To take VC Funds or Not

 John Mullins in his HBR blog VC Funding Can Be Bad For Your Start-Up gives enough arguments on why entrepreneurs should avoid them as much as possible and when not possible delay them in the lifecycle of their enterprise. I agree with each of their arguments. I am happy to see that there is some study that shows that most successful businesses are built without the investor’s money or as they say funded by the customer’s money. I hope there is a formal study done to co-relate the success probability and investment amount or the stage of investment.

I have always maintained that investors take a major chunk of energy, that entrepreneurs should ideally be spending on building their businesses, understanding and engaging with the customers. Anyone you gives you money would demand many things and would potentially dictate how you should be doing things.

Entrepreneurs can potentially put themselves in the a Venture Capitalist’s or investor’s shoes and try to understand – why they invest in a new business that is yet to prove it mettle in the market and can potentially fail too. I am sure even a small introspection would tell them that they invest to multiply their investment and that is their single point goal – mostly if not always. And they would want this multiplication as soon as possible, that is why you see lot of investments happening in the scaling up stage of the businesses.

I spoke to a few investors for the research of my book The mouse Charmers, though funding and investors was not the angle I was covering but I thought it may still be a good idea to take their point of view was and I realized the only metric that matters to them is Return on Investment. To me, there is a bigger purpose that businesses serve than just making their investor’s money grow.

Having said that ‘ Can we totally ignore the investor community?’ , ‘Can certain businesses be done without major investors?’ – The answer is obviously No.

I think even investors are at potential risk of businesses that are built solely to tap into an investor fund without any intention of building a business in the long term.

Do read the John’s post for his arguments that I have not repeated in this post.


Effective Digital Enterprises

In the Mckinsey article The seven habits of highly effective digital enterprises authors tell 7 traits of effective digital enterprises. My book The Mouse Charmers that studies the most successful digital businesses of India also talks a bit about these traits through some detailed case studies. Let me focus on one aspect that both the authors of above articles and I agree upon – Digital businesses need to be standalone businesses and not the extensions of existing business. It is not another sales channel you add to your existing channels and hope to add to your sales. It is a channel that needs 100% attention from the team that manages it. It needs a strategy of its own which may not be tightly coupled with the rest of the organization. It needs a different focus as the dynamics involved are different.

Take an example of a grocery store. An offline grocery store is all about inventory management, store location and store operations while an online grocery store can technically have infinite inventory and the key factor here is logistics and how you deliver from your hubs to homes in an efficient and predictable way. Similarly, online general stores like Snapdeal need to have huge supplier network and need to device methods like discount coupons and deals to emulate online sales through partners. The biggest expense for offline store is the store itself and the staff to manage it, making sure that people turn up on the store and hopefully find what they are looking for. For the online store, the big expense is logistics cost and the efficient route planning every day and managing the expectations of the customer when they can not touch and feel the products they are ordering. For the store customers are located in a vicinity and it is easier to profile them, for online anyone with a internet connection is a potential customer and it is not so easy  to profile them. As we see in this example the basic skill sets required to run the same business offline and online are very different, the business model is different and so the strategy. If one business is treated as an extension of another, there is bound to be a lot of loss in an attempt to synergize or even measure them on same parameters.

Online businesses have their own challenges as well that are specific to them. Will talk about them in another post may be.

Co-Creating Future with the Customers

This article ‘Co-Creating Future with the Customers’ was first published in Businessworld India. reproducing it here for the readers of this blog. 

The other day I observed an advertisement of diamond jewelry on my laptop screen while browsing for some information. The advertisement was eye catching and I clicked, to be engrossed in the world of beautiful earrings, gemstone studded rings and what not. I am not a jewelry person but I was still tempted to buy some. I stopped and thought if I can really trust a website to purchase high-end products like diamonds or gold. Immediately, the woman in me took a back seat and innovation mindset got invoked. How would a business that is breaking into a new space handle the customer fears and make them comfortable with their offerings? In our age and time, this question applies to all new age business like the above one selling a product online for the first time.

In such cases, your business itself has to become a research and testing ground for studying customers or consumers. Customers are as clueless about their behavior as businesses are. Remember the first time we ordered a book online and opted for cash on delivery (COD) and if this was also the first time the company was experimenting with COD. Neither of us could have predicted if, as customers, we would like it or not, what challenges will this experiment present for the service provider and what new expectations it would give rise to in the consumer’s mind. Its only after the first delivery would a service provider realize that doing it in a small neighborhood is fine but doing it scale would require technical innovations along with systems that ensure reliable bringing back of cash from locations across a big and diverse country. We may love it for we do not have to worry about credit card fraud and the risk is not ours until the order reaches our doorstep, but then we may struggle with the exact change every time an order is delivered. This may lead the digital company to think of ‘card on delivery’, where instead of using your card at the time of ordering, we use it at the time of receiving and we can be happy collecting those credit card points for some freebies.

New age companies, that is, companies that launch a new product or a service, or use a new channel to deliver the same old products and services for the first time have to make experimentation a way of life. They have to keep experimenting with their customers, keep giving them some new options and study their responses and reactions very carefully. Now, experiments do not come easy and can cost a lot, so there has to be a logical balance too. Most successful companies experiment using smart use of technology that help minimize the costs and the time involved. They usually pick up a small sample of their existing users and give them new experiments. Based on the response they either built upon the new feature or modify or reject it. This way the investments are made in creating products and services that have a base level of customer acceptance.

The part that is tricky is to decide what experiments to choose out of millions possible and thousands you think might work. This is where a bit of analysis can help. You can use the basic cost-benefit analysis, you can extrapolate what has worked in the past, you can look at the market trends and refer to market studies or engage in commissioning studies if need be. While there are many analytical and statistical tools at one’s disposal, successful innovators never undermine their own intuition – for what is intuition but a hidden data processing machine inside us that processes data on many different dimensions and parameters than our logical selves can perceive and program.

This is a process of co-learning and co-adapting as the companies and consumers together create a new environment. Businesses must remember this can be a slow process as we take the time to adopt changes even when we are a part of creating them. They need to give customers some time for this and can potentially use this time to smoothen the rough edges of their new product or service, to close any gaps that might exist and to work on scaling it up for a bigger set of customers. This is like co-creating the future with your customers, as they like it.

Social Banking

As social media gains ground, it becomes a integral part of the corporate strategies. The first to jump on the bandwagon were the marketing and sales functions when established a brand presence of social media channels and engaged with the customers directly. Though some of them chose to outsource the management of Twitter Handles and FaceBook Pages and lost the plot. Running campaigns and promotion become a part of the marketing plans and to an extent budgets.

Getting operations on social is new experiment attempted by Kotak Mahindra Bank. Code names Kotak Jifi it lets you approach the bank to open an account through FaceBook or Twitter, other channels will get added as they gain momentum I guess. The formalities to open the account still need to be followed – its a regularity requirement – no one can do anything about it. You can give an account opening request online and do some basic operations like checking your balance using your social media Ids – how safe are these and do you really need these channels for banking when your e-mail is as much on your phone as your social media app – only time will tell when certain number of people have tested the function. As I always say these new experiments are new for both the customer and the company and the no one can predict the outcome.

How this helps the bank is that it lets them reach your social network. Remember Kotak Mahindra is a late entrant in the banking space and needs to do something innovative to entice the customers who are either with the other established banks or reach out to new first time customers. By going social it is reaching out to younger population that may be opening its first account. Youngsters who have just started earning or are on their way to earn their first incomes can be tapped easily on social networks and people usually tend to stick with the bank they have an account with, unless the bank really works hard to loose them.

Now from the product perspective, I read through their FAQs and the fine print document and here are some highlights:

  1. Account can be opened only through social media Id and as of now is invite only and available in limited cities : This means the product has been made exclusively for people who are active on social media, indicating this has become a key element in customer profiles. Invite only and limited cities part will change as they test and fine tune the product and expand or drop the offering. Its like beta launch.
  2. Its a Zero Balance but also a Zero Interest account. You do need to put in some funds to begin with that you can use later. Above a certain amount you can shift funds to fixed deposit, but if you keep  it in savings account you get no interest – the minimum interest you get in other products is 4% : Bank doe snot loose anything if you do not keep any funds in it, but you loose interest component for the idle funds lying in the bank – so benefits those who spend a lot and frequently meet zero balance.
  3. Many transactions that come for free normally are charged for e.g. only 10 check leaves are free and you pay from 11th onwards or fees for cash transactions at the branches – but then give and take some features / charges this may not be real differentiator in terms of a banking product.
  4. Social currency: A key feature of social media is that it lets your broadcast whatever you do to your network instantly. So if every time you buy something using your account, your network knows hence increasing their probability of buying the same things – this is where the bank can tie up with many online brands for co-promotion and in the process leverage each other customers. The the social media currency would be the equivalent of credit card / frequent flier points in the social economy. I see that they allow trading of this currency too – again a feature I would look out for to see how it is adopted by the customers.

Should I be worried about the security bit – is my data safe on social media platforms? Well, I would not worry much about it because the data is eventually stored in some server that I have no clue where it is located. If a hacker decides to locate (s)he would locate the server – irrespective of if it is a bank or a social media platform server. I trust that both entities take good measures for securing my data. Human fraud again can happen in any of them with equal probability. 

Now I would be keen to see how they bring out specialized features for ‘Social Media Users Only’ customers. As of now they only use these channels to reach out to new customers and to provide the existing banking facilities through the addition medium of social media accounts. Fun would be when they bring out such innovative features that people who are not on social media will jump on to use these features.

Till then, sit back and enjoy the conversations….

Where is the real Innovation Happening

Vijay Govindrajan and Gunjan Bagla in their HBR blog Emerging-Market Engineers Power Global Innovations inadvertently point out a media flaw that in its Global 100 reports lists the companies from the developed world only, discounting the captive R&D centers of these companies that are located in emerging markets like India and Chine, discounting the outsources or bought over research elements that fueled the core innovations of these companies. It also looks at the media agencies the flawed approach of looking at the number of patents filed as a key criterion for the Innovativeness of a company and disregarding the real companies and people behind the innovation.

Authors give examples of Innovations that were done in India and elsewhere that were eventually credited to a company from the developed economy. They give brilliant examples from GE to Otis Elevators and Jabil circuit, all of whom have research links leading to India. They also talk about Compal Electronics of Taiwan that is behind the success of big names like HP, Toshiba, Sony, Fujitsu, and Siemens. Somewhere researchers also need to differentiate between companies that produce innovations and those who package and market innovations.

This leads me to a question would authors who are not of Indian or Eastern origin looked at this report from this angle? Is there a skew in our evaluations depending upon where we come from? This leads to another question does having a diversity in your research team becoming a necessity rather than a social equity requirement?

Time to think!

Next Cradle of Innovation

Christopher M. Schroeder in his HBR article The Middle East Could Be a Cradle of Innovation quotes the changing scenario in MENA i.e. Middle East and North America region, a case of leap frogging in adapting technology due to lack of baggage of old technology. He specifically quotes the huge penetration of mobile phones and how they are contributing to the economy. How the GDP now passes through mobile phones, how stories are being shared and how probably the content is being consumed.

He further predicts that this region might become the cradle of innovation for the coming times, and just like no one could see the economic rise of countries like Japan and Finland, we are unable to see the rise of Middle East.

I would like to add that innovations and economic dominance moves in circles and between various regions and the time of middle east may be returning. Yes, we should expect some good innovations from them, some of which may be already in use there but unexplored by the rest of the world and some of them may be invented for the rest of the world.

Till then, do you know of any innovations from middle east in last 100 years…

Reverse Innovation

Vijay Govindarajan in an HBR article ‘How to Build a reverse Innovation’, talks about Stanford University’s BioDesign program, where students are going to developing economies and figuring out how the reverse innovations can be done from there.
Reverse Innovation is nothing but frugal innovation ,where you have rigid constraints like resources and cost and you have to deliver may be 50% of the functionality of a sophisticated product at say 15-20% of the cost of the higher end solution. Most of these innovations have happened based on the ‘Necessity is the mother of Invention’ principle. 
Till now this has happened more to serve the markets that will not be able to afford the full blown solutions. In other words, these were the plain vanilla versions of the solutions that are sold to the richer economies. Now with the world economies moving towards a more equanimous environment, the reverse innovations may become standard solutions.