their business.

Working with startups, I have come across three distinct phases of building a business. I am going to focus on product businesses since most other businesses cannot be deemed startups according to me, simply due to the challenges posed in scaling such businesses rapidly.

 

Building a Product

The first phase of embarking on a startups is to build a product. But even before you build a product you need to verify that the problem you are looking to solve is real and that the customer you are going after feels it.

 

Every business is built on the basis of a keen insight into human behaviour, businesses exploit the behaviour to make a profit.

 

The need to test the behaviour hypothesis and ensuring that it is correct is extremely important to ensure that the product does not fail once it has been developed. We have worked with startups that have used all kind of tools including whatsapp, Facebook page and groups, Pinterest, etc. to build the quick and dirty manifestations of what the product is likely to do. In certain cases, we have had startups run the product like a service before taking a dive towards developing it. Running it like a service tends to be people heavy and hence cousins, friends, siblings, etc are exploited to pitch in from time to time. Once the same can be tested with small groups of 100 to 200 people, the proof of the behaviour is surely in place.

In the case of hardware related products, prototyping the product is crucial. Thanks to the advent of crowdfunding, it is possible to gauge the demand for a product in the market fairly quickly, sometime even before the prototype is ready.

At this stage it makes sense to take the time and invest the resources necessary to build the product. If you have a founding team that is solid on the tech side, it is possible to build out versions of the product that are extremely simple and addresses 2 or 3 of the most critical features that the end product will have. Trying to get all of the features or functionality of the product into the first version is difficult and dangerous.

Apart from establishing the hypothesis, the advantage of doing the quick and dirty product is pure insight.

I tend to compare most things to mathematical equations and if you were to look at a business as a mathematical equation, there are several variables that you may know but several that you cannot even foresee when starting out. This process gives you an insight into many of the variables that you would have normally missed out on.

Building a product is hard – You need to take all of these insights and turn it into a workflow that would be well suited to the use case that you are building for. The product has to be able to accommodate all of the exceptional requirements that would arise and function intuitively.

 

Building a Business

Now that the product is done, one needs to build a business around the product.

People only spend money on something when they believe that the value that they get would be greater that the cost they must incur

Value is a belief – This is exactly the reason why some people would go and spend 1,00,000 rupees to buy a trouser at Prada and others would stand around haggling for a 1000 rupee trouser at the local market.

Building a business involves instilling the ‘belief’ that the product that you are selling is worth a lot more than the cost that they would be incurring.

 

Steve Jobs was neither a hardware guy, nor a software guy. What did he bring to the business?

Well, he brought this thing called belief.

 

Making money is all about making the other person believe that there is value in what you are looking to offer them. This comes down to two things.

Firstly, how well has the pain been understood. If you understand that pain felt by the customer well enough, you would have a clear understanding of how willing or unwilling the customer is going to be to get rid of it. The bigger the problem, the easier it is to perceive value. Secondly, how well is the solution being projected. Most luxury businesses are just projection alone.

I had written another post on the art of selling here.

Turning the product that you built into a torrent of money is challenging because this is where being fast and nimble has a huge role to play. As an entrepreneur you need to get constant feedback from the customer fine tune your product repeatedly and iteratively in order to reach the state of perfection investors like to call the ‘Product-Market Fit’.

According to me, you reach product-market fit when you have clarity of what the market requires. Most often the consequence of this understanding reflects in being able to tell the returns one can expect from investment in marketing.

‘If I spend $10 Million in marketing, we should be able to triple our user base over the next 18 months and gather a 5% share in the category that we are targeting.’ When you have ‘Product-Market Fit’, you can essentially express scaling-up in the form of an equation.

 

Building an Organisation

The final stage is to move towards organisation building. If you thought building a product and the business was hard, this is far and away the hardest.

 

A successful business is one which has a high degree of predictability of Income.

 

In a startup things tend to be rather impromptu, most of the decisions are taken in response to the market. Strategies can flip in a matter of months.

Once the company has established a market position and a certain degree of predictability has set into the business, the focus of strategy has to shift away from exploring many pint sized markets to addressing fewer barrel sized market. This involves building an organisation that can take care of certain repetitive functions. You must first of all define these functions, these revenue units, these business vertical and hand them over to appropriately talented individuals.

In my experience it is important to think about organisation building, when you pass the product stage. Thoughts on organisation building has to begin simultaneously with the process of developing the business.

What would a 100 people organisation look like?

What roles are people going to play?

What are the kinds of skill sets may be required?

Recruitment is a long and arduous process, especially in today’s world. If you find someone who is talented, make a mental note of what role you would want them to play in your business and where you would see them fitting in. Its like a game of chess where you are setting up your pieces for the right time to come along.

Some founders have a latent network available to them which is quite powerful. Some have to go out and build them. Preferably bring in people who have equally strong networks in their area.

At the end of the day any organisation is only as good as the people who are a part of it. Bringing together people who are consistently better than yourself, and nurturing them, is the best way to build an organisation.

The best organisations are ones where the job of the leadership is only to provide direction.

Startups Club and What I have learnt during this journey

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I spoke about Startups Club and 5 learnings that I have taken away till now working with the many entrepreneurs who make up Startups Club. Sharing the video of the talk I gave during Seedstars World’s Bangalore Semi-finals. The audio is not particularly high quality and you may have to use a earphone.

Uncertainty behind Success

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Often times, when someone narrates the story of a startup, the focus is on the here and now. Also as you hear how things unfolded, it is hard not to think that there was a plan which was always in place. Truth be told most of the startups are absolutely unsure of how things are going to progress week on week, leave alone month on month or year on year. The uncertainly is greater at the earlier stages and diminishes as time goes by.

Also, when you come across a company that is at a place of great success, it is hard to imagine that the success was so uncertain.

The honest truth is that most companies even the very well established one suffer from a great deal of doubt and uncertainty. Nobody can accurately predict the future and hence the uncertainty. There are a couple of videos that I am providing links to, which clearly show even the mighty have doubt within themselves

The first video is of Alex Schultz, Vice President (Growth) at Facebook, speaking about the growth strategies that Facebook used in its early days. He goes on to talk about the doubt that existed within the company about whether it was even possible to grow beyond 50 Million users because every social network prior to them had plateaued at 50 Million. The link to the video is here.

The second video is of Brian Chesky, founder of Airbnb talking about how they financed the first few days of Airbnb. The company at one point was selling more cereals (which was a marketing gimmick) than rooms. You can find the link to the video here.

These are hugely successful companies today; was there a time when they had doubts about their ability to succeed? Most certainly. I am certain they still have doubts today, only the nature of those doubt would be extremely different.

Take the case of Apple. Arguably the most successful company on the planet at this point of time. Whenever Apple launches a product there is a great deal of doubt that accompanies it. Back in 2007 when they launched the iPhone, they would have been incredibly happy had iPhone sold just as much as iPod.  As can be seen from the graph below, iPhone outperformed the iPod.

mac-vs-ipod-vs-iphone-vs-ipad

Success is about being able to push past the doubt. A true entrepreneur is one who is able to thrive despite uncertainty. Working towards eliminating the source of the uncertainty and forging ahead.