Tag: trust

Stay in Business

Stamina is one of the most underrated advantages in entrepreneurship. In a world where people start quickly and quit quickly, simply staying in business can dramatically tilt the odds in your favor.

Looking at all cases of long-term business success that I have observed in my life, a common underlying philosophy seems to be: [in Hindi] “Dhande mein tike raho” (focus on staying in business).

Phases of a business lifecycle

As any person who has ever started a business knows, the first order of business for an entrepreneur is finding product-market-fit – making something people want and are willing to pay for.

Once product-market fit has been established, the next order of business is to make it profitable, Phase 1 of which is unit economics profitability on an immediate basis:

(1) Positive gross margin, by selling something for more than the cost of goods sold ➡

(2) Positive contribution margin, so all variable costs incurred per unit are recovered, and eventually ➡

(3) Positive net margin, so both variable costs and an allocated share of fixed costs/ overheads are covered.

Phase 2 of profitability is making the business P&L profitable, so generating operating profit that covers all fixed costs of the business, and eventually, net profit (or PAT).

Phase 3 of profitability is generating free cash flow – the ultimate goal of any business, and the ultimate dream of any entrepreneur.

The core currency of business

Starting from the pre-PMF phase till the free cash flow phase, the drivers of success in each phase are very simple:

  • Retain & grow existing customers.
  • Find new customers.
  • Keep accessing capital to continue the journey (retained earnings, equity, debt).

If you think about it, the intangible currency that drives all the above is “trust”. As existing customers spend more time using your product/service, assuming they are happy with it, their propensity to stay & grow with you keeps increasing with each year.

Multiple human biases like commitment bias, consistency bias and behavioural inertia end up reinforcing this customer stickiness, as long as you keep delivering what you promise.

Similarly, the more time you spend in the marketplace, the likelihood of new potential customers hearing about you, particularly from your existing customers, keeps going up.

Finally, we always hear that capital chases returns. In reality, capital chases “risk-adjusted returns”. The more time you spend in the marketplace, the higher your trust is within the ecosystem, which reduces the risk perception around your business among capital providers.

That’s why banks prefer lending to businesses with established histories. The same reason is why VCs and PEs tend to track founders & companies for months before investing in them. It’s also the reason why institutional LPs can sometimes take years to build comfort around a GP, but once they back a team, they keep doubling down on them across multiple fund vintages.

So, “trust” is the key currency that businesses need in order to continue making progress across various phases of their lifecycle.

Competition

In addition to Customers and Capital, businesses also need to worry about Competition. Ultimately, customers are evaluating multiple options in the marketplace, and the business that ends up winning their vote is the one that is uniquely differentiated against competition.

This is where “staying in business” provides rich dividends, especially in the present age of fast-food entrepreneurship and role-playing founders.

The cost of starting any business & getting some early traction has gone down significantly, courtesy of technology. Therefore, any serious entrepreneur should expect the top-of-funnel competition in the pre-PMF phase to keep increasing each year.

However, the faster people are starting companies, the faster they are tapping out of the game as well. So, as your business continues chugging along and moving across the lifecycle phases outlined earlier, you will see a steep drop-off in competition at each phase.

Therefore, just by merely surviving, your odds of the marketplace self-selecting you as one of the few viable options keep going up.

Compounding

The key idea is positioning oneself to harness the power of compounding by staying in business. If you look at the most successful family businesses globally as well as major startup success stories across geographies, the reality is that it takes a decade to get it right and create a foundation, and then another decade to dominate the market and reap the rewards.

Most people don’t have the enthusiasm, energy and a mission-driven mindset to endure such long journeys. For founders, stamina is one of the proverbial low-hanging fruit that can help you massively tilt the playing field in your favour over the long term.

Co-founder Breakups

Sharing some insights/patterns from various co-founder breakups I have witnessed over the years.

Recently, I received the sad news of a potentially powerful co-founding team breaking up rather acrimoniously. I had been tracking this team closely for several months now as a potential deal, and this happened right as the company received a seed term sheet from a Tier 1 VC.

Over a 15-year career in venture, I have expectedly seen several co-founder breakups, both in my own portfolio as well as those I have known well/ observed from the sidelines. This recent breakup got me thinking about any patterns/ insights I have noticed over several such instances over the years. Here are a few:

1/ Undergrad batchmates seem to have higher endurance

For some reason, I have repeatedly noticed that teams where the co-founders have been undergrad batchmates tend to survive much longer. Perhaps relationships born in those fledgling, relatively innocent years tend to have higher levels of subconscious trust and, more importantly, a sense of love and tolerance.

While it’s easier to find people with complementary skills and similar pedigrees (both of which look great on paper on the team slide), what keeps co-founders together is also what keeps people together in long-term marriages – having an underlying mutual respect & fondness, which leads to daily hours of fun as well as the willingness to both extend higher levels of tolerance to each other, as well as introspect and evolve to meet the other person midway.

Especially at the seed stage, company missions can evolve with pivots, but this mutual vibe is what keeps co-founders together across multiple iterations and often, multiple companies.

2/ Ex-colleagues and work friends seem to have a higher risk

My hypothesis here is that most people tend to put on a work personality at the job that suits their manager’s preferences as well as the company’s culture. Therefore, even after working with someone as a colleague, it’s very hard to know their real, full personality and values. In many cases, people end up misjudging mutual fit, especially when it comes under the immense pressure of doing a 0-to-1 startup.

Interestingly, this applies to colleagues at both large companies as well as startups. As an investor, I often hear pitches where founders say, “We worked together in the trenches of this early-stage startup and discovered this idea”. While this gives the impression of a strong set of founders germinating inside the cauldron of another startup, I have frequently seen such teams breaking up soon. While they do have the claimed early product and GTM skills they together learned at the startup, the mutual co-founder vibe & grit end up breaking under pressure.

3/ Co-founders coming together via common friends/ relatives, without a strong shared history, is a miss

I see this scenario a lot – one person decides to start up, spreads the word around for a co-founder, connects with someone via a really strong common friend/ relative, and both decide to partner.

In the majority of these cases, there is no shared history, and the team also hasn’t had the opportunity to spend enough time in the trenches going through the ups and downs together. When pitching to seed investors, they usually tell the story of “our skills are perfectly complementary, and both of us have met each other multiple times at this X/Y/Z person’s parties over several years, and developed a shared passion for this idea”.

In most cases, this ends up being a window-dressed story of the co-founding team and lacks the underlying bond & trust needed to grind out the tough times.

4/ “Earned co-founders” are solid

In many cases, folks start as single founders, surround themselves with early founding team members, validate, iterate, and get to early PMF with them, and during this journey, 1-3 people naturally come up and start playing a critical role in the management team. In a sense, they start playing the co-founder role without the title (or the equity).

I call these earned co-founders, and these are solid personas. In many of these cases, I have pushed the solo founder to look at these 1-3 people as core parts of the leadership team, if not as full co-founders, and have it also reflect in their equity at the appropriate time.