Saturday, 14 January 2023

How to build an Investable startup?

Startups are difficult, especially the early-stage ones. An early-stage founder usually has a hypothesis about a problem statement and a probable solution in mind. How do you get from there to an investable high-growth company?

Here are my thoughts:

1. Find proof that confirms that the problem statement indeed exists. Let's say you have a hypothesis that men above 6 ft height have difficulty finding clothes of their size. How do you validate it? What proof can you showcase to someone who doesn't believe in this statement? To do that, talk to some 50 customers ('men above 6 ft height') and capture their feedback in a notebook. Spend time with such men in shopping to actually understand their pain points. There is an amazing book on this topic called 'The Mom Test'. Every early-stage entrepreneur must read it.

2. Once you have the proof that confirms that the problem statement exists, work backward to create a solution. Build just enough features to solve the major pain area. The Product create would be called an MVP - Minimum viable product. Then go back to those 50 men you met and show them the Product and see if it solves their problem. Are they able to shop easily now? Do they get a better fit? Do they save time? Does it cost lesser? Ask for feedback.

3. Basis the feedback, go and improve the product and show it to them once again. Repeat this exercise until many of the 50 men are happy and want to pay for your product. Let's say some 15 - 20 of them are keen to pay you for your product, congrats, you just found a 'Product/Market fit' - one of the hardest things to achieve in a startup. This activity is beautifully captured in a book called 'The Lean Startup'. Do read it if you haven't already, irrespective of the stage of your startup.

4. Now that you have a Product/Market fit with some 15 people keen to pay for your product, you need to build a story around why your startup can become really big. When I say really big, I mean, nothing short of $100M in revenues. Because that's the kind of startup VCs are keen to fund. This means that your TAM (Total Addressable Market) must be large. A quick Google search tells me that 1% of Indians are above 6 ft. Let's say 50% are men. So that's about 75 lakh men. At Rs. 1000 spent per person per year, that's a TAM of $100M. If you capture 10% of it, you can reach $10M in revenue. But then you need a $100M revenue story to be investable by most VCs.

5. On day 1, you may not have a Product that can go to $100M in revenues like the above case. But then what can you do to reach there? An obvious example is to add a Product line for women. That's another $100M of market. Total $200M. We've assumed Rs. 1000 per person per year. If you could sell other things like tall men/women slippers, that would be another Rs. 2000 per year which is $400M for a total of $600M.

6. What other problems do tall people face? They might need taller doors to not bang their head. But then you're a fashion e-commerce company. So that's not relevant for your line. Basically, focus on adjacent product ideas for the same customer base. Here is an example - you've built something for tall people. How about adding something for people who are a little out of shape? They too might need help in purchasing clothes and they can relate to tall people's problems. That will surely be at least $500M worth of market.

7. So now, you have a fashion product for tall men but you've built a story comprising of tall women, and out-of-shape people for a total of $1B market. If you can capture 10% of it, you're in a position to disrupt a large market. But then why you? What's special about you? Why can't someone else do it? Why should an Investor not bet money on that VP of Myntra who has the same idea?

8. You will have to answer this question - Why you? It could be that you have deep connections in the fashion industry. Or you have some prior experience working at such brands. Or you are an extremely smart person who can learn things fast, including learning about a new industry quickly - this is where many people ask me why Investors are so keen to fund IIT and IIM founder startups. Well, investors have no specific preferences for funding only IIT or IIM founder startups. They want to invest in generally smart people. If you can prove it to them, most investors won't care about your degree. But then you have to find a way to convince them.

9. That's it. You have answered most of the questions - what's the problem statement? What's the solution? How big is the market? Why you? There are a few other questions that you may want to answer that many investors would like to understand - why now? What's the competition? What's the underlying secret sauce (could be tech or anything else)? What's the moat? How can you ensure that others don't simply copy your idea and so, it becomes a price war?

Whether or not you want to raise funds, these are the right questions you should ask yourself if you're starting ANY business. At the end of the day, you have to create a sustainable business that solves the pain points of the customer. Are you doing that? These questions will help you answer that.

What else do Investors look for?

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