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Entrepreneurship: The future of India

Entrepreneurship is fast gaining its duly deserved recognition as the driver of future economic growth in India. This recognition and acceptance, while mostly prevalent in urban India, is slowly percolating into the rural parts of the country. In the last few years enough entrepreneurial ventures, also called startups, have met with success for a larger segment of the population to open itself to this new opportunity.

The Central and State Governments, corporations, academic institutions, investors and also several individuals have gotten behind and created the entrepreneurial ecosystem that helps create and promote startups. However, the concept of a startup is still highly misunderstood by society at large.

What is a startup?
Carrer, Sucess A startup is the initial experimental phase of a company during which it figures out what to sell and to whom it should sell. Samsung is not a startup because it knows that it should make and sell smartphones. It also knows who its customers are and how to reach them. So it is well beyond the phase of experimentation, and is in the phase of execution.

On the other hand, if a company wants to solve a new problem that hasn’t been addressed before, and if it is unsure whether anyone would be interested in buying their solution, then they need to conduct a series of iterative experiments to validate all their assumptions. For example, if a company wants to make flying cars to solve the traffic problem, it would be a startup for the following reasons:
  1. It doesn’t know whether building the flying car is technologically viable.
  2. It doesn’t know how much it would cost to build the flying car and how much they can sell it at.
  3. It doesn’t know whether anyone would be interested in buying a flying car (which will probably be expensive)
  4. If people are interested in buying flying cars, how many such people exist? Are there only 10 people in the world who might buy a flying car (in which case it is not a viable long-term business) or are there millions of such people?
During the startup phase, a company needs to find answers to such questions. If all the answers fall in place favorably, then the startup graduates into a company.

The difference between startups and businesses
Broadly, there are three key differences between a startup and a business:
  1. Scale
  2. Uncertainty
  3. Ecosystem
The key difference between a startup and a traditional business is scale. For example, let us say I own a photocopy shop or a kirana store that generates Rs. 10 lakhs of income every year. This revenue is not going to change drastically next year or the year after. There will be slight fluctuations in the overall amount, either upwards or downwards and adjusted with inflation, but there will be no dramatic increase or decrease in revenue. This sets an entrepreneurial venture, also called a startup, apart from a business.

In a startup, you start off with almost no revenue. You do not generate any money in the initial stages because you are still building a product. In this time, you will actually have negative cash flows because you have to invest into resources that will help build your product. However, after the product hits the market you will see a steep growth in your revenues. This is because the product can be sold to millions of people or thousands of companies. In year one you might sell to 10,000 customers and in year two you might sell to 1,00,000 customers. This is not possible in a kirana store (unless you open several kirana stores). This is often called the “hockey stick” model of growth – where you have initial losses and then have a steep rise in profits.

Another difference between a startup and a business is the level of uncertainty involved. When you open a photocopy shop, then you can estimate the amount of business you will generate. The factors that will determine the success (or failure) of your photocopy shop include:
  • Location
  • Competition
  • Marketing (big board outside, clean interiors, good and quick service, etc.)
  • Uniqueness (lower cost, color photocopy, faster copies, etc.)
  • Demand (nearby colleges, Govt. offices, etc.)
Based on these factors, you will be able to make a reasonable estimate of the revenue you can generate from your photocopy shop.

However, with a startup the uncertainty is a lot more complex. As in the flying car example above, the questions and assumptions are of a larger magnitude and hence more difficult to ascertain.

A new parallel ecosystem has emerged for startups over the past few years that is entirely different from a business ecosystem. This is partly driven by the resource requirements of businesses versus startups. Every business needs a funding agency that gives the initial capital to acquire resources in order to run the business. Startups have the same requirement, although the mechanics are quite different.

If you were to start a factory that manufactures, for example, matchboxes, then you would typically go to a bank for a loan. The bank here is the funding agency whom you approach for acquiring resources (land, equipment, etc.). In order to secure their loan, they might either ask for a personal guarantee or hold the assets of the factory on lien. Banks are typically risk averse and will invest into areas that they are reasonably sure will not fail. Initially you might want to sell matchboxes only in one area. As you expand your channels into more areas, you will be able to sell more matchboxes. To do this, you need larger manufacturing equipment, for which you will be given more loans by the bank.

However, if you were to build a cloud-based software, the resources you need to acquire are not tangible (such as land or equipment) but rather intangible (salaries for employees). The bank will not be able to give you a loan because they are unable to hold any assets on lien (since you have no assets). In such cases you would have to approach a risk capital investor, such as an angel investor or a venture capitalist for funding. These investors, unlike the banks, invest into companies which are more risky, but also hold the potential of generating more returns. In exchange for their money, you will need to give away a part of your startup (as equity shares) to your investor.

How do you become an entrepreneur?
Carrer, Sucess Now that you are clear on what a startup is (and what it is not), you may choose to become an entrepreneur. An entrepreneur is an individual who wants to solve a problem, profitably, by acquiring resources that are beyond his/her reach.

So what are the skills required to become an entrepreneur? We can broadly divide the skills required into four categories:
  1. Technical expertise
  2. Domain expertise
  3. Entrepreneurial expertise
  4. Business expertise
Technical Expertise
Startups are built to serve a growing group of customers. The aim of the startup should be to sell to every possible customer in the world. Usually, in order to serve such a large customer base, the startup will involve technology. And even if you choose to be the business expert in your startup, you should understand the technology behind it enough to talk about it passionately and confidently. Technical expertise could be IT (for a software startup), engineering (for a flying cars startup), etc. Usually startups have a technology founder. If you are not technologically savvy, then you should look for a technology co-founder.

Domain Expertise
Domain expertise is a deep understanding of your customers. If you are building technology for hospitals, then do you understand how hospitals function? Do you know who makes the purchase decisions? Do you know whom to approach within the hospital? Usually domain expertise comes with experience. If you already do not have domain expertise, then you should consider getting a mentor with domain expertise.

Entrepreneurial Expertise
This is the skillset in entrepreneurs that some people say cannot be taught. This is the set of characteristics that are inherent to an entrepreneur which are not as necessary in most other jobs. Some of these skills include:
  1. Ability to take risks
  2. Ability to make trade-offs and decisions under uncertainty
  3. Can-do Will-do attitude
  4. Execution-oriented – always looking for a solution to every obstacle
  5. Ability to negotiate and sell
  6. Ability to lead
Business Expertise
This is the generic business administration skillset that would be required for most management jobs. Such expertise would include marketing, HR, finance, accounting, project management and other such standard skillsets that are taught in business schools.

How do you get started?
If everything you have read so far has excited you, and you can’t wait to get started on your own startup, then here are a few different ways in which you can get started:
  1. Build your own startup:
    If you have an idea that you are really excited about, make sure you have all the expertise listed above to launch your startup. If you are not an expert in some of the areas, then bring on board a co-founder or a mentor who can complement your expertise. Be open to feedback and be ready to change course if you get advice from several people to do so. Most startups “pivot” (change direction) after a few months once they realize that the market needs something different from their product. Always look for signals that indicate what you should be building. You may also choose to join an incubator or an accelerator program at a later stage. There are hundreds of incubator/accelerator programs in India, primarily in Tier 1 cities. Ideally you should find a program which focuses on the niche that your startup is in.
  2. Join another startup as a co-founder:
    If you have not found a problem that you would like to solve, look out for other people who are solving problems that excite you. If you find a startup that excites you, and if your skills are complementary to the startup’s current co-founders, talk to them about getting on board.
  3. Get some experience before you startup:
    Having a couple of years of work experience helps entrepreneurs in several ways. Experience helps understand the rigor of doing a business. It also builds expertise in either a domain or a technology or business (or a combination of them). Once you have some experience and expertise under your belt, you might be in a better position to launch a startup.
  4. Study before you startup:
    For budding entrepreneurs who want to develop business skills or technology expertise, there are several educational programs that can help. The education can either be informal (online courses such as Coursera) or short-term formal courses at institutes such as ISB, IIM Bangalore and Woxsen School of Business. For entrepreneurs who want to sharpen their technical skills, they may take courses at IIIT Hyderabad under the PGSSP program.

About Author:
Prashanth Meka heads Strategy and Branding at IIIT Hyderabad.
Previously he headed the incubation center at IIIT Hyderabad and grew it to one of India's largest academic incubators for technology startups. Prashanth has global experience across North America, Middle East, Africa and Asia in marketing with companies such as Nokia. Prashanth currently delivers workshops and lectures on the role of incubation centers and evangelizes entrepreneurship within unexposed communities.
Published date : 25 Oct 2014 02:07PM

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